Alamos Gold Inc (AGI) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.25.13 | About: Alamos Gold (AGI)

Alamos Gold Inc (NYSE:AGI)

Q2 2013 Earnings Call

July 25, 2013 12:00 pm ET

Executives

James R. Porter - Chief Financial Officer

John A. McCluskey - Chief Executive Officer, President, Director and Member of Technical & Sustainability Committee

Manley R. Guarducci - Chief Operating Officer and Vice President

Jason King Dunning - Vice President of Exploration

Analysts

Rahul Paul - Canaccord Genuity, Research Division

Anita Soni - Crédit Suisse AG, Research Division

Adam P. Graf - Cowen and Company, LLC, Research Division

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Operator

Good afternoon. I'll now turn the meeting over to Mr. Jamie Porter, Chief Financial Officer. Please go ahead.

James R. Porter

Thank you, operator, and thanks, everyone, for attending Alamos' second quarter 2013 conference call. In addition to myself, our presenters today are John McCluskey, President and Chief Executive Officer; Manley Guarducci, Vice President and Chief Operating Officer; and Jason Dunning, Vice President of Exploration. I'd like to remind everyone that our presentation will be followed by a Q&A session.

Before we begin, please note this disclaimer concerning forward-looking statements. We refer all participants to our forward-looking statements and resources disclosure in our press release and MD&A and caution that mining and exploration is subject to a number of risks and uncertainties, particularly with respect to the mining and processing of ore, recovery rates, operating plans and the conversion of mineral resources to proven and profitable reserves, to name a few. There can be no assurance that forward-looking statements made in the press release and conference call based on information on hand today will prove to be accurate. Future results and events could differ materially from those anticipated in such statements and should not be relied upon. Also, please bear in mind that all the dollar amounts mentioned in this conference call are in United States dollars, unless otherwise noted. Now John will provide you with an overview.

John A. McCluskey

Thank you, Jamie, and good afternoon, everyone. Hopefully, most of you have had a chance to review our second quarter results, which we issued this morning. We had another great quarter at Mulatos, producing 53,000 ounces of gold, a record for our second quarter. Production has been exceeding expectations on all fronts. We're beating our crusher throughput targets and we continue to beat our cost guidance. Total cash costs including the royalty were $448 per ounce, and all-in sustaining costs of $682 per ounce remain well below guidance and among the lowest in the industry. Despite the sharp drop in the gold price, we continue to generate strong margins and cash flow. I'm also pleased to report that given our strong first half production of 108,000 ounces, we are well on our way to meeting or exceeding our full year 2013 production guidance of between 180,000 and 200,000 ounces at a total cash cost between $500 and $520 per ounce.

The second quarter highlighted just how well positioned we are relatively -- relative to the industry with our low cost structure. Across the industry, we've seen a number of projects shelved and operating mine plans revised in recent weeks given the drop in the gold price. Yet we continue to generate healthy margins and cash flow. Combined with our strong balance sheet and fully funded growth profile, we believe we are well positioned to execute on our organic growth plans and acquisitions while returning value to our shareholders through dividend payments and an active share buyback program. Our friendly agreement to acquire Esperanza Resources for cash of approximately $69 million is an example of this. We believe this transaction demonstrates our commitment to smart, disciplined and manageable growth, aligned with our strategy of adding accretive low-cost ounces in a politically safe jurisdiction. This is a relatively small transaction at less than 3% of our current market cap. However, we expect that it could add meaningful production growth, more than 50% in Mexico and nearly 30% across all of our operations. We expect this transaction to close by early September.

We followed this with the acquisition of Orsa Ventures earlier this week. This is another small transaction, but should not be discounted because of its small size. We are adding quality ounces to our development pipeline in a good jurisdiction with very good upside potential.

In Turkey, we continue to await for the formal EIA approval for our Kirazli project. We are in regular communication with Turkish government officials and expect that the EIA will be approved before the end of 2013. We now expect initial production for Kirazli in the first half of 2015. I'm now going to ask Jamie Porter to comment on our financial performance for the quarter.

James R. Porter

Good afternoon, everyone. As John mentioned, the 53,000 ounces of gold that we produced in Q2 marked a record for the second quarter, while our first quartile cash operating cost of $378 per ounce translated to another strong quarter of operating cash flow. We sold 55,000 ounces in the second quarter and managed to beat the average London PM Fix price by $8 an ounce with an average realized price of $1,423 per ounce for revenues of $78 million. Year-to-date to the end of Q2, we both produced and sold 108,000 ounces of gold for total revenues of $164.5 million. Despite the input cost pressures that we've been facing, particularly with respect to salaries, cyanide and diesel, total cash costs of $448 per ounce were significantly below our guidance for the year of $500 to $520 for the second straight quarter. Our all-in sustaining costs were $682 per ounce in the second quarter, more than $100 below our annual guidance of between $785 and $825 per ounce, emphasizing our relatively low overhead and sustaining capital.

