Lake Shore Gold's CEO Discusses Q3 2013 Results - Earnings Call Transcript

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Lake Shore Gold Corp. (NYSEMKT:LSG) Q3 2013 Earnings Conference Call November 6, 2013 10:00 AM ET

Executives

Mark Utting - Vice President, Investor Relations

Tony Makuch - President and CEO

Dan Gagnon - Senior Vice President, Operations

Eric Kallio - Vice President, Exploration

Phil Yee - Vice President and CFO

Analysts

Kerry Smith - Haywood Securities

Operator

Good morning ladies and gentlemen. Welcome to the Lake Shore Gold Third Quarter 2013 Financial Results Conference Call on November 06, 2013. Please be advised that this call is being recorded.

I would now like to turn the meeting over to Mr. Mark Utting, Vice President, Investor Relations. Please go ahead.

Mark Utting

Thanks very much, Operator. And welcome everybody to Lake Shore Gold’s third quarter 2013 conference call and webcast. Our speakers today will be Tony Makuch, our President and Chief Executive Officer; and Phil Yee, our Vice President and Chief Financial Officer. We do also have a number of other members of our management team in the room with us today as well.

Before beginning the presentation, I would first like to say that slides accompanying today’s remarks are available on a viewer advance basis, on our webcast which is available on our home page www.lsgold.com.

I’d also like to remind listeners that the presentation that will follow includes forward-looking information as defined under certain securities laws. Forward-looking statements are subject to a number of risks and uncertainties. And the company does not provide any assurance or guarantee of future performance, and listeners are cautioned not to place undue reliance on forward-looking information.

I draw your attention to the forward-looking statement advisory on slide two of the slide deck with accompanying the presentation and the similar forward looking advisories available in our press releases and in our MD&A for the third quarter. Our review of risks and uncertainties is also provided in our annual information form which is available on our website and on SEDAR at www.sedar.com.

With that, I’d now like to turn the call over to Tony Makuch, Lake Shore Gold’s President and CEO.

Tony Makuch

Thanks Mark. Thanks everybody for being on the call. And maybe before I start again I would like to thank all the people who do the work at Lake Shore Gold, our employees, our supplier and our service providers. We just get the privilege to sit here and discuss results and present results and without their efforts I could not be here today reviewing strong third quarter results that the company has achieved.

Okay. Now I am going to start on slide number three the third quarter of 2013 was a pivotal point for Lake Shore Gold. We reported historically lower operating costs with cash costs averaging just over $700 per ounce. We completed our mill expansion and accelerate the quarter with throughput averaging well over 3,000 tonnes per day and we continued to improve our grade with an average grade of 4.7 grams per tone. Our capital program for the was largely completed and we remain on track to generate net free cash flows during the fourth quarter, in fact we are generating net free cash flows today.

Turning to slide four. We had a solid quarter of production despite no commissioning. Gold sales were significantly higher than both the third quarter of last year and this year’s second quarter, as you will see when we look at our revenue with 58% increase more than offset the impact of lower gold prices. In September, we exceeded our targets of 3,000 tons per day averaging over 10% above this level or close to 3,400 tons per day for the month and as I will discuss later our throughput levels increased further in October. Looking at our nine months results, total production was about 83,000 ounces and our gold sales totaled 86,000 ounces.

Now slide five, we achieved strong cost improvement in the third quarter. Cash operating costs were $701 per ounce sold that was 31% better than the third quarter last year and a 23% better than the second quarter of this year.

We had better grades and we also have the impact of a number of cost control measures, these measures actually start to kick in during Q2, but the impact is really seen in our numbers for this quarter. For the first nine months of 2013 our average cash operating cost are 856 per ounce, at this level of cost we are well within our target range for the full year of our guidance and in terms of our all in sustaining costs, they are in line with our target levels of around $1,000 per ounce. We are actually tracking and expect to bring them below $1,000 an ounce in the fourth quarter.

Looking at our guidance for 2013 on slide six; we remain on track to achieve our production of 120,000 to 135,000 ounces of gold for the year. Cash operating cost of $8,875 an ounce and cash capital investment of approximately $90 million.

Our optimism around achieving our targets is well supported by our latest monthly results. As shown in slide seven, we had a record month in October, we produced 17,500 ounces by processing and now which are 3,550 tons per day and an average head grade of 5.2 grams per ton. These results clearly demonstrate the capabilities of our expanded Timmins mining and milling operations, we are also very pleased with the success we are having in achieving our targeted grades.

Now I will move over to slide eight, and I will turn the call over to Phil Yee, our chief financial officer.

