Alamos Gold Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.24.14 | About: Alamos Gold (AGI)

Alamos Gold (NYSE:AGI)

Q1 2014 Earnings Call

April 24, 2014 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

Analysts

Andrew Quail - Goldman Sachs Group Inc., Research Division

Rahul Paul - Canaccord Genuity, Research Division

Jeff Killeen - CIBC World Markets Inc., Research Division

Don MacLean - Paradigm Capital, Inc., 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' first quarter 2014 conference call.

In addition to myself, we have on the line today, John McCluskey, President and CEO; Manley Guarducci, Vice President and Chief Operating Officer; and Charles Tarnocai, Vice President of Corporate Development.

I would like to remind everyone that our presentation will be followed by a Q&A session.

Before we begin, please note the disclaimer concerning forward-looking statements. We refer all participants to our forward-looking statements and resources disclosed 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 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 the dollar amounts mentioned in this conference call are in U.S. 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 the chance to review our first quarter results issued this morning. This year presents both a challenging and exciting year for Alamos, as we transition to underground mining at San Carlos, in what we expect will be a stable source of high-grade mill feed for a minimum of the next 4 years.

In the meantime, our open-pit heap leach production continues to prove why it is the backbone of our Mulatos operation. Production of 37,000 ounces of gold was consistent with our expectations, and total cash cost of $617 per ounce were well below full year guidance of $700 to $740 per ounce.

We remain one of the lower-cost producers, and even with significant decrease in the price of gold from a year ago, we continue to generate strong margins and operating cash flow in the first quarter.

Underground development of San Carlos is underway and we remain on track to begin supplying high-grade mill feed early in the third quarter of 2014.

We're looking forward to accessing the potential of San Carlos, given the positive implications of the recent reserve and resource update, which included a 43% increase to its total underground reserve grade, as well as further exploration upside.

We continue to advance one of the strongest growth profiles of our peer group, with projects, like our Mulatos Mine, characterized by low capital intensity, low cost, open-pit heap leach projects that generate cash flow in the current gold price environment.

We are moving closer to securing surface rights at Cerro Pelon and La Yaqui. Baseline work remains on track for the plant resubmission of the Esperanza EIA. We are embarking on a significant drill program at Quartz Mountain. And in Turkey, we look forward to a resolution of the injunction affecting our Kirazli EIA approval.

In Turkey, the success of the AK party in the local elections, held just under 1 month ago, demonstrated the strong, popular support for its progressive economic policies, which we believe bode well for the development of not just mining, but all industries in the country.

We closed the quarter with $410 million cash and no debt. Combined with our ongoing cash flow generation, we remained extremely well-positioned to not only fund this development pipeline internally, but also to pursue further value creation opportunities through accretive acquisitions.

We will be paying our 9th consecutive semiannual dividend, $12.7 million, later this month, which will bring the total cash that we've returned to shareholders in the form of dividends to $84 million, more than the amount the company raised to initially build the Mulatos Mine. Combined with over $300 million in free cash flow generated to-date from Mulatos, we have demonstrated a long-term track record of capital discipline.

Given the similar characteristics of all the assets in our development pipeline, we intend on replicating this success many times over.

And with that, I'll turn the call over to CFO, Jamie Porter, who will comment on our first quarter financial performance. Jamie?

James R. Porter

Thank you, John. As John mentioned, gold production of 37,000 ounces in the first quarter was in line with our expectations, while operating costs came in below our annual guidance.

We sold 32,200 ounces in the first quarter at an average realized gold price of $1,291 per ounce, consistent with the London PM Fix average price, for revenues of $42 million. Gold sales were below production in the first quarter, as in-process store inventory was sold at the end of 2013, in advance of the new tax reform in Mexico.

Operating cost came in below guidance on all fronts, leading to another strong quarter of operating cash flow. Total cash cost of $617 per ounce were 12% below the low end of our guidance. And all-in sustaining cost of $908 per ounce were also well below our annual guidance of $960 to $1,000 per ounce.

While these costs are up year-over-year, it's important to note that they remain below the industry average. Even with the current challenging gold price environment, this has allowed us to continue to generate healthy margins and cash flow, with cash flow from operations before changes in noncash working capital of $15.9 million or $0.13 per share.

We expect cash flow from operations to fund all of our development capital and exploration spending in 2014.

Earnings in the first quarter were $2.7 million or $0.02 per share. Relative to a year ago, earnings were primarily impacted by a significantly lower gold price, fewer ounces sold and higher amortization.

Amortization of $354 per ounce in the first quarter was approximately 45% higher than a year ago and is expected to remain elevated through the second and third quarters, until the high-grade Escondida deposit is depleted. Once Escondida is depleted, we expect amortization to fall to approximately $200 per ounce. The effective tax rate was 42% for the quarter, reflecting the impact of nondeductible charges in Canada and Turkey, which have the effect of increasing the rate above the statutory tax rate.

