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Lake Shore Gold Corp. (NYSEMKT:LSG)

Q2 2013 Results Earnings Call

August 13, 2013 10:00 AM ET

Executives

Mark Utting - Vice President, Investor Relations

Tony Makuch - President and CEO

Phil Yee - Vice President and CFO

Dan Gagnon - Senior Vice President, Operations

Analysts

Kerry Smith - Haywood Securities

Daniel Earle - TD Securities

Stephen Walker - RBC Capital Markets

Operator

Please standby, your meeting is ready to begin. Good morning, ladies and gentlemen. Welcome to the Lake Shore Gold Second Quarter 2013 Financial Results Conference Call on August 13, 2013. Please be advised that this call is being recorded.

I would now like to turn the meeting over to Mr. Mark Utting, Vice President, Investor Relations. Please go ahead.

Mark Utting

Thanks very much, Operator. And welcome everybody to Lake Shore Gold’s second quarter 2013 conference call and webcast. Our speakers today will be Tony Makuch, our President and Chief Executive Officer; and Phil Yee, our Vice President and Chief Financial Officer. We do have a number of other members of our management team in the room with us today as well.

Before beginning the presentation, I would like to first of all say that there are slides accompanying the remarks available on our website on a viewer advance basis.

I’d also like to remind listeners that the presentation to follow will include forward-looking information as defined under certain securities laws. Forward-looking statements are subject to a number of risk and uncertainties. The company does not provide any assurance or guarantee of future performance, and listeners are cautioned not to place undue reliance on forward-looking information.

I draw your attention to the forward-looking statement advisory on slide two of the presentation and also similar advisories that are available in the press release and MD&A for our second quarter, which were both issued yesterday. Our review of risks and uncertainties is provided in our latest annual information form which is available on SEDAR, as well as on our website at www.lsgold.com.

With that, I’d now like to turn the call over to Tony Makuch, President and CEO of Lake Shore Gold.

Tony Makuch

Okay. Thanks, Mark, and good morning, everyone. Thanks for coming and listening in on the call. Maybe before I start I’d like to, maybe, send our appreciation that lot of people that did a lot of hard work for the company over the last quarter or even throughout the July as we are completing the commissioning of our mill.

We get the benefit here of talking and discussing good performance from people and hard work and the result that other people did and obtained over the period, and we really appreciate the opportunity to get to work with them.

I will start with slide number three, and looking at slide three, couple of highlights, I’d like to point out. So, we are very pleased with the progress we made in the second quarter. In short, we had record production, improved cost performance, capital investment was on track and we remained poised for our major breakup point for our company.

Looking at the highlights, we had production up to 31,800 ounces poured and 30,800 ounces recovered. Our mill throughput averaged over 2,500 tonnes a day in the quarter and we achieved excellent improvement in grades, 4.3 grams per tonne for the quarter and 4.6 grams per tonne in June. And also, well, I guess, we stayed on track with our capital investment and project development. We are commissioning our mill now and are on track for 3,000 tonnes a day by early September.

Going to slide four, I want to just point out now that our -- we’ll have look at our cost performance. We did very well in improving our cost. In fact, we did better than the nameplate number suggests.

Our cash operating costs were $908 per ounce sold, but that was affected significantly by inventory movement. Basically, we sold higher cost ounces that had been produced in the first quarter during the second quarter, excluding that impact and royalties of $28 per ounce. Our cash cost per ounce sold were around 795 an ounce in the quarter.

Also, we included some numbers in our press release that provided good sense of the dollar spent in the quarter, $74 per tonne for mining, $5 per tonne for trucking and $22 per tonne for processing, significant improvements in costs than the previous quarter.

Slide five provides the six months highlights. Production at 54,000 ounces places us on track to achieve our guidance given that we are fast approaching the point when we will jump to 3,000 tonnes a day.

Two things in particular I will highlight is that despite a sharp decline in the gold price compared to 2012, our 36% increase in gold sales and improved cost performance allowed us to achieve strong growth in cash earnings from operations. In terms of capital, we invested $66 million in the first half of the year, which is close to three quarters of our planned capital for the full year.

Going to slide seven now, as mentioned, we are fast approaching a major turning point. We are now commissioning our mill expansion and by early next month expect to be at 3,000 tonnes a day. Once we get there, we expect to be at least, we expect to achieve annual production of over 140,000 ounces. Cash costs of around $700 per ounce. Capital requirements will fall off dramatically and we are excited that the company to begin generating net free cash flow in Q4 of this year.