Phil Yee

Thanks, Tony. Good morning everyone. Slide eight, highlights the key operating details for the Q3 results. Compared to last year’s third quarter virtually all of our numbers have improved and many of them have improved by a significant amount. Most notably I would like to highlight that Q3, 2013 production increased 38% from Q3, 2012 levels, to 28,900 ounces. Q3, 2013 sales were up 58% to 32,300 ounces.

Cash from operating costs improved 31% to $701 an ounce and all in sustaining costs were $1,027 an ounce.

Switching over to slide nine. Turning to profitability, earnings from mine operations nearly tripled in the third quarter to $7.6 million. As outlined in the slide, the impact of the 58% increase in sales compared to last year's third quarter more than offset a $278 per ounce reduction in the Canadian dollar gold prices. The higher revenue was partially offset by higher cash operating costs and higher depreciation and depletion both as a result of higher volumes in 2013. However, on a unit basis, both improved year over year.

Moving on to slide 10, which takes us from earnings from mine operations to the net loss recorded for Q3 2013. As outlined in the slide, the net loss for the quarter has reduced substantially compared to the prior year, to $1.7 million from $10.8 million a year earlier. The improvement reflects higher earnings from operations, lower write-downs on investments and lower mark-to-market losses on the embedded derivatives, related to the Sprott gold loan in Q3 of 2013.

Slide 11, looks at the nine month operating performance year over year. The theme is similar to the quarterly results and the key numbers all shown excellent improvement. Total production of 82,900 ounces increased 34%, while gold poured of over 78,000 ounces was up 28%.

Our cash from operating costs at $856 per ounce, a 14% improvement over prior year. And as Tony mentioned, it is within our target range for the full year. Looking at all in sustaining costs, they were just over $1,500 per ounce, but as you have seen there has been steady improvement as the year has progressed. And we expect to see these costs reduce further to below $1,000 per ounce in the coming quarter.

Moving on to slide 12, this outlines the earnings from mine operations for the first nine months of the year. Earnings from mine operations for the first nine months of 2013 were up 89% to $13.2 million again strong volume growth grow revenues higher despite a lower average gold price. And similar to the quarterly analysis cash operating costs and depreciation depletion are higher on a dollar basis due to the increased volumes in 2013, but on a unit basis both improved year-over-year.

Slide 13 provides the snapshot of the P&L for the comparative nine month periods, consistent with the quarterly analysis our net loss for the nine month period has reduced compared to the prior year. Reduced net loss from continuing operations reflected increased earnings from mine operations, lower write-down on investments and a mark-to-market gain on the embedded derivative related to the Sprott loan. These factors more than offset the impact of higher financing costs related to our debt. The $4.3 million net loss from discontinued operations in 2013 mainly reflects the translation losses on the disposal of our Mexican assets which we discussed with you last quarter.

Moving to slide 14, this summarizes Lake Shore Gold’s financial position as of September 30, 2013, cash in bullion totaled $15.2 million which really represents the low point for our cash. Looking at our current assets and current liabilities, our current ratio was at 1.13 and we are in full compliance of all the debt covenants related to the Sprott credit facility. In terms of our, in terms of our debt facilities, we have made 10 of the 29 monthly payments on the gold link loan of Sprott, there are 19 monthly payments remaining with approximately an outstanding principal balance of around $22 million based on the current gold price at the end of quarter three. We have a $35 million standby line with Sprott that is fully drawn and is due in January 2015 and we have a $103 million of unsecured debentures with a maturity date of September 2017.

At this point, I’d like to turn the call back to Tony.

Tony Makuch

Okay, thanks Phil. I’m going to start now and get to slide 15, and viewing a review of operations, where we are seeing strong results at both of our mines. At Timmins West Mine, we produced 22,600 ounce in the third quarter and 65,000 ounce as year-to-date. Our grade in the third quarter averaged 4.9 grams per ton and we saw a further improvement in grades in October and are now producing in line with our reserve grades.

At Bell Creek mine, we produced 63,000 ounces in the third quarter of 2013, if you exclude some low grade material we process during the Mill commissioning, our grade average 4.2 grams per ton. We are currently seeing improved grades at Bell Creek as well and are increasing our tonnage at the mine to between 500 and 750 tonnes per day. Production is currently focused in the north A zone between the 610 and 685 levels and as expected the zone is getting wider at that.

Slide 17, looks at our new mill, or mill side. As you have heard we’ve completed our mill expansion in the third quarter, our mill is operating very well and is exceeding our expectations. For example throughput in October average over 3,500 tonnes per day, close to 20% above the target level.

