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Executives

Michael Kuta - Corporate Secretary

Klaus Zeitler - Chairman, Chief Executive Officer and Director

Robert Henderson - President and Chief Operating Officer

Aurora Davidson - Chief Financial Officer

Analysts

John Pancari - Evercore Partners

Stephen Aldridge - Hilliard Lyons

Joseph Reagor - ROTH Capital Partners

Amerigo Resources Ltd. (OTCQX:ARREF) Q2 2014 Earnings Conference Call August 8, 2014 2:00 PM ET

Operator

Good day, ladies and gentlemen. Welcome to the Q2 2014 investor call. I would now like to turn the meeting over to Mr. Michael Kuta. Please go ahead.

Michael Kuta

Thank you, operator. Good morning, ladies and gentlemen. Welcome to the Q2 2014 investor conference call of Amerigo Resources Ltd. on Friday, August 8, 2014.

Before we begin our presentation, let me caution you that our comments and discussions will include forward-looking statements and information within the meaning of applicable securities legislation. Although, we believe that the anticipated future results, performance or achievements expressed or implied by the forward-looking statements and information are based on reasonable assumptions and expectations.

You should not place undue reliance on forward-looking statements and information because they involve unknown and known risks, uncertainties and other factors which may cause the actual results, performance or achievements of the company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements and information.

You should review our press release issued August 7, 2014, and our other documents filed with the Securities Authorities in Canada including our Annual Information Form under the heading description of the business risk factors. These documents describe the material factors and assumptions that were applied in drawing the conclusions and making the forecast and projections as reflected in the forward-looking statements and information and the material factors that could cause our actual results, performance or achievements to differ materially.

Except as required by law, we undertake no obligation to update or revise any forward-looking statements or information made in this presentation.

Now, I'd like to introduce our Chairman and CEO, Dr. Klaus Zeitler.

Klaus Zeitler

Thank you, Michael. I'll start with making a few general comments, and I'll talk a little bit about our Cauquenes expansion project. And then I will hand over to Rob Henderson, our COO; he will talk about the operational results. And then, Aurora Davidson, our CFO, will talk about the financial results.

With respect to Cauquenes, and I think that is a subject where everybody is most interested, where we exactly stand. I want to go back to Salman Partners' notes of July '14, where Salman reported that we have received our environmental approval for the Cauquenes project. And Salman then mentions, quite a few other permits and approvals which we still need, and I just want to go through them and explain where we stand with them, and how important they are.

But before I do so, I just want to say that most of them are not in the same league, as for instance receiving the environmental approval or negotiating the deal about Cauquenes and the extension of the fresh tailings to 2037 with Codelco.

Salman mentioned that we still need to obtain construction and operational permits, we still need to finalize the financing, we need to have an electricity contract, we need to have an off-take contract and we need to have an EPCM contract. So let me just go through these and give you a little bit understanding of where we stand with them.

With respect to the construction and operational permits, which we have to get from SERNAGEOMIN, the geology and mining agency; from CONAF, the forestry agency and from SERIMI, the health agency. These are permits which are very normal permits.

So it is quite different from the environmental permit, where you, well, first of all, not know how long it will take for the agencies to approve that and sometimes you are really not sure whether at the end of the day, you will get the environmental approval.

But once you have received the environmental approval, as we did, then all these other permits are pretty normal, particularly because these agencies they have participated in approving the environmental permit. So they know quite well what is happening. And so we will have these permits by the time we are ready to stop construction or when we are ready to start operation.

With respect to the electricity contract and the off-take contract and the EPCM contract, these contracts all need to be in place together with the financing. And I can say that we have made quite some good progress in that regard.

The electricity contract we have a letter of intent of heads of agreement, where all the major terms have already been negotiated. And it is now just up to the lawyers to finalize that contract, and that has to be done within a timeframe of 60 days. And these 60 days are already rolling.

With respect to the off-take contract, as you know, we are selling right now our concentrates to Enami, a Chilean state company, the copper concentrates; and the molybdenum concentrates to a private company in Chile.

The molybdenum concentrate agreement will continue. We will have more production, so we will need to have additional off-takes, but that is not a requirement at this point for the financing. So we have time to negotiate that agreement, since we only need to have that in place, when the production of molybdenum concentrates increases substantially, once Cauquenes is in full production.

