Teranga Gold's (TGCDF) CEO Richard Young on Q2 2016 Results - Earnings Call Transcript

| About: Teranga Gold (TGCDF)

Teranga Gold Corp (OTC:TGCDF) Q2 2016 Earnings Conference Call July 28, 2016 8:30 AM ET

Executives

Trish Moran - IR

Richard Young - President & CEO

Paul Chawrun - COO

David Mallo - VP, Explorations

Navin Dyal - CFO

Analysts

Operator

Welcome to Teranga Gold’s Conference Call for the Second Quarter of 2016. As a reminder, this conference call is being recorded today, Thursday, July 28, 2016.

Your host for today is Trish Moran, Head of Investor Relations. Ms. Moran, please go ahead.

Trish Moran

Thank you and good morning, everyone. With me on today’s call is Richard Young, Teranga's President and CEO; and Chief Operating Officer, Paul Chawrun, David Mallo, our VP of Explorations and Navin Dyal, our CFO. Following management’s presentation this morning, we will open the lines up for questions. I’d like to remind everyone first to please view Page 2 of our operating and financial highlights presentation, which is posted on our website, to view our caution regarding forward-looking statements and the risk factors pertaining to these statements.

And now over to Richard.

Richard Young

Thank you, Trish. Good morning everyone. This year is shaping up very well. After setting production and mill throughput records in the first quarter. We replicated this feat again in the second quarter. Our cost structure continues to improve materially and combined with higher gold prices led to a 17% increase in our cash margins.

Overall for the quarter earnings were $0.02 per share and we generated free cash flow of almost $100 per ounce. As a result we've added nearly $14 million in cash to our balance sheet so far in 2016. I'm also proud to highlight that in June Teranga received a sustainability award from the Canadian UN Global Compact Network. This award validates the progress we've made in addressing the needs of the local communities in Senegal and underscores our commitment to responsible mining.

Our overarching goal is to maximize free cash flow, based on the new life of mine plan for Sabodala that we announced in the first quarter and as shown on slide 5. We expect to generate free cash flow of over $0.5 billion at $1200 gold on just our base case mine plan and remember this plan is only for Sabodala. A portion of the cash flow from Sabodala is being invested in high return organic growth initiatives that leverage our existing asset base like the mill optimization and to advance exploration programs around our mine site. As well as to invest in in-organic growth initiatives like the Gryphon acquisition.

To expedite our organic growth, we've strengthened our exploration team this year by adding David Mallo as our Vice President of Exploration and we're putting more money into the exploration program. I'm pleased to report that already we're seeing results.

We have three new deposits, two on the mine license and one on the regional land package that at a minimum are expected to be added to the resource category by year end. In addition, there are many more targets we tested which David will highlight in a few minutes. On top of this quarter's financial and operating success the quarter also marks the start of the new era for Teranga. As the next multi0-jurisdictional mid-tier West African Gold Company with activities in two and soon to be three countries as shown on slide 6.

It started in June when we announced the acquisition of Gryphon Minerals. Gryphon activities are focused in Burkina Faso where they've got a 90% interest in Banfora, our permitted gold project with about a 1 million ounces in reserves at about two grams. Gryphon is also party to two explorations JVs on prospective targets, Golden Hill and Gourma.

To accelerate Banfora's development last week we invested $3.4 million by way of a private placement. The funds from the private placement will be used to expand reserves and to begin the optimization of Gryphon feasibility study on the mill option. Once the acquisition closes which we expect to happen in October the Banfora project will increase our gold reserves to 3.6 million ounces and enhance our exploration pipeline.

Banfora is expected to contribute to our production and cash flow profile commencing as early as 2019. Also during the second quarter, we signed a joint venture agreement with Miminvest, a company controlled by one of our directors, David Mimran. Miminvest holds four exploration permits covering nearly 1400 square kilometers in Koulouqwinde. This JV represents a great opportunity to increase our optionality and expand our footprint in West Africa with a strong local partner. While there have been many discoveries in mining friendly Koulouqwinde it is considered to be a prolific, untapped frontier for gold.

With that I'm going to stop here and let you hear from some of the other members of our team. First up is Paul, our Chief Operating Officer. Paul will provide an overview of operations and talk about our plans for Banfora. Next we have an exploration update from David Mallo, our VP, Exploration and finally our Chief Financial Officer, Navin Dyal who will wrap things up today with a review of our financial highlights for the quarter and half year.

Now over to you Paul.

Paul Chawrun

Thank you, Richard. So turning to slide 9, the entire first half of the year has been very strong. We've achieved record production and successfully established another new deposit, our third pick in less than 18 months. We've reached a mill throughput milestone of over two million tonnes, our unit costs have improved dramatically and we're ahead of reserve models in each deposit being mined. The execution at site has been near flawless and I'm proud to say that even when operating costs at lowest levels the team considers safety first. We recently surpassed more than 10 million hours work without a loss time incident. This is a tremendous accomplishment. Not only compared to our West African peers but compared to mining companies globally and I'd like to congratulate everyone at site for their great work.

