Lake Shore Gold Corp. (LSG) Q2 2015 Earnings Conference Call July 30, 2015 2:00 PM ET
Executives
Mark Utting – Vice President, Investor Relations
Tony Makuch – President and Chief Executive Officer
Phil Yee – Senior Vice President and Chief Financial Officer
Eric Kallio – Senior Vice President, Exploration
Peter van Alphen – Vice President, Operations
Meri Verli – Vice President, Finance
Analysts
Stephen Walker – RBC Capital
John Madesk – Private Investor
Kerry Smith – Haywood Securities
Craig Johnston – Scotiabank
Derek MacPherson – M Partners
Tom Schwartz – RBC
Walter Soroka – Private Investor
Operator
Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lake Shore Gold Second Quarter 2015 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]
Thank you. I would now like to hand the call over to Mr. Mark Utting, Vice President of Investor Relations with Lake Shore Gold. Please go ahead sir.
Mark Utting
Thanks very much, operator, and good afternoon, everyone. And thank you for participating in today’s call to review Lake Shore Gold's first half and second quarter 2015 financial and operating results conference call. With me today are Tony Makuch, our President and CEO; Phil Yee, our Senior Vice President and CFO; Eric Kallio, our Senior Vice President of Exploration; Peter van Alphen, our Vice President of Operations; Meri Verli, our Vice President of Finance; Natasha Vaz, our Vice President of Technical Services and Alasdair Federico, our General Counsel and Vice President of Legal.
Slides accompanying today’s remarks are available on a viewer advance basis on the webcast on our website at www.lsgold.com. Following the presentation we will open the call to questions.
Participants are reminded that during the call some comments made will be forward-looking statements. A cautionary language around forward-looking statements is provided on Slide 2 of the presentation and is also available on our website; I refer you to this information.
With that, I'd like the turn the call over to Tony Makuch, President and CEO of Lake Shore Gold.
Tony Makuch
Hey. Thank you, Mark, and thank you everybody for being on the call here. We want to get – we get to tell you about the performance and achievements of Lake Shore Gold in this call and it's more important, first of all I want to talk about the 520 people we have working for us Timmins, those are the ones that generate these results. We want to express our appreciation and our gratitude and thank them for their ongoing efforts and for working safely and productively and getting the results that we achieve.
At Lake Shore we make a point to provide information to the market as it becomes available and we think that is good disclosure and as a result we have previously released many of the key numbers for the first half and second quarter of 2015 that you are going to see in this presentation. So I'm going to go through the slides very quickly and I’m going to provide a brief overview, we’ll then be happy to take your questions.
Before I get into the details, I’ll draw your attention again to forward-looking statement. Going to Slide 3, starting with the first half of 2015, we had a very strong first six months of the year including record performances in a number of areas. Among our record results we had gold sales of 98,500 ounces based on production of 95,600 ounces. Our sales led to record revenues of $146.6 million.
Slide 4; our unit costs were very strong. Cash operating cost averaged $551 per ounce sold and all in sustaining cost were $809 per ounce. Turning to Slide 5 with record sales and low-cost we had cash earnings of $79.6 million in the first half of the year. Earnings from mine operations of $37.6 million and we generated very solid cash flows from operating activities of $62 million.
Slide 6 now, with strong earnings and cash flows we have achieved solid growth in our cash position. Cash and bullion as of yesterday stood at $83.8 million, up 36% from the beginning of 2015. And I want to stress that all of the growth had come from internally generated cash flow, we have not done any external financings in 2015.
Looking at Slide 7 now, looking at revenue in more detail. Our revenue of $146.6 million in the first half of 2015 was up 7% from the same period a year ago. The largest factor contributing to our revenue growth was a 5% increase in the Canadian dollar gold price of C$1,488 per ounce, that increase resulted from an impact of a weaker Canadian dollar, which declined from $0.91 to $0.81 this year. Contributing about 30% of the increase in revenue were higher sales volumes, which were about 2% -- from the – up 2% from last years’ first half.
