Dundee Precious Metals Inc. (NYSE:PJT)
Q2 2016 Earnings Conference Call
July 29, 2016 09:00 AM ET
Janet Reid - Investor Relations
Rick Howes - President and Chief Executive Officer
Hume Kyle - Chief Financial Officer
David Rae - Chief Operating Officer
Nikolay Hristov - SVP, Sustainable Development
John Lindsay - SVP, Projects
Sam Crittenden - RBC Capital Markets
Jeff Killeen - CIBC
Trevor Turnbull - Scotia Bank
Welcome to the Dundee Precious Metals’ Second Quarter Q2 2016 Results Webcast and Conference Call. I will now turn the meeting over to Janet Reid. Please go ahead, Ms. Reid.
Good morning, everyone. I am Janet Reid, the Manager of Investor Relations. And welcome to Dundee Precious Metals second quarter conference call. With me today are Rick Howes, President and Chief Executive Officer; and Hume Kyle, Chief Financial Officer, who will each comment on the quarter, as well as David Rae, Chief Operating Officer; Nikolay Hristov, SVP, Sustainable Development; and John Lindsay, SVP Projects who are here today to assist with answering questions following our formal remarks.
After close of business yesterday, we released our second quarter results and hope you had an opportunity to review our material. All forward-looking information provided during this call is subject to the forward-looking qualification, which is detailed in our news release and incorporated in full for the purposes of today’s call.
Certain financial measures referred to during this call are not measures recognized under IFRS and are referred to as non-GAAP measures. These measures have no standardized meanings under IFRS and may not be comparable to similar measures presented by other companies. The definitions established and calculations performed by DPM are based on management’s reasonable judgments and are consistently applied.
These measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS. Please refer to the non-GAAP financial measures section of our most recent MD&A for reconciliations of these non-GAAP measures.
Please note that operational and financial information communicated during this call has generally been rounded and is in US dollars unless otherwise noted. On this morning’s call, Rick will comment on our second quarter operating results as well as the progress being made on our capital projects and exploration programs for the quarter. Hume will then provide an overview of our second quarter financial results and our guidance for 2016.
With that, I will turn the call over to Rick.
Thanks Janet, and hello everyone and thanks for joining us today for our second quarter 2016 conference call. I am pleased to provide you with an update on our second quarter 2016 results and progress and our key projects as an institute. It is amazing how quickly the fortunes of the gold mining industry have changed since the beginning of this year from being an unloved and unwanted sector to be in the top performing sector in a few short months.
Year to date gold is up over 25% behind only silver and zinc so far this year. The GDX gold index is up over 110%. Certainly a number of factors that have driven this recent move up, but we as an industry cannot afford to take this for granted and must continue our focus on productivity improvement and creating long term sustainable value in our businesses. We continue to execute our strategy to optimize our operations performance, strengthen our balance sheet and advance our organic growth initiatives with good progress on all fronts. Our operations have totaled performance in the second quarter tracking well against our 2016 guidance on production income. With gold production up 38,092 ounces and copper production of 9.6 million pounds excluding the tam line production which was sold to [indiscernible] in April.
Our gold production guidance has been revised upwards approximately 10% to reflect a strong first half Chelopech production. Our all in sustaining cost per ounce of gold was $580, well below our guidance despite the significant impact of a lower copper byproduct revenue. Our balance sheet as of June 30th remains in good shape with available liquidity of a $184 million made up of $24 million in cash and a $160 million in undrawn revolving credit facility. Our debt at the end of Q2 continues to decline and now stands at $149 million. We remain compliant with all of our bank covenants and we have significantly strengthened our balance sheet with the proceeds from a [indiscernible] and [indiscernible] at the old equity rate completed this month. Chelopech continues to perform well, mill throughput is up 10% over last year in accordance with the 2016 planned production increase. Second quarter Chelopech copper and gold production decreased by approximately 10% over the first quarter due to lower copper and gold rates mined. The higher production along with a lower grade resulted in Chelopech producing 29,573 ounces of gold and copper concentrate and 8,519 ounces of gold and pyrite concentrate along with 9.6 million pounds of copper.