Turning now to slide 10. During the second quarter or from our high grade high strip ratio deposits, Gora and Golouma, was combined with the medium grade inventory buildup from last year at Masato. The result was record Q2 production of 52,540 ounces, a second quarter throughput of more than a million tonnes as we’ve benefited from a high blend of oxide ore and improved production with certain elements of the mill optimization program now complete. With the rainy season now upon us we are well-prepared, the shift has been made to a harder blend of low oxide mill feet and the watering systems are operating in the new mining areas with solid ground conditions for the equipment.

Moving to slide 11, our mining and milling unit cost continue to ratchet it down despite moving into more complex ore bodies this year. Improving productivity and reducing costs remains a key focus as we continue to see the benefit of low fuel prices and euro denominated operating expenses. The exception this quarter was cash costs, we were up slightly due to higher inventory movement expense attributable to processing from stockpiles. While we expect to continue processing from the stockpiles this year we remain on track to achieve our cash cost guidance of $600 to $650 per ounce. Overall the unit costs during the quarter and half year are in line with our updated life of mine plan.

We have steadily been reducing costs for some time now. The unit cost reduction seen over the last two years is shown on slide 12. Comparing the second quarters of 2014, 2015 and 2016 we have seen mining, milling and cash unit cost declined by 22%, 51% and 24% respectively. It's our intention to be a low cost producer in every jurisdiction we operate.

So turning now to slide 13, I'm pleased to report that the mill optimization project is coming to a close and is currently in the commissioning phase. This is well ahead of schedule and had a lower cost. So some background, historically we've been crusher constrained by adding an additional crusher in screen. We will now have the capacity for a steady state feed to the mill circuit once we move into the harder ore. As a result we expect throughput to increase by approximately 15% compared to where we were in mid-2015 prior to initiating this project and this is shown in our updated 43-101. When the decision to proceed with the mill optimization project was made in April last year, it was made with a lower gold price environment and there was consideration to defer and conserve our cash.

However we were confident in our ability to execute and we knew this was an important long term growth initiative even at those lower gold prices. So not only does this augment our existing infrastructure it's expected to have an internal rate of more than 50% on a $20 million investment and that is a $1200 gold.

So turning now to slide 14, so obviously the big event in the quarter was an announcement of our proposed acquisition a Gryphon, a series of high grade open pits with mineable reserves in excess of 1 million ounces and strong potential for upside. As part of our due diligence process we visited the Banfora project and our takeaway was the Gryphon team has done an outstanding job with resource delineation, technical studies and community relations and there is a strong likelihood that reserves will increase through the drill programs which are currently underway following the recent private placement.

Once our proposed acquisition of Gryphon closes the new combined team will make the development of Banfora project a top priority. For the timeline, at present we are commencing optimization studies, additional drilling and continuing community engagement for the alternative livelihood program. This fall we plan to update the carbon-in-leach feasibility study and then file an updated 43-101 by approximately mid-2017 then assuming the updated feasibility study meets our hurdle rate and we will proceed with obtaining Board approval and commence construction in the back half of next year. So based on this preliminary timeline the first goal for Banfora is estimated to be in the first half of 2019.

With that I will now ask David Mallo to tell you both the positive exploration results we are seeing.

David Mallo

Thank you, Paul. I am really pleased to be here today to review the encouraging exploration results we're seeing on both the mine license and the regional exploration property. Having been directly involved with the Teranga team for more than six months now I have a very good sense of the opportunities and I am very optimistic that a number of deposits remain to be discovered throughout our vast land package.

Our exploration programs are yielding encouraging results on many fronts and follow-up evaluation will be quite exciting. Slide 15, outlines the active mine lease expiration targets. Following a very busy second quarter our two most advanced prospects Goumbati West and Golouma North will be moving along the prospect pipeline into initial resource calculations during Q3.

At Goumbati West, trenching have traced the gold bearing court [indiscernible] system over a minimum 1500 meter strike extent of which 900 meters has been successfully drilled to-date predominantly on 40 meter sections. Whole to whole correlations and continuity of mineralization both along strike and down depth are proving to be excellent. To the immediate west of our Goumbati West prospect we’re in the midst of an extensive RC profile drilling program. These are following up on significant soil anomalies.

Initial assay results from this drilling are very positive, suggesting the potential for an additional sub-parallel zone. Together the Goumbati West area is showing very good resource development potential all within trucking distance of the mill. The second advance prospect destined for Maiden resource evaluation in Q3 is Golouma North where drilling has focused on multiple intersecting gold bearing shear systems now outlined over a minimum 250 meter strike extent.

