Perseus Mining's (PMNXF) CEO Jeff Quartermaine on Q2 2016 Results - Earnings Call Transcript

| About: Perseus Mining (PMNXF)

Perseus Mining Limited (OTCPK:PMNXF) Q2 2016 Earnings Conference Call July 26, 2016 7:30 AM ET

Executives

Jeff Quartermaine – Managing Director and Chief Executive Officer

Analysts

Operator

Thank you for standing by and welcome to the Perseus Mining June 2016 quarterly conference call. At this time all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Jeff Quartermaine, Managing Director. Please go ahead, sir.

Jeff Quartermaine

Thank you very much and good morning, ladies and gentlemen and thank you for all joining me today and also our Investor Relations Manager, Cathy Moises, on this teleconference which has been timed to suit our friends in the northern hemisphere and to review Perseus’ June quarterly report.

Now, some of you will know we did provide a market update earlier this month that gave a preview of today’s report as at July 7, but today’s report gives the full details of our recent activities during the quarter ending June 30. Now it’s fair to say that the June quarter and indeed the entire June 2016 half year has been a very busy period for us here at Perseus.

In a sense it’s been a transformational time, because not only have we put in place the building blocks needed to transform our Company from being a single mine, single country enterprise into a business that in a few years can realistically expect to produce around 500,000 ounces of gold from three mines located in two countries. But this quarter we’ve also put in place the financial capacity to deliver on this ambitious plan.

Now, this has involved two initiatives, namely we’ve successfully completed an equity placement and an accelerated entitlements offering to raise AUD102 million. And we’ve also successfully implemented a number of measures at our Edikan mine that should ensure that within six months or so from now, that Edikan will become a cash cow capable of generating a very significant proportion of our future cash requirements.

So with the quarter that’s just passed, the Perseus story is not about the past or the next month or two; it’s about the future. Perseus today is a very different proposition to the company that captured the bull market appeal several years ago and then struggled to live up to expectations. We have reset the asset base of the Company, we’ve strengthened our relationship with the countries and the communities that host our assets, we’ve built up a team of people who have the experience and expertise to unlock the value of these assets and deliver excellent growth for our shareholders. And we’ve now provided the team with the financial capacity to do what’s required.

So from here on in it’s about executing the plan and I trust that the information contained in today’s report, from this info it’s going to be very evident that we’ve made a very promising start to doing just that. So with that overview of the quarter, let’s look at some of the specifics, starting with our corporate activities.

Now, as you’re aware, early in the quarter, around April 19 in fact, the scheme of arrangement under which Perseus acquired all of the outstanding shares in Amara Mining took effect, giving us ownership of what we regard to be one of West Africa’s highest quality undeveloped projects. I’m talking, of course, about the Yaoure gold project in Cote d’Ivoire. This asset, together with our existing Edikan gold mine in Ghana and our soon to be producing Sissingue gold mine in Cote d’Ivoire, provides us with a balanced portfolio of producing and growth assets.

And I should say that in addition to this, we also hold a portfolio of very promising exploration projects, from which we hope to generate further growth, but the discussion on these assets is for another day, not today. Now, following on from the completion of the Amara transaction, on June 20 we announced an equity placement and accelerated entitlements offer to existing shareholders, with the aim of raising AUD110 million of new equity. The institutional portion of that offering closed oversubscribed on June 22 and the retail portion of the offering closed subsequent to the end of the quarter on July 15.

In total, the full AUD402 million was raised at an upper price of about AUD0.50 a share from new and existing institutional funds and also retail investors. And this was done with the express intention of using these funds to finance our growth strategy. Now, it’s true to say that some people did raise eyebrows when this deal was announced, but it has certainly achieved its objectives. It has given us the wherewithal to fund our growth strategy and has certainly taken off the table the debate about whether or not Perseus can fund our current plans.

The answer is now very clear; we can and no more need be said on the subject. The fundraising has meant that at the end of the quarter our financial position was very strong. We had immediately available cash in bullion of AUD166 million and subsequent to the end of the quarter, a further AUD8 million has been received following the completion of the retail offering.

We have no third party debt, other than accounts payable in the ordinary course of business. However, as we indicated in documentation issued at the time of the equity raising, we do have plans to borrow $60 million of project finance to partially fund the development of the Sissingue project. And that finance will be coming from two banks, namely Macquarie Bank and BNP Paribas.

