Newmarket Gold, Inc. (OTCQX:NMKTF) Q1 2016 Earnings Conference Call April 29, 2016 11:00 AM ET
Laura Lepore - Head of Investor Relations
Doug Forster - President and Chief Executive Officer
Rob Dufour - Chief Financial Officer
Darren Hall - Chief Operating Officer
Chris Thompson - Raymond James
Stephen Walker - RBC Capital Markets
Heiko Ihle - HC Wainwright
Welcome to the Newmarket Gold First Quarter 2016 Earnings Results 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]
I would now like to turn the conference over to Laura Lepore, Director of Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. With me on the call today are Doug Forester, President and Chief Executive Officer; Robert Dufour, Chief Financial Officer; and Darren Hall, Chief Operating Officer of Newmarket Gold.
Today, we will be providing comments on our results for the three months ended March 31, 2016 and on our outlook for the balance of the year. We will then open up the call for Q&A. The slide deck that we will be referencing during this call will available on our website at newmarketgoldinc.com.
Before we get started, I would like to direct everyone to our Safe Harbor statement on slide 2. Our remarks and answers to your questions today may contain forward-looking information about future events on the company's future performance. Although forward-looking statements are based on what management believes to be reasonable assumptions, the company cannot assure shareholders that actual results will be consistent with these forward-looking statements.
The company disclaims any intention or obligation to update or revise any forward-looking statements resulting from new information, future events or otherwise. For a complete discussion of the risks, uncertainties and factors which may lead to our actual financial results and performance being different from the estimates contained in our forward-looking statements, please refer to our latest quarter-end report. All figures are in U.S. dollars, unless otherwise stated.
With that, I would like to turn the call over to our President and Chief Executive Officer, Doug Forster.
Thank you very much, Laura, and good morning, everyone. Welcome and thank you for joining us for Newmarket Gold's first quarter financial results call. On slide 3, the Newmarket operations team delivered a solid first quarter with strong consolidated gold production, 58,057 ounces, a 9.2% increase over Q4 2015 and a 2.7% decrease over Q1 2015. Our strong results were led by a record quarterly performance at our flagship Fosterville mine.
During the quarter, Fosterville continue to benefit from high grade visible gold-bearing Eagle Fault zone, which contributed to a 28% year-over-year increase in average mill feed grade to a record 7.34 grams per ton resulting in a record production of 33,138 ounces during the quarter.
We are also pleased with the improved performance from out Cosmo mine, which delivered increased quarterly production of 16,340 ounces, a 27% improvement over the previous quarter, with average mill feed grade of 3.09 grams per ton an increase of 21% over Q4 2015. In terms of cost, Fosterville achieved low operating cash cost per ounce sold of $473 and all in sustaining costs of $723, a significant result and a competitive cost profile compared to our peer group.
On a consolidated basis, we delivered low operating cash cost per ounce sold of $701 reflecting our improving consolidated grade and recovery profile, largely driven by record grade of Fosterville mine as well as focus on operational excellence companywide cost containment initiatives and the impact of weakened Australian dollar.
All-in sustaining cost per ounce sold decreased 3.2% year-over-year to a new record low of $908. Our first quarter cost performance positions us well to achieve our 2016 cost guidance including operating cash cost guidance of $650 to $725 all in sustaining costs of $950 to $1,025 and production guidance of 2005 to 2020 ounces. With our strong first quarter performance, we generated $8.9 million in free cash flow after investing $3.8 million in growth expiration and development.
On slide 4, our strong Q1 2016 performance and the exercise of warrants enabled us to increase our cash position 43%, or $15.6 million to $52.1 million by the end of Q1 2016, further strengthening our balance sheet. With our solid cash position and with the full convergent and redemption of our convertible debentures at the end of March, Newmarket is well positioned at the end of quarter being essentially debt free with only $1.6 million in long-term debt on the balance sheet and approximately a $175 million shares issued and outstanding.
