Kirkland Lake Gold Inc. (OTCPK:KGILF) Q4 2015 Earnings Conference Call March 10, 2016 11:00 AM ET
Jennifer Wagner - Corporate Legal Counsel
George Ogilvie - CEO
Perry Ing - CFO
Andrew Mikitchook - M Partners
Phil Ker - PI Financial
James Steels - Bank of Nova Scotia
Cosmos Chiu - CIBC
Raj Ray - National Bank
Good morning, ladies and gentlemen and welcome to the Kirkland Lake Gold Earnings Call for the Third Quarter and Yearend of 2015. At this time, all lines are in listen-only mode. 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, Thursday, March 10, 2016 at 11:00 AM Eastern Time.
I would now like to turn the meeting over to one of your hosts for today's call, Jennifer Wagner, Corporate Legal Counsel. Please go ahead.
Thank you, Blair. And thank you participants for joining us this morning. Today’s call will take approximately 15 minutes. We will then allow for an additional five to ten minutes for questions and answers.
Before we begin, I will go through our abbreviated version of our forward-looking statements. Some of today's commentary may contain forward-looking information for Kirkland Lake Gold. We refer you to our detailed cautionary note regarding forward-looking statements in our press release issued this morning, a copy of which is also available on the company Web site at klgold and filed on SEDAR.
You are cautioned that actual results and future events could differ materially from the respective conclusions, forecasts or projections. I refer everyone to the section on forward-looking statements in the company's latest MD&A and filings available on SEDAR, which set out the material factors that would cause these results to differ.
During the call today, we will make reference to non-GAAP performance measures, such as average realized price per ounce sold, cash operating cost per ton produced and per ounce produced, all-in sustaining cost per ounce sold and all-in cash cost per ounce produced.
These are common performance measures in the mining industry, but do not have any standardized meaning. A reconciliation of these non-GAAP measures are set out in the earnings release issued today, as well as Appendix B of the Management Discussion and Analysis dated December 31, 2015.
Please also note that a recording of this call will be available for replay, the details of which are posted on the corporate Web site.
As a remainder to all, the Stub year for 2015 consists of an eight months period commencing May 1, 2015 ending on December 31, 2015. With this last quarter consisting of the two months period being November and December. Note that all dollar figures disclosed during this call are in Canadian dollars unless otherwise noted.
On the call with us this morning, we have George Ogilvie, President and CEO.
Good morning, this is George.
Perry Ing, Chief Financial Officer.
Good morning, this is Perry.
I'll now pass the call over to George to summarize the highlights for the quarter.
Thanks, Jennifer. And good morning, to everyone and thank you for joining us on the call today. I'm pleased to see that we've had another consecutive quarter of profitability and free cash flow generation. We produced 27,604 ounces of gold in the third quarter at an average head grade of 0.41 ounce per ton or 14.1 grams per metric ton. For the stub year we produced the 102,597,000 ounces of gold and achieved an average head grade of 0.42 ounce per ton or 14.4 grams per metric ton. We were able to achieve and even beat some of our guidance metrics for this year which Perry will discuss in more detail.
We generated $19 million in free cash flow during the year which has contributed nicely to our growing cash balance. One month after the close of the acquisition of St. Andrew Goldfields, we have approximately $110 million cash on hand. Chris Stewart, our VP of Operations could not join us this morning for the call. So I'll discuss our operational results on his behalf.
Our cash operating cost per ton of CAD$327 for the stub year saw a slight decrease over the previous year from CAD$345 a short-term or down some 5%. This was mainly attributable to a strong daily run rate of 1,123 tons per day in the third quarter, which actually saw our cost per ton in that quarter dropped to CAD$289 per ton. On the cost of the equation the natural attrition of our labor numbers continues to fall meaning efficiencies such as meters per man-shift and tons per man-shift continued to improve.
Our cash operating cost per ounce for the quarter CAD$716 or US$535 per ounce. We remained focused on mining as close as possible to the reserve grade which has paid off for us substantially over the last year, while we remain profitable and free cash flow generous in a challenging to 2015 gold price environment. While we continue to assess opportunities to increase throughput this is not the primary focus of our mine plan. Quality tons is what will allow us to continue to drive down our cost and maintain the grade profile of the mine.