Slide 8 looks at net earnings. During the first half of 2015, we reported net earnings of $13.7 million which compares to net earnings of $17.5 million for the first half of last year. As I mentioned earlier, our cash earnings and earnings from mine operations were a record performances in the first half of 2015, really the key factor affecting the net earnings was our decision to spend aggressively on exploration at 144. Exploration is success driven and we’re having a lot of success here. As a result we are very committed to our exploration in 2015 and we feel it is a key driver for creating shareholder value as we went – outline new resources and ultimately reserves at mine – at our Timmins Corporations.
Slide 9; turning to other highlights, the one thing I didn't mention on the last slide was that partially offsetting higher explorations – expenses was a reduction in finance expenses, that resulted from continuing progress reducing debt. As many of you know we made our last payment on the gold-linked note on May 29 and we now have no senior secured debt. That saves us over $1 million per month in debt servicing. In the first half of 2015, our debt servicing costs were about $13 million. That number will come down by about $7 million, between $7 million in the second half of this year.
I already mentioned exploration; during the first half of 2015 we further extended the dimensions of the 144 Gap Zone and in June discovered a new zone to Gap Southwest Zone, about 200 meters further to Southwest of the original Gap Zone. The results we are getting are very exciting and we have a very active drill program planned at 144 in terms of the second half of the year.
Turning to Slide 10 now; this slides give the map that we often shown on our presentations. The map highlights our vision at the Timmins West complex, that vision is that what we have here could be multiple gold deposits drilling on the 144 trend. We have drilled aggressively in two areas so far this year and have had two discoveries.
Slide 11 shows more clearly the new discovery area, it also highlights our exploration drift. The exploration drift is being driven as a drill platform, the total development we had planned here was 1,220, we started this in the end of February of this year. We’ve now advanced over 950 meters. And so we’re getting exceptionally good progress and performance from our people doing this – completing this development and we expect it will be completed before the end of Q3.
We started underground drilling here in June with the initial work of 144 Gap and we’re still drilling that area. We will soon be commencing drilling the 144 Gap Zone itself with five drills to be declared over the next month or so. We have a drill moving into there today, so we will have two drills working underground on that drift, starting early next week.
Slide 12, turning to the second quarter. It is first important to look at it in broader terms. While there are some differences the first half of 2015 and 2014 have many similarities. In both the years due to sequencing we had one very strong quarter; last year was in Q2 when we had grades of 5.4 grams per tonne. This year we had it in Q1 when the grade was 5.7 grams per tonne. We said at the time the grades would revert back closer to the reserve rate that is what we saw in Q2 2015. Production in the quarter was 42,600 ounces with sales of 45,900 ounces. Based on our sales, we had revenue of $67.4 million.
Slide 13; our unit cost remained very good, cash operating cost averaging below $600 per ounce and all in-sustaining cost averaging below $900 an ounce, showing about $877 per ounce.
Slide 14; sold revenue and continued costs, as previously reported, showed in previous two slides. Reported cash earnings of $32.7 million and earnings from mine operations of $14.2 million, cash flow from operating activities were $26.4 million.
Now going to Slide 15; taking a closer look at our revenue for the quarter. They were down $75.1 million – sorry, they were down from $75.1 million in Q2 2014. The reduction was entirely due to lower grade in this year’s second quarter as mentioned during Q2 2014 we had a grade of 5.4 grams per tonne. Lower volumes more than offset a positive impact from a higher Canadian dollar gold price due to a weaker Canadian dollar.
Slide 16; looking at net earnings. We had net earnings of $1.7 million in Q2 2015 versus net earnings of $12.9 million in Q2 2014. The change in earnings really relates to two things, we talked about extensively in press release already. The reduction in revenue based on our grades and our decision to significantly increase our exploration spending this year based on the success we have driven.
Slide 17; and now we’re just turning to our outlook for the rest of 2015. On July 8, we improved our guidance for the year. We now expect to produce at least 180,000 ounces of gold. Cash costs are targeted to be better than $650 per ounce and all in-sustaining costs are expected to be below $950 per ounce. And you can see from the first half of this year, we are performing significantly in line or better than what we’ve given in terms of our full-year targets.
