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Alamos Gold (NYSE:AGI)

Q4 2013 Earnings Call

February 20, 2014 12:00 pm ET

Executives

Scott Parsons

James R. Porter - Chief Financial Officer

Manley R. Guarducci - Chief Operating Officer and Vice President

Jason King Dunning - Vice President of Exploration

Analysts

Dan Rollins - RBC Capital Markets, LLC, Research Division

Jeff Killeen - CIBC World Markets Inc., Research Division

Anita Soni - Crédit Suisse AG, Research Division

Michael J. Gray - Macquarie Research

David Forster - BofA Merrill Lynch, Research Division

Operator

Good afternoon. I'll now turn the meeting over to Mr. Scott Parsons, Director, Investor Relations. Please go ahead.

Scott Parsons

Thank you, operator, and thanks to everyone for attending Alamos' Fourth Quarter and Year-End 2013 Conference Call. Our presenters today will be Jamie Porter, Chief Financial Officer; Manley Guarducci, Vice President and Chief Operating Officer; and Jason Dunning, Vice President of Exploration. I would like 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 mining and processing of ore, recovery rates, operating plans and the conversion of mineral resources to proven and probable 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 of the dollar amounts mentioned in this conference call are in U.S. dollars unless otherwise noted. Now Jamie will provide you with an overview.

James R. Porter

Thank you, Scott. Before I provide an overview of the quarter, I should mention that John McCluskey, our President and CEO, is currently traveling with Prime Minister Stephen Harper's delegation to the North American Leaders' Summit in Toluca, Mexico for a series of meetings with President Obama and President Pena Nieto of Mexico. This offers a valuable opportunity for John to discuss some of the challenges facing Alamos with key government officials from both Canada and Mexico, including the recent tax reforms in Mexico and the permitting of the Esperanza project.

Hopefully, most of you have had a chance to review our fourth quarter and year-end results issued this morning. We had another strong year at Mulatos. Our open-pit heap leach production, the driver of our Mulatos Mine, performed extremely well in 2013, with throughput and grade coming in above budget. We produced 39,000 ounces in the fourth quarter and met our full year guidance, producing 190,000 ounces. We also sold a record 198,200 ounces at total cash costs of $496 per ounce and all-in sustaining costs of $772 per ounce, both below our full year guidance and among the lowest in the industry.

Even with the 28% decrease in the price of gold in 2013, we continued to generate strong margins and operating cash flow in both the fourth quarter and full year on the back of our low cost structure. We enhanced our long-term development pipeline through the acquisitions of Esperanza Resources and Orsa Ventures in 2013. We now have one of the strongest growth profiles of our peer group with low-cost, low capital-intensity projects that, like our Mulatos Mine, all generate cash flow in the current gold price environment.

In 2014, we expect to produce between 150,000 and 170,000 ounces of gold at total cash costs of $700 to $740 per ounce and all-in sustaining costs of $950 to $1,000 per ounce. While this represents a decrease from the production levels we have experienced over the past 2 years, it is important to highlight 2 points. First, we expect development of the low-cost Cerro Pelon and La Yaqui satellite deposits to move our production closer to the level achieved in 2013. Second, even with the recently announced increase in costs, our all-in sustaining costs remain below the industry average, which allows us to continue to generate strong cash flow.

Our balance sheet remains one of our greatest strengths. Despite paying net cash of $48 million to complete the 2 acquisitions and returning more than $25 million in dividends to shareholders in 2013, we increased our cash and short-term investments to $417 million as of December 31, 2013, a $54 million increase from a year ago, and we remain debt-free. Combined with our ongoing cash flow generation, this has afforded us the financial flexibility to fund our development pipeline internally while also pursuing further accretive growth opportunities.

One of these opportunities has been executing on our share buyback. Following what we believe to be a market overreaction to our 2014 guidance, we repurchased for cancellation 351,500 common shares at a total purchase price of $3.3 million since the start of the year.

At this point, I'd like to turn the call over to Alamos' Chief Operating Officer, Manley Guarducci, for an overview of the quarterly and annual operating results.

Manley R. Guarducci

Thank you, Jamie. Good afternoon, everyone. As Jamie mentioned, 2013 was yet another strong year at Mulatos. Total crusher throughput averaged a near-record 17,900 tonnes per day in Q4, marking the fifth consecutive quarter in which throughput exceeded the annual budget. For the full year, throughput averaged a record of 17,900 tonnes per day, which is a 12% increase over 2012. The grade of the crushed ore stacked on the leach pad in the fourth quarter was 0.96 grams a tonne and averaged 1.07 grams a tonne for the year, 9% above our full year guided grade of 0.98 grams a tonne. We continued to benefit from positive ounce reconciliation of 13% in the quarter and 8% for the year relative to the block models.