With respect to the EPCM contract, again we have basically negotiated that contract. There are only very minor items left and that contract will also be in place once the financing is in place.

So then that takes us to the financing. And again, here we have reported that the due diligence has been done by the bank, and we are now in the final stages of negotiating the loan agreement. But I'd like to mention one important fact, and that is when we started out negotiating this loan agreement with the bank, we were starting out on the basis of a financing of $100 million.

In the meantime, we are talking about a loan of $131 million, which shows that during the process of due diligence, the bank has become very knowledgeable. And therefore, they came to the conclusion that this is a very robust project, which can carry more loan financing than originally thought by the bank. And that's the reason that we were able to increase the loan amount from about $100 million to $131 million.

We have also already spent $9 million, mainly for engineering and procurement services. And so between the bank loan and our expenses so far, we have basically financed the total amount of the investment required, however, excluding contingency, excluding interest during construction and bank fees. So this shows that we have gone already a long way with respect to financing of this project.

And as we said already, we expect that during this quarter, we will finalize the financing of the Cauquenes project. And on that basis, we will then be able to start with the construction, either before the end of this quarter or shortly thereafter. And we expect to have production coming from Cauquenes in 2015. Not full production, but we will start having production from Cauquenes already in 2015.

So we are very happy about the progress of this important project for Amerigo. And I am sure this will have significant effect in terms of earnings, cash flow for many years to come.

So that's my notes on Cauquenes. And I now like Rob to talk about operations. But before he starts, I want to make one comment. As you have seen in our press release, we are going through a low-grade phase in our operations. And my only comment there is that I'd rather have a low-grade phase during low copper prices than a low-grade phase during high copper prices. And I think it also shows that even on low copper prices and low grade, we are still in a position to make positive cash flow.

After Rob, as I said, Aurora will talk about the financial results. And again, I have only one comment there, she will explain the logic of modern day accounting, how it is possible to percent losses, when you just concluded a contract, which allows your operation to continue for 20 more years. So I'll let her explain that in connection with her report on the financials. Rob?

Robert Henderson

Thank you, Klaus. So for the second quarter of 2014, MVC produced 9.3 million tons of copper at a cash cost of $2.22 per pound. And although these production levels were similar to Q2 in 2013, MVC's copper production was lower than expected, the reasons being mainly due to the low sulphide grades in the El Teniente fresh tailings and from the Colihues.

In the quarter, I am pleased to report that MVC operated safely and had no loss lost time incident. Although, we believe that grades and production rates will improve in the second half of this year, we have revised our 2014 production guidance down from 45 million pound to 40 million pounds of copper and 500,000 pounds of molybdenum.

The cash cost items for the year remains at $2.15 to $2.25 per pound, and cost production initiatives at MVC such as terminating the Colihues mining contractor are expected to reduce operating costs in the second half of this year. As Klaus mentioned, work is proceeding on plan for the Cauquenes expansion project and capital cost estimate remains at $120 million, and we are on track to start construction in Q4 this year.

That's all from me. And I'll hand over to Aurora to discuss the Q2 financials.

Aurora Davidson

Thank you, Klaus and Rob. From a financial perspective, I'm going to start with financial reporting or a part of the report. In Q2 we had an eventful quarter, as there were significant adjustments made in connection with the contract extension with El Teniente, which resulted in a net expense of $6.2 million, which of course are all non-cash nature expenses.

The exercise has now been completed and we have also signed up on it. We have also signed up on the rights to make it a case study on the lack of business logic of accounting standards, but that is a different story. We don't expect any further changes coming from this contract extension in the subsequent quarter. So that's all behind us.

Excluding the estimate changes, our financial results for Q2 were a loss of $2.1 million or $0.01 per share, and cash flow generated from operations was $1.5 million. On a year-to-date basis, we have posted a net loss of $2.5 million, also $0.01 per share, and we have generated cash flow from operations of $6 million.

We have also continued to advance detail engineering for the Cauquenes project, and this work along with sustaining CapEx has resulted in an investment cash outflow of $2.7 million in Q2 and $6.1 million on a year-to-date basis. Our cash cost for Q2 and year-to-date was $2.22 per pound copper, and we continue to maintain our annual guidance of a cash cost below $2.25 per pound copper.

As Rob mentioned earlier, this wasn't a good quarter in terms of production, driven by low grades, but management of MVC and Amerigo have been working closely to implement further operating cost initiatives. And additional cost reductions were put into place as of July 2014, which are already positively contributing to a more robust operating cash flow in July.

