Alacer Gold's CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: Alacer Gold (ALIAF)

Alacer Gold Corp. (OTCPK:ALIAF) Q1 2014 Earnings Conference Call April 28, 2014 6:30 PM ET

Executives

Rodney P. Antal – Chief Executive Officer

Mark E. Murchison – Chief Financial Officer

Analysts

Cathy Moises – Evans & Partners Pty Ltd.

Stefan Hansen – Morgan Stanley Ltd.

Dan Rollins – RBC Capital Markets

David Haughton – BMO Capital Markets

Brett McKay – Deutsche Bank AG

Operator

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the Alacer Gold 2014 First Quarter Earnings Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

At this time, I would like to turn the conference over to Rod Antal, Chief Executive Officer. Please go ahead.

Rodney P. Antal

Thank you, Saatchi and thank you all for joining us today. This call is to discuss Alacer’s strong quarter one 2014 results. Joining me on the call today is Mark Murchison, our Chief Financial Officer, who will be speaking to a slide deck, summarizing our quarter one results, which along with other documents released today are available on our website. Following the presentation, we’ll open up the call for a Q&A session.

If I could direct you to Slide 2 of the presentation, this call will include forward-looking statements. Please refer to the forward-looking language included in our press release in MD&A. Additionally; all dollar amounts in this presentation are expressed in U.S. dollars unless otherwise noted.

Now turning to Slide 3, which summarizes the strong performance from Çöpler. I would firstly like to congratulate the Çöpler team for achieving significant safety milestone. They’re working one year and plus 3 million man hours without a lost-time injury. a great achievement. I’m pleased to report that Çöpler continues to deliver predictable and safe operating performance.

First quarter gold production of 42,335 attributable ounces was delivered at industry-leading all-in costs were $739 per ounce. At total of 1.4 million tonnes of oxide ore was stacked on the heap-leach pads during the quarter and an average grade of 1.5 grams per tonne gold, which was in line with our internal plans.

Now recovery ratio for quarter one was 80%, as production continues to benefit from the high grade ore stack in 2013 and the improvements made to the heap-leach operations last year. It is important to note that we expect the recovery ratio to revert back to what’s in our guidance of about 67% during the remainder of 2014.

Sulfide ore mine continued to provide positive gold reconciliations, as compared to the resource block models. In the first quarter, we mined 0.5 million tonnes of sulfide ore at an average grade of 4.9 grams per tonne. This was more than 80% higher than the resource block model on a contained ounce basis. Bringing the overall positive gold reconciliation to roughly 50% in the 2 million of tonnes of stockpiled sulfide ore today.

Operating cash flow totaled $29.8 million in the quarter, demonstrating the continued strong operating margins of Çöpler. Alacer is on track to meet our 2014 production and cost guidance at 160,000 to 180,000 attributable ounces and all-in costs of $730 to $790 per ounce.

I will now hand over to Mark for an overview of our financial results, outlined in Slide 4.

Mark E. Murchison

Thanks, Rod. The Corporation continues to have a strong balance sheet. At the end of March, we had cash of approximately $292 million, no external debt and $308 million of working capital. Cash increased during the period by $2 million. After taking into account, the payment of a $22 million distribution to our joint venture partner, Lidya Mining representing their share of the 2013 Çöpler results. Alacer paid its maiden annual dividend of $0.02 per share on the April 15 this month.

Turning to Slide 5, we have an overview of Alacer’s P&L for Q1. Please note the summary title is the continuing operations only and therefore excludes any Australian numbers in the comparatives.

Touching on a few key items, ounces sold for the quarter were 55,128 at an average of $1,302 per ounce, the gross sales of $71 million, which was 21% less than Q1 2013, primarily due to lower prices.

Çöpler’s production costs increased in Q1 2014, compared to Q1 2013, by approximately $5 million to approximately $29 million. the increase was driven primarily by higher stripping ratio and drawdown of heap-leach inventory. Depreciation and amortization increased approximately $10 million in Q1 this year, compared to $7.5 million in Q1 last year. the increase was primarily driven by additional capital items commencing depreciation from the 2013 CapEx program.