This strong performance was partially offset by lower-than-anticipated grades milled from the Escondida high-grade zone of 3.46 grams a tonne in the fourth quarter and 6.8 grams a tonne for the year, below the full year average budgeted grade of 11 grams a tonne. While grades were below expectations in the fourth quarter, as we saw grade variability at the bottom of the zone, it is important to note that we are in the final quarter of production from the Escondida open pit. Since we commenced mining in the zone, the ore grade mined and milled of 9.6 grams a tonne has been close to the average reserve grade.

Development activities in Mexico in Q4 were focused on underground development to access Escondida Deep high-grade ore and following receipt of the EIA approval, completion of the haul road to the El Victor and San Carlos deposits. The development budget for Mulatos for 2014 is $30.3 million. This includes $3.1 million at Escondida Deep, where we have completed development of the first stope level, with the second level underway. We remain on track to begin underground production at Escondida Deep in Q2. The budget also includes $18.3 million for San Carlos, with approximately half allocated towards underground development and the remainder allocated towards the pre-strip of the open-pit portion of the deposit and construction of the bridge across the Mulatos River. Development of San Carlos remains on track to access additional high-grade mill feed by the second half of 2014.

Negotiations to acquire surface rights for Cerro Pelon and La Yaqui are ongoing while legal proceedings continue in parallel. We expect a resolution in the third quarter of 2014. Once we acquire the surface rights, we expect permitting and construction will take 18 months to complete. The 2014 budget for Esperanza is $11.3 million, which is focused on baseline work for resubmission of the EIA report in 2015 and an internal feasibility study incorporating the resource update subsequent to the 2011 PEA.

In Turkey, the company recently received notice that the Canakkale Administrative Court issued to the Ministry of Environment an injunction order regarding its approval of the EIA for the company's Kirazli project. The basis for the injunction was lack of assessment of the cumulative impact of the Kirazli project in conjunction with other potential mining projects in the region. The ministry is now formally challenging the court's decision. A hearing of the underlying legal claim which led to the injunction order, is expected to take place within 6 months. In the interim, the company is amending its EIA for the Kirazli project to include an assessment of the potential cumulative impact of all projects proposed for the region.

It is important to note that this injunction does not relate to any substantive concerns with the Kirazli project or the Kirazli EIA, which had previously been approved by the Ministry of Environment. Once we have all the permits in hand, we could see gold production from Kirazli within 18 months. However, the recent political instability in Turkey has increased our uncertainty around when these permits will be obtained. Accordingly, the company has implemented further cost-reduction measures in Turkey with a budget for 2014 of $4.8 million.

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

James R. Porter

Thanks, Manley. I'll now provide an overview of our financial results for the fourth quarter and 2013 year. Gold sales in the fourth quarter of 42,200 ounces contributed to record sales of 198,200 ounces for the year at cash operating costs of $426 per ounce. This translated into another strong quarter and year of operating cash flow. Revenues in the fourth quarter were $54 million, with an average realized gold price of $1,276 per ounce. For the full year, we beat the average London PM Fix gold price by $13 an ounce, with an average realized price of $1,424 for revenues of $282 million.

Gold continues to trend lower in the fourth quarter. However, our cash flow remained strong, with cash flow from operations before changes in noncash working capital of $12.7 million or $0.10 per share. For the full year, we generated cash flow from operations before changes in noncash working capital of $113.3 million or $0.89 per share

We've reported a net loss in the fourth quarter of $5.3 million or $0.04 per share. Earnings were impacted by a onetime noncash deferred tax charge of $9.8 million to account for the impact of the recent tax reform in Mexico and a $1.5 million charge relating to severance payments to be incurred as a result of the transition to contractor mining. Excluding these items, our adjusted earnings were $6 million or $0.05 per share. For the full year, we reported earnings of $38.8 million or $0.30 per share. Relative to the prior year, earnings were primarily impacted by lower gold price.