We close the transaction with St. Andrew on January 26, 2016 and as such are not reporting any results for the East Timmins assets for 2015. We are currently in the process of integrating the operating, capital and exploration budgets and the 2016 mine plans and will update the market with definitive guidance in mid-April. We remain committed to provide and promote a safe working environment for all our employees across all of our operations.
Indeed in 2015 our Macassa Mine achieved 1 million mine hours loss time free and is currently 334 days loss time free, while they were no reportable environmental incidence in our investments in 2015. The integration of our businesses is a top priority for us right now. We see this transaction as a partnership where we can learn best practices from one and other across our operations. The East Timmins assets have been performing well on their own over the last several years and we will look to improve upon these operations and our own long-term sustainability of being a long life, safe and profitable, intermediate gold producer within Canada. I'd like to thank our entire Kirkland Lake team for their support and hard work.
I'll now pass the call over to Perry Ing, our CFO to deliver our financial results. Thank you.
Thanks, George. I’ll go through some of the key financials metrics for the year. In terms of revenue in the third quarter we generated revenues of CAD$37.6 million from the sale of 25,300 ounces at an average sales price of CAD$1,486 per ounce during the two months period. For the full eight month stub year, we generated revenue of CAD$150 million from the sale of 101,000 ounces at CAD$1,483 an ounces, which puts us in the middle of our guidance for the year. In terms of cost, as George mentioned, we saw our cash operating cost per ton per ounce fall to CAD$716 or US$535 per ounce during the quarter.
This was a tremendous achievement being able to bring cost down to these levels, these are the lowest operating cost for a reporting period in the recent history of Macassa. In terms of all-in sustaining cost for the quarter we've reported costs of CAD$1,358 or just over US$1,000 per ounce and for the full stub year CAD$1,259 per ounce sold or US$979 ounce. In terms of all-in cash cost, we've reported CAD$1,346 for the two months stub period which has CAD$997 per ounce which compared with the full year eight months period of CAD$1,338 per ounce or US$1,030 ounce.
In terms of our all-in cash cost for the year, they were higher for the period than for the remainder of the year due to transaction cost related with the St. Andrew acquisition, one-time payment and inventory adjustments between ounces produced and ounces sold, as well all-in sustaining cost for the two months period reflected the purchase of capital equipment towards the end of the year.
Overall though all-in cash cost remained approximately CAD$100 lower than the last quarter of the prior fiscal year. We believe that going forward, we will continue to see our all-in sustaining cost and all-in cash cost reduced further.
In terms of overall profitability we've reported pre-tax income for the year of 16.5 million, net and comprehensive income was CAD$7.3 million or CAD$0.09 a share. Our effective tax rate was skewed for the current and prior quarter as a result of Ontario Mining Tax audit assessment for prior years which we believe is a one-time event for which we have little to no exposure for remaining open tax years.
In terms of cash flow, cash flow from operations was CAD$49.2 million for the year, of that we generated CAD$19 million in free cash flow for the year which is just over our guidance for the year. As George mentioned our cash balance of CAD$110 million compared favorably to our remaining convertible debt of CAD$119 million, which we now view as very manageable. We still have over a year to the first maturity of our 6% convertible bonds and we believe we'll generate a cash to be able to satisfy these obligations.
I'll now hand over to George for closing remarks.
Thanks, Perry. And it's great to see the positive momentum in the share price after closing the transaction and forming the market of the quality assets acquired and of course now being helped by a higher gold price environment. We look at 2016 as very much a transitional year for Kirkland Lake, as we bed-end [ph] the integration of our East Timmins assets, we will spend the time and the effort necessary to properly integrate the business units and more importantly the working cultures.
Our people are our greatest asset and making sure we can keep open and transparent links of communication will be imperative to our success. We're completing the consolidation of the budgets and plans as we speak and we believe that with a minor increase in capital development i.e. sub CAD$10 million and explorations at the East Timmins assets this year, we will probably set up our business for potential increases in 2017.
At the Macassa Mine we have two projects on the go that will allow us for potential efficiency gains in the future. We'll talk more about these in the coming quarters, after we see some initial results. I believe that our prudent approach has greatly contributed and benefited the company and has allowed us to achieve seven quarters of profitability and free cash flow generation, that's has placed the company on a firm financial footing.