These plans are well advanced and should be finalized either late this quarter or very soon thereafter. We have in place forward sales contracts for the sale of our gold for 260,000 ounces of gold. The average forward price is $1272 an ounce, which is not that far from the spot price today. Now, this includes 100,000 ounces of hedging that was specifically done to support the project finance facility for Sissingue. This was done at a price of $1390 an ounce.

Now, this hedge book represents a very small proportion of our overall resource and reserve inventory, but what it does do is it prudently underpins our plans for the next 10 months or so and this is important, we feel. Now, I mentioned earlier the other leg of our funding plan was to put Edikan into a position where it could generate strong cash flows to partially fund our growth strategy.

Now, in this regard I’m very pleased to report that we now have only six more months of capital investment to undertake at Edikan, waste stripping and capital development before the operations entered a period of sustained strong positive cash flow. And based on our current estimates, this should start early in calendar year 2017 and then continue for the remaining seven years of the current life of the project, but more of this in a moment.

So the successful acquisition of new pre-development assets, together with the equity and planned debt capital raisings, plus the future cash flows from Edikan and Sissingue, which should kick in in the March quarter of 2018 and from Edikan, as I said, in early January 2017, what this means is that Perseus is now very well placed to fund the growth strategy that will transform this Company from a single country, single mine enterprise to a multi-mine, multi-country gold producer with production in excess of 500,000 ounces of gold. And all this will happen within the next four to five years without further recourse to shareholders.

So let’s talk about Edikan, since this has been our major asset for some time and will be important to us going into the future. Firstly, I’m very pleased to say that the intensive work program that we flagged last quarter that was needed to improve operating performance at Edikan has been successfully implemented and we’ve now seen a material improvement in performance at the mine in recent months.

And I’m also very pleased to say that this has also continued on into the month of July to date. We were onsite last week in Ghana and things were running very, very well when we left. And so it does seem that the situation has turned around quite remarkably. As I said, as the quarter progressed the revised grade control initiatives that were implemented last quarter took effect, and by June we were achieving very close reconciliation between targeted gold grade and the grade of ore that was being presented to the mill.

And looking at the data just before coming on this call, I noted that to July 23 we actually had 100% reconciliation between actual mine grade and targeted mine grade. So that was very pleasing and that trend puts us well on track for delivering on our targets in coming quarters. Also very important is that as a result of accelerated mining by our contractor, AMS in particular, our mining has advanced through the transition zone in the Fetish pit, which means that by quarter end 100% of the ore that was being mined was being mined in the fresh ore.

And as a result, more fresh ore was available from mining to feed to the mill and this meant that we needed to draw much less of the ore from our low grade stockpiles to keep the mill fully fed. The net effect of the improved grade control measures, combined with the advance through the transition zone, has meant a steadily improving grade of processed ore and very close reconciliations between targeted grades and mill grades, as I said, and with that, improved gold recovery.

Now, what this has meant is that during the quarter these improved grade control measures have led to a marked increase in head grade, so an increase of – a quarter-on-quarter increase of 19% to 1.01 grams a tone and in the month of June it was actually running at 1.04 grams a tone.

At the same time, the mill run time has progressively improved, with the plant operating around 88%, including scheduled downtime in the month of June, and that is significantly better than it was earlier in the quarter. This meant that for the quarter we produced 40,058 ounces, which was 8% more than in March and 24% more than in the December quarter.

Now, for the six months ending June 30, Perseus produced 77,208 ounces in line with our revised production guidance for half year. And for the 12 months ending June 30, we produced 153,902 ounces, also in line with our revised annual production guidance of 152,000 to 167,000 ounces.

Now, the measures of our productivity, our unit mining cost and unit milling cost, our unit mining cost decreased during the quarter to $3 a tone from $3.14 a tone in the previous period. This is mainly on the back of increased mining quantities. Unfortunately, this good work was undone to a degree by – or offset to a degree by an increase in unit processing costs. We increased those from $9.11 the previous quarter to $10.86.

This was largely due to the fact that we processed about 10% less tones during this period, so if we’re processing less tones, then automatically our unit cost goes up. But also there was an increase in the cost base as a result of increased maintenance and also the payment of some retrospective charges. These related specifically, these retrospective charges, to electricity charges that hadn’t previously been billed and also an outcome on a wage negotiation that dates back to 2015.