Our effective tax rate for 2013 was 51%. However, removing the impact of the $9.8 million noncash deferred tax charge, our effective tax rate is 38%, which reflects the impact of nondeductible corporate charges in Canada and Turkey. The company implemented several tax planning strategies prior to January 1, 2014, to mitigate the impact of the Mexican tax reform, including the transition to contract mining. This transition will shift sustaining capital spending required to maintain an owner operated mining fleet into operating expenses, lowering the amount of tax payable under the new 7.5% special mining tax, which is based on earnings before interest, taxes, depreciation and amortization. The statutory income tax rate in Mexico is now 30%. Incorporating the impact of the 7.5% special mining tax, we estimate our effective tax rate in Mexico will be approximately 35% going forward.

Now we'll hear from Jason Dunning, our Vice President of Exploration.

Jason King Dunning

Thank you, Jamie. Total exploration expenditures in 2013 were $16.1 million. This included $12.1 million spent at Mulatos, focused on directional drilling at the San Carlos northeast extension, infill and step-out drilling at East Estrella and the El Realito deposits. Results from drilling activities are expected to be reflected in the company's mineral reserve and resource update, which will be released at the end of the first quarter of 2014. The 2014 budget at Mulatos is expected to be $13.3 million, which includes a minimum of 56,000 meters of drilling. The current focus of exploration at Mulatos is continuing to delineate high-grade mineral reserves to provide mill feed beyond the life of the Escondida and San Carlos high-grade deposits.

At Esperanza, the 2014 budget is expected to be $2.8 million and will be focused on work for the resubmission of the EIA. Work will include approximately 7,000 meters of infill and condemnation drilling around the Esperanza deposit. Spending was minimal at Quartz Mountain in 2013 as the company focused on finalizing its exploration permits for the 2014 drilling program. At present, the first permit for the initial 3,000 meters of drilling should be finalized and issued before the end of the first quarter 2014. The 2014 budget is expected to be $6.3 million and focused on in-fill drilling of the existing mineral resource, in addition to a small regional reconnaissance program on the relatively unexplored land package around the Quartz Mountain deposit and adjacent properties. Work will include approximately 16,000 meters of drilling on the Quartz Mountain deposit.

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

James R. Porter

Thank you, Jason. That concludes our formal presentation. I will now turn the call back to the operator to open the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Dan Rollins from RBC Capital Markets.

Dan Rollins - RBC Capital Markets, LLC, Research Division

Manley, I was wondering if you might be able to provide a little bit more color on the, I guess, cumulative impact assessment that you need to do for Kirazli. Is that just related to gold mining, gold projects in the area? Or is that all of mining or extractive industries within the Canakkale area?

Manley R. Guarducci

Dan, right now, we're not too sure what it includes because the regulations are in place but there's no parameters to define the regulation. So until the Ministry of Environment clarifies that in greater detail, we're in a little bit of a gray area. But based on normal cumulative impacts in the past, I would say it would be in the region, Dan.

Dan Rollins - RBC Capital Markets, LLC, Research Division

Okay. And then, I guess, because this rule went into effect as of October 3, 2013, are you amending the Agi Dagi EIA to also cumulative -- to take into account this cumulative benefit? And will that slow the permitting process for Agi Dagi?

Manley R. Guarducci

We will be doing the same for Agi Dagi. We will be considering the cumulative impact for the EIA, but we don't think it will delay Agi Dagi much more.

Operator

The following question is from Jeff Killeen from CIBC.

Jeff Killeen - CIBC World Markets Inc., Research Division

Maybe just an extension to that comment, Manley, thinking about Agi Dagi itself, do you think that the permitting process for Agi Dagi will change at all, just given this new parameter that's being put in place, in terms of do you expect that there could be challenges subsequent to its final submission?

Manley R. Guarducci

In Turkey, it's pretty much general practice that has been challenged. The Ministry is who gets challenged when you get the EIA. But I don't think it's going to change much with Agi Dagi . When we designed both of these, we generally took into consideration things that affect the cumulative impact, like water sources and things like that, drainages that are affected by the projects. So we really designed the projects with that in mind. For example, we're not using the same watershed, right, or water source. So things like that just have to be documented and added to the file and resubmitted.

Jeff Killeen - CIBC World Markets Inc., Research Division

Okay, great. And then wondering if you might be able to provide some clarity on just where the underground development is at Mulatos for Escondida Deep and for San Carlos and how close do you feel that you are to being able to start, actually, actively mining there.

Manley R. Guarducci

At Escondida Deep, we have reached the ore body. We've gone through and developed the top level of the ore body. We're ramping down right now and coming close to entering the midpoint of the ore body. And then we'll have to develop the bottom end. There's 3 levels of this ore body. It's fairly small. But we're in a good position to be in production close to or at the end of March.