However, our effective tax rate in Mexico was lower than the statuary rate, as we've benefited from tax planning initiatives that we undertook at the end of 2013.

With $410 million in cash and no debt on our balance sheet, we remain in a strong financial position going forward.

We currently hold more than $3.20 per share in cash, representing more than 1/3 of our market capitalization, creating a strong value proposition.

Combined with our ongoing cash flow generation, we are fully funded on our peer-leading growth profile and have the flexibility to pursue further accretive growth and value creation opportunities.

We repurchased 351,500 common shares during the first quarter for $3.2 million under our share buyback program and maintained our dividend level, which at our current share price represents a 2.2% yield, putting us among the highest in our peer group.

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. As John mentioned, our open-pit heap leach production, the backbone of the Mulatos operation, continued to exceed expectations in the first quarter.

The grade of the crushed ore stacked on the leach pad in the first quarter of 1.03 grams per tonne, was 21% higher than our annual budget of 0.85 grams per tonne, as we continue to experience positive grade reconciliation relative to the block model. Since the start of mining at Mulatos, we've experienced a positive grade reconciliation of 12% relative to the block model. This benefit was partially offset by the lower-than-anticipated grade mined in mills from the Escondida high-grade zone of 3.28 grams per tonne, compared to the annual budget of 5.3 grams per tonne.

The grade variability we saw in Q4 of last year, continued into Q1 until the zone was depleted in early March. While the grades at the Escondida high-grade zone did disappoint in the final 2 quarters, it is important to look at the total life of this project and the overall grade of over 9 grams per tonne that came in close to the reserve grade.

Given the smaller reserve of 32,000 tonnes in the Escondida Deep, as outlined in the 2013 reserve update, we expect the mill to run below capacity during the second quarter, until the start of the underground production from San Carlos early in the third quarter.

Additionally, the negative grade reconciliation experienced in the final 2 quarters at the Escondida high-grade zone, attributable to the nugget effect, may persist into the Escondida Deep.

As a result, we expect stronger production in the second half as throughput ramps up at San Carlos. Underground development is on track at San Carlos to provide mill feed early in the third quarter. To ensure timely access to the high-grade ore, underground development at San Carlos is focused on widening access in a 150 meter tunnel that was part of the historical mine workings. A separate underground access will be developed during the second and third quarters.

We do not anticipate similar-grade reconciliations at San Carlos, given that it is an entirely separate deposit with more uniform grade distribution. Rather, we are excited about the potential of San Carlos, given the recent 43% increase in the underground reserve grade.

While we are still in the process of updating the mine front, San Carlos is expected to provide high-grade mill feed for at least the next 4 years, and we expect the increase in grade will positively impact high-grade production and operating costs over that time frame.

In addition to San Carlos, we are also incorporating the increase of the open-pit heap leach reserve grade, which at 0.93 grams per tonne, stand 9% higher than our 2014 budget.

Total pressure throughput averaged 16,800 tonnes per day, below our annual budget of 17,700 tonnes per day, as a result of a 4-day planned shutdown in order to install a new reclaim tunnel to accommodate the leach pad expansion. Backing out the 4-day shutdown, pressure throughput was 17,600 tonnes per day, in line with our budget.

Negotiations to acquire the surface rights of 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.

At Esperanza, baseline work required for the resubmission of the EIA report continues and exploration activities at Quartz Mountain are focused on validating the existing resources.

In Turkey, a hearing on the underlying claim, which led to the injunction against the Kirazli EIA, took place on April 17, several months earlier than expected, with the decision from the court expected to be released in June.

In the interim, the company is amending its EIA for the Kirazli project to include an assessment of the potential cumulative impacts. Initial production from Kirazli is expected 18 months from the receipt of outstanding forestry and operating permits.

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

John A. McCluskey

Thank you, Manley. That concludes our formal presentation. I'll now turn the call over to the operator, who will open the lines for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Andrew Quail from Goldman Sachs.

Andrew Quail - Goldman Sachs Group Inc., Research Division

I've got a couple of questions, mainly on Mulatos. First one is what can you guys estimate will be the contribution of San Carlos, sort of in Q3, and then when you ramp up a bit more in Q4, of the total underground?

Manley R. Guarducci

We expect the contribution of San Carlos to increase starting at the beginning of Q3 and ramping up through to the end of Q4, peaking -- or reaching our objective of 750 tonnes a day at the end of the year.

Andrew Quail - Goldman Sachs Group Inc., Research Division

Okay. And you can't give any numbers, sort of what percentage that would be, or any sort of percent, even what improvement on Q3 versus Q4?