Overall, this resulted in mining gross profit of approximately $32 million for the quarter, and further deducting other expenses, such as exploration, G&A and other costs. Alacer reported a profit before tax of approximately $23 million. And finally taking into account, tax expense of approximately $8 million. Alacer reported a profit after-tax of approximately $15 million.

I would like to take a minute just to comment on the corporation’s tax expense. Firstly, it is important to note the corporation primarily paced corporate tax at the Çöpler entity level in Turkey. The approximate right is 20%, which is in line with the Turkish corporate tax rate.

At the corporation level, we consolidate in the other entities in the group. These entities derived losses from activities such as regional exploration costs, and those costs are unable to be offset against the Çöpler entity profits. These other entity losses therefore reduce the profit at the corporation’s consolidated level and that increases the effective tax rate at the corporation level. I also highlight in Q1, we had one-off expenses relating to the write-down of residual assets held for sale in Australia and restructuring costs.

Further, we had an additional $2 million of non-cash tax expense incurred for restating the deferred tax balances due to further devaluation of Lira. This non-cash tax adjustment will occur each quarter, based on movement in the FX rate. For Q1, these items resulted in a corporate effective tax rate of approximately 35%.

Moving to one-off items and the FX impacts on deferred tax balances, the corporation effective tax rate would have been less than 25%. I do not expect the corporation’s effective tax rate to continue at the Q1 level; rather it will fluctuate around the Turkish corporate tax rate of 20% and be primarily impacted by movements in FX and incentive tax credits available in Turkey.

In relation to the incentive tax credits, we are currently assessing whether additional expenditure incurred in Q1 2013 – in forecast the 2014 may qualify as eligible for Turkish incentives tax credits. Should additional eligible expenditure be identified, this will reduce both cash tax paid and the effective tax rate going forward.

Now if you could please turn over to Slide 6 and I’ll hand back to Rod.

Rodney P. Antal

Thanks, Mark. We’re getting close to publishing the 5,000 tonne per day pressure oxidation DFS, which is now subject to completing our internal reviews. We are on target to deliver this to the market prior to the end of this quarter. This is an extremely important milestone for Alacer that we’ll provide clarity on the next chapter, Çöpler.

I want to note that we recently submitted the supplemental EIA to the regulators, commencing the permitting process for the Çöpler POX project. A key of an item with respect to the DFS is a positive gold reconciliation.

As you may recall, we announced in March that we have initiated a resource conciliation project to better understand the continuing trend of positive sulfide gold reconciliation, we are encountering from the sulfide ores.

As I mentioned earlier in this presentation, in the March quarter we saw this strength continue and in fact, accelerate. In my 0.5 million tonnes of sulfide ore and an 82% positive gold reconciliation, the manganese pit provided 300,000 tonnes, at 5.31 grams per tonne, with a 63% positive gold reconciliation, in while relatively smaller volume, the Marble and Main pits combined contributed 200,000 million tonnes, at 4.27 grams per tonne and a 166 positive gold reconciliation.

At the end of March, we have stockpiled over 2 million tonnes of sulfide ore, at 4.89 grams per tonne, around 315,000 contained ounces. This has provided a 48% positive gold reconciliation on a contained ounce prices as compared to the resource block models.

As a reminder the resource reconciliation were included reviewing the drilling database, reviewing the assay methods and reviewing how the sulfide resource has been estimated. And recently, we just completed a discrete validation drilling program. With this (indiscernible), the work is progressing well, but we have not completed enough of this work to say, what the outcomes will be.

We are hopeful that the results of this project will be completed in time for inclusion in the DFS. However, if not, we will not provide related to the DFS in Q2, 2014. I just want to add that until the work is complete, the impact of such reconciliation and its impact on the DFS is unknown and therefore subject to uncertainty.