I also mentioned that we are extremely pleased to have Eric Sprott as a new significant shareholder of Newmarket to date. Mr. Sprott had invested in excess of CAD$68 million in Newmarket, and he now owns 17.9% equity stake in the company. We look forward to his ongoing support as we focus on growing our production, reserves and resources and creating shareholder value.
Before I turn it over to Rob to get into financial performance and then Darren for more color on our operations, on slide 5, I’d like to briefly highlight our updated mineral resources as we delivered on our commitment to create value for shareholders by maintaining our consolidated mineral resources and increasing our reserves at Fosterville following strategic investments in growth during 2015.
As of December 31, 2015, we successfully replaced our mineral reserves mine in 2015 and slightly increased our measured and indicated resources to 4.7 million ounces. At Fosterville, mineral reserves increased 34% to 244,000 ounces after depletion partially due to the high grade visible gold-bearing Eagle Fault zone discovered last year. Mineral reserve grade increased 25% year-over-year to 6.95 grams per ton from 5.55 grams per ton.
Most importantly, at Fosterville’s current mining front, which is comprised of the Phoenix and Lower Phoenix gold systems measured and indicated mineral resources of 673,000 ounces graded 8.33 grams per ton have been delineated. To-date, the Lower Phoenix gold system have been traced by development and drilling for over 2 kilometres and remains open for further expansion. With our latest surface based drill programs, we have also confirmed the potential to expand the fine mineral resources both up-plunge and down-plunge in the Lower Phoenix gold system.
Additionally, Stawell gold Aurora B discovery resulted in a maiden inferred mineral resource of 30,400 ounces creating 3.5 grams per ton, following three successful expiration programs completed during 2015. The grade of the Aurora B inferred mineral resources 42% greater than the underground mineral reserve grade.
Looking ahead to the balance of 2016, our top priority is to continue to focused on safe operations, free cash flow generation, sustaining and improving our production and cost profiles, optimizing and improving more recoveries in mill feed grade, rolling high margin reserves and resources and accelerating our growth and development initiatives.
Our shareholders have been rewarded in 2016 with Newmarket share price having increased over 150% since the start of the year where the price of gold in Australian dollars has increased only 14% during the same period. I want to thank our shareholders for their support and we look forward to continued success during the rest of 2016.
I’ll now turn it over to Rob Dufour, our Chief Financial Officer.
Thank you, Doug. Turning to the financials results on slide 7, total revenues of $66.1 million were generated in the first quarter of 2016 from $57,796 ounces of gold sold at an average realized gold price of $10,139 per ounce. Revenues were 9.4% [ph] lower compared to the prior year, partly due to the lower average realized gold price, but also noting that the sale of 2750 ounces of gold bullion held on the balance sheet in 2014 were recorded in Q1, 2015. Mine operating income in Q1 2016 was $17.6 million, compared to $19.8 million in 2015, with the prior year including approximately $1 million in operating income from the sale of the gold bullion.
The remaining decrease, driven mainly by lower revenues was offset by lower operating expenses largely due to the weaken Australian dollar and lower depletion and depreciation as the result of longer mine life for Fosterville and lower book values at Cosmo. I would also note the increase in royalty’s year-over-year, which reflects the commencement of 1% NSR royalty at stall. Looking to the bottom-line, the company posted net income of $6.5 million or $0.04 per share, compared to net income of $15.7 million in Q1 2015 or $0.13 per share.
Note that the per share results reflect the higher weighted average number of shares outstanding during Q1 2016 of $146.3 million such increase driven by the convergent in redemption of the debentures and the exercise of warrants. As noted before, net income was competitively lower due to the impact of the sale of gold bullion from the balance sheet in Q1 2015 and also reflects the impact of explorations spending of $3.8 million versus $0.8 million in 2015 and $1 million increase share based compensation due to the partial investing of the company’s performance share units due to the strong performance and the company share price.