With that, I’ll pass the presentation on to Phil Yee, our Chief Financial Officer and he can give some updates on financials.

Phil Yee

Thanks, Tony. Good morning, everyone. I’d like to start off with slide seven, which provides key operating details recorded to 2013. Specifically, I’d like to highlight a 26% growth in tonnes and total production year-over-year, as well as a 17% increase over Q1 of this year. We achieved 31% growth in gold poured in Q2 of this year, compared to Q2 of last year, and a 55% increase over Q1 of this year.

The trend line for our cost is very favorable. The percentage change numbers have brackets around them, which then looking at cost is a very good thing. In particular, we have a 19% improvement in all in sustaining costs when looking back at Q2 this year in comparison to Q2 of last year.

Turning to profitability, slide number eight looks closely at our earnings from mine operations in the second quarter. Earnings totaled about $1.8 million. As these slide shows we had a $5.3 million negative impact as a result in the drop in the gold price. This offset a strong favorable contribution from an 11% increase in gold sales volume in the quarter.

Operating costs were higher on a dollar basis, which reflected a strong volume -- the strong volume growth. On unit basis, as you can see, operating costs improved quite significantly. We also had a favorable impact from depreciation and depletion year-over-year, which reflected the write-down we took at the end of the year 2012.

Moving on to slide nine, slide nine takes us from the earnings from mine operations to a net loss we have recorded in Q2 of 2013. Q2 year-over-year reports reduced net loss from continuing operations, reflecting a $7.7 million gain on embedded derivatives, which related to the accounting for the gold linked loan. This is offset by lower mining earnings, financing costs of $2.8 million, as well as $3 million in write-downs on investments.

Net loss from discontinued operations reflects translation losses related to the disposal of the Mexican subsidiary which is effective May 8th of this year.

Moving on to slide number 10, we take a look at the six-month operating performance year-over-year. Again, the company reports strong growth in tonnes processed, ounces produced and ounces poured.

Our grade averaged about 4.1 grams per tonne in the first six months of the year with an improving trend as the year has progressed. In addition, the company is reporting a very favorable trend line in terms of costs.

Moving on to slide number 11, the earnings from mine operations for the first six months of the year, the key point I’d like to highlight is the impact of the 30% increase in gold sales, which had a $24 million favorable impact on earnings.

The $12.8 million negative number for costs, again is a function of strong growth in volume, on a unit basis those costs improved. Higher depreciation and depletion also reflects strong growth in sales.

On slide number 12, looking at the six-month P&L, the reduced net loss from continuing operations reflects increased earnings from mine operations and a $9.8 million gain on embedded derivatives, offset by the impact of $5.9 million in financing costs and $3 million in write-downs on investments. Net loss from discontinued operations reflects the translation loss affected on the disposal of our Mexican subsidiary.

Turning to slide number 13, this is a summary of our financial position. We had cash and bullion of $28 million as of June 30th. With regards to the current assets and liabilities, our current ratio at the end of June was 1.16 and as a result we are in compliance with all of our debt covenants.

Slide 13 also provides the summary of our debt facilities. We have our gold loan outstanding with Sprott for $35 million. We have made six payments on this loan which has been paid back with monthly cash payment equaled to 947 ounces of goal. We also have a $35 million standby line with Sprott that is fully drawn and is due on January of 2015 and we have $103 million of unsecured debentures.

At this point, I would like to turn it back over to Tony.

Tony Makuch

Okay. I’ll get back and start on now slide 14, just looking at our operations and this is our Timmins West Mine, I mean, we see significant interest, we are seeing strong results from both mines but, in terms of Timmins West Mine we had very strong result in the quarter, we produced over 24,200 announces in Q2 ‘13, which was an increase of 27% year-over-year.

The grades have been improving and averaged over 4.4 grams per tonne in Q2, and we are on track with our development and expect to continue to grow output. And I think that we’ve also seen an improvement in grades as we look forward and getting closer to our reserve grade.

Going to slide 15 at Bell Creek, we are pleased with the production we are getting from and the upward risk we are seeing here. We produced 66,000 ounces in the second quarter which was an increase of 20% from the last years’ second quarter and the grades have improved here and they’ve averaged 4.2 grams per tonne, we believe there is an excellent opportunity to continue to grow output and improve grades going forward at Bell Creek as well.