Despite a sharp decrease in the gold price in Q2, operating cash margins remained strong at nearly $1,000 per ounce. Cash flow from operations before changes in non-cash working capital was $33.8 million or $0.26 per share. We had a number of significant cash outflows in the quarter, including a $12.7 million dividend payment and a $12.3 million withholding tax prepayment, which will be recovered throughout the remainder of 2013. As a result of these and corporate tax installment payments, our cash flow from operations after working capital changes was reduced to $13 million.

Earnings in the second quarter were $8.8 million or $0.07 per share and were impacted by several items, including a $6.8 million accounting loss from the disposition of the Aurizon investment, as well as total foreign exchange-related losses of $4.9 million. In total, these had the effect of lowering earnings per share by approximately $0.09.

I'd like to briefly explain the $7.8 million loss we recorded on the Aurizon investment in the second quarter, of which $6.8 million is classified within other loss and $1 million is within foreign exchange loss. Recall that we acquired 26.5 million shares of Aurizon, a 15% stake, prior to launching our hostile bid. Our cost base for these acquisitions was approximately CAD 4.55 per share. When we decided not to pursue the Aurizon acquisition and receive cash and Hecla shares as part of their takeover offer, we ended up realizing approximately CAD 4.30 per share.

To give you some context, the loss of the shares amounted to a 5% decrease in our investment from mid-January to the end of June. During the same period, the gold price dropped 27% and the TSX Gold Index was down 42%. Although we're not pleased to have had to have taken a loss in the position, considering the prevailing market conditions, it was an acceptable outcome. Note further that we swapped approximately 6.6 million Alamos shares in order to acquire the majority of our Aurizon position. So in addition to recouping our investment in the 3 million shares that we acquired on the public market, we effectively raised $100 million and nearly CAD 15 per share. When we acquired the Aurizon stake, we were well aware that if we ultimately did not proceed with the takeover, we'd be able to liquidate our position and effectively raise a substantial amount of cash in a very challenging market on favorable terms.

Through this transaction and our operating performance, we have substantially enhanced our financial position, and our balance sheet has never been stronger. We have no debt, and our cash and short-term investment balance increased by nearly $100 million in the quarter to $456 million as of June 30. Our total working capital now stands at an excess of $505 million. We continue to generate significant levels of operating cash flow, giving us great flexibility to pursue our goals, which is in evidence through 2 recently announced acquisitions.

We intend to finance all of our capital development and exploration spending in Mexico and Turkey internally, including the addition of Esperanza to the pipeline.

At this point, I'll turn the call back to John.

John A. McCluskey

Thank you, Jamie. Alamos' COO, Manley Guarducci, will now discuss quarterly operating results. Manley?

Manley R. Guarducci

Good afternoon, everyone. The Mulatos mine performed very well in the second quarter, beating our budget with respect to throughput and gold production. Total project throughput averaged 17,600 tonnes per day, marking the third consecutive quarter in which throughput exceeded the annual budget of 17,500 tonnes per day. With the onset of the rainy season, we expect a decrease in throughput in Q3, but are still confident that we'll average over 17,000 tonnes per day for the full year. The grade of the ore -- the grade of the crushed ore stacked on the leach pad in the second quarter of 1.1 grams a tonne was higher than the full year guided grade of 0.98 grams a tonne. We continue to mine and stack higher-grade ores than predicted by the block model. Grades milled from the Escondida high-grade zone were 10.94 grams a tonne, in line with the full year average budgeted grade of 11 grams a tonne and a sharp improvement from the reported grade in the first quarter of 2013.

The recovery ratio of 75% in the quarter was consistent with our budget. Overall, it was a strong start to the year, positioning us well to meet or exceed our full year production and cost guidance. Development activities in Mexico in the quarter were focused on Escondida. The Escondida Deep portal has been colored with approximately 15 meters of drift completed, and the installation of support equipment is underway. Once the Escondida open pit ore body is depleted in early 2014, Escondida Deep will provide high-grade mill feed for an additional quarter based on the current reserve until San Carlos has been developed. The company expects permanent approvals to San Carlos in the third quarter to allow development of the San Carlos and El Victor deposits. As we anticipated construction start on our projects in Turkey, our focus in the second quarter was on front-end engineering. We continue to forecast an 18-month timeline for permitting and construction once formal EIA approval is received.

With the change in the timing for expected receipt of the Kirazli EIA, we are now anticipating initial production from Kirazli in the first half of 2015.

Following the close of the Esperanza acquisition, our focus will turn to permitting. We have thoroughly reviewed the initial EIA submission by Esperanza, along with the deficiencies with the filing identified by Simonette [ph]. We believe these deficiencies are manageable and are confident we have the expertise to address them through a more robust EIA filing given our extensive experience operating and permitting in Mexico.