General and administrative expenses were also higher during the period reflecting the expanded corporate team compared to early 2015. In terms of the cash flow, the company’s operations generated $18.3 million in Q1 2016 compared to $27.5 million in the previous year. The decrease was mainly driven by $3 million more in growth exploration spending and lower revenues when noting that the prior year benefited from $3.3 million in cash flow, relating to the sale of gold bullion previously held.
In terms of capital, we invested $7.5 million into mine development during the quarter, largely focused on Fosterville, which accounted for $6.6 million of the total expenditure. Mine development at Cosmo was comparatively low at $0.5 million with a focus on operating development in the now access Mining Block E and also in the 640 drill drive growth development, which provide the drill platform for the Silver lode and the Eastern lode footwall targets, in addition to future grade control drilling. This decrease at Cosmo for the recent quarters, the main driver for the lower spend rate compared to 2015.
Finally, the company benefitted from net cash from financing activities in Q1 of $4.3 million, which reflects the proceeds received on exercise of share purchase warrants and some stock options and also includes the final interest payment on the debentures of $700,000.
With that, I’ll turn it over to Darren Hall, our Chief Operating Officer to discuss key highlights from our operations during the quarter.
Thank you, Rob. So, I think the core value of Newmarket gold, when we are committed to providing a safe and healthy work place for all of our employees and business partners. As we continue on our journey in Newham, I’m pleased to report a 25% reduction in our reportable injury frequency rate in the first quarter of 2016. Starting on slide 9, as Doug mentioned earlier, the operations are little bit just over 58,000 ounces of production for the quarter, including a record 33,138 ounces of Fosterville. The trend of increasing rate of Fosterville continued during the quarter with an average grade mild of 7.34 grams per ton, a 16% increase over the fourth quarter of 2015.
The positive grade trends have continued in April and now anticipate strong metal performance in the second quarter. To insist and surely realized maximum value from these higher grades, we completed construction and commence commissioning of a gravity circuit during the quarter, which will positively impact recoveries commencing in Q2. Turning to slide 10, on the Fosterville exploration front, we continued with an aggressive drilling program, involving 600 gram rigs drilling a combination of infill and extensional programs.
We’ve also recently completed 3 surface based drilling programs, targeting up and down-plunge extensions to the Lower Phoenix system, results to date have been very encouraging and we anticipate providing an update in the second quarter for the extensional programs outside of currently define reserves. Turning to the Northern Territory on slide 12, it is pleasing report that Cosmo reproduced 16,340 ounces of gold in the first quarter, which is a 27% improvement over the fourth quarter of 2015.
The average grade mild was 3.09 grams per ton, a 21% improvement over the fourth quarter of 2015, which is consistent with our expectations, as production moves into the higher-confidence Mining Block 8. Recovery for the quarter improved to 90.7% as a result of capping daily throughput rates to 2,500 tons per day, enabling us to move to a continuous milling strategy.
With implementation of continuous milling in early March, we saw daily recoveries improved to 95% to increase result oxygen levels. We continue to see improved recoveries into April. Given our position in Mining Block 8 and the cynically improved recoveries, I’m confident that we are well positioned to deliver our 2016 production guidance for Cosmo.
Turning to slide 12, production was consistent with the fourth quarter of 2015. Looking ahead, stall continues to progress a multi-targeted underground drilling program focused on the upper levels of the mine and the strongly dollar mineralized and remains on track to mid of 2016 production guidance of approximately 35,000 ounces.
With that, I’ll turn it over to the operator to open it for some questions.
We will now begin the question-and-answer-session. [Operator Instructions] The first question is from Chris Thompson of Raymond James. Please go ahead.
Hi, good morning guys and congratulations on a good quarter.
Couple of quick questions here. Why don’t you give us a sense of timing for the next batch of exploration results specifically from Fosterville?