Turning to slide 16, in terms of our Mill, we had continued to see strong result in quarter, our recoveries were over 95% in Q2, our throughput exceed to 2,500 tonnes per day and for the last three weeks of the quarter we actually were achieving 2,800 tonnes per day. Our processing costs as we increase throughput were $22 per tonne in Q2 and in the month of June we’ve seen throughput cost of $19 per tonne.

We are commissioning the expansion and haven’t process a lot of material over the last couple of weeks, but we are getting there and we are on track to reach 3,000 tonnes a day by early September.

Now on to slide 17, over the reminder of 2013, we will complete the mill expansion to over 3,000 tonnes per day. Grow our mine production to support higher throughput, reduce cash costs to US$700 per ounce, bring our all-in sustaining cost down to approximately $100 -- 1,000 per ounce and reduce our capital spending level significantly in the second half of the year.

Finally, slide 18, we are well-positioned to achieve our guidance, which is production of 120,000 to 135,000 ounce for the year. Cash costs of US$800 to US$875 ounce. Capital investment of roughly $90 million and we expect to generate net free cash flow in the fourth quarter.

Thank you. We will now be happy to take any question you may have.

Question and Answer Session

Operator

(Operator Instructions) Our first question is from Kerry Smith from Haywood Securities. Please go ahead.

Kerry Smith - Haywood Securities

Thanks, Operator. Tony, you had budgeted $10 million in exploration for the year, you’ve only spend $2.9 so far in the six months, will you spend that full amount then in 2013?

Tony Makuch

Well, actually, in terms of that the $2.9 is the exploration we spent outside of the mine property and our budget for $10 million that’s a lot of spending in side the mine. So we are actually on track to spend -- spend that for year.

Kerry Smith - Haywood Securities

Okay. So, because if I look on the MD&A, on page six in that table, it’s a exploration surface and in-mine was $2.9 million, so that doesn’t include delineation drilling then, is that correct?

Tony Makuch

Yeah. It’s just -- that’s just a capitalize portion of it.

Kerry Smith - Haywood Securities

Oh! That’s just a capitalized. Okay. I see. So how much exploration of the $10 million that you budgeted, I mean, how much is left to spend in the last six months then?

Tony Makuch

About $4 million to $5 million.

Kerry Smith - Haywood Securities

Okay. Okay. So, you kind of half way through that. I see. Okay. Okay. And then, just on the mill itself on the CapEx for the project? How much actually is left to be spent to complete the CapEx?

Tony Makuch

A very little, we really completed the spending but some of the spending was done in the month of July but you talking about less than $1 million remaining.

Kerry Smith - Haywood Securities

Okay. So, if actually -- and then it came in on budget, I presume and all that was fine then?

Tony Makuch

Yeah.

Kerry Smith - Haywood Securities

Okay. So there is basically nothing left to spend. And then the $1 million costs that you gave in your slide presentations here for June, less sub $19 a tonne, just remind me what the throughput rate was in June on average?

Tony Makuch

It was above 2,600 tones per day, on average 2,700 per day.

Kerry Smith - Haywood Securities

Okay. Okay. So the cost will come down pretty nicely there, what sort of number do you think that would look like at 3000 tones a day then?

Tony Makuch

We’ve been budgeting and guiding for -- I mean -- really is around $22 a tonne is what we expect and would like to achieve as the year progresses.

Kerry Smith - Haywood Securities

Okay. So you think that $19 was kind of an anomaly then and then $21 to $22 is more sustainable number there?

Tony Makuch

Yeah. I mean we have to -- as we get the new mill operation, we’ll have some additional costs running a SAG Mill. There are few things that we still need to get a better understanding of, as we optimize the plan.

Kerry Smith - Haywood Securities

Okay.

Tony Makuch

And -- but you’ve seen numbers like 18 -- 19 to 18, $19 a tonne are achievable from that plant. And we’re going to move forward to try to do that but we’re -- it’s a little bit early now in terms of -- getting a sense what our power drug is going to be, what our power cost are going to be for the plant as we ramp up in and run the SAG Mill and the rest of the plan and few others areas.