Before wrapping up and turning the call over to questions, I’d like to reiterate the continued strong operational safety performance of Alacer. We recently strengthen our pool by adding Thomas Bates, as an Independent Director. He brings additional technical and financial skills to the Board. Ed Dowling’s appointment as Chairman will already helps strengthen our already strong relationship in Turkey.

Çöpler’s low cost heap leach production continue to provide strong cash flows, which provide the platform for our soon to be released sulfides DFS. Finally, we continue to be excited by Alacer’s organic growth opportunities in areas of our existing Turkish portfolio, and are working towards progressing these exploration projects into mines.

This now concludes our prepared remarks. And I will now open the conference call to questions, Saatchi.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Cathy Moises of Evans & Partners. Please go ahead.

Cathy Moises – Evans & Partners Pty Ltd.

Good morning, Rod. What I was certainly going to ask about the FX tax rate that clearly you’ve answered that prior day. So just, you know that it would be a non-core asset and Çöpler is performing very well. but longer-term you’re looking to mine a single mine operation. And if not, are there any areas you’re particularly focused on or off?

Rodney P. Antal

Yes, I think, we hope – I have Mark to explain the tax effect more like the chance like it did. So I appreciate that, look really the target for us right now is completing the Definitive Feasibility Study for Çöpler, it’s obviously a key piece of work that we’ve been working on for quite a long time, it’s really been completely focused on that piece of work done and getting some clarity on what that will provide us looking into the future.

So that’s being our initial focus, but what I got on the background, the exploration work that’s continuing in and around Çöpler. And also be on the country which I said before that we are quite excited about. And I think we – within our portfolio and that’s a very large portfolio we had well over 100,000 hectares of land around Turkey that we’ve started some exploration on which is good and we’re seeing the initial results early this year that are related on (indiscernible) in particular.

That’s really another key focus for us as we look at our pricing strategy and adding to our production portfolio. And we believe right now that that really holds the key to probably providing the best approach for Alacer in returning better returns and to be going and buying something. It doesn’t mean that we don’t look at our assets. Anyhow we do quite exhaustive reviews around Turkey to see what is valuable to us, in particular. I mean that right now we just don’t believe it is a good potential return from what we currently have in our portfolio.

Cathy Moises – Evans & Partners Pty Ltd.

Thank you.

Operator

The next question is from Stefan Hansen of Morgan Stanley. Please go ahead.

Stefan Hansen – Morgan Stanley Ltd.

Hi, everyone, just a quick one from me on your near-term grade expectations, your upsell grade, I see if you mined 1.5 grams that’s pretty similar to what is on the leach pad at the moment, but you’re guiding to 1.6. Does that mean we could sort of expect migrates start to pick up in the second and third quarter this year?

Rodney P. Antal

Yes, look. I mean we’re still on, the guidance that we had Stefan is still is the guidance that we have in 1.6. It’s not going to pick up considerably. So I sort of hesitate to say it’s going to be a whole lot more than the 1.5, 1.6 that we’ve been experiencing. But that’s what we expected to do 10 years back.

Stefan Hansen – Morgan Stanley Ltd.

Okay. That’s it for me thanks.

Operator

The next question is from Dan Rollins of RBC Capital Markets. Please go ahead.

Dan Rollins – RBC Capital Markets

Yes, thanks very much. Rod, we’re willing to get maybe just touch base a little bit more detail on the sulfide reconciliation. You mentioned that you’ve been getting fewer tonnes, but much higher grades. I’m wondering if you could put a little bit of percentage around how off the – how much are lower the grade that the tonnes have been just the block model and then in that respect on, relative to be – how high the grades have been because they have been fairly significantly higher?

Rodney P. Antal

Yes, they had Dan. Look I will try and summarize the work really that is going on it seems too positive if you – the first part is really a validation efforts that we’ve been going on. But looking at the drill and block, they are looking at the assay results that QI on the assay that we are doing upside.

We have been – we’ve obviously just completed the rand of twin hole drilling with using two key methods around the ore body as well, I mean some other validation process.

