SEMAFO's (SEMFF) CEO Benoit Desormeaux on Q1 2014 Results - Earnings Call Transcript

May. 6.14 | About: SEMAFO Inc. (SEMFF)

SEMAFO Inc. (OTCPK:SEMFF) Q1 2014 Earnings Conference Call May 6, 2014 10:00 AM ET

Executives

Robert LaVallière - VP, Corporate Affairs and IR

Benoit Desormeaux - President and CEO

Martin Milette - CFO

Analysts

Ovais Habib - Scotiabank

Nana Sangmuah - Clarus Securities

Cosmos Chiu - CIBC

Don Blyth - Paradigm Capital

Andrew Breichmanas - BMO Capital Markets

Operator

Good morning, ladies and gentlemen, and welcome to the SEMAFO Inc. Q1 2014 Results. After the presentation, we will conduct a question-and-answer session. Instructions will be given at that time. Please note that this call is being recorded today Tuesday, May 6, 2014 at 10 AM Eastern Time.

I will now like to turn the meeting over to Mr. Robert LaVallière, Vice President, Corporate Affairs and Investor Relations. Please go ahead Mr. LaVallière.

Robert LaVallière

Thank you, Simon and good morning, everyone. Members of SEMAFO’s senior management team joining me for the call today are Benoit Desormeaux, President and CEO; Martin Milette, Chief Financial Officer; and Patrick Moryoussef, Vice President, Mining Operations.

I would like to remind listeners that some of the matters to be discussed during today’s call may contain forward-looking statements. Forward-looking statements include but are not limited to items such as our expectations regarding the market price of gold, timetables, mining operation expenses, capital expenditures, guidance and resources and reserves estimates. Such statements are given as of date of this conference call and involve risks and uncertainties. A number of factors and assumptions were made in preparing such statements and actual results could differ materially. Accordingly, you should not place undue reliance on forward-looking statements.

For additional information with respect to forward-looking statements, risk and assumptions, please consult our 2013 annual MD&A as updated in SEMAFO’s first quarter 2014 MD&A and other fillings made with the Canadian Securities Regulatory Authorities and available on SEMAFO’s website at www.semafo.com.

SEMAFO disclaims any obligation to update or revise any forward-looking statement except as required by law. I make this cautionary statement on behalf of all SEMAFO’s spokesperson who may address you during this conference call.

With that said, I would like to turn the call over to Benoit Desormeaux. Benoit?

Benoit Desormeaux

Thank you LaVallière. I’ll begin today’s conference call by confirming one of our key strategy which is to focus on quality answers and the development of our high-grade Siou and Fofina deposits. In that regard we made the decision to reward the mine plant sequence in order to reassign a portion of the Wona-Kona mining fleet to Siou and Fofina. This led to a weaker first quarter performance which will however serve as a catalyst for the reminder of the year when we expect a significant upsurge in production. I must commend our operations team for their tireless efforts to not only meet but to exceed extremely tight deadlines and expectations. Our Mana team is the backbone of our operations and the development at Siou and Fofina was only possible through their dedication and determination.

At Siou the gradual ramp up of mining activities was reflected in our March production with a higher head rate and improved gold recovery rate and lower cash operating cash per ounce.

Bulk test results from the high-grade Siou deposit in March were in line with the expectations, providing very good reconciliation against the block model. Test results indicated an average grade of 4.7 gram per ton at a recovery rate of over 96%. In April we achieved the full mining rate at Siou, during the month we exceeded March production with more than 20,000 ounces of gold with an average head grade greater than 2.9 grams per ton. Accordingly, we are maintaining our 2014 production guidance of between 200,000 ounces and 225,000 ounces of gold.

Gold revenues in the first quarter totaled $38.5 million, cash flow from operating activities amounted to 2.1 million or $0.01 per share, we had an operating loss of $14.7 million compared to an operating income of $21 million in the first quarter of 2013, primarily due to lower revenues. The decrease in revenues was mainly due to a 19% decline in the average realized selling price. Note also the variation of almost 6,000 ounces between gold ounces sold and gold ounces produced which is due to the timing of shipments.

On the exploration side we recently increased our land package in Burkina Faso by 1,678 square kilometers through the signatures of two farm-in agreements and the acquisition of one permit. An agreement with Monteray Mining Group for the three year working rights and an option to acquire 90% interest in the Bilakongo and Tigan permits and a 100% interest in the Kana permit. These three permits covers an area of 293 square kilometers and are located adjacent to the Mana property approximately 35 kilometers northeast of the processing plant.

An agreement with [indiscernible] Limited for the three year working rights and an option to acquire up to 80% ownership of nine exploration permits on the Banfora Belt. These nine permits cover 1,153 square kilometers of land located approximately 200 kilometers southwest of SEMAFO's Mana permits.

We also recently acquired the 232 square kilometer Pompoi permit from Goldrush Resources; this strategic permit is located immediately south of our Pompoi Nord permit owing to its proximity to the recently discovered promising 15 kilometer geochemical anomaly trend on Pompoi Nord, we consider this new permit not only a promising target, but an important strategic addition to our portfolio.