Our newly expanded executive team of seven has over a 150 years of experience within the mining industry. We have to support and a wealth of knowledge at the Board level, and we believe that we will be able to unlock additional value for our shareholders throughout the course of 2016 and beyond.
I look forward to speaking with you again in May when we report our Q1 consolidated earnings.
And I’ll now turn the call back to Jennifer.
Thanks George. We will now be opening up the call for Q&A session. And I’ll ask the operator to kindly review the procedures for posing questions, thank you participants.
[Operator Instruction] The first question comes from the line of Andrew Mikitchook from M Partners. Your line is open.
Just as we are preparing for Q1 numbers, just maybe this question for Perry, how do we -- how are you going to present the St. Andrew's numbers, is it -- I think we calculated it at 66 calendar days, is that how we should think about to the portion that will be included on to your financials?
That’s correct Andrew. So we will be consolidating as of to date following the acquisition day so towards the end of January, you will see a consolidated reporting for production and all our financial metric from done forward.
Just from that point, there won't be any odd accruals or remove -- you won't have the whole quarter and then have to back off stuff [multiple speakers] in control?
Okay. And then maybe George, just the timing I am sure if it's clear yet for you guys either, but this concept of this updated guidance, is that a separate event from Q1 performance results? Or could potentially be that the same release?
It potentially could be combined together. The current schedule we have is to release guidance to the market mid-April and of course that would be after the closing of our Q1 and typically we put out to weeks after the closing, our production numbers. So certainly an opportunity there for the combination of first quarter production and the guidance for 2016 as a pro formal company.
Okay. And just last question, just to make sure the details. You said that the potential CapEx into the St. Andrew's assets is clearly sub CAD$10 million, that is CapEx, it's not exploration, right? Exploration is separate.
That’s correct. Exploration is separate.
Okay, that’s it. I’ll let other people to ask question behind me. Thank you and congratulations.
The next question comes from the line of Phil Ker from PI Financial. Your line is open.
I guess the question for you to address Chris being gone. But just with the unit cost that your Macassa coming down I guess around 20%, could you just touch on maybe what initiatives were driving those cost lower during the, I guess stub quarter?
Well, certainly as I alluded to in my discussion there, we continue to see our man power numbers fall through natural attrition. When we closed out December of 2014, we had some 1,015 people on the payroll. And as we closed out December 2015 that number has fallen now to about 900 people. So over the course the full 12 month period, we’ve see an additional 115 people leave our labor force. And the numbers have fallen again over the last two months since those numbers.
So I think that’s extremely positive because obviously the labor being an arrow there in the high grade gold mine as labor intensive. But we continue to perform at or above previous levels with our labor force being reduced and obviously labor force is a major component of or operating cost.
So we can sort expect that performance from the man power going forward?
Yes absolutely, Phil I mean alluded to it, but one of the initiatives we’re looking at right now is the utilization of tele-remote equipment. We’ve just taken delivery of an Atlas Golf Course, good TRAM that’s being slung underground that’s weak, but it’s fitted with tele-remote capabilities. As you know within our mine we have fiber optics, so the sort of top process is that during the shift change, where we have a two hour blast clearing window, which is four hours in 24 hour period, is there are possibility of mucking out a couple of headings with the remote good tramp.
And then later on in the second half of this year started to work actually go to remote trucking from surface, that’s -- it's very early days and we haven't baked that into any production or any guidance, there is obviously going to have to be some bugs that will be warped out, but we see 2016 as being a real opportunity to get that to work. And I am placed with, so that when we move on to 2017, we can take advantage of that.
Okay. And then just may be couple of questions for Perry. First with the St. Andrew's acquisition, what sort of combined tax loss carry forwards are we may be looking at in the near future here.
They don’t have -- St. Andrews does not have any net operating losses in terms of carry forwards, but in terms of their general tax pools, I'd say they are proportionate to our tax pool for Kirkland Lake so in terms of just UCC and other categories we would expect that say spot prices to be paying full cash taxes somewhere around 2018 maybe even late 2017 depending on costs and gold price.
Okay, that's good. And would we be able to just touch on G&A just with the growth and expanded office space, et cetera, with St. Andrews acquisition, can we get some sort of annual estimate perhaps.
That will be part of our guidance that we put forward, but overall I think even with onetime cost I think we’ll be a bit ahead for 2016. And then obviously for 2017 and go forward we’ll be they can significantly compared to the run rate of the two prior companies combined.