Gold production in the second half of 2016 is expected to be lower than the first half as a result of lower gold grades, lower grade zones in the mining sequence. Chelopech cash cost per ton of ore milled continues to decline. As a result of the optimization work and were at $33.72 per ton in the second quarter. Cash cost per ounce of gold and copper concentrate was $393 in the quarter. In December we announced a 4.2 million ton increase in the measured and indicated mineral resource of the Chelopech, some additional mineralizations surrounding the [indiscernible], we drilled 4300 meters in the second quarter in this area and the drill results continue to confirm economic grades and continuity as well as some extensions of this resource.
Once sufficient drilled definition is completed a study will be undertaken to determine technical and economic viability for extraction and a mine plan for this area will be developed. Further exploration drilling is planned for 2016 and 2017 and possible expanse into 2.5 million tons per annum will be evaluated as part of the inspection.
In our regional exploration program around Chelopech we have identified a new target area known as the southeast [indiscernible] zone located to the southeast of existing mine block. This zone is approximately 700 meters in length and 150 meters in width and drilling to test this zone with underground and surface drill hole is expected to start in September of 2016. At our [indiscernible] smelter, complex concentrate smelter the 44,545 tons in the second quarter was in line with expectation. The annual maintenance shutdown commenced on June 18, 2016 and sought a return to operations on July 16 2016. Complex concentrate smelted during the first six months of 2016 up 101,967 tons was 5% higher than the corresponding period at 2015, due primarily to increased availability of the [indiscernible] grid and a timing of the annual maintenance shutdown.
Reduced auction supply from one of the two auction implants [indiscernible] smelted throughput in May. These [indiscernible] were addressed during the maintenance shutdown in June in the off season supply is now back to full capacity. The after plan commenced commercial production in the first quarter in the first quarter of 2015 and operated as planned in the first half of 2016 producing 92,314 tons of acid. The operation of the new copper convertors stabilized during the second quarter of 2016 contributing to a decrease in the second handed material that accumulated during the construction and commissioning of the new acid plan convertor as well as reduced variability and estimated deductions for metal exposures. Secondary material levels are expected to continue to decline in the second half of 2016 and in 2017 resulting in reduced variability and deductions for metal exposures and stockpile interest.
Unfortunately only shortly after completing the annual part of recruiting and restarting north to normal operations, a country wide power outage in Namibia occurred on July 22nd. During the power outage backup systems for power and cooling water did not operate as expected which caused a cooling water leak in the furnace roof to enter the [indiscernible] product and compromise the integrity of the refectory running. No one was hurt in the incident however repairs to the roof and furnace [indiscernible] are expected to take three weeks, resulting in a reduction in throughput of approximately 22,000 tons. Complex concentrate smelter in 2016 is now expected to raise between 200,000 and 220,000 tons. Most of the repair cost will be covered by insurance. Full investigation of the instrument is underway and will address all measures to prevent any re occurrence. We continue to advance software stacks and projects that can actually increase throughput of complex concentrate into as much as 370,000 tons per annum.
Feasibility study is underway and expected to be completed in Q4 of 2016. Commercial discussions are underway to secure sufficient complex concentrate fee to build the expanded capacity and [indiscernible] permitting work as we go. We continue to explore potential partnerships, partnerships for systemic funding of this expansion. At [indiscernible] permitting progress continues on plan. Land use pre designating were received in February and land purchase was completed in May. All documents for final construction permit were submitted in June and a permit is expected any day now.
The financing plan remains on track and we expect to be in a position to seek board approval for projects released in Q3. This would lead to project construction beginning some time towards the end of Q3 with commencement and production expected in the second half of 2018. We've ramped up our [indiscernible] solution program around, looking to expand the resource base and extend the life of the [indiscernible] project. Three follow ups on the drill holes were completed at Cooper-Morris prospect. The Cooper-Morris is located about 2 kilometers east about a [indiscernible] and the initial discovery hole which intersected 12 meters at 12.8 grams gold at 4.9 gram silver back in December of 2015.
All three recent holes intersected similar grades and interpretation is ongoing and further follow up drilling is planned for later in the year. Complete assays are pending for four drill holes that tested other targets in the [indiscernible] project area during the second quarter. We're confident that we will find additional satellite deposits in close proximity to the [indiscernible]. And now 100% above that recent project in Serbia, we've completed a full technical review on all projects and have integrated this above our operations feedback into our operations group. [indiscernible] gold project exploration activities are focused on evaluation of additional targets, targets close to existing and further indicated resources through a variety of geo-chemical and geo-physical methods with additional drilling planned for later this year.