SEMAFO’s 2014 initial exploration budget was set at $18 million, which is entirely the devoted to the Siou intrusive. We have now allocated a further $2 million to carry out geochem mapping and other drilling of the new exploration permit with a view to identifying priority drill target. Initial areas targeted for exploration on the Banfora gold project permits are along the main share zone where there is evidence of geochem anomaly and seasonal mining.

Currently nine of our drills are active, and probably seven are on the promising 15 km geochemical anomaly trend and two on the Bilakongo and Kana permits. In mid-May four additional other drill will be active on the new Banfora permit and the second RC drill will be assigned to the 15 km geochemical anomaly trend. In June, two core rigs are scheduled to carry out infill drilling between 180 and 225 meters vertically at Siou with the objective of replacing and increasing the reserves base.

In closing, I want to reiterate that our strategy remains unchanged. We intend to maintain our focus on quality ounces through a continued exploration focus in the vicinity of the Siou intrusive and on the 15 km geochemical anomaly trend by pursing cost control and optimization program, and by continuing to expand our product pipeline. We continue to have a solid financial position. We are debt free and have a cash and cash equivalent of 62 million as of March 31, 2014. We are also maintaining our 2014 production guidance of between 200,000 ounces to 225,000 ounces of gold at a total cash cost of between $695 per ounce and $745 per ounce. We remain confident in our ability to deliver shareholder value. We will continue to build on our track record of delivering solid results.

This concludes the presentation portion of the conference call. I will now like to open up the lines for the question-and-answer session. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Ovais Habib with Scotiabank, your line is open.

Ovais Habib - Scotiabank

Just well, very good question in terms of, you guys had a very solid month in April, and the material coming from Siou; is that kind of a production, is that a sustainable production estimate going forward into the remaining months? Is that just the grade that’s affecting? Is it a high throughput? Can you give us a little bit more color on that?

Benoit Desormeaux

Yes, the production in April is definitely mainly due to grade, and this is a sustainable grade and sustainable production. You remember that we issued a guidance to reach an average of 3 grams as the plan for the year. And if we want to reach the guidance, of course we need to achieve that kind of production. So, yes it is sustainable.

Ovais Habib - Scotiabank

And another question, in terms of Q1, what kind of grades were you experiencing from Siou, if we can separate the grade coming from Wona-Kona and Siou deposit?

Benoit Desormeaux

Yes, we don’t -- we had good grade. Bulk test was 4.7 but that’s not the only tonnage we had from Siou but we were, as expected based on block model. The grade in total for the quarter was of course lower at 1.93, mainly because of feeding the plant with a stockpiled ore. If you look in the report we’ve mined 467,000 ton. But we processed 642,000. So the mining rate, because we were pushing on the development of Siou and Fofina, we had to process more stockpile, a low grade stockpile. And we were also mining in some areas at Wona-Kona with an average grade, below reserve grade which is not what we will be mining for the remaining of the year. So the grade was lower. It was expected like that. And because we were pushing on the development of Siou and Fofina, we had a weaker quarter. But we are still on the same guidance. We are still forecasting to be at an average grade of 3 grams for the year.

Ovais Habib - Scotiabank

And in terms of catalyst coming throughout the year or expected results from your exploration program, when could we see some results, would we be looking at Q3 for that?

Benoit Desormeaux

Yes, it’s not impossible that we have exploration results before that. We’ve been pretty active with target drill on that trend as well. There is an RC drill that has been working since probably mid-March. So depending on the results, we will wait till we have a fair amount of results. It doesn’t work really giving a couple of drill results, so we're waiting to have results. Not impossible, before the end of second quarter, but definitely in the third quarter.

Operator

Your next question comes from the line of Nana Sangmuah with Clarus Securities; your line is open.

Nana Sangmuah - Clarus Securities

Congratulations gentlemen, just a quick follow-up question on the G&A. I saw that it bumped up quite a bit this quarter. What should we be expecting going forward and if you could give some explanation on the restricted [indiscernible] plant which contributed to those increase?

Benoit Desormeaux

On the administration side I think we were pretty much on budget, we have announced the guidance of 16 million for the year. It’s a question mostly of timing, so we maintain our guidance at 16 million; we’re a bit higher in the first quarter but no big deal. There are a few things I can ask Martin maybe to just give quick comments on it.

Martin Milette

So, what is the question exactly is the increase of the expense?

Nana Sangmuah - Clarus Securities

Yes.

Martin Milette

Yes, the increase of the expense is the increase in the share price. So as you know the RSU is payable based on the share price. So when the share price of the company increase, we have an increase in the expense and when their share price decrease we have a lower expense.

Nana Sangmuah - Clarus Securities

So that variability should be expected across border in the year?

Martin Milette

Yes it will follow the situation of the share price.

Nana Sangmuah - Clarus Securities

But you’re still confident of maintaining your guidance of 16 million for the year.