Let’s consider that, the run time though. We did experience a series of unscheduled maintenance events early in the quarter that reduced the run time, and also the throughput rate of the mill decreased during the period as the proportion of softer transitional ore in the mill feed decreased. These factors combined to, as I said, reduce the amount of ore being milled by about 10% during that period.

And that is particularly disappointing for us because given that where the grade of ore had actually going up 19% during the period, had we been able to maintain our throughput rates, then the increase in gold production would have been well above the 8% that was actually recorded. But nevertheless, it did occur and we needed to deal with those issues. So as I said, what we have experienced is a decrease in tones processed, coupled with a slight increase in costs, which inevitably led to an increase in the cost per tone process.

Now as a result of all this, the total unit production costs amounted to $1168 an ounce, about 13% above the $1030 recorded in the prior quarter, while sustaining capital during the period actually decreased by 10% to $291 an ounce from $322 in the previous quarter, giving us an all-in cost for the quarter of $1542 an ounce. Now, what that meant that for the six months to June 30, our all-in site cost was $1493, which was in line with our revised half year production – our cost guidance rather, of $1350 to $1550.

And also in line with the 12 month guidance that we had given of $1300 to $1400, our costs for the 12 months actually came in at $1351 an ounce, bang in the middle. In terms of other initiatives on the site, we actually had a very strong quarter. So in terms of construction of housing to relocate residents of the Eastern pits and the Esuajah North mine take areas, that work is on schedule with an under budget – actually it’s ahead of schedule and under budget, with the first houses ready for occupation later this month.

Just to remind us and as we are constructing a total of 179 structures, including 12 institutional buildings to house former residents of the Eastern pits and the current residents of the Esuajah North area, to date 20 of those houses are fully completed and are awaiting occupation and all other structures are in various stages of completion. Now, this exercise will be well and truly completed by the end of the year, so that is ahead of schedule and it’s materially under the budget that we originally announced.

In fact, when we first announced the cost of – or the estimated costs of this exercise, we were predicting a cost of around $46 million, but through various means we’ve been able to bring that cost down closer to $30 million. So that was a very pleasing cost reduction. Another initiative successfully completed just post the end of the quarter was the installation and commissioning of a diesel fired power station on the site, aimed at ensuring 100% self-sufficiency for Edikan in the event of possible future shortages in power in Ghana.

Now, as I say, this was completed on July 19. What we’ve done on the site is we’ve installed 16 diesel fired generators, each capable of generating 1.4 megawatts each. We have actually de-rated the units to 1.2 megawatts each, giving us a total operating capacity of 19.2 megawatts. So that is more than enough for us to be totally self-sufficient in the event of a total shutdown of the grid.

Now going forward, it is our plan to draw 100% of our power from the grid. But if, for some reason, that’s not possible, then we will be able to produce our own power. That will be at a slightly higher cost than the grid power, but this incremental cost is very, very modest when one compares that to the cost of not running if we don’t have power. The total cost of this installation was about $8.2 million all up, and that is well below our initial estimates and a very pleasing outcome.

A further exercise that we’re involved with at the moment is undertaking some planned upgrades of the processing plant to improve run time and reduce maintenance costs. And these modifications are on track for implementation during the next six months, up to December 31. And I should note before somebody asked me this, the downtime for this installation has been factored into our production forecast for the second half.

Now, two of the planned changes, namely the installation of a low-profile feeder to replace conveyor CV6 or whatever out from under the crusher, and the installation of a newly-designed mill discharge screen, along with a number of other additional smaller jobs, should materially reduce downtime and, in the process, reduce maintenance costs and free up maintenance staff to do a more effective job in preventative maintenance.

Now, all of this means that going forward we should have higher and more reliable run time. And then that’s all important in terms of us being able to generate our targeted production levels and, of course, generate the cash that we aim to be doing. These works that I’ve mentioned have got a total budget of about $8.4 million, some of which has already been spent. But the majority of the work will take place in the next six months.

Another exercise that we’re doing during this period is actually opening up the Esuajah North pit. And this means that, during this period of time, we’ll also be continuing to invest in waste stripping for another six months. However, come the end of this calendar year, we do see a significant reduction in capital, both in terms of waste stripping and construction. And this, happily, coincides with a steadily – steady increase in head grades.