We’re also continuing to assess and develop targets on licenses over the less able [indiscernible] complex in the South of Serbia. In summary we're excited now that we're finding near and started construction of our long anticipated low class, open pick gold project in [indiscernible] which will significantly contribute to the companies growth and earnings and profile as a gold producer. Thank you, I will now turn the call over to Hume who will review the financial results and 2016 guidance following which we will open the floor to questions.
Good morning everyone. As Rick noted operational performance for the quarter and year to date was in line or better than planned and from a financial perspective excluding the results in respect of Kapan which was sold effective April 28 and treated for financial reporting purposes as a discontinued operation. For Q2 we reported an adjusted net loss of $0.05 per share compared to an adjusted net earnings of $0.01 per share in Q2 in 2015. Adjusted EBITDA and funds from operations of 18 and 16 million each of which were essentially unchanged from Q2 2015. These results were driven primarily by a 27% decrease in realized copper prices, a 17% decrease in complex con smelted due primarily to the timing of the smelter's annual maintenance shutdown in Q2 this year versus Q1 in 2015, together with oxygen related constraints in May and higher local currency operating expenses [indiscernible]. This was partially offset by a 5% increase in realized gold prices and 11% increase in gold sold and a 24% decline in the value of the [indiscernible] or the Namibian dollar relative to the US dollar.
For the six months we reported an adjusted net loss of $0.06 per share compared to a adjusted net earnings of $0.01 per share for the same period in 2015. Adjusted EBITDA was 39 million unchanged from 2015. Funds from operation of 46 million were up from 36 million in the comparable period in 2015. These results reflected by a 5% increase in complex con smelted and higher toll rates of [indiscernible], ore treatment charges and transportation costs at Chelopech, a 2% increase in realized gold prices which averaged approximately $1233 per ounce, higher grades and a 29% decline in the Namibian dollar. This was partially offset by a 28% increase in realized copper prices, sorry decrease in realized copper prices and higher [indiscernible] the operating expenses at [indiscernible].
The adjusted loss in the second quarter and first six months of 2016 also reflects higher depreciation following the commissioning of the acid plant in the third quarter of 2015 and the new convertors in the first quarter of 2016.
From a cost perspective cash cost per ton of ore processed in the second quarter and first six months of 2016 was $34, 4% and 5% lower than the corresponding periods in 2015 due primarily to higher volumes or ore mined and processed partially offset by higher cost for labor, electricity and certain consumables as well as increased backfill activities.
All-in sustaining cost were up in the second quarter and first six months of 2016 and $580 and $462 were up 22% and 29% from the comparable 2015 level reflecting lower realized copper prices partially offset by lower treatment charges and transportation costs. Cash cost per ton in [indiscernible] byproduct [indiscernible] is similar than the second quarter of 2016 was $502 up 35% almost up to the second quarter of 2015 due to lower throughput primarily to the timing of the annual maintenance and by higher local operating costs associated with increased contractor consumable, labor and electricity costs partially offset by weaker Namibian dollar. Cash cost per ton for the six months was $406 down 5% relative to 2015 due to higher volumes and a weaker Namibian dollar partially offset by higher local operating costs.
The all sustaining and growth capital expenditures for the quarter were 4 and 9 million respectively for an aggregate spend of 13 million down 18 million from the corresponding period in 2015. Year to date capital expansion totaled 24 million down from 34 million in the corresponding period in 2015 and these decreases reflect lower spending on the acid plant and new copper convertors assume. Looking forward we've increased our 2016 gold and copper production guidance by approximately 10% and 4% respectively to reflect better than expected metal production during the first-half of 2016. With the unplanned three week outage resulting from the recent power disruption in Namibia, as Rick mentioned, guidance for Tsumeb has been reduced to reflect approximately 20,000 tons of lost production.
Guidance pertaining to cash cost net of byproducts have also revised to reflect this updated production guidance resulting in all-in sustaining cost grams being reduced by approximately 9% to $750 and $850. And cash cost per ton is concentrated smelters been increased by 14% to $380 to $425. Total capital expenditure guidance for 2016 remains unchanged. Although we do envision updating the growth capital forecast, following the receipt of Board approval to proceed with the construction phase of the project later this quarter, consistent with our existing project execution plan.