Jeff Killeen - CIBC World Markets Inc., Research Division

Okay, great. And maybe just one final question in regards to exploration drilling or in-fill drilling perhaps at Cerro Pelon and La Yaqui. Is there any other drilling that may need to be done prior to wrapping more of a detailed mine plan around these zones? Or is the drilling done to this point sufficient?

Jason King Dunning

That's a good question. Currently, both deposits are reported as reserves, so they would be considered sufficient. That said, as we get closer to a decision and we do get the surface rights and we start moving into that 18-month period, I'm sure our collective teams between exploration and operations will, of course, revisit based on a more current gold price, as well as a re-scoping the projects. So -- but I can't make that determination because, again, they are both reported as reserves.

James R. Porter

The one thing to point out is that the reserves for Cerro Pelon and La Yaqui were calculated at an $800 gold price.

Operator

The following question is from Anita Soni from Crédit Suisse.

Anita Soni - Crédit Suisse AG, Research Division

Just 1 question actually with regards to reserves. I'll follow-up on that one. Do you include -- what's included in your reserve estimate when you -- with that $850 per ounce price of gold? In terms of costs, what are you trading it off of?

James R. Porter

Sorry, Anita, the price that I just referenced of $800, that was the price that was used to estimate the proven and probable reserves for Cerro Pelon and La Yaqui back in 2010. So it would have been -- the cost assumptions that were used would be in our disclosure. I'll pass it over to Manley to give you a more thorough answer.

Manley R. Guarducci

Yes. Anita, we did internal tech reports on the projects. And at that time, we had quotes for, how do you say it, mining contracts and all that. So we're just in the process of updating all of those now.

Anita Soni - Crédit Suisse AG, Research Division

All right. So when you -- did you include -- I'm just wondering, all the OpEx estimate -- like, all the OpEx unit mining cost per tonne, process, G&A is included when traded off against the $850? And similarly, is sustaining capital included in there or not?

Manley R. Guarducci

Anita, it was treated just like our Mulatos project. Everything was included there.

Anita Soni - Crédit Suisse AG, Research Division

Okay. And then just a follow-up on the permitting at Kirazli. I guess I'm just trying to understand, in terms of the timeline, how does this interact with the elections that are going on in Turkey? And where do you -- like, what sort of -- how do you envision this playing out? If you could give a sort of a month-by-month, quarter-by-quarter expectation of proved -- like, resubmission of the EIA and then when it gets into the right hands, to be decided whether or not the injunction will be removed or not.

James R. Porter

Anita, it's Jamie here. So in terms of the timing, there are elections throughout the year in 2014. The local elections are upcoming in March, and then there's federal elections later in the year. We're looking at kind of a 2-phase approach on -- with respect to challenging the injunction. The Ministry of Environment has objected to that, and they'll be a hearing to determine whether that's overturned or not within the next month or so. If that injunction is not overturned, the hearing on the merits of the initial case will take place in about 6 months' time. What's important, though, is that we're updating our EIAs for both Kirazli and EIA (sic) [Agi Dagi] so that in the event that we get a negative outcome in both of those cases, we'll be prepared to resubmit the updated EIA which contemplates cumulative impact. So if -- the worst-case scenario, we resubmit that in June, July of this year and seek approval from the Ministry then.

Anita Soni - Crédit Suisse AG, Research Division

Okay. And what do the -- what options do the litigants have in terms of pursuing Courts of Appeals? So basically, so if it gets -- if your injunction gets overturned, they can presumably take it to the next court level. And when does that stop -- when does that process stop?

James R. Porter

If that were to happen, we would have been in the same situation. I mean, the concern is with the fact that the EIA does not address cumulative impact. We'll have that ready to be filed. So that's the basis for our plans but does not sort of really materially increase our timeline going forward. We expect that -- to be able to submit that by the middle of this year.

Operator

The following question is from Michael Gray from Macquarie.

Michael J. Gray - Macquarie Research

I got 3. First of all, you say you're using $1,250 for 2014 in your budget. Is that going to be the same number? Can you comment for your year-end 2013 reserve and resource estimates at the end of March?

Jason King Dunning

Yes, Michael. Jason here. We're using $1,250 gold for the year-end for proven and probable reserves, and that will be applied globally throughout all of our projects.

Michael J. Gray - Macquarie Research

Okay. And then on Quartz Mountain, a fairly aggressive budget, $6.3 million. I see their drilling 16,000 meters. What will that get you to in terms of categories of resources and reserves? And what kind of economic studies or visibility might you be able to springboard from that program?