Kerry Smith - Haywood Securities

Okay. And you did have a five-day shutdown of the mill in the quarter just, I guess, is related to the time of the new expansion. Will there be anymore full shutdown like that through the commissioning process or is it now literally just a ramp-up process?

Tony Makuch

Well, you mean during the commissioning point process, we’ve had up and down, up and down but we don’t plan to have any major shutdown between now and the end of this year.

Kerry Smith - Haywood Securities

Right. Okay. So everything is all tied in and it’s now just a same commissioning then?

Tony Makuch

Yeah.

Kerry Smith - Haywood Securities

Yeah. Okay. Thanks a lot.

Operator

Thank you. The following question is from Daniel Earle from TD Securities. Please go ahead.

Daniel Earle - TD Securities

Yeah. Hey guys, congratulation on the operating result, looks like you’re well in your way to guidance?

Tony Makuch

Thank you.

Phil Yee

Thank you.

Daniel Earle - TD Securities

Yeah. But I was curious on whether you have any further thoughts you can share with us on the capital range for 2014?

Tony Makuch

That’s still a little early now, Dan. But I think we’ve talked about in the past that we would be reducing, I mean, in our PEA, which we have put out -- years ago gave some general sense of what our capital was. We’re tracking somewhat to that, some what the difference are what we do and operate at Bell Creek. And there are few other areas we need to assess in terms of Timmins expansion over at the Mill area. But it’s kind of early to see what it is but in that we do see our capital spending next year will be lower than it was this year.

Daniel Earle - TD Securities

Okay. But you still be, I mean the prior guidance range was lower than what it is this year. Do you still think it would be towards a lower end of that guidance range or is it possible you might even be below that?

Tony Makuch

Well, I’ve, I -- I think we vision [this year] something between 50 million and 80 million.

Daniel Earle - TD Securities

Yeah.

Tony Makuch

And I think of those numbers are still pretty good.

Daniel Earle - TD Securities

Okay. And then is there any thing you can share with us on discussions if you have had any with Sprott Resource Lending on the repayment schedule?

Tony Makuch

Go ahead Phil.

Phil Yee

Hi, Dan. It’s Phil here. Yeah, we’ve been in constant communication with Sprott. We’ve talked about different scenarios but the objective was to try and manage it the best we can. And I think we’ve done a fairly good job, maintaining the covenants above water. At this point in time, the discussions are ongoing. And at this point, we’re going to keep our options open.

Tony Makuch

Yeah. But I mean we’ve been -- month-over-month we’ve been repaying down the gold-linked note that -- so we’re paying the amortization hedge on that and able to service that plus any additional interest payments and still maintain cash liquidity for the company.

Daniel Earle - TD Securities

Okay. That’s great. Thanks a lot.

Tony Makuch

And we see that continuing on for the rest of this year.

Operator

(Operator Instructions) The following question is from Stephen Walker from RBC Capital Markets. Please go ahead.

Stephen Walker - RBC Capital Markets

Thank you, Operator. Tony, just with respect to the grades that you’re seeing in July at Timmins and Bell Creek, can you give us an indication of what those grades are that you’re delivering to the plant?

Tony Makuch

Well, as our grades continue to improve even over the second quarter and we are seeing grades now coming -- as I’ve mentioned earlier close to our reserve grade. So we are – we did -- we are seeing that we can achieve grades of five grams per ton.

Stephen Walker - RBC Capital Markets

On a consistent basis or day-to-day you’re hitting that?

Tony Makuch

Not on a consistent basis but basically we average yield over five grams per ton in the month of July in terms of processing.

Stephen Walker - RBC Capital Markets

That’s average from Timmins and Bell Creek together?

Tony Makuch

Yeah. Actually it was -- it was actually close to between 5.5 and 6 grams per ton average for the month.

Stephen Walker - RBC Capital Markets

And then can you maybe back up and explain sort of how you were able to get that or how you’ll be able to exceed the expected sort of average, is that less disillusion where you end up in a better mining sequence. What was that -- when you look at the month of July, what was that?

Tony Makuch

It’s not -- as we’re forecasting us going forward we’ve -- we’re getting to the point where we’re getting some of the benefits of the work that we did in 2012 and the first half of 2013. We had lot of developments to get more of the ore body exposed. We have more flexibility now in terms of mine sequence and in terms of where we mine.

