San Gold Corporation (OTC:SGRCF) Q3 2013 Earnings Call November 13, 2013 11:00 AM ET
Tim Friesen - Investor Relations and Communications
Ian Berzins - President, Chief Executive Officer and Chief Operating Officer
Gestur Kristjansson - Chief Financial Officer, Vice President, Finance and Corporate Secretary
Michael Michaud - Vice President, Exploration
Christos Doulis - Stonecap Securities
Good morning. My name is Elena, and I will be your conference operator today. At this time, I would like to welcome everyone to San Gold Corporation's 2013 third quarter results conference call. (Operator Instructions) Mr. Tim Friesen, Communications Director, you may begin your conference.
Thank you, Elena. Welcome to San Gold's 2013 third quarter results conference call. Today's presenters are Ian Berzins, President, CEO and Chief Operating Officer; Gestur Kristjansson, CFO; and Michael Michaud, San Gold's Vice President, Exploration.
Before we begin today's management presentation, I will make a cautionary statement regarding forward-looking statements. This presentation includes statements that may constitute forward-looking statements or information. Any forward-looking statements made and information provided reflect the company's current plans, views, and estimates.
Forward-looking statements and information, which include all statements that are not historical facts, are based on certain material factors and assumptions that are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated or suggested by the forward-looking statements or information. Consequently, undue reliance should not be placed on these forward-looking statements and information.
The information contained in our annual information form and in our quarterly management discussion and analysis, which is available on our website and on SEDAR, identifies some factors and assumptions upon which these forward-looking statements or information are based on and the risks, uncertainties and other factors that could cause actual results to differ. All forward-looking statements and information made or provided during this presentation are expressed, qualified in their entirety by this cautionary statement and the cautionary statements contained in our press release and the company's management discussion and analysis dated November 12, 2013.
With that, I'd like to hand the call over to San Gold's President, CEO and Chief Operating Officer, Ian Berzins.
Thanks Tim. Good morning, everyone, and welcome to San Gold's 2013 third quarter conference call. Our primary objective at the beginning of Q3 was to improve on the progress made in the previous quarter and to drive the operation to an overall improved cash position with the goal of free cash in the near-term.
To cut to the chase, while I'm very pleased with much of the progress made during the quarter, I am not satisfied with the fact that we had an overall comprehensive loss of CAD6.4 million. The operation produced less ounce of gold during the quarter than we planned due to reduction in grade and gold prices remained under pressure. As a result, we required to do some small financings in order to maintain our current level of the treasury.
Without question, the operations continue to make progress in terms of unit productivities and cost reductions, but we have not yet struck the proper balance in terms of quality of ore being mined versus the quantity of ore being mined.
To date, the mining methods we have chosen to implement and the equipment we have invested in have allowed us to make an order of magnitude improvement in our safety record as well as our cost per ton, but we are accepting more dilution than what I feel is acceptable. This will be a main focus for us in Q4 and beyond.
I think it's important to recognize that our Q3 2013 performance relative to the equivalent quarter of Q3 2012 is on a comparative basis, somewhat irrelevant, and that we began Q3 2012 with 55,000 tons on a surface stockpile following the failure of the ball mill in Q2 of 2012. This allowed us to maximize mill capacity in the subsequent quarter and set new records for that quarter in terms of mill throughput.
In addition, the gold price we had last year was approximately CAD300 per ounce more than what we currently operate under. Accordingly, some of the comparatives I plan to focus on are in relation to Q1 and Q2 of this year, where we began a rebrand of the company with a focus on efficiency versus growth and a reduction in capital spending.
When I look at the quarter on balance, we remain on track to meet our full year production guidance and our operating costs are holding constant, as we continue to mine and mill near record levels. We have made significant progress in curtailing capital investments without compromising the future of the operation and setting ourselves up with a much improved and underground infrastructure particularly on 16 and 26 levels.