Recent results have confirmed high grade plunging shoots [ph] and it's these structural controls on the gold mineralization that are the focus of current drilling. Beyond Goumbati West and Golouma North we have numerous other very good early stage exploration targets including [indiscernible]. A previously undrilled 600 meter long golden soiled geo anomaly [ph]. Our initial drilling here was very encouraging with seven of our eight poles intersecting gold mineralization. There remain many more targets and much more work to be done.

Now over to our vast regional land package shown on slide 17, of primary current interest is the [indiscernible] which is comprised of four distinct shallow to moderate dipping gold bearing horizons some of which have postulated strike extensions of up to 1400 meters. And initial resource evaluation is scheduled for Q3 to outline potential target size and aid and guiding our planned drilling follow up in the fourth quarter.

And finally the area that our exploration geologist are currently most excited about, the immense donut region which comprises the cinnamon, honey, jam and ABC prospect areas. To-date our detailed full coverage results have identified numerous new expiration targets worthy of significant follow-up evaluation. This includes a drill ready targeted jam, drilling expansion targets of cinnamon and honey and a particular interest to your geo-chemical anomalies at ABC which is adjacent to our high grade Gora deposit.

Given these encouraging results slide 18 highlights the minimum work plan for the balance of the year. Our budget is $12 million with approximately 6 million left to be spent. That amount could increase slightly as we begin to upgrade resources. Following the closing of the proposed acquisition of Gryphon the combined Teranga Gryphon team will be focused on developing Banfora and Golden Hill and exploring [indiscernible]. The combined team has extensive experience, a strong track record and in-depth knowledge of the geology of this country that sums up where things currently stand on our ongoing exploration activities and our plan for the back half of the year.

I will now hand things over to Navin Dyal, our Chief Financial Officer to summarize the quarter's financial highlights.

Navin Dyal

Thank you, David. We are in a strong financial position at the halfway point of the year and we're seeing margin expansion, strong free cash flow and cash buildup on the balance sheet. These are the highlights and let's look at things in more detail.

Turning to slide 20, revenue for the second quarter grew by 22% to nearly $74 million, a stronger production drove a 16% increase in gold sales and gold prices rose, our average realized price was 5% higher than the prior quarter. The story is much of the story year-to-date with revenue up 19% in the first six months of the year. Turning to slide 21, Paul has already told you how well they're doing on lowering cost and our corporate office has also been doing its part to reduce costs.

Last quarter, we took measures to reduce our head office overhead and better align our corporate G&A reporting with our peer group. At this point of the year our G&A is 3.5 million, this is partly due to lower cost but also timing. I will suggest that you continue to use our guidance for the year of 8 million to 9 million for modeling purposes. Slide 2, shows our all-in sustaining cost for the 3 and 6 month period. In the second quarter, while development capital was lower, there were not quite enough to offset the increases in other capital, capitalize [indiscernible] cost and share based compensation and therefore we saw a slight uptick in all-in sustaining cost to $968 per ounce.

Of this amount this quarter growth CapEx totaled $60 per ounce. The majority of this was spent on the mill optimization. Year-to-date all-in sustaining cost are $891 per ounce and we’re on track to achieve our guidance. With our cost and the gold price trending in the right directions we're seeing double digit margin expansion for the quarter and year-to-date as shown on the slide 23.

Similar to what we saw with unit costs, our margin improvement is even more remarkable over the last two year period. Regardless of what the gold price does our business improvement program will continue and we expect further benefits this year.

Turning to slide 24, EBITDA is up 11% in the quarter despite the fact that we booked a loss in gold derivative contracts, higher share based compensation and expenses relating to our proposed acquisition of Gryphon. We estimate acquisition cost to be approximately 2 million for the year. Net profit was 6.1 million or $0.02 per share, as losses on gold derivative contracts and higher income tax expense offset higher gross profit.

Slide 25 illustrate the effect of our strong result on our cash flow metrics. For the three and six month periods, cash flow from operations improved by 71% and 56% respectively and with free cash flow making significant turnaround. Free cash flow on a per ounce basis but $97 for the quarter and $123 for the six month period.

Turning to slide 26, the increase in cash flow translated into a $5 million increase in our cash balance at quarter end. Our cash balance of 58 million at the end of June, 31% higher than the beginning of the year. However if you include the $12 million in value added tax receivable on a pro forma basis a cash of 70 million.

And with our strong balance sheet we felt comfortable making a 5% equity investment in Gryphon last week in advance of the acquisition closing in October.

Operator, you may now open up the line for question.

Question-and-Answer Session

Operator

Richard Young

Thanks, Carol. It is a busy morning with a number of companies reporting. So I think everyone's quite busy. So let me just summarize we've got a strong balance sheet, it was a very solid quarter, we're on track to meet our guidance. Q3 is off to a strong start as well and as you've heard we've got a number of organic and inorganic growth opportunities as we move through the balance of this year. So, we're excited about the path forward and we look forward to providing updates as we move forward. And thank you everyone for joining the call today.

Operator

This concludes our conference call for today. Please disconnect your lines and have a good day.

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