We did a 100 ounce or 100,000 meters of drilling in 2012. We now have that information log that we’re able to use that information to get little bit more tighter into our scoping, planning et cetera. So we have a lot more of the information. We have a lot of the progress that was done in the previous year. And we’re able to -- lot of the previous grades had some impact as we were doing a lot of development and exploration development or delineation development on the levels which tended to give us some lower grades going to the mill.

We’re getting beyond that now. So we’re able to start focus on our stopes, tighten up our stopes and get some improvements in grades. We did try to deal -- we’re trying to -- with the drilling results we got, using that drilling information, we’re being a lot more tighter in terms of designing of our stopes and being able to plan our stopes to be maybe slightly smaller than they were in the past.

Stephen Walker - RBC Capital Markets

That’s very helpful. What would be the, I mean, what’s reasonable guidance for the third and fourth quarter if we’re looking at sort of average head grades to the mill as it ramps up here?

Tony Makuch

I mean we see ourselves somewhere between, I think, for the full year we were looking at averaging somewhere around 4.5 grams. We think we’re still on track for that and so we see somewhere between 4.5 grams and 5 grams, our average grades for the remainder of the year.

Stephen Walker - RBC Capital Markets

Okay. Thanks Tony. Just getting back to your comment on underground developments at Timmins mine, on both parts of the deposit, how many months of ore development do you have ahead of you. Where do you lie on the schedule as far as if you were to stop any of the underground development today, how long could you operate with the stopes and then development?

Tony Makuch

I’ll let Dan Gagnon answer that question.

Dan Gagnon

We’re in very good shape when it comes to development. We’re getting rates that are actually surprising us that really we get from our workers and we’ve -- basically if you look at from today to the end of the year if you’re looking at Timmins West, the two deposits right now as it stands, we have 80% of the develop. So we’re in a position where very soon we’ll have a 100% of our stoping blocks developed. And when you look at Bell Creek, we basically have a 100% of the development completed to mine what we need to mine for the rest of the year.

Stephen Walker - RBC Capital Markets

Okay. So you’ve basically got to Bell Creek, call it, five months of development ahead of you and then for Timmins West would be 12 months, is that how we kind of read that or …?

Dan Gagnon

So I was just commenting on this year’s plan, the 2013 plan, basically that we are pretty close to have all the development complete for the Timmins West deposit. But we do have development beyond that to start making our plan for 2014, so that’s correct.

Stephen Walker - RBC Capital Markets

Okay. So five to six months for both of them. So what would you ideally like to be given sort of what normally happens if you’ve got whatever your point from six stopes or eight stopes and you’re developing another four or five but for to maintain the 3,000 tonnes a day, what sort of ratio stopes that are being mined versus stopes being developed for you, do you feel comfortable with or would you feel comfortable with -- how much sort of -- how much sort of question would you like to have in front of you nine, 12 months or five, six months?

Dan Gagnon

I think we feel comfortable when we’re in the range of six months to a year which is really where we’re setting ourselves up to be so about six months to a year ahead of us.

Stephen Walker - RBC Capital Markets

Okay.

Tony Makuch

That’s one of the big challenges we’re also trying to do as well, Stephen, it’s not just have the development done but we also need to make sure we have the delineation drilling done to those levels as well.

Stephen Walker - RBC Capital Markets

And then currently, how many -- what do you point from -- how many stopes you point from now on both Timmins West and Bell Creek?

Tony Makuch

It varies depending on the cycle but basically at the Timmins West, we’re generally pulling from above three to four stopes. And at the same time, we’re actually drilling some of the stopes.

Stephen Walker - RBC Capital Markets

Right.

Tony Makuch

And at Bell Creek, we have smaller stopes and probably in the range of two to three stopes that we try to keep active at all times.

Stephen Walker - RBC Capital Markets

Okay. Great. Thank you for that, Dan. Thanks.

Operator

(Operator Instructions) There are no following questions registered at this time. I would like to return the meeting to Mr. Utting.

Mark Utting

Thanks very much, Operator and thanks everybody for participating in today’s call. As you’ve heard, we believe we’re making very good progress and we’re on track and very well situated to have a very strong year. Our next quarter end will be -- call will be in early November and we look forward to speaking with you again then. Thanks very much.

Operator

Thank you. That concludes today’s conference call. Please disconnect your lines at this time and we thank you for your participation.

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