Manley R. Guarducci

I don't really understand the question, Andrew, I'm sorry about that.

Andrew Quail - Goldman Sachs Group Inc., Research Division

Just sort of saying sort of what will be the contribution, and then sort of what improvement will you guys see from sort of Q3? I know it's obviously -- it's going to increase and improve, but what do you sort of see the numbers around that?

Manley R. Guarducci

Our budget for -- our budget based on last year's reserves is about 5.2 grams a tonne for underground grade. And as I mentioned, we're just in the process of reevaluating that because of the increased grade in the 2013 reserves. We expect a bump [ph] in that. We're still forecasting what our guidance was as of the end of last year until we update the mine lines. If there's any material differences, we'll report those when those are done.

Andrew Quail - Goldman Sachs Group Inc., Research Division

Okay, great. And just on costs, so did you see any sort of material change or -- between sort of Escondida and San Carlos?

Manley R. Guarducci

No, we don't expect any material change with cost. The mining methods we're using underground are the same.

Andrew Quail - Goldman Sachs Group Inc., Research Division

Okay, great. And last one is just what Manley said, is there any sort of timeline on when we would expect that sort of updated mine plan?

Manley R. Guarducci

We're in the process of doing that. We should have it completed, definitely this quarter, probably by the end of this month.

Operator

Our next question is from Rahul Paul from Canaccord Genuity.

Rahul Paul - Canaccord Genuity, Research Division

Just wanted to follow up on San Carlos. In terms of tonnage, I guess it's the same question, different way. In terms of tonnage, should we expect meaningful tonnage from San Carlos in Q3, closer to the 500-tonne-per-day level or should we expect something lower than that?

Manley R. Guarducci

No, I think it will be able to start in that range, Rahul, and then ramping up to the 750 tonnes by the end of the year.

Rahul Paul - Canaccord Genuity, Research Division

Okay, that's helpful. And then just wondering, at San Carlos again, what is the critical path item for commencement of underground production in Q3? Is it underground development or is it something else, like completion of the bridge before the rainy season? What I'm trying to get at is what are the risks that first production may be pushed into Q4, as opposed to Q3?

Manley R. Guarducci

I don't think -- the bridge is going to be constructed in time, Rahul. Okay? So I don't think that's a big risk. And the development is also -- in reality, it's ahead of what we had originally scheduled because of us going into that old portal. We're only 70 meters away from the ore body, so I don't see that as being a significant risk either.

Rahul Paul - Canaccord Genuity, Research Division

Okay. And then just moving on, I guess, Manley, you indicated that you will be updating the mine plan for the higher reserve grades, both at San Carlos and the open-pit heap leach. So I'm just wondering, from a sequencing standpoint, are there any reasons as to why you may not have access to the higher-grade material this year as opposed to future years, 2015 and beyond?

Manley R. Guarducci

Sorry, I didn't really understand the question, Rahul. But if you're referring to what we could -- we have this year compared to next year, this year we're ramping up, starting from now up to into Q4. And next year, we're going to be in a very good position to exceed what we're going to do this year, that's for sure.

Rahul Paul - Canaccord Genuity, Research Division

No, I was more talking about your update in mine plan coming out. Your reserve grades have gone up, both underground reserve grades at San Carlos and the open-pit heap leach grades, and both are somewhat higher than your budget for this year. I'm just wondering, if there are any reasons you would expect these grades to be lower this year, especially with the open-pit heap leach, as opposed to next year?

Manley R. Guarducci

No, Rahul, I don't expect the grades to be lower. In fact, I expect the grades to come up a little bit because of the increased open-pit grade and also the increase in San Carlos, okay? So I expect us to get a little bit of a bump this year.

Operator

Our next question is from Jeff Killeen from CIBC.

Jeff Killeen - CIBC World Markets Inc., Research Division

A couple of questions. First of all, on the mill throughput for Q2, do you have an expectation for what kind of throughput we would expect during the quarter?

Manley R. Guarducci

It's too soon to tell. We're underground, we're developing. We're starting production ramping in the first level and the second level. But it's just too soon. We're only a couple weeks into the quarter and it's a little too early to tell you.

Jeff Killeen - CIBC World Markets Inc., Research Division

Okay, perhaps looking at it from a different angle then. With San Carlos -- sorry, excuse me, with Escondida Deep being about 32,000 tonnes, I'm assuming that, that will get completely consumed in Q2, but do you think there will be more than that go through the mill during Q2?

Manley R. Guarducci

I don't think you'll see more than that go through the mill because of the -- a little bit of inconsistencies that we've encountered so far. You might see a little bit carried through into Q3. But as we mentioned -- I mean, the overall ounces that we have in there are recoverable for -- based on the last reserves, 7,500 ounces. Even if we get 50% of that or 70% of that, it's almost insignificant to the overall ounce production we have this year. It's just one part of production.