With that, I'll turn the call back to John.

John A. McCluskey

Thank you, Manley. We'll now hear from Jason Dunning, Vice President of Exploration.

Jason King Dunning

Thank you, John. Good afternoon. Exploration spending in the second quarter totaled $3.6 million. This consisted of $2.5 million in Mexico focused on completing infill and step-out drilling at East Estrella and deep directional drilling at San Carlos, along with targets at Mina Vieja and El Salto which are adjacent to the open pit. During the quarter, we also spent $1.1 million in Turkey. We are in the process of compiling our drilling assays from the first half of 2013, and we'll provide a more thorough update later this quarter.

We recently announced 2 potential additions to the pipeline in Esperanza and Orsa. It is still very early stage at this point. However, we will have more to talk about in the coming months once the transactions are closed.

With that, I'll turn the call back to John.

John A. McCluskey

Thank you, Jason. Now that concludes the formal part of our presentation. I'll turn the call back to the operator and open the call to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Rahul Paul from Canaccord Genuity.

Rahul Paul - Canaccord Genuity, Research Division

Looking ahead to 2014, Escondida is expected to be mined out in the first half. You do have San Carlos Underground, which is lower grade than Escondida. But I'm just wondering, since the grades to the mill might decline, are there -- have you looked at any opportunities to keep production levels from Mulatos closer to the 200,000 ounces per year level, possibly an expansion to the crusher throughput, expansion to the mill? Or are you expecting the heap leach grades to go up?

Manley R. Guarducci

Rahul, it's Manley. I'll take that one. We discussed in the past that the mill that we have right now is very easily upgradable to 1,000 tonnes a day for a very minimal cost. So with the lower grades from San Carlos, we will be upping the throughput of the mill. And we should compensate for the lower grade to shoot for the same production that we're currently obtaining now.

Rahul Paul - Canaccord Genuity, Research Division

Okay. And then just moving on to Turkey, you indicated that the EIA commission essentially completed a review in Jan. I'm wondering why it's taking so long to get all the signatures for final approval? The reason I'm asking is, have any of the key people that need to sign off changed?

John A. McCluskey

Rahul, this is John McCluskey. I'll answer the question. The fact is, the committee approval was actually given to us in early March rather than January. So it was initially anticipated that we would receive that approval sometime in the second quarter. And the fact is, we don't have it. I spent 3 weeks in Turkey at the end of June and early July. I had the opportunity to meet with many officials within the government. And that means across various ministries, including economy, natural resources and the environment. And essentially, everybody seems to be very, very sympathetic to the project. But nobody's able to give us a very -- a specific sort of data as to when we can anticipate the approval. It appears to be imminent, but no specific date given. So you can imagine I communicated to them that, that makes it quite difficult for us as a company dealing with shareholders and a market that's sort of watching what we're doing there and the development plans that we have, timelines and so forth. And it would be very helpful if they could give us some more specific date to reference for the market. And again, they're very sympathetic to the problem, but nobody is providing us with a reference point. So without any sort of guideline coming -- forthcoming from the Turkish government, the best that we can do as a management team is to say, "Well, as near as we can tell, we're going to get it sometime during the second half." But literally, that could be next week or it could be December. We just don't know. It's just a complete vacuum as far as we're concerned. I think part of the delay has -- is likely related to some of the political and social upheaval that we saw in the news over the course of the month of June and into July. I have no doubt that's had a bearing on things that are going on. There's also other issues going on in Turkey with the buildup of something like 300,000 refugees on their border with Syria, ongoing focus on their relationship with the Kurds, both in Iraq and living within Turkey. I have no doubt that this government has its hands chock-a-block full. It doesn't mean that they don't care about the project or they don't see the importance of the project. Certainly, all of the feedback that we received from the government officials is that they care very much about it and that they perceive this project going through to production. But their follow-through has been far short of our expectations. And I would've loved to be able to provide the market with far better guidance than I can, but I think I've articulated as best as I can the limitations that we're under. I still feel very positive about the country as we feel very, very positive about the project. But this is just something we're going to have to work through. And it obviously requires much more patience than what most CEOs are typically blessed with. But short of that, we remain optimistic. And we're anticipating receipt of it sometime in the next few months.

Operator

The next question is from Anita Soni from Crédit Suisse.

Anita Soni - Crédit Suisse AG, Research Division

My question is with regards to just how should we be thinking about the timing of the Escondida Deep ore in the next year, in 2014? I think it was a startup, I guess, in Q1. And would that carry you through to the San Carlos in Q3, I think?

Manley R. Guarducci

Anita, it's Manley. We have enough ore in the pit to take us into Q2 next year. And then Escondido Deep will come online, which will take us well into Q3. And with the EIA permitting in September of this year, we have enough time to develop San Carlos and get it online before that's completed, Anita.