Turning to Slide 18; our final slide. Other catalysts for the company in the second half of this year should include additional drill results of 144 where we – in the second half of this year we expect to complete 55,000 meters of surface drilling and 40,000 meters of underground drilling, all within the 144 Gap Zone.
Also we will complete our underground exploration program at Bell Creek which will involve about 33,000 meters of drilling and 800 meters of development, should get some exciting results from there. And we see a lot of progress in terms – we’d continue to be on track as talked from an exploration point of view to come up with our first resource for 144 Gap in Q1 2016, which will be effective December 31, 2015.
With that, I will end the presentation. Thank you for listening and happy to take any of your questions.
Question-and-Answer Session
Operator
[Operator instructions] Your first question is from Stephen Walker with RBC Capital.
Stephen Walker
Just a couple of questions if you would. Just to go back to regional challenging exploration, on page – the presentation I apologize, on page…
Tony Makuch
You’re talking about the slides…
Stephen Walker
On Page 10 showing the regional around the 144 zones. The Gold river trend has obviously similar resource grades to Timmins West and what you’re seeing at the Gap Zone, the zones are relatively close to surface. You’ve got over 1 million ounces in the category and 17,000 ounces measured and indicated, what is happening along this trend. What is your plan as far as exploration; it would seem that it would be relatively closer access easier access than some of the underground. I know there is advantages in material across from the 140 zones to Timmins West shop, but talk a little bit about Gold River and what your thoughts are there?
Tony Makuch
Maybe I’ll make a few comments and then I’ll pass it on to Eric Kallio, who can give you a little more. You hit it on the head first off. In terms of where we are, we think it’s a very good area to explore and we have 1 million resource everything that's positive. But our priority right now is working towards advancing our project as quick as we can. This year to take advantage of things within proper areas where we think we can develop it quicker at this point in time because it closer to the shop and closer to Timmins West mine. So that’ why we are prioritizing into the 144 Gap and 144 area, but I’ll let Eric to add, some color in terms of his thoughts on the Gold River trend.
Eric Kallio
I think that, the – even though the 144 trend, at this point in time is has a lot less work, I guess the work we’ve done in case very large sized structure and with very few holes, we’ve been getting some very thick intersection with some pretty good grades in it. So there is a potential to maybe advance that project very rapidly depending on how fast it converts the model hedge. So I think we’re in lesser starting point, but it could actually be moved ahead pretty quick, with the kind of success we’ve been having so far.
Tony Makuch
Couple of other things I’ll mention there about the Gold River Trends. Gold River metallurgy is a little bit different than the metallurgy over at the 144 trend and nearby Thunder Creek. We have similar metallurgy, or actually even improved metallurgy at – what we come at 144 up to well over 97% recovery we’re currently getting. Gold River, we would have to do some changes in our circuit a little bit in order to really get improved recoveries or matching recovery. So that is one of the other challenges, besides the fact that we would have to develop it as a new operation as we see, off the bat one for Gold River there is some metallurgical issues we’d have to deal with.
Stephen Walker
That makes sense. Just another question in other tact; the benefit that you’ve seen in the US dollar exchange rate, either continued weakness but in the Canadian dollar, but you also obviously get a more gradual benefit from the exchange rate depending on sort of consumption of consumables and labor issues factors and so forth, what if any further benefits could you be given where current exchange rate is now in the back half of the year, do you think that's fully baked into the guidance or you’re just, you’re going to use 0.81 exchange rate and leave it at that. What are the benefits or what is the potential that you could see from, that may not be priced into the stock even using 0.81 exchange rate?
Tony Makuch
I think in the MD&A I think we said we’re using the exchange rate of 0.81, so that's what we we’re seeing. So that we could get some extra benefits from that as it goes on, but so that’s from a cost point of view, we see some opportunities there, but we are also getting some benefits on the cost because most of our costs are in Canadian dollars as well. So we’re not seeing some inflationary effects by weakening Canadian dollar, we’re actually getting some benefits that way.