So what we’ve got ahead for us for the next six months is this, the first six months of this new financial year will involve high spending in gold production, somewhat in line with the June quarter, which means we will, for the next six months, have a continuation of a relatively high all-in sustaining cost. However, once we hit the second half of this year, so from January 2017 onwards, head grades pick up, which in turn lifts gold production.

Now, at the same time, our cost base will fall due to less capital expenditure on stripping and other developments. And the cost per ounce will fall away and our margins will increase. Now, this means that for the first half of the financial year, we’re going to be cash negative; but for the second half we’re going to be strongly cash positive. And this is all measured at $1200 gold, which means that for the total year it will be about break-even if the average price is around $1200 gold.

So in specific terms, what we’re guiding is this; that in the first half of the year we’ll do 80,000 to 100,000 ounces. In the second half we’ll do 125,000 to 145,000 ounces, giving us somewhere in the range of 205,000 to 245,000 ounces for the entire financial year. The costs associated with this production are similarly – come in two parts. So the first half, as I said, relatively high, in the range of $1285 to $1595. In the second half this falls quite significantly to $995 to $1135, giving us, over the full year, a range of $1110 to $1325 an ounce.

Now, I’m very pleased to say that once this trend is established in the second half of this financial year, it continues strongly into fiscal 2018 and beyond. So from about January 2017 we are entering a period of about seven years of sustained heavy cash generation. Now, some of the cynics will say, about time, and I have to say I couldn’t agree more, frankly. I’m kind of over having challenges as well. But it is genuinely a case of putting up with another modest performance for the next six months, before we move into cash harvest mode.

And that cash flow is expected to be of sufficient size to not only repay our total investment in Edikan, but also deliver a handy return and handy surplus cash that can be deployed on a lot of projects that do need funding around that time. Now, speaking of the other projects, let’s focus on those for a moment, starting first with the Sissingue mine.

Now, following the recent equity raising that was concluded earlier this month, execution plans for the full-scale development of Sissingue have now been activated. And the first production of gold is scheduled to occur in the December 2017 quarter. Sissingue, as you are aware, is currently forecast to produce 395,000 ounces of gold at an all-in site cost of $632 an ounce over the next five-and-a-quarter year period. And that will generate an after-tax rate of return of 27% real at an average price of $1,200 gold.

Now the total capital cost of constructing this mine is about $100 million. And we most certainly expect that the life of this mine will extend beyond five-and-a-quarter years, particularly as we generate further exploration outcomes from the nearby Bele deposit. We have had some encouraging showings over there. And I would think that it won’t be too long before we can come to market with some news of additional resources being available for this project.

Negotiations with a very highly-regarded contractor are well advanced and we’ll be finalizing the EPC contract, which accounts for about 50% of the estimated construction scope and about 45% of the cost. That will be signed very early in the coming months and recommencement of the site works will kick off shortly thereafter.

I mentioned the $60 million project debt facility for Sissingue. Final credit approval and documentation is anticipated to be completed in coming months. And that will mean that the project will be fully funded in the proportion of $40 million of equity, $60 million of project debt, totally ring-fenced to the Sissingue asset. I mentioned earlier the fact that we were required, under this hedging – under this debt facility, to put in place 100,000 ounces of hedging.

And thank you to the Brexit vote that occurred not so long ago, we were able to hedge that 100,000 ounces at $1,300 an ounce, about $100 more than our minimum requirement and $100 an ounce more than our estimated gold price for feasibility purposes. So about a quarter of the expected gold from Sissingue has been sold at $100 above the feasibility price, so that gives the project a nice little kick along to start off with, and certainly underwrites and underpins and de-risks the financing of this project.

Now given the quality of the project planning and the assembled team that we have put in place, we do expect construction and commissioning to be relatively trouble free over the next 12 to 14 months. And we do expect to be producing gold, as I said earlier, in the December quarter of 2017. So that is a fairly rapid development period for us; one that we will believe – do believe is going to generate some material benefits for the Company going forward, and particularly benefits that can be directed towards the development of our third project which is the Yaoure gold project, which we acquired, as I said, from Amara earlier this year.

Now, subsequent to the recent acquisition of Yaoure, we’ve done quite a lot of work in preparing to commence work on the definitive feasibility study. We have put out contracts for all the material work packages; they’ve been ordered to a range of very highly-regarded consultants and contractors. Runge Pincock Minarco will perform the role of lead consultant for the study. And we have a study team of very skillful professionals in house who will work with RPM on that exercise.