Jason King Dunning

The meters that have been allocated in 2014 are premised on taking the inferred resource, which, again, encompasses the entire deposit, and bringing that to some level of measured and indicated. This is again, probably, what most -- would be considered a Phase 1 exploration program in terms of drilling, that more than likely, in 2015, will be a comparable or slightly larger Phase 2 that will hopefully take the measured and indicated into some level of proven and probable. So I'm looking at probably a 2- to 2.5-year timeline to actually bring this to a quality where we would be at a point to conduct an internal feasibility study.

Michael J. Gray - Macquarie Research

Okay. So no economic study before you get to all that drilling, the Phase 1 and Phase 2, done?

Jason King Dunning

No. I mean I think it would be premature. We want to make sure we've collected all the appropriate information in all of the key areas necessary for that study. We do not want to, again, to coin a phrase, "put the cart before the horse." So again, the goal here is to define the resource as best as possible so that we give complete optionality to the operations team when they want to take it through their studies.

Michael J. Gray - Macquarie Research

Okay, great. And on the outlook for the dividend in 2014, can you provide any comments?

James R. Porter

Unchanged at this point, Michael.

Operator

The following question is from Douglas Johnston [ph] from Ghandelmert [ph].

Unknown Analyst

Question, I understand that guidance for 2014 is roughly 170,000 ounces. What probability do you attach to either higher or lower numbers than that? Might production attain 200,000 ounces, for example? Or is that not realistic?

James R. Porter

So I'll take that question. This is Jamie speaking. We've -- our guidance range for the year is 150,000 to 170,000 ounces. And the most likely scenario would be that we come in right in the middle of that range at 160,000 ounces. If you look back at our 2013 performance, our guidance range was 180,000 to 200,000 ounces. We came in at 190,000.

Unknown Analyst

Good. What probability do you attach to a higher number? Is that possible or lacking progress in Turkey or elsewhere?

Manley R. Guarducci

Those numbers have nothing to do with Turkey or any other projects. They're strictly based on Mulatos. And the probability of it being higher will be a function on if we experience higher grades in the Mulatos pit or significantly higher grades in the high-grade zones that we plan on mining.

Unknown Analyst

Got it. And my last question, what would be a reasonable case for production from Turkey in 2014 and 2015?

James R. Porter

I think based on the timeline that we've recently disclosed and the permitting, the time frame is 18 months from the time of receipt of all the permits to get first production from Turkey. So 2014 or '15 would be too soon. I think we're looking at production coming beyond that.

Unknown Analyst

And what numbers might you expect in 2016, for example?

James R. Porter

As our disclosure indicates, we're unwilling to give a specific target as to when we will start production in Turkey or what the level of production might be in the first year, given the permitting challenges that we're facing currently.

Operator

The following question is from David Forster from Bank of America Merrill Lynch.

David Forster - BofA Merrill Lynch, Research Division

Can you give us an update as to what you're seeing on the M&A front, if you're on the hunt right now, and if so, where you're seeing value, whether it be exploration, development or producing properties?

James R. Porter

Thanks, David. It's Jamie here. I think we're always on the hunt. With our balance sheet the way it is, we've got $417 million in cash and no debt, we certainly have the ability to execute on all kinds of transactions. Obviously, the equities have come up over 40% year-to-date, so there's less value than there was at the end of last year. But we still see some opportunities, and we'll continue to evaluate them. Our focus has always been on projects that make sense at this gold price, and that will continue to be our mentality going forward.

Operator

[Operator Instructions] The following question is from Anita Soni from Crédit Suisse.

Anita Soni - Crédit Suisse AG, Research Division

Just wanted to follow up. On Cerro Pelon and La Yaqui, you said, I think, in your disclosure, it's about 60,000 to 70,000 ounces. That's when it's fully ramped up, right?

Manley R. Guarducci

That's correct.

Operator

[Operator Instructions] There are no following questions registered at this time. I would like to return the meeting to Mr. Jamie Porter.

James R. Porter

I'd like to thank everyone for attending the call today, and if there are any further questions, please feel free to reach out to Scott Parsons. Thank you, everyone.

Operator

If you have any further questions that have not been answered because of time limitations, please feel free to contact Mr. Scott Parsons at (416) 368-9932, extension 439 or at 1 (866) 766-8801.

This does conclude today's conference call. Please disconnect your lines at this time, and we thank you for your participation.

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