Yeah. Good question Chris. We’re looking at second quarter for sure, I don’t give exact week or month, but we’ll definitely get an update this quarter and we did publish a couple of results there with our physicals and we’ll get the bulk of the new asset results and drill information out in the near-term certainly this quarter.
Okay. Great, thanks. Just moving on very quickly to Cosmo here, noticeably the throughput there about 2100 ton a day and the grade at about 3 grams obviously a nice increase from the Q4 there, I mean is this what we should be modelling on a ongoing basis?
Yeah, Chris. We remain to change during Q2, well Q1 to go to capping daily throughput rates. I mean, I understand the chemistry and oxygen as the key region in [indiscernible] and the deficiency in dissolved oxygen slows and you did not level throughputs rate will negatively impact recovery. So I guess, our philosophy going forward is to cap throughput rates at around that 2000 and 2500 ton a day during sure we can get an adequate level of oxidization, which will allow for good recovery. So, that is kind of the basis going forward.
Okay. Great. And then, just quickly Fosterville here, I know it is what about 18,000 ton a day, it’s slightly lower throughput I guess compared with the Q4 there. Again, can you comment on that sort of throughput on a forward-going basis?
No. I mean, the Q1 throughput rates were impacted by plan maintenance. So, it’s consistent with what we had planned.
Right. Okay, we should be looking at something close to maybe 2000 ton a day?
Yeah. Consistent with what we’ve provide, guidance and what we’ve seen historically.
And ultimately, Chris, we’re doing this step out drilling at Fosterville. We had some results to-date, we’re now drilling services on additional sections up-plunge and ultimately we would like to open as we mentioned open additional mining fronts up-plunge, which would provide us a new mining front to fill the mill additionally, but as I said, as Darren said that’s directly for the moment, but the future looks bright in terms of the potentially open up additional mining fronts in the medium term.
All right, is any of that from Harrier I think we might have spoken about this earlier from the other main part of the mine there?
Harrier is not - we’re drilling much from Harrier this year Chris as you know, but we believe Harrier has a good future for Newmarket. We’re drilling there now. We will get an update out on Harrier at some point as well, in addition to the main Phoenix, Lower Phoenix zones and that could provide additional mill feed in the future and that’s why we’re actively drilling there with a couple of rigs.
Great. Fine, and then finally, very quickly just, if you wouldn’t mind just an update on the Big Hill there and then wrap it up with more Maud Creek, I understand we are expecting what a PEA for that opportunity soon.
Yes we are on a revised schedule for May release, the results of the Maud Creek PEA and so we will get that out, they say in that same timeframe. SRK is doing that for us and doing a very good job. And then on Big Hill, we are looking in Q2, we are looking for basically process guidance from the regulators in terms of the track to getting that project back on a track to potential permitting. We’ve been of that track for a period, but we do anticipate we’ve had heightened communication with the regulators and that’s good news. So we’re looking at Q2 for getting some sort of visibility into the process going forward.
Okay guys all right. Thanks a lot. I will leave it for other similar questions. Thanks.
The next question is from Stephen Walker of RBC Capital Markets. Please go ahead.
Thank you. Just a follow-up on Chris’ question on Fosterville, the higher grade zones that you are identifying in the Eagle Fault Lower Phoenix, recollection is it is about 70,000 ounces in a resource figure at this stage, are you going to be able to build up sufficient tonnage where we will be able to see those ounces grow within a resource or a reserve statement or are you kind of mining them as you find them. What I’m trying to get a sense of is, what is the upside potential of the higher grade material, are we going to see it in year-end reserve statement upgrades or periodic resource updates or is it something that, oh year we are reminded in the quarter and it’s gone through the plant.