Stephen Walker
On a percentage basis, when percentage is your direct US dollar, whether it’s steel or consumables of some sort. What percentage is US dollar versus Canadian dollar costs?
Tony Makuch
I’ll let Phil Yee answer that question.
Phil Yee
That majority of our expenditures are in Canadian dollars, we do have for example some grinding media and so forth that we source in the US. So I’d say it’s probably, it’s probably 95% Canadian.
Stephen Walker
Okay that's very helpful. Thank you Phil, thanks Tony, thanks Eric.
Operator
Your next question is from John Madesk, Private Investor.
John Madesk
Can I ask you to speak to the acquisition and the status of the acquisition and it’s – whether or not there's any debt attached to that? Thank you.
Tony Makuch
Well in terms of the status of the Temex proposal that we put out, we haven't heard yet, Oban has right to match, which expires today at 4 PM, so until we hear otherwise right now it's still a proposal, so that’s where that is. In terms of the Temex, Temex has no debt, so there is no debt that we see from this acquisition of Temex. But again for the proposal we have to wait for the – to hear something from Oban or from Temex themselves, whether they’ve got a matching proposal.
John Madesk
In the case of earnings, just looking to zero period, could you expand on how that was caused, I didn’t exactly understand why we slipped to zero earnings period.
Meri Verli
I think you are trying to earnings per share. We did have earnings to the second quarter, so [indiscernible]. We do have earnings to the second quarter of $1.7 million. The bigger type one of fracture, or significant fracture was spending on 144. Because all of our spending it is part of our earnings and that affect our earnings. So for the first half of the year, we spent around $11.4 million. We had zero dollars last year, so that’s significant.
Tony Makuch
And what we’re doing there, the exploration work we’re doing at 144 currently we're expensed at 100%. We’re not capitalizing any of that. We are counting fall season until we come up and find a resource on the property we expense all explorations. So as Meri said, $11.5 million of extra spending this year compared to last year on exploration and $6.5 million in Q2.
John Madesk
Do you continue to expect that at the balance of the year?
Tony Makuch
Well we had announced $25 million exploration program for 2015 and so yeah it will be little higher in the second half of this year actually.
John Madesk
Thank you.
Operator
Your next question is from Kerry Smith with Haywood Securities.
Kerry Smith
Tony or maybe – the cost per tonne in C dollars came from $107 in Q1 down to half actually, to $103 in Q2. I just wonder, how much lower you think you get those costs or do you think that’s the kind of getting down to where you thought screwed down pretty well?
Tony Makuch
Okay, Peter you want to answer that question.
Peter van Alphen
We’re obviously working on looking at ways of lowering our cost per tonne, the mines are getting deep and things are getting further away. It’s a possibility, but we’re looking at other efficiencies in terms of trucking being able to increase the productivity at Bell Creek. So we are working on it, and we will continue to focus on that into Q3, Q4.
Tony Makuch
Peter has got number of initiatives he is working on to reduce cost. One is continue to improve on our backfilling cost pace, so there's some initiatives in terms of using more of our existing drillings, as opposed to purchasing from other sources, which we have been using make – backfill. We’re looking at making economic changes in our explosives types, so which could help us save money. We’re looking at – as Peter alluded, we’re replacing four 42 tonne truck we use the hall up to Bell Creek ramp with three 50 tonne trucks. So we go one less truck, they’re more productive and we we’re looking at possibly increasing tonnage. So I would say that our cost have come down, we still see some room to improve in our cost per, but they’re small steps.
Kerry Smith
So when would be trucks replaced at Bell Creek. When you’d have the 50 tonne trucks running, is that 2016? Is that happening this year Tony?
Tony Makuch
[Indiscernible], so we will have three 50 tonne trucks at Bell Creek by the end of the year if the deliveries are on time.
Kerry Smith
Okay and then the other four will be taken out of service?
Tony Makuch
As we get the new ones yes. One other thing where we are replacing we’re taking over where the contract long drilling with our own people and we’re still facing that in Q4 – Q3, Q4 over Timmins West when we get delivery of our own drills.