Martin Milette

Yes, but that’s excluding RSU.

Nana Sangmuah - Clarus Securities

Okay.

Martin Milette

And when RSU is bigger it’s a good news, it’s because share price going up.

Operator

Your next question comes from the line of Cosmos Chiu with CIBC. Your line is open.

Cosmos Chiu - CIBC

Congrats on getting Siou up on time and budget, so now I guess Fofina as well. Maybe my first question is on the tonnage, I don’t know if you can but would you be able to give us more details in terms of the tonnage contribution from Siou in Q1 and also for the month of April as well?

Benoit Desormeaux

Yes, we provided Cosmos guidance for the year saying that would account for 20%, of course in the first quarter I think Siou was less than 100,000 ton, because it was the early period of development. It’s increasing, we achieved the full mining rate we set in April and we said the full mining speeds, it’s about 3,000 ton per day, so we’re close to 90,000 tons, 95,000 tons. So are we going to have months that are lower, yes but in a quarter we should be pretty much on that target, but we can have depending on the development we can have months at 60,000, months at 50,000 months at 100,000. So depending on where we’re mining.

Cosmos Chiu - CIBC

Okay, but you’re on budget for the 30% for the year in terms of Siou’s contribution?

Benoit Desormeaux

Definitely.

Cosmos Chiu - CIBC

Great. And then may be on Fofina, congrats again on get that up and running. Now that you have started milling some of that ore from that deposit, how has that kind of reconciling in terms of tonnage and grade?

Benoit Desormeaux

So far it’s been (conciling) [ph] very well. We did not do both as we did in -- at Siou, we will probably do it later, it’s only the first month, there was only a couple of thousand tons that came to the plant. So later maybe in May or June we'll do a bulk test to confirm but so far so good.

Cosmos Chiu - CIBC

And then maybe my last question is on CapEx. You’ve guided to for the year Siou CapEx to be $12.5 million, you spent about $4.5 million so far or in Q1 2014. How is the rest of that going to be spread out is it pretty heavy in Q2?

Benoit Desormeaux

That’s probably going to be almost completed in the second quarter. It was pretty much what we were forecasting at the beginning of the year, the first half of the year without most of these CapEx. If we can defer some in the third quarter we will, so it doesn’t mean -- but I would say the majority will be in the second quarter.

Operator

(Operator Instructions). Your next question comes from the line of Don Blyth with Paradigm Capital. Your line is open.

Don Blyth - Paradigm Capital

Congratulations on a good quarter particularly excellent March. Just on Fofina you have started feeding the ore there, how long do you expect it to take to build up to the full mining right there? And was that -- I am running about 1,250 tons per day is that reasonable full rate?

Benoit Desormeaux

Yes, we will probably try to reach 1,500 and we’re expecting to be at that kind of rate by the end of second quarter. We have announced in our guidance that Fofina would account for 16% of our feed. Now that we’re a bit earlier we might be between 16% and 20% and reaching that online rate by the end of June.

Don Blyth - Paradigm Capital

Thanks a lot. And just on the cash balance, dropped maybe a little bit more than I expected but definitely seems to be the timing of the gold sales in the quarter, some additional spending on those interesting property acquisitions as well. Would it be fair to say you're expecting free cash flow moving forward and building that cash back up?

Benoit Desormeaux

That’s what we’re expecting, yes.

Operator

Your next question comes from the line of Andrew Breichmanas with BMO Capital Markets. Your line is open.

Andrew Breichmanas - BMO Capital Markets

Thanks and congratulations on a good quarter. Just wondering if you could provide a bit of an update on the power situation in the connection to the grid?

Benoit Desormeaux

Yes, the connection to the grid is still expected by the end of the year. So we're expecting somewhere in the fourth quarter, probably closer to the end of the year to be connected. So we're following the development on this, and so far so good.

Andrew Breichmanas - BMO Capital Markets

So has Sonabel come through it with what they were supposed to do in order to be able to make that connection? Or are you still waiting, is it really waiting on them to facilitate the connection?

Benoit Desormeaux

There are doing the work. That project is not managed by us, but by Sonabel. We are following them on the development of the power line and all the equipment. So they are in fact with what they had to do to meet that deadline.

Andrew Breichmanas - BMO Capital Markets

And just to be clear, does your guidance for the year include any sort of impact from connecting to the grid power or is that not included in there?

Benoit Desormeaux

It’s not included in 2014. We made a conservative saying that it’s going to be at the end of the year. So, no power grid in our 2014 guidance.

Operator

There are no further questions at this time. I turn the call back over to our presenters.

Robert LaVallière

Thank you Simon, and would like to take this opportunity to remind listeners that SEMAFO first quarter 2014, MD&A and financial statements are available on our website and also on SEDAR website. The audio webcast of this conference call will also be available for replay on our website for a period of 30 days. SEMAFO’s Annual General and Special Meeting of Shareholders will be held on Thursday May 15, at 10 AM at the Sheraton Hotel at Montreal. Thank you very much.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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