Okay, that's it from me and I'll pass it on to the other analysts. Thank you very much.
The next question comes from the line of James Steels from the Bank of Nova Scotia. Your line is open.
Hey guys actually all of my questions were just answered, so we’re good, but thanks and good work on the good quarter.
And the next question comes from the line of Cosmos Chiu from CIBC. Your line is open.
Got one quick question here. Maybe just looking at the new battery operating equipment that was differed in terms of delivery in 2015. Could you remind me again in terms of are these replacement units or additional units and have you received them since yearend?
Yes Cosmos we took delivery late last year of two electric 20 tonne trucks. Those are new addition to the fleet. So we've now gone from three electric trucks to five, and then the upper portion of the South Mine complex where we have better ventilation, at least down to the 5,300 level. We have a diesel truck which is able to run their if we have any issues with maintenance or emergency breakdowns, so essentially we have 5.5 units able to run in the SMC. This year we’re are also schedule to take the delivery of five new electrics good trams. I believe three of those are in addition to the new fleet and there are a couple which are replacing older units.
And George I know it's been a while now since you've utilized the battery powered equipment has it been pretty good so far, up to your standards? How have they've been in terms of longevity?
Well I can tell in the two years tenure that I've had with the company as we've learn through using the equipment we've seen the efficiencies in the life of the batteries only improve. I think two years ago we were getting 2.5 hours on a battery before it had to be changed out, now we’re getting 3.5 hours on a unit and we believe that there is further opportunity for improving upon that as we continue to learn from our operating experiences.
Is this something that you can bring over and utilized at the Timmins East assets or is that not as necessary given it's actually a much bigger -- I've been there before and ventilation isn’t as much of an issue at Timmins East.
It is something that could taken over there I suppose but I would probably say that we’d probably wants to remain with diesel currently, I mean obviously with the price of fuel where it is, it's relatively -- from an operating perspective it's cost efficient to be running the diesel units.
The diesel units as far as capital purchase is concerned compared to an electrical unit is probably half the cost. Obviously with the battery operated equipment is fairly cutting edge, we’re probably one of the leading proponents or leading mines in the world using this technology and until other mines -- other underground mines start using it we will really see the purchase or capital cost coming down.
Great, thanks George. That's all I have.
And the next question comes from the line of Raj Ray from National Bank. Your line is open.
Just a quick question on recall you were looking at reversing the air flow in the mine, do you still intend to undertake that and do you expect any downtime because of that?
Yes Raj when I spoke about the two opportunities, I touched on the tele-remote, the second one is indeed the reversal of the ventilation system. So just for everybody else’s benefit on the call when the Macassa three shaft was originally sunk, the main production shaft was in fresh air. When Kirkland Lake took over the property in 2002 for whatever reasons the ventilation was turned around, so the main production shaft is an exhaust because we put our people underground there, we have to clear the mine of all the gases, so we lose two hours after every blast at the end of each shift which is four hours in a day.
The other thing that we see is we draw fresh air from some of the old workings across the camp, at Kirkland Minerals, Wright-Hargreaves, et cetera. And as that air moves across the strike length of the camp, on the other side of our property all the workings are flooded to the 4,200 level, which means the air has a lot of opportunity for picking up moisture on the other side which doesn't raise the temperature, but increases the humidity levels which makes it feel warmer.
So we're busy doing a study right now, from an economic perspective, it looks as if it would pay us dividend, we're just working with an engineering group to ensure that we can actually physically reverse the ventilation and it's not going to impede our product. And I would expect probably in the next month, we would make that decision and if we were going to approve the pen on that, sometime in the second quarter, we would make that change and of course, we would have purchase propane burners to ensure that the fresh air going down three shaft and the fall in the winter of this year, the air is then headed.
So you should expect more information on that in the coming quarter, there would be some down time, Raj, I think it’s less than a weak, but we know that we have the capability of catching up based on the hoisting capacity and certainly the milling capacity that we would have.
There are no further audio questions at this time. I'd turn the call back over to the presenters for closing remarks.
Well, thanks everyone for your time today. And I look forward to speaking with you again in the coming weeks and months. Thank you ever so much.
This concludes today's conference call. You may now disconnect.
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