Kerry Smith
Okay and just on the C$, I know in the past you haven’t really talked much about trying plus the hedging some of the C$ exposure. Is that something that you think about now at a point eight dollar or so, or you’re thinking just would rather leave it as a natural hedge against the US dollar gold price.
Tony Makuch
Kerry, we look at it on a continuous basis, and it’s been rather unpredictable debt. But I think at this point where the US Cad is that and given the forecast for the next three to, I guess next three months to the end of the year with the FED announcement yesterday and the oil price and so forth, we’re expecting Canadian dollar to continue to be weak. And given the range that is at right now, at 12930 [ph], we haven’t done any hedging at this point or any forward contracts. Given where it is now, we’re just continuing to covert as we start our goal, which is I think is a very practical approach at this point in time, until there is some evidence.
Kerry Smith
And maybe just one last question, maybe for Peter. Just on the grade profile as you’ll get into next year, you’ve budgeted great issuance 4.2 grams, what that kind of the grade we should start to think about for next year in terms of budget grade, somewhere in that providing range from 4.2 to 4.4?
Peter van Alphen
We expect to grow to be by the end of the year in the 4.2 to 4.4 and we don’t see it changing from that.
Kerry Smith
Okay, that’s helpful. Great. Thanks very much guys.
Operator
Next question is from Craig Johnston from Scotiabank.
Craig Johnston
I think Kerry asked most of my questions. Just wondering if you could provide any details on grade kind of in the next quarter, what you’re seeing just in the near term right now.
Tony Makuch
I think Peter had alluded to it, and I think what we’re going to see grade similar to say what we did in Q2 and that’s what we see, Q2 – Q3 and Q4 grades similar to what we have.
Craig Johnston
Okay great. That’s it from me. Thank you guys.
Operator
The next question is from Derek MacPherson from M Partners.
Derek MacPherson
Quick question for you. Just on the capital cost. Capitals I guess is trending a little bit lower in the first half of this year, where do you expect to sort of to be in the back half of the year?
Tony Makuch
Maybe I'll let Phil Yee answer that question.
Phil Yee
In terms of capital, I think we’re spending up to half of what we expected to during the year, which was $26 million year-to-date and we expect that pretty well to continue this in timing and timing differences, maybe slightly more in the second half. But I think it’s pretty comparative to the first half there.
Tony Makuch
But also Q3 is going to be slightly higher than Q4. And maybe because there is a number of projects we’re trying to finish off whether its summer related work, some electric work to support underground drilling at the 144. We’ve got a lot of work being spent at 144 with drilling et cetera and that ties into some capital as well.
Derek MacPherson
And maybe a few trucks arriving as well?
Tony Makuch
Yes.
Derek MacPherson
That was my only question. Thank you guys.
Operator
Next question is from Tom Schwartz with RBC.
Tom Schwartz
Just asking about the Bell Creek portion, what portion of tonnage is coming from Timmins West and Bell Creek portion of your total advantage now?
Tony Makuch
Peter, maybe can answer that question.
Peter van Alphen
For the full year we’re targeting roughly 1 million tonnes from Timmons West and 300,000 tonne will come from Bell Creek.
Tom Schwartz
And have they commenced the – have they started the underground drilling at Bell Creek for exploration, I noticed on your last Page, 18, you’re planning for a 325 of meters of underground exploration. Is that started now or…
Peter van Alphen
We’ve started on what we call our Phase 1 of the program, which is targeting between 735 and 925, there was a 10,000 meters in that Phase 1, so completed still about less than half of that.
Operator
Next question is from Walter Soroka, Private Investor.
Walter Soroka
I assume from the information that we’re getting that you are doing open pit and also drift mining, correct?
Tony Makuch
We don’t do any open pit mining. We’re underground, we mine underground.
Walter Soroka
So the grades that you’re getting then all has to be done by the drift work, there is no overburden removing just – because the grade I thought it was maybe a mixture of the two. But I guess it’s not, it’s all underground mining?