Beginning the year, our full year capital development target was CAD59 million. Our current full year target is now approximately CAD44 million, representing a 25% reduction based on significant reductions during the last quarter and plant reductions for the next quarter. Our full year budget for property, plant and equipment was CAD19 million. Our full year target is now closer to CAD10 million, a 47% reduction.
Overall, we have reduced our capital investment this year by approximately CAD24 million or 31%. In addition, general and administrative expenses have been reduced by approximately CAD1.1 million. We continue to enjoy exploration success due in large part to the regional structural analysis currently underway.
In September, we announced the discovery of four new near surface zones located close to our existing infrastructure. At the start of November, we announced very high-grade result from another zone adjacent to our 26 Level infrastructure and we anticipate additional results to be released in the near future.
Our exploration program is now focused on the underground, where our drill platforms are much closer to the ore bodies. Three underground drilling stations are currently in operation, upgrading the inferred and indicated mineral resources into higher confidence measured and indicated.
Surface exploration has been reduced to a single drill now that our flow-through exploration commitments are completed. This means we will see significant cost reductions in drilling for the balance of the year. We continue to look for ways to reduce future spending commitments, while maintaining the value of previous investments.
We recently completed a purchase agreement with Cougar Minerals on a contagious claim block that was similar to the agreement entered into during the previous quarter with Wildcat Exploration. Both agreements have resulted in reducing cash commitments, while protecting previous investments made at these properties.
As stated earlier, gold prices remain weak during the quarter, as the company endured a drop in price of gold of more than CAD300 compared with last year. Given the uncertainty of future gold prices, it is imperative that we continue to make efficiency gains in subsequent quarters.
During the past quarter, the company generated small loss from operations of CAD0.6 million, a cash contribution from operations before changes in non-cash working capital of CAD2.2 million and recognized a quarterly total and comprehensive loss of CAD6.4 million.
Cash cost did increase during the third quarter to CAD938 per ounce of gold sold, in part because we assume responsibility for all the primary development in Hinge and 007 from the mining contractor in June of this year. Once we took over from the contractor, certain overheads that we're being capitalized, started being captured as operational items and were expensed.
We currently remain on track to produce between 75,000 and 85,000 ounces of gold for this year. However, I expect full year cash cost will be higher than planned at between CAD900 and CAD950 per ounce sold due to the impact of grade.
Overall, we remain well-positioned in terms of our first priority, which is achieving free cash flows. We are not there yet, but we're making excellent progress, and I remain optimistic that this objective will be achieved by early 2014.
I'll now take a few minutes to view the company's third quarter operating activities, following that Gestur will discuss the financials and Mike will discuss our exploration activities.
First, I want to commend our employees and contractors for their continued commitment of safe production. We once again finished the quarter with no loss time accidents and now have completed more than 600 days and 1.4 million hours without a loss time accident.
We finish the quarter with approximately 420 employees and 100 contractors supporting the project, which is similar to our manpower during the last quarter and approximately a 100 fewer people than at the start of the year. We continue to focus on training and developing capacity from local communities in order to fill vacancies from attrition where possible.
We produced 20,220 ounces of gold in the third quarter of 2013. Grade for the quarter was 4.24 grams per ton. This was a reduction from the previous quarter and does reflects the fact that low-grade surface stockpiles were milled during the quarter in order to ensure we remain on track for achieving full year gold production guidance. That said, I recognize it is our stated target of 5 grams per ton and it is something we will continue to scrutinize closely.
The company mines 167,397 tons at an average mining rate of 1,825 tons per day. The company relies on mechanized cut and fill and long-hole mining as our principle mining methods. We were also experimenting with alimak long-hole mining in the L13 zone, as our alternative method for mining narrow vein structures that otherwise would be uneconomic and thereby providing some incremental feed for the mill.
We milled approximately 175,300 tons of ore at an average milling rate of 1,906 tons per day. Mill recovery was 93.3%, a slight decrease over the last quarter, but very acceptable given the grade. Surface stockpile decreased from approximately 15,000 tons from the start of the quarter to approximately 7,800 tons at the end of the quarter.