Anita Soni - Crédit Suisse AG, Research Division

And on Escondida Deep, can you remind me what the grades on that was? Is that similar to the 11 gram per tonne? Or was that expected to be higher or lower than that?

Manley R. Guarducci

Slightly lower. It's about 8 grams a tonne.

Anita Soni - Crédit Suisse AG, Research Division

And just in terms of Agi Dagi, I think you indicated in the press release that it would be a similar type of permitting process. Should I then think about pushing out my timeline for the Agi Dagi startup by about 6 to 9 months as well?

Manley R. Guarducci

Yes. What we're saying, Anita, is we're going to use the same timeline that we experienced for Kirazli for Agi Dagi because that's the best measurement we have, okay?

Anita Soni - Crédit Suisse AG, Research Division

Yes. And originally, you had thought that would be sort of a 3-month timeframe. And right now, it's taken sort of 6 to 9 months, right?

Manley R. Guarducci

Correct, correct.

Operator

[Operator Instructions] The next question is from Adam Graf from Cowen and Company.

Adam P. Graf - Cowen and Company, LLC, Research Division

Just a quick question. I noticed your SG&A seems to be running significantly ahead of 2012 expenditures. I was wondering if you could maybe give us some guidance on the full year SG&A expectations?

James R. Porter

Adam, it's Jamie here. I'll go answer that question. So we got our New York Stock Exchange listing earlier this year. That's part of the reason for higher G&A costs going forward. We expect, on a quarterly basis, to run somewhere between $4 million and $4.5 million.

Operator

The next question is from Trevor Turnbull from Scotiabank.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Manley, I just wanted to follow up on Rahul's question about expanding the mill. You mentioned it's quite easy to do that. And I assume there's not a whole lot of cost. But is there any permitting you have to do to double the -- say you wanted to go to 1,000 tonnes a day on the mill?

Manley R. Guarducci

Trevor, no, there's absolutely no permitting. We're not adding chemicals or anything to that effect. It would just be upgrading our VSI part of the mill. That's it. It's a very minor fix, okay?

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

And sorry, VSI is -- what's that again?

Manley R. Guarducci

It's the grinding portion of the gravity mill. Instead of a ball mill, we use a vertical shaft impactor. So that would be the part that we'd have to upgrade.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Okay. And obviously, those are things that are readily available. You don't have any lead times to worry about, things like that?

Manley R. Guarducci

Not an issue, not an issue.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

And then maybe for John, just again on Turkey. It obviously must be frustrating not being able to get even answers as to the timing. Is there any opportunity to escalate or speak to anyone else in the government to kind of -- to help apply a bit of urgency to those that seem unable to make the decisions right now?

John A. McCluskey

Yes, there is. And in fact, we're doing that.

Operator

There are no further questions at this time. I would like to turn the meeting back over to Mr. McCluskey.

John A. McCluskey

Well, very good. Well, thank you very much, everyone, for attending the call. This has been certainly the strongest second quarter that the company has had. It just occurred to me yesterday when we were going through our script for the call that this is my 39th conference call with the market since I've been CEO of Alamos Gold. I guess we're getting fairly familiar with the process by now. But we don't take it in a complacent way at all. We really focus on putting together our quarterly information in a very clear and concise fashion. And the efforts that we've made on disclosure, I think, have been recognized in the market. And I just want to say, a lot of credit for this goes to, particularly, Jamie Porter and Manley Guarducci; Greg Fisher, our Vice President of Finance, who you don't hear that much from. These guys work tremendously hard on putting together all the information that we provide to the market at the end of each quarter. And I'm very thankful as the CEO of this company that it's very thorough and very accurate information that we're able to provide for you. Again, I want to also give Jamie Porter another nod here for the excellent gold sales program that he managed this quarter. It was a very tricky quarter with a rapid deterioration in the gold price. You're probably noticing most companies are reporting realized gold prices that fall far below the London Fix. And we managed to beat the fix by $8 an ounce. And that's pretty much Jamie Porter, who leads up that sales program on his own with a minimum amount of consultation with me. But again, that's really a tremendous job. And when you consider how tricky it was this particular quarter, it made quite a significant impact on our earnings, getting those gold sales right. So again, thank you, everyone, for attending the call. And we look forward to updating you again at end of the third quarter. That concludes our comments for today. I'll turn it back to you, operator.

Operator

Thank you. The conference has now ended. If you have any further questions that have not been answered, please feel free to contact Mr. Scott Parsons at (416) 368-9932, extension 439, or at 1 (866) 766-8801. Please disconnect your lines at this time, and we thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Alamos Gold (AGI): Q2 EPS of $0.07 misses by $0.07. Revenue of $74.3M beats by $2.56M. (PR)