With the recent sale of Kapan, the equity offering and the hedging has been undertaken and certain plans, amendments in May to our revolving credit facility in anticipation of commencing construction of the Krumovgrad project. We’re well positioned to move this project forward, which in the current market environment, can be fully funded from internally generated cash flow from our operations supplemented, if necessary, with existing cash resources of approximately $226 million, comprised of cash and the undrawn portion of our long-term revolving credit facility.
With that, I’ll turn the call back over to the operator.
Thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question is from Sam Crittenden of RBC Capital Markets. Please go ahead.
Just wondering if you could provide a bit more color on the costs at Tsumeb, you mentioned the same from higher local currency costs. Does that to do with wage pressure, or if you’ve had to expand the workforce to accommodate the extra capacity or planning at Tsumeb?
So look, we actually completed the three year collected bargaining agreement this year, and give toward some wage pressure as part of those cost increases. The other thing is we have seen increases in electricity, that’s not unexpected that comes through like in the quarter and we will expect to see that translate into the rest of the year. So those are the two main items. Hume also mentioned some contracted costs, and that’s related to some of the things that we now do around our maintenance activity and our acid plant activity. So, those are the three areas where there has been cost pressure.
So when you get the throughput up to a steady state range, I believe you’re targeting 240,000 tons per year. What cash costs range for the smelter do you anticipate going forward at those levels?
So the original cash cost that we have for this year and in fact for the second half reflect as those levels, so I would assume at the full production rate. So the correction is reflecting a lower tonnage as a result of taking effectively one month out of the quarter. So, if you look at the previous guidance, it would be within that range.
So these extra costs you’re seeing aren’t going to impact that longer range, you don’t think, in a meaningful way?
We have those items already factored in.
So it's 305 to 400, was your original guidance or somewhere in that neighborhood?
And then just a question on shallow patch, I am just curious what’s prompted the increased guidance. Is this grades being little bit higher than planned, or throughput mainly or a combination of the two?
As we do say, grades do vary from quarter-to-quarter in connection with the mining sequence. And what we wanted to try and do because you can’t see that variability is provide some indication of our immediate path forward. And the 20% variation in grade in the quarter in the year resulting from the initial guidance as opposed to just assuming the production in Q1 and Q2 will translate into the rest of the year. And so that’s why we’ve done it.
Yes, I understand the grades are expected to fall in the second half of the year. But you’ve also increased your overall 2016 guidance by below 10% is that because you have higher grades in Q1, like is that really what drove that?
Yes, it's the answer, but there are also other things as well. So, we did see a good performance on recovery, higher than we’ve actually expected. We have been doing some work, but we don’t feel as confident on what the recovery expectation is. The second element is we saw that’s important between copper concentrate and higher rise to be more towards coppers in between in 2015. So, the reason why we provide guidance is our confidence based on performance with the head grades in Q1, also the recovery expectation in H2. And that is offset by the reduction in grades. I hope that helps that.
Thank you [Operator Instructions]. Following question is from Jeff Killeen of CIBC. Please go ahead.
Just to go back to the operating costs at Tsumeb, and specifically with the power. You mentioned that you had expected an increase coming. Just wondering the term that you signed your agreement for with respect to pricing, and then when that renews. And do you think that there could be subsequent increases, or is this something that you think will be progressive as you go forward, or -- give us some color on that.
What happens is the power price is set by the utility. Now we have some ability to be involved in the discussions on that, so they have an expectation, and there was compensation with industries, particularly in test and mining industry. There was an agreed number, which I believe was 15%-16% which is what we have in the budget. So we were expecting that number. In Southern Africa, there has been under investments through the years and there has been an expectation where you would see above inflation rate increases in power cost. So we’ve taken that into account.
And how often is the pricing renegotiated?
It's something that is reviewed every year. And what we have is we have an estimate of forecast from the utility based on what they’re seeing. We’ve taken into account some of the capital investments, demand supply, influenced by lot of things, contracts with third-party countries. And obviously what’s happened with the gold and other base metal price changes, that’s influenced demand in South Africa, in particular. So, there’s quite a number of variables that have taken into account here, and also taken into account, of course, what’s happened with the Namibian dollar relative to other currencies.
And we don’t know for sure, but I think our own internal forecasts were, were suggesting that we anticipated or attribute the rate increases that would be higher than inflation for probably several years. So, three year period and thereafter we expect then to track more inflation.