I'm also very pleased to note that we have completed the permitting process for the new tailings management area. Construction has commenced on this project with starter dykes using local contractors, including a First Nations joint venture entity. We continue to make good progress on extending the Rice Lake mine infrastructure into the Hinge and 007 deposits from 16 and 26 levels.
We have already advanced out under the down dip extension of the Hinge mine and are currently drilling a number of nearby targets to determine their mining potential, including L8, L10 and the newly discovered 61, 63 zone. We see excellent potential to add working paces, accessed by the 16 Level infrastructure.
On 26 Level, we are currently mining at the newly established 710 vein. As I mentioned earlier, recently obtained drill results into the Hinge well have been very encouraging, returning six intersections, showing excellent grades over strong widths, immediately adjacent to the 710 vein. Included in those results was one hole, which returned 45 grams over 6 meters.
We are now integrating this region into the short-term mine plant. I remain very optimistic with discovery such as these will result in improvements in the overall grade and that with the cost rationalization measures we have implemented over the past six months, our overall financial performance will continue to improve.
In addition, these new discoveries in proximity to the existing infrastructure, should allow us to add more workplaces, thereby allowing us to optimize the installed mill capacity.
I would be happy to answer any questions you may have during the Q&A portion of the conference call. With that, I will pass this on to Gestur to provide a review of the financial results. Gestur?
Thanks, Ian. Good morning, everyone. I'll start by highlighting a couple of points. First, as Ian mentioned, we've reduced our capital spend on mineral properties and PP&E this quarter by CAD12.1 million compared to the same quarter last year and by over CAD8.5 million compared to the previous quarter.
The company generated CAD2.2 million in cash flow from operations, before changes in non-cash working capital, in part due to the efficiency initiatives implemented in the start of the second quarter. Combined, these initiatives have conserved our cash position and contributed to the bottomline.
The company completed a private placement for proceeds of CAD4 million and received approximately CAD2.7 million in capital equipment lease and term loan financing. We have also made the first CAD2 million installment on our unsecured convertible debenture interests. The company ended the quarter with CAD20.3 million in cash and short-term investments.
I will now discuss the balance sheet, the income statement and the cash flow statement for the quarter. All amounts are presented in Canadian dollars.
Starting with the balance sheet. We ended the quarter with current assets of CAD43.9 million and a working capital surplus of CAD30.1 million. During the quarter, the company invested CAD7.7 million on the capitalization and development of mineral properties and CAD0.7 million in property, plants and equipments.
Current liabilities have been reduced by approximately CAD12 million since December, while long-term liabilities have risen by CAD39 million, primarily due to the unsecured debenture financing undertaken in the first quarter.
Our flow-through share premium is down to CAD74,000 from CAD5.5 million at yearend, as we fulfill our flow-through commitments. These commitments are all, but defeated at the end of September and we're accordingly reducing our exploration spend.
Moving on to the income statements. San Gold reports revenue of CAD28.7 million compared with CAD41 million in the same quarter last year. The decrease in revenue results from a 14% decrease in the ounces of gold sold, and an 18% decrease in the realized price per ounce sold. The realized price of gold sold also dropped over CAD300 in the same period from CAD1,675 to CAD1,373 in Q3 2013.
Loss from operations was CAD0.6 million compared with income operations of CAD5.4 million in the third quarter of 2012. Cash costs per ounce were CAD938 per ounce of gold sold compared with cash costs of CAD812 in the third quarter of last year. Overall spending is down slightly, but there is somewhat less ounces over which spread to costs. Recall that Q3 last year was somewhat of an anomaly as we molded surface stockpile that have been created during the mill repairs.
The company recognized CAD7.4 million in depletion expense, a 47% decrease compared with CAD14 million recognized in the third quarter of 2012. The decrease resulted primarily from the decrease in the ounces. For comparison, the depletion expense this quarter was similar to the second quarter of this year, which was CAD7.8 million.