No I think the answer is both. We would like to see, Stephen and thank you for your questions and we like to see Eagle reserve and resource growth in addition to obviously feeding the mill. That’s certainly the plan going forward. There is a number of, we have got four rigs working underground there now. We’ve got the surplus rigs doing this step-out program as well. So, ultimately our goal would be to do both. Obviously, to continue this feed the mill, a quarter by quarter with both Lower Phoenix, Phoenix tradition mineralization, self mineralization as well as Eagle and then in addition we would like to bank additional reserves and resources from the Eagle Zone going forward. But of course, we just discovered Eagle really in June, announced in July we’re learning more about that structure, that system every day. We’ve traced it over 600 meters to date still open. So, we’re learning a lot as we go Stephen, but that’s certainly our view and our goal.
Do you have a sense of, for 2016 the percentage of material the terms that could be drawn from that zone as we go through the rest of the year and what it could look like in 2017, I know it’s a little early to be thinking about sort of mine plans for 2017, but in the budget for this year do you have an estimate of what could go through the plant from those higher grade zones and maybe percentage of tons mind.
We don’t per say Stephen, but certainly performance in the last two quarters has certainly indicated that the amount of gold that we are being produced and perhaps 10% to 15% of that is coming from Eagle. Of course now we have the gravity circuit commissioned and deployed. We are going to give it a full quarter obviously to report on how we are doing in terms of gravity gold recovery, but that will give us an even better indication of perhaps how much gold we are getting from Eagle, but traditionally we’ve been talking about that 10% to 15% level that could be updated in the second quarter as we see how the gravity circuit performs.
Great. Thank you for that and I guess my follow-up question was on the gravity circuit and what you are seeing so far, is it ramping in as a dovetailing is expected or are you getting, is it a recover that you are expected, or is it too early as you suggested?
I’ll let Darren answer that question to you.
Hi Stephen. Thanks for the question. The delivery of the project was excellent. The team did a fantastic job with the delivery on time, on job, on budget, on schedule great job. We’ve had a flawless commissioning. We’re seeing excellent results coming out of the circuit consistent with our expectations. And a guess as we run through Q2, we will be in a better position to be able to talk about percentage delivery from that circuit as we can reconcile over the quarter, but very encouraged by the results thus far and as Doug said the benefit is being around 10 days ago in the similar direction and it’s quite an impressive facility.
It is impressive Stephen to see the gold coming off the table. So as Darren said, full marks to our team there that built that facility – that process facility at the gravity circuit in good time and on budget.
Yeah, appreciate that Darren, thank you. And just one last question and I apologize because I know you dealt with this earlier on and I jumped on the call five minutes late. Can you walk me through again sort of the issue around timing of sales and why the realized gold price was sharply – notably lower than the average price? If you’ve covered it off and we can deal with this offline, I don’t want to take up time, if you’ve dealt it already, but...
Fair question, Stephen, and I’m going to ask Rob to help me with that.
Thanks for bringing that up, Stephen. I don’t believe we did exclusively address that and we haven’t talked about it in the MD&A and really was a function of obvious timing of when we priced our shipments. We did a little bit more earlier in the quarter than maybe we would have generally. We’ve got a nice little – I think we’ve – if you remember back then I think we’ve started at about AUD$1,450, which it was certainly – we still – the operations are still sustainable, but we saw a little bit of a bump up to AUD$1,550 priced a little bit more earlier, so when things kind of jumped up, we might have lost on some of that, but we are seeing some nice recovery particularly today over the past week and our average realized gold price is keeping up pretty well with the current environment.
And of course, Stephen, our main goal with our gold sales program is to lock in margin. It’s a mug's game obviously to try and maximize or beat the gold at the spot price, but we would like to do better than we did in the first quarter for sure, but absolutely the goal is to lock in margin and that’s the philosophy in terms of our gold sales program.
With that in mind, are you looking at locking in Australian dollar, U.S. dollar exchange rate, what’s your thought process with respect to exchange rates?