And then maybe just thinking on higher level with the smelter, this year was expected to show consistent run rate from the operation, and then we’ll get a view on what the more longer-term earnings potential could be. So given you had some one-time items, it sounds like in the second quarter and then you have this issue in the third quarter with prior. Do you think Q4 will be a more of a status quo quarter that we can use that as a projection for 2017 on a go forward basis?
That is certainly our expectation. So, what we’ve seen in Q2, it's not evident in the figures, as we saw some of the things that we have done in terms of the continuity of the operations coming through. So we have good performance. It was mentioned in the MD&A. We did see improved performance in terms of online ton, and that’s really important for smelter in terms of in process refi for operating performance costs and so on. So we started to see that come through. We’re a little bit hampered by the oxygen plant, in particular, in Q2 but that’s not in results, so the oxygen plant is now onto full production. So we do expect good performance once we reach our [indiscernible].
And then maybe just one question on Krumovgrad, you had mentioned that there is new [indiscernible] and you’re interested in doing some drilling on to the south. Just wondering do you see that as something that could be reachable from current underground with some product development in that direction? Or is this something you’d be looking at with fresh eyes?
Hi Jeff, it's Rick here. That’s the one I talked about we call it southeast pressure zone. It's actually adjacent, it is in shallow patch. So that is going to be drilled from underground and starting in the fall. But the Krumovgrad potential that I talked about is what I mentioned coupe on north, which is a satellite deposit 2 kilometers deep that we discovered back in late December last year, and we’re just starting to drill it and we hit three holes, and have an expected gold mineralization in it. We have a number of other satellite deposits that we’ve also already drilled and tested. So, really we feel certainly that there is good, I would say, potential in Krumovgrad with the satellite deposits.
Thank you. The following question is from Trevor Turnbull of Scotia Bank. Please go ahead.
Looking at the income statement, there was a finance cost of say 3.5 million. Was that related to getting extensions on the line of credit?
It would certainly include any of those cost that’s primarily entrance related. I think in the financial cost that you have in P&L, you’ve got the refinancing cost, you’ve got the input cost, and you’ve got accretion [indiscernible].
And with respect to those revolving lines of credit or credit lines, so you were able to extend them that looks like in April get a one year extension on the different tranches. So, with the exception of just some minor payments so certainly no big payments due until early in 2019, is that right?
There is no repayments that that you're referring to, in the normal products but we would expect as we would extend our revolver within the year, there is a renewal fee that’s associated with that, but it's modest. And the revolver has three tranches A and B were extended in April and through 1st June to restore the original maturity to over three and five year term. Tranche B was specifically deferred and is going to be extended in August and we held off doing that so as to ensure that the extension of that tranche married up in line with the construction schedule of Krumovgrad. And with that then we would have essentially a combination of three and five year money aggregating 275 million.
And Tranche B is $150 million repayment?
We have three tranches that’s Tranche A that’s 45 million five year, Tranche B that’s 150 million and that’s three year and Tranche C is 80 million five year.
I don’t have it in front of me, but Tranche B is the one you say you will extend further from August and then it all marries up together, and also marries up with commercial production I assume from Krumo?
No A and B were extended already and Tranche C as in Charlie. It's the one that’s been extended in August to align with the targeted schedule.
And final question on all this is -- and do you have the opportunity potentially in the future if you want to extend them, not counting the one in August, but A and B. Could they be extended even further down the road if you so desire?
I mean the specific intent of that facility has always been and continues to be, which referred to as an evergreen facility, so every year we intent to go to our lenders, as we have in the past, and sees an extension that would restore the original terms of the maturity. So that is the case with respect to Tranche A and B. And Tranche C that wasn’t really the expectation, we put that in place just to provide additional flexibility on Krumovgrad. And that tranche we’re not actually planning to see, not that we could, but we’re not planning to see evergreen place extensions we’ll let that facility run over the course of five years, because it was purely put into just provided added support and is expected to amortize the way in terms of availale limit over five year. At current prices, we wouldn’t even anticipate drawing down on the facility. But again it's there to provide flexibility and as prices turnover.
There are no further questions registered at this time. I’d like to turn the meeting back over to Mr. Howes.
Thank you very much for attending the call today, and please have a good day and a good week.
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.
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