General and administrative expenses were CAD1.9 million, compared with CAD3 million in the third quarter of 2012. The decrease is due to 1% reduction in corporate overhead, and the 30% decrease in share-based compensation expense, as a result of the current moratorium on options.
After exploration, general and administrative, and other net expenses including the recognition of CAD2 million of income tax recovery on flow-through shares, total and comprehensive loss for the quarter was CAD6.4 million or CAD0.02 cents per share, which compares to a net loss of CAD0.8 million, particularly zero cents share in the same period of 2012.
Moving on to the statement of cash flows. Cash flow generated by operating activities before changes in non-cash working capital was CAD2.2 million or CAD0.06 cents per share compared with the contribution of CAD15.8 million or CAD0.47 cents per share in the third quarter of 2012. The company's marketable securities decreased by CAD2.7 million during the quarter, as proceeds were used to fund working capital and development.
Capital spending during the quarter was focused on improving key infrastructure, primarily within the 007 deposit and on extending the 16 and 26 levels of the Rice Lake mine in order to accelerate access to the down dip extensions of these deposits.
As noted, but worthy of repeating, the company is transitioning to a more sustaining level of mobile equipment and mineral property investment, as most key items have been procured and are in place for use.
That concludes my review of the financial statements. If anyone has any further questions, I'd be happy to answer them during the Q&A. And with that, I turn the call back over to Ian.
Thanks, Gestur. I will now ask Mike Michaud, San Gold's Vice President, Exploration, to provide an overview of our exploration activities. Mike?
Thanks, Ian. During the quarter approximately 45,000 meters of drilling was completed with two surface and three underground drill rigs in operation. The drilling have two main objectives: first, to better delineate and extend the known-zones of gold mineralization at the Rice Lake, 007 and Hinge mines; and second, to further explore known-gold trends that could be developed in the relative short-term, during more regional and conceptual drilling targets has been deferred.
Definition drilling at the 007 and Hinge zones continues to confirm the strong vertical continuity of the gold mineralization, which has not yet been tested below 1,400 meters depth. The 007 mine will remain a priority throughout 2013, and the company is continuing its effort to convert the large inferred mineral resource in the 007 deposit to measured and indicated resources, and subsequently, to mineral reserves.
As Ian mentioned earlier, the company has intersected a new gold structure in the immediate hanging wall of the 710 lens of the 007 deposit. Initial results included an intersection returning 22.5 grams per ton over 4.2 meters. On November 4, the company announced additional results that includes drill hole 614-13-01, which returned 45.3 grams per ton over 6.1 meters and drill hole 614-13-09, which returned 14.7 grams ton over 4.1 meters.
This gold mineralization is located in the immediate hanging wall of the 710 zone and it's easily accessible from the new 26 Level development. This still remains open to the east and down plunge and represents significant exploration potential.
In addition, as part of the near-mine exploration campaign, the company is in the midst of completing the comprehensive structural analysis and geologic modeling exercise designed to better define the controls on gold mineralization as an, a, before exploration targeting. In September, the company announced the discovery of multiple new zones of gold mineralization from surface drilling along the Shoreline Basalt and within close proximity to existing infrastructure.
Initial drilling has identified four new zones. Most notably, drill holes JH-13-60 that returned 7 grams per ton gold over 10.1 meters within the 6163 zone, and AB-13-01, which returned 12.4 grams per ton over 4.3 meters in the newly discovered Scout zone. During in the future we'll continue to explore these new and exciting areas of which several can be more effectively drilled from underground locations.
Since the end of the third quarter, the company has reduced the number of drills and operations to one surface and three underground drills. And we expect to maintain this level of activity until yearend and throughout 2014.
Also in October, San Gold announced that it acquired 100% interest in 20 mineral claims of Cougar Minerals Corp representing approximately 3,117 hectares of land in the Rice Lake gold belt. The previous option agreement has been turned into favor of this improved agreement, in which San Gold will retain the full value of all previous work completed and reduce work expense by approximately CAD1.5 million over the next two years.