We are studying that now. Stephen, with our indenture in place for the convertible debenture, which just came off at the end of March, just a few weeks ago, it restricted our ability to do many things on a corporate financial basis such as hedging both the currency and the metal. Now that we are free from those limitations, we are looking at that, no decisions yet, but it is something we are discussing. We are watching the FX, we look at guidance on that, we watch performance, but ultimately we are discussing how we can potentially look at doing locking in FX and/or the gold price, but nothing in the plans at the moment.
That’s all for me. Thank you, Doug, Darren and Rob.
[Operator Instructions] The next question is from Heiko Ihle of HC Wainwright. Please go ahead.
Hey, guys, sorry, I’m running through security here right now. Gold free underground development and you’ve got $7.5 million of spend this year, which $6.6 million at Fosterville, obviously, Cosmo and Stawell at less than $1 million combined. Is there anything we should be reading between the lines here especially given the fairly decent results from one of those three assets thus far this year?
No, nothing to read between the lines there. It’s all about scheduling really in terms of development. So it just happened to be the first quarter was biased that way. Of course at Fosterville we’ve got a drill drive going on there. This is the Harrier drill drive, so that consumed a fair bit of cash in the first quarter, but that’s going to allow us to do our drill programs later on. Ultimately, it’s more scheduling than anything Heiko, but I wouldn’t read too much into that. We certainly are very much focused – still very much focused on Cosmo and Stawell in terms of progressing both those assets.
This is Darren Hall, how are you? Just a layer, I mean, if you consider 2015, those snipping level of development at Cosmo in order to develop into warning [ph] blockade, we are now in our development state, we are now at our production sequence there, so there wasn’t the same demand in terms of capital at Cosmo.
Got it. Okay. Speaking of reading between the lines time of the things, I mean, I’ve just gone over your balance sheet this morning. You guys are just finding for a transformational acquisition and the annual prices are sort of going against acquisitions over the last couple of months, but then I see all the writing about being debt free and that leads me to believe how you guys are going to do some of this, how are you going to fund it, is it going to be another debt deal, is it going to equity, anything?
Both those Heiko, it’s Doug here. Yeah, no, we will look at any accretive financial structure in terms of debt, in terms of equity depending on what the asset is, depending on the – obviously on the sticker price if you will. We are looking at lots of assets. The landscape is still positive for new market in terms of acquisition, but we are cautious investors. We recognize that we have some organic growth in front of us, which we want to – especially at Fosterville, which we want to capitalize on. Ultimately, yes, we want to roll-up additional assets. Yes, maybe the prices are going up for quality assets, but we are not looking for assets at fire sale prices, we are looking for quality and we are willing to pay up for that. But at the moment, we are very much focused on organic growth. And in terms of financing those acquisitions, it will be specific to the type of acquisition we are making, but you know all the n members, yes, it’s debt, yes, it’s equity and it was clean balance sheet certainly debt could in the cards.
Right. And we are still mostly looking at Australia or have we – I mean I know you just said we are not really looking, but I would assume you are always looking.
Right. Always looking, opportunistic in that area. Yes, Australia, yes, North America, ultimately in terms of – and Stephen mentioned the FX effect, it would be nice to pair our Australian gold production with some U.S. gold production that would be sort of the natural hedge if you will against a strengthening Australian dollar, but those were our areas of interest, Canada, United States and Australia.
Cool, excellent. Thank you guys so much and I will get back in queue.
Thanks, Heiko. Appreciate it. Good luck with your security.
This concludes the question-and-answer session. I’d now like to turn the conference back over to Douglas Forster for any closing remarks.
Thanks very much. Really appreciate everyone joining the call this morning. It’s been a strong first quarter for Newmarket Gold. I’d like to thank our 800 employees and contractors in Australia and the senior management team, leadership team here in Vancouver for the excellent work on delivering on what we said we would deliver on.
We are looking forward to Q2 and the rest of the year. It looks like a strong year ahead for new market. Obviously, we’ve appreciated the shareholder support. The share price has done well this year, but we are really just getting started. So thank you again for joining the call. We look forward to speaking to you on the next quarter call.
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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