And that’s really important as we move forward to ensure that the integrity of the mining today particularly, we have in sulfide that would go to surface sound. We don’t expect any reason but it's obviously a key control shape as we move forward.

The second place of work is really that’s coming back over and looking at the models as they currently constructed and as you all remember we use water retreating method to develop our resource model. So it’s really been a question that we’ve been asking ourselves using the knowledge we have today, plus all the validation work is whether that provides us with the most appropriate method moving forward or something better given the mineralization that we have block looking forward. So that’s really in the nutshell of the work that's going on, and it’s obviously fairly important given the – as you said the significant positive gold rate reconciliations that we have been experienced.

The bright copy is actually different by pit. I can give you that after the call. I don’t have it front of me to the exact. So I don’t want to sort of guess and get it wrong but. It has been by pit, if you look at it we’ve actually monitored that 65% of the sulfide of the 2 million tonnes on surface, with that 65% has that come from the Manganese Pit so far and the rest is from the Marble mines. So it just varied by pit, by grade, by time, so it’s not consistent. You expect that because we do have different zones in each of the pit as well, so that's what it’s – sort of it’s not a one-dimensional issue that we are working with.

So I can get you the number by pit, it’s probably less relevant, I think in the overall program, but I can get you, I can certainly get you the numbers.

Operator

The next question is from David Haughton of BMO Capital Markets. Please go ahead.

David Haughton – BMO Capital Markets

Hi Rod and Mark, thank you for the update. I’ve got a couple of questions that I’ve really posed by the work that you have got underway right now. So you’ve got, you’re quite handling agglomerator in for SART. And I heard what you are saying about the recovery ratio is likely to drip back down to the long-term average, but I would have thought that with the agglomerator coming into the mix that you might have had an improvement there, and then once if you have looked at that all have a chat about the stacking right.

Rodney P. Antal

It will certainly held, but really what’s been driving that number which is our calculated number, with the fact that we were putting on high grade tonnes on to the heap-leach, and if you remember the kinetics of the heap-leach, there is sort of three months lag between that and production. So we are mining for higher grade and we’re still producing the lower grades, but now we’ve switched around that.

What’s going on to the heap-leach is, I want a more consistent granular grades for this year, but we are still getting the effects in the run off the high grades from the end of last year. So…

David Haughton – BMO Capital Markets

But the best price really were in the first and second quarter of last year, when you are looking at the fourth quarter of 2013, it was closer to the 1.6 kind of level. So I can understand that the lag effect there, but it appears somewhat higher than it would have anticipated from that leach recovery had?

Rodney P. Antal

It is and what I am going to say secondary is the second part of those that we as you remember it’s towards the end of last year, we started to increase the cyanide dosing on the heap-leach to get a bit of percolation through it. So we’re getting the – I guess the residual returns of that program, which will continue by the way as we look forward. So it will start to balance itself back and we’re already starting for the signs of it coming back more the 60%, 70% level.

David Haughton – BMO Capital Markets

Okay. So, then moving on the second, right. You’re not doing the wrong, but you’ve done that for a while to any size anyhow. Moving forward into the balance of the year, just looking at the stacking rates, you made a comment there that with the clay handling that that should improve. What sort of target should we be thinking about for your stacking rate through the balance of the year and should it be ramping up or probably selling out at some stage, if you can mention that too please?

Rodney P. Antal

It will still be consistent with what we’ll have, what we’re putting on these items, where the amount of tonnes stacked for the year. So it won’t – just because we have the clay handling circuit online, it doesn’t mean that we’re going to have a ramp up. It just means that we’re going to be able to move in particularly into the main pit with a level of copper to be able to crushing grown the clays and the agglomerators. Now we’re still going to see our stacking rates by fairly much the same as what they’ve been.

David Haughton – BMO Capital Markets

Okay. So, should we be thinking something less than 6 million tonnes per annum for 2014?

Rodney P. Antal

I think it actually will be ramped in. I think the actual growth was too much for them.