The company's land package at Rice Lake not covers more than 400 square kilometers. The company is also very encouraged by recent positive drilling results, at 50%-owned Tully project near Timmins, Ontario. The operator SGX Resources recently announced infill drilling results that have confirm the grade and width of the mineralization in the upper 200 meters of the deposits.
In May, SGX announced drill hole 13-15 that intersected four separate zones including 14.1 meters of 20.1 grams per ton gold. More recently, in September, SGX announced that continued drilling has extended the Tully Deposit over 1 kilometer strike length and the zone remains open, along strike and down depth. In this area hole 13-38 returned 36.7 grams per ton gold over 6.3 meters at a depth of 200 meters below surface, and very encouraging.
That concludes the exploration summary.
Thanks Mike. Once again, I'd like to emphasize that we remain in a period of transition. We have made some difficult decisions over the past six months. We're also now seeing the positive results of these decisions. We remain focused on efficiency versus growth at this time.
We remain optimistic that gold prices will improve. However, we're also continuing to operate conservatively and with the understanding that prices could drop further. We are continuing to look at all costs, not just focusing on cash costs and we understand we must live within our means.
I expect mining and milling rates will remain stable and grade will continue to improve in the fourth quarter. And we are maintaining our guidance to produce between 75,000 and 85,000 ounces with full year cash costs between CAD900 and CAD950 per ounce. I also expect continued success from our underground drilling programs.
This concludes our formal presentation. At this time, I'd like to ask the operator to open the line for questions. Elena?
(Operator Instructions) The first question is from Christos Doulis with Stonecap Securities.
Christos Doulis - Stonecap Securities
So CapEx came down significantly versus year ago, so I'm wondering if you can provide some guidance going forward both for Q4 and 2014.
We've continued, as you know the work aggressively on 16 and 26 Level, so those areas had still required capital investment, but we have been able to reduce by about CAD8 million on that spend, including the property, plant and equipment. And that's our expectation that the capital spends for Q4 will be very similar to Q3 in that range of CAD8 million to CAD9 million.
Just to flush that out a little bit, Christos, so in Q1 we had capital development of about CAD15.5 million and PP&E of CAD3 million for CAD18.9 million. So the total CapEx, Q2 was about CAD17 million, about CAD12.8 million capital, CAD4.1 million PP&E. This most recently completed quarter we had CAD7.6 million in capital development and both CAD650,000 in PP&E, for CAD8.3 million.
We see Q4 fairly similar to Q3. So that brings us kind of in at around the CAD55 million plus or minus. I mean there is a formulated component to the development. So I don't have perfect visibility into the CapEx and we see next year on a similar plain. We haven't completely finished our budgeting at this time, but we see it.
There is certainly efficiencies that we can pick up compared to Q1 and Q2 of this year, but there is a certain amount of development that we need to do and there's a certain amount of plain replacement that needs to happen. So hopefully that gives you some goalposts.
Christos Doulis - Stonecap Securities
Then just another quick question here. I noticed in the news release, you're now talking about the guidance up to 85,000 ounces. Last, I saw was 90,000, so this is I guess revised guidance now or did I miss a guidance revision?
No. I mean we were guiding early in the year to 75,000 to 90,000 ounces, but after three quarters we're at 60,000. So even on a pro-rated basis, we felt it made more sense to be guiding to 75,000 to 85,000.
Thank you. This concludes the question-and-answer session. I would now like to turn the meeting over to Mr. Berzins.
Thank you, operator. Again, I would like to thank everyone for joining us on the call today to review these results. Thanks, and have a great day.
Thank you. For more information, please visit San Gold's website at www.sangold.ca or contact Tim Friesen, Communications Director, at 855-585-4653 or by e-mail at firstname.lastname@example.org. This concludes today's conference call. You may now disconnect.
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