Jeff Killeen - CIBC World Markets Inc., Research Division

Okay, very well. And then looking at the open pit, obviously, another good quarter there in terms of grades. Even above the new revised reserve grades, so can you comment on that? Do you think it is just another quarter of positive reconciliation or were there some slightly higher-grade areas targeted during the quarter? What are you thinking there?

Manley R. Guarducci

We have not changed our mine plan, nor do we change our mine plan. We always mine what we plan based on the model. We do continue to see a positive grade rate [ph] reconciliations and overall ounce reconciliation. And the big bump this quarter was due in part that a significant part of the tonnes that came out was sulfide material that was budgeted and scheduled for waste that converted to ore.

Jeff Killeen - CIBC World Markets Inc., Research Division

Okay, very well. And do you get a sense that, that trend may continue into Q2?

Manley R. Guarducci

I can't say. I mean we've been fortunate enough that it's been continuing year-over-year since 2008.

John A. McCluskey

This has been an ongoing question that we receive. We always guide to the block model and we've had positive reconciliation relative to that block model, but it doesn't mean we will stop guiding to the block model. It's just the way -- it's just the nature of those ore deposits.

Operator

[Operator Instructions] Our next question is from Don MacLean from Paradigm Capital.

Don MacLean - Paradigm Capital, Inc., Research Division

Maybe just following up on what Jeff was asking about, and maybe getting a little bit more granularity on that 21% better-than-budget number. Was it just simply because you ran into more sulfide than normal, Manley?

Manley R. Guarducci

In part, yes it was. We -- if you want specifics, we converted 230,000 tonnes of SAS material that was scheduled to go to the -- as scheduled as waste that converted to ore. And it had higher grade than our normal oxide mixed material, therefore, you see the bump in grade.

Don MacLean - Paradigm Capital, Inc., Research Division

Okay. And then, will you be operating the same area in the pit where that occurred in Q2?

Manley R. Guarducci

I can't say for sure. But we see that every now and then, Don, as we go from the top down. When we hit that area, we do get positive grade reconciliation, as we have in the past.

Don MacLean - Paradigm Capital, Inc., Research Division

Okay. And maybe can you just touch on and remind us again a bit about the leach cycle recovery timing, Manley? What percentage of the gold that goes on the pad in the quarter tends to come out and then maybe tie that into your expectations of whether or not that 71% recovery can be improved to get to the 75% budget?

Manley R. Guarducci

On the leach pad, Don, I -- we still go with the modeled recovery, we always have. And that's around 70%, 71%. The leach curve, we get about 75% of the recoverable gold in the first 10 days. But then we extend the leaching cycle to 120 days, okay? I can't comment on how much we put this month versus next month that we get out. We look at it over an annual or 18-month basis to get a better idea. However, we haven't seen anything that differentiates anything from what we've done in the past, everything looks pretty good.

Don MacLean - Paradigm Capital, Inc., Research Division

Okay. And then maybe also if you could tell us, maybe specifically, what the mining plus processing cost is per tonne you're expecting for Escondida Deep and San Carlos, as compared to the cost per tonne for Escondida, when you were doing the open pit?

Manley R. Guarducci

Right now, we're looking at $60 to $70 a tonne for the underground, okay? The difference between San Carlos and the Escondida Deep is going to be minimal, not just the distance, there's the cost from hauling the ore from the portal to the crusher, because it's a longer haul. The mining methods are the same, so the costs are expected to be the same.

Don MacLean - Paradigm Capital, Inc., Research Division

Right. And how does that compare with Escondida's, I presume that had a strip attached to it? The open-pit.

Manley R. Guarducci

I think you asked about the Escondida open pit. Well that's a lot more cost, Don. I mean...

James R. Porter

Yes. Our open pit mining costs are closer to $4 per tonne of ore. So you're comparing $4 for the open-pit material, to $60 to $70 for the underground material, both at Escondida Deep and at San Carlos.

Don MacLean - Paradigm Capital, Inc., Research Division

And is that kind of how you work with an attached strip ratio that works out to the...?

Manley R. Guarducci

We didn't -- Don, we didn't break out the Escondida high-grade portion of the open pit from the overall open pit. It was just part of the overall open-pit costs.

John A. McCluskey

Nor did we break the San Carlos strip ratio. It's all inclusive in our mine plan.

Operator

Thank you. This concludes the question-and-answer session. 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. The conference call has now ended. Please disconnect your lines at this time. We thank you for your participation.

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Alamos Gold (AGI): Q1 EPS of $0.02 in-line. Revenue of $41.5M beats by $4.36M.