David Haughton – BMO Capital Markets

Okay. And that coming on later in the year, second quarter, maybe seeing some benefits in the third quarter, what’s your expectation there for improvement in the cost structure, just to generative base cyanide soluble copper out of the system and reduce the consumables. They have a target in mind?

Rodney P. Antal

Look, it worked, we haven’t submitted. Right now we’re going about 215 parts per million of copper going through. The solution, it hasn’t stated negatively, usage for gold recovery at that stage. It’s when it starts to get a way back so the 50 mark, which we’re tracking up to, which way we’ll turn on the star player. So it’s not that far away. Then, again we sort of expect that around SGA. But we haven’t seen a significant increase in the reagent usage to get the gold recovery. So I don’t expect we’re going to any uplift in – to start. A less usage of reagents to get an uplift in there around cost of it.

David Haughton – BMO Capital Markets

Okay. And final question, back to mark on depreciation rate, have that you lifted the rate of these higher than what we’ve seen before, but would we expect for that to increase further once the place storing and the stock come on stream during the course of the year?

Rodney P. Antal

Yes, David, so the expectation is we had about probably $190 per ounce in Q1 and would start sort of focus to come on the year and start depreciate it. That will go up with just some other more minor CapEx coming on line it will increase. So our forecast for that, by the time we get to year-end it’ll be around $220 per ounce.

David Haughton – BMO Capital Markets

Okay, great. All right. Thank you, guys, and look forward to the big announcement in a couple of months time on the DFS.

Rodney P. Antal

Thanks, David.

Operator

(Operator Instructions) The next question is from Brett McKay of Deutsche Bank. Please go ahead.

Brett McKay – Deutsche Bank AG

Okay, thank you. just a couple of quick ones, still expecting the second half’s skew, is it getting to the 90?

Rodney P. Antal

I think you said sorry, Brett, did you say the second half to move into the Main Pit?

Brett McKay – Deutsche Bank AG

Yes. Are you still expecting the production to be skewed to the second half as you get into the high grades from the Main Pit?

Mark E. Murchison

That’s an interesting question. Normally Q1 is probably the long range of our results because we get the winter months which sort of play heavy with the leach kinetics. This was actually quite a mild winter for us. So we haven’t seen the other problems that we normally experienced, Q1 was pretty good. So as we see – as the other quarters run out for the remainder of the year, we still will be on track for our production going. So we don’t think it’s going to be too skewed in any month. It was going to be skewed, we would have said less production in this quarter, but really we just got the run off that we may have got later in the year early on.

Brett McKay – Deutsche Bank AG

Okay. So I mean there’s a comment in your guidance that you put out couple of months ago, which says your gold productions expected to be high on second half as increasing amount of ore is mined from the Main Pit. So is that not any longer the case that we saying?

Rodney P. Antal

Yes, look, I mean the grades will start to come up presumably into the Main Pit as we just talked about. It typically go with some moving into more backwards these spread to time, but it’s not going to be a significant ramp up, it just means that it’s not going to be skewed to the second half as this is the first half.

Brett McKay – Deutsche Bank AG

Okay, okay. And just on dividends, just following the dividend in the fourth quarter last year and now into this quarter? We’re just expecting you to continue accumulating cash today risk the funding of the Sulfide Project. Is that the outlook?

Rodney P. Antal

Look, it is and again we will obviously talk a lot more about in a couple of months, but all indications that we said before is the cash flow that’s going to be – that we have on hand is going to be generally over this next period will be relatively required to produce – to construct the sulfide plant. So yes, it’s been accumulated with that specific purpose in mind to fund the sulfide plant in the next few years.

Brett McKay – Deutsche Bank AG

All right. Thanks, guys.

Operator

There are no more questions at this time. I will now turn the call back over to Rod Antal for closing comments.

Rodney P. Antal

Thanks, Saatchi, and look thank you everyone. I’d like to thank you all for joining, Mark and myself today. As we have said, we’re off to a good start in 2014 and more it will as we look forward to discontinuing and shortly release the results of the Definitive Feasibility Study. So with that, I’d like to wish you good-bye and thanks very much.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.

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