A significant part of the feasibility work involves a 42,000 meter diamond drilling and reverse circulation resource infill drilling program. Now this is due to commence later this week if the rig arrives, or first rig arrives on the site. If not this week, then certainly early next week. And by the middle of next month we’ll be running four rigs on the site. So not only will we be doing 42,000 meters of infill drilling, but we’ll also be doing 40,000 meters of RAB drilling to completely sterilize the plant sites of mine infrastructure.

We’ve been having some very fruitful discussions with the government in Cote D’Ivoire around the environmental permits. And we do expect that that permit will be issued in very short order. We just need to file a couple more documents, and that – all of the work on that permitting will be completed. And so that should move things forward very quickly. We do expect that the DFS will take us about 12 months to complete, from the time we commenced late in the last financial year.

So we should the full study results being available around the middle of 2017, but of course we’ll be releasing drilling results progressively as we go through the drilling program. And I have to say that, without wishing to preempt the outcome of that drilling program, we do have some quite optimistic views around what we might discover and about the potential for, not only improving our level of confidence in the integrity of that resource at Yaoure, but also, quite potentially, delineating a project that in fact is certainly, if not as good as, then somewhat better than what we had originally envisaged. So that’s all in the future. And at this point we’re not able to make any predictions around that until we’ve done the work, but certainly our team of professionals that we’ve got on site there at Yaoure are very excited around the prospects and that augurs very well for the future.

So, in speaking of the future, in the immediate future what we will be doing at Edikan, we’ll be producing gold in line with guidance. But in terms of quantity of gold and cost, we’ll be making sure that the grade control practices that we implemented in the last half of the year stay in place and will apply to all mining going forward and make sure that we don’t run ever run into those sorts of issues again.

We’ll be fine-tuning the performance of the mill, with the implementation of a number of modifications to that flow sheet. We’ll be finishing the construction of housing and gain access to new mining areas. And, in effect, basically what we’ll be doing at Edikan, we’ll be setting ourselves up for a very strong cash flow over the next seven years of the life of the mine.

At Sissingue, as I mentioned, we’ll be getting the EPC contracts in place. We’ll be getting work kicked off very smartly on the site. We’ll be doing detailed design and procurement, whatever is left of that. We’ll be finalizing our project debt facility and getting all of that in place. And we will be continuing drilling on the Bele deposit, which is nearby. And we look forward to bringing you some further news from that work, which will give the Sissingue mine an extended mine plan. And of course, if then we are then able to achieve that, then that’s money straight to the bottom line in terms of the return on that particular investment.

Okay. Yaoure, as I said, we’ll be advancing work on the feasibility study, principally through the execution of a 42,000 meter drill program. And from the back of that work, we’ll be improving our level of confidence in that resource, that will be used for mine optimization going forward. And, of course, we’ll be advancing our work with the government to ensure that our social license remains intact.

So that’s an overview of the activities of Perseus Mining over the last three months and six months. As I said at the outset, it’s been a very exciting time for us, using this period wisely to not only put in place the high-quality asset base, to improve our social license, to improve the quality of our human resources who are going to be delivering our projects and also delivering the financial capacity to do that. So we’re very, very excited about the future. We can see that this is a Company that has significant growth potential and has the wherewithal to deliver it.

So thank you very much for hearing our story today. And at this stage I’m very happy to take any questions from those of you on the line who wish to ask them. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

Jeff Quartermaine

Okay. Well it seems that there aren’t any questions, and that is fine. As I said right at the start, I am joined on today’s call with our new Investor Relations Manager, Cathy Moises. Cathy has joined us from the last six weeks. She has 30 years of sell-side analysis experience and is a very seasoned practitioner in this space. And Cathy is available to communicate with you offline to address any specific issues that you may have after you’ve had some time to reflect on the quarterly report which has recently been published and also what I’ve said in the call today. So please take the opportunity to speak with either Cathy or myself if there is something that you’d like to discuss going forward.

But anyway, thank you very much for joining us today. We do appreciate your time. And we look forward to communicating individually with you all in coming periods of time. Thank you.

Operator

That does conclude our conference for today. Thank you for your attendance. You may now disconnect your line.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!