Q2 was also a very busy quarter in respect of the advancement of the Cauquenes expansion project finance. We made very good progress in connection with this effort, as due diligence has been satisfactorily completed, and we are also working on the final terms of the finance agreement for our loan of $131 million as Klaus reported earlier.

That's all I have to report.

Klaus Zeitler

So we are now ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from John Pancari.

John Pancari - Evercore Partners

Three quick questions. First, on the dividends, there was a time when you had the cash flow to pay, and as you pointed out in past quarters, the dividend was suspended in order to build up some cash for the project, which we all understood. There was some talk of possibly considering a dividend going forward even during the period of construction of financing, and obviously that would be contingent upon what type of bank agreement that you reached.

And I think, Klaus, you had mentioned, you were considering negotiating with the bank for the flexibility of perhaps paying a dividend of some nature or amount during the construction period. Could you give me a little color on that? Is that still possible? Is that not on the table because of cash flow constraints? Would it be more likely, construction would be completed and production would be ramped up first, et cetera?

Klaus Zeitler

Well, I think we still have that flexibility in the agreement as it stands, so it will depend a lot on various factors. One, that we stay within our forecast for the investment cost, that we conclude, what we call internally the first phase of the project, which is the infrastructure and putting into place the extraction facilities for Cauquenes, and then processing these tailings in the existing facilities, to have that phase of the project done as fast as possible, and certainly of course also on the copper price. And if all these things are positive, there would be the possibility from our financing agreements to do something like that.

Operator

The next question is from Stephen Aldridge.

Stephen Aldridge - Hilliard Lyons

You've got these lower grades in the fresh tailings coming out of El Teniente. And I think you've been having these low grades for some several quarters now. Is this because El Teniente is just doing a better job of extracting metal?

Robert Henderson

What's happening at El Teniente is they're a bit behind on their underground production quantities. So the tonnage fed to the mill is lower than it has been in the past. So with the effect that that mill is not 100% utilized and they have more [ph] reagent time and grinding powder available in their mill, and consequently they are getting better recoveries and sending lower grade down to us.

So it's a consequence of them behind on their mine plan. We have had communications with El Teniente and they need to get the tonnage right back up again in the second half of the year. And we expect the grades coming to us to increase, as they push ton through their mill. And what we've seen on July is indeed that is the case, they managed to get the tons up and grade has subsequently recovered. So low grade from the fresh tailings is due to their underutilization of their mill, due to low tonnage.

Operator

The next question is from Joseph Reagor.

Joseph Reagor - ROTH Capital Partners

Looking at Cauquenes you said that you should have some production from it in 2015. How should we think about that? I guess, is it going to be an offset to other production in the back half of 2015? And what kind of levels can we expect from the existing Colihues going forward and El Teniente as far as a percentage of a total tons?

Klaus Zeitler

What I was referring to is that that we will be able to startup with Cauquenes in 2015 and this will have an effect on the result of copper production. So we are expecting a higher copper production already in 2015 rather than only in 2016.

Operator

The next question is from John Pancari.

John Pancari - Evercore Partners

As I said there I got three quick questions, so I understand we're limited to one per cycle here. So just my second question is on the average cost, your release mentioned that cash cost per pound $2.22, correct?

Aurora Davidson

Yes.

John Pancari - Evercore Partners

And then the royalty, if I calculated it correctly is approximately $0.67 a pound for the third quarter?

Klaus Zeitler

For the second quarter. Yes.

John Pancari - Evercore Partners

I'm sorry, second quarter rather?

Klaus Zeitler

Yes.

John Pancari - Evercore Partners

And total cash cost were $3.23. So could you just give me a little breakdown on the $0.34 difference?

Klaus Zeitler

That's depreciation.

John Pancari - Evercore Partners

So it's all non-cash charges?

Klaus Zeitler

Right.

John Pancari - Evercore Partners

So with royalty payment of $0.67, which obviously has been an impediment to your more robust cash flow in the past, naturally. What do you see going forward, as production increases that would ameliorate just a larger royalty that would tend to inhibit much higher cash flow or profitability?

Klaus Zeitler

If the prices stay the same, the royalty will stay the same, more or less. So there is no change there other than, if the prices go up. And as we said in our earlier press release, when we announced the production results, we said that with Cauquenes we expect cash operating cost to go down well below $2.