Tony Makuch
It’s all underground mining. Yes we do sub level long haul basically at all of our operations. We drift overcut, undercut and then we drill [indiscernible].
Walter Soroka
Because of the layout of where the good ore is and the bad is, I guess there is no choice of trying to say that well we would like to have a quarter where we’re going to just mill some of the better grade and turnover better return and then have that additional money for exploration or whatever, which you’re already trying to do to cover exploration cost within your money raised in the sale of bullion.
Tony Makuch
We have an ore body, we got a mining sequence we have to mine, we try to mine -- maintain stability and everything and sometimes the grades get better and sometimes they go down, but overall we have a reserved grade and we talked about previously about targeting grade 4.2, 4.4 grams as our overall reserve grade. And that’s what we look to achieve. We don't purposely go and to try high grade something. Trying to get the best grade we can, but we’re not trying to just high grade the mine and sterilize any ounces.
Walter Soroka
I had one other question here. If I were trying to look at it from analysis of PE, and I know -- when I stick the quotes on the Internet, it put down $0.08 as the earnings, is that correct?
Tony Makuch
You actually – sorry, do we have $0.08 for earnings per share?
Walter Soroka
Yes.
Tony Makuch
I don't – not for the quarter no.
Walter Soroka
What I found one is 250, 2015. Just some sort of a gauge to compare it to other gold mining companies to see how well they are doing with the PE, the gold a little cheaper.
Tony Makuch
If you really want to compare to the gold mining companies, I think the best thing to do is look at cash flow. We’re generating free cash flow in terms of – so there is lot of things that effect earnings. And as we said, we increase substantially exploration expenditures in the first half of the year and the quarter and we feel it’s going to really help in terms of generating extension to mine life and significant resource and reserve the growth.
And so we’re spending money in some areas that affect earnings, but we were generating cash flow free cash and building up, so in the end we’re making money and that’s something you should – if you really compare us to other gold companies, cash flow, we’re generating versus them and not operating cash flow, net free cash flow.
Walter Soroka
Alright.
Tony Makuch
Mark, do you have some color to put?
Mark Utting
Yes I was just going to say that that’s commonly when you look at things like price to cash flow, EBTIDA, as Tony said and that’s why we’ve been in sort of like four times cash flow and our valuation suggest that there is upside on that, but that tends to be the sort of metrics that we look at in terms of comparable valuation. Incidentally, we had our earnings per share with $0.03 per share in the first half of the year.
Walter Soroka
The only other question is that, you mentioned in the brochures [indiscernible] that they have exploration areas, they had something excluded one time. Is there are still outlying areas that you have potential of doing exploration et cetera or is it pretty well in the Timmons area?
Tony Makuch
We have some other properties, we have the Fenn-Gib property, which is about 60 kilometers east of Bell Creek mill and closer to Kirkland Lake and we still have the large property packaging in Northwestern Quebec beside at [indiscernible], we have about 30 kilometers of -- east and west side, so we have a large package up there.
Walter Soroka
But none of those are in the immediate plans to do any exploration?
Tony Makuch
No, those properties are in good standing and our priority right now is to do our exploration and advance our properties very nearer our mines and mill.
Walter Soroka
You’re looking on the current property, but I was just wondering whether there is any future plans to get and sort of sniff out some of the other areas that you have.
Tony Makuch
We think they are good areas and as they in time, there will be things there, but for the – where we are and where we are in our cycle of growth of the company in this market. Right now those properties are just being kept around. They are very good. We think they’re very highly perspective and very good properties.
Walter Soroka
There are off in the future, but not in the immediate future?
Tony Makuch
Right.
Walter Soroka
Alright. Well thank you very much.
Tony Makuch
Thank you.
Operator
There are no further questions at this time. I will turn the call back over to the presenters.
Tony Makuch
Well thanks everyone for taking part in the call today. We look forward to having our next call, which will be with our third quarter results at the end of October. Thanks and have a great holiday weekend.
Operator
This concludes today’s conference call and webcast. You may now disconnect.
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