Operator

The next question is from Joseph Reagor.

Joseph Reagor - ROTH Capital Partners

Again, toll milling question here. What was the length of that toll milling contract, and is there a potential to extend in beyond the current contract length?

Robert Henderson

It's a year-to-year contract, and it's obviously contingent on the Maricunga mine continuing to produce their by product concentrate. So right now contract is till the end of the year and we expect it to be maintained.

Operator

The next question is from John Pancari.

John Pancari - Evercore Partners

Coming around for the third strike here. A quick wrap up. Klaus, in the past you had mentioned there is sort of floor and a ceiling on the royalty payments. And could you just giving a little color on that again, if you could refresh me on that? And Rob, if you could tell me what the power demands would be after '17 or rather after the construction is completed, and how would you address the power you need to going forward, because I think in '17 or at the end of '17 the current power agreement expires?

Klaus Zeitler

Well, I think a main issue for us was that in the past the royalty was payable and was dependent on copper price, but it started at a base of $0.80. And this of course was historic. I mean the agreement was made in 1990. So therefore $0.80 were chosen at that time as the start of royalty payments, and that was a major concern for us that we need to change that. So what we have right now is that royalty is payable, when copper price are above $1.95.

And that $1.95 was negotiated on the basis of our estimate of our costs at the time when we produce from Cauquenes, so that we don't run into the problem as we had in 2008, 2009 at the financial crisis, that we have to continue paying royalty, when we don't make any money. And that situation of course put us into a very difficult financial situation at the time. And so a main emphasis in our negotiations was that this cannot happen again. Now, with respect to the upper end, we have three different upper ends, one is, well, Aurora can give the details.

Aurora Davidson

We have three different upper ranges. For Colihues we have lower at 4.27, then we have the fresh tailings at 4.80 and Cauquenes we have at 5.50.

Klaus Zeitler

And that is upper levels, the royalty is sort of around 30%.

Aurora Davidson

Yes.

Robert Henderson

Maybe I should address the power. Part of your question John, and right now we have a contract for maximum demand of 38 megawatts from Endesa, at an average price of about $0.10 per kilowatt hour, and that contract comes to an end in the end of 2017. And we've been in negotiation with alternate energy suppliers, wind and solar, et cetera.

And what we are looking at is to have a contract that goes for a further 15 years off to 2017, that will supply about 80% of MVC's needs, and that's maximum demand about 255 megawatts. So we're looking for a PPA contract that would supply about 80% of our future demand. And we're at advanced stages in negotiations right now at a very competitive price.

Operator

The next question is from John Pancari.

John Pancari - Evercore Partners

Rob, I just was wondering what are spot prices these days for power?

Robert Henderson

Spot price it's obviously very dependent on the water levels in the reservoirs. And when it's wet, the spot price goes down to about $0.10. And when it's dry, like it is now, it's in an order $0.20 to $0.24 per kilowatt hour. So spot varies, but considerably depending on the rainfall.

John Pancari - Evercore Partners

And has there been a change to the problems with hydro, has the drought abated it all in the last year?

Robert Henderson

Right now, we think spot price is about $0.20. So the drought has not abated in Chile yet.

John Pancari - Evercore Partners

And the new contract of -- did you say 255 megawatts?

Robert Henderson

No. 55. 38 to 55, it is our maximum demand.

John Pancari - Evercore Partners

Right. That's why I was shocked at the number. The last point I had, and you'd be happy to hear, the royalty charge, as you scale up, you said on a sliding scale or is it -- well, you had mentioned it's approximately 30% below average for all three levels over various price ranges, is that about accurate?

Aurora Davidson

Yes. That's correct.

Klaus Zeitler

And it's sliding scale.

John Pancari - Evercore Partners

With obviously, the smaller percentage, the higher up you are and a lower percentage?

Klaus Zeitler

Yes.

Operator

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Kuta.

Michael Kuta

Thank you very much, everyone, for attending our Q2 conference call. We look forward to talking to you again in three months, with hopefully better results for Q3. Thank you, again.

Operator

Thank you. The conference has now ended. Please disconnect you lines at this time. And thank you for your participation.

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Source: Amerigo Resources' (ARREF) CEO Klaus Zeitler on Q2 2014 Results - Earnings Call Transcript
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