Going in the final slide, slide 18 to conclude. We are well positioned to achieve our 2013 guidance, we produced just over 100,000 ounces as of the end of October and are well positioned to achieve our target of 120,000 to 135,000 ounces for the year. Our cash cost target is $800 to $875 per ounce and after nine months we are within the range at $856 per ounce and we are seeing additional improvement in costs in Q4.

Thank you. We will be happy to take any further questions you might have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from [Kevin Chu] from CIBC. Please go ahead.

Unidentified Analyst

Hi, good morning guys.

Tony Makuch

Good morning Kevin.

Unidentified Analyst

So I guess maybe if we could just start on the October production which actually looks quite good. I guess I am just trying to get a sense of whether this rate of throughput can be sustained for the remainder of this quarter and Q4?

Tony Makuch

Well first off in terms of this level of throughput the mill throughput, definitely the mill throughput can be sustained, we are working at this type of throughput level in Q4, it’s working, it is slight above our mine throughput levels at this point in time we didn’t design out mine to exceed 3,000 ton a day. We have some stockpile that we are able to gain build up upon during the first part of the year as part of completing the mill commissioning. So we are going to be able to achieve close to these levels for the rest of this quarter, but it is not our goal to achieve these levels and we are not capable of achieving these levels of throughput into 2014.

Unidentified Analyst

Right. Yeah, I guess that’s pointing to, starting point to the stockpile contribution there?

Tony Makuch

Yeah. We do expect to achieve over 3000 tonnes a day say in 2014, but that’s not equate for these levels.

Unidentified Analyst

Okay. And in terms of are you planning any scheduled maintenance to the mill in the coming quarters?

Tony Makuch

Yes, we have built into our mill plan, with the mill plans and the throughput designs, we do have scheduled maintenance that we’ve built in, but we could run the mill at and when we come back with our design capacity of 3,000 tonnes a day or in fact we are able to achieve 3,550 tonnes per day, we have actually designed in availability and utilization to take into account any maintenance that we might need to do. So we have, when we do operate the mill, we operate it at significantly higher rate on a day-to-day basis than what we expect to average. So when we talk about 3,000 and 3,550 it’s our average calendar day.

Unidentified Analyst

All right. And how about the grade of 5.2 gram per ton, I guess previously you guys have been talking 4.5 to 5 for the second half. So should I assume that there should be a little bit of pullback in that number?

Tony Makuch

Well, I think we discussed about achieving on average for the full year about 4.5 grams, maybe I’ll let Eric Kallio, our VP Exploration give a sense on the grade in there, but we expect --.

Eric Kallio

We have been making some adjustments throughout the year to processes and we have been also gaining some better understanding of the ground that should go along. So it’s taking sometime to gradually build up. But I think right now we're seeing the results of all that. We’ve made some changes developed it to mine a little bit more on the --. So we’re now mining probably closer to 10% to 15%, which is still below the amount that could be mined and mix up about 50% of the tonnage at Bell Creek. But I think this is what we see now is that we've mine a number of stopes, we've been getting better predictability and based on these regions, why we can't continue to do that.

Phil Yee

But, I guess if you look at Q4 and I think we've been guiding to 4.5 to 5 grams on average for the quarter and I think you're still safe to use that numbers.

Unidentified Analyst

Okay. And then just turning to your financials, I guess for the quarter it looked like you guys had sustaining capital of $7 million and total capital spend for of about $17 million. So with the more expansion complete now should we kind of expect that $7 million to be the continuing number going forward?

Phil Yee

You mean $7 million on quarter basis?

Unidentified Analyst

Yeah.

Phil Yee

The capital spending is coming down and I think we're talking about, we've discussed on a quarter-by-quarter basis now and if you look at what we’d probably be able do in terms of capital next year, it's somewhere between $40 million and $55 million on an annualized basis. And that's pretty much the run rate we're at right now.

Unidentified Analyst

Okay, great. Thank you. That's all my questions.

Operator

Thank you. The next question is from Kerry Smith from Haywood Securities. Please go ahead.

Kerry Smith - Haywood Securities

Thanks operator. Tony just on the stockpiles that you were using the supplement in [oil field] in Q3 what sort of tonnes and grades would you have last like how long would you be able to see that to stockpile mature. Is it enough for sort of Q4 and that’s it or could you just give me some sense?

Tony Makuch

I’ll let Dan Gagnon, VP Operations he is here and Dan can give you some color on that.

Kerry Smith - Haywood Securities

Okay. Hi Dan.

Dan Gagnon

Hi Kerry. Yeah stockpile wise we built quite a bit of a stockpile in August when we were commissioning, but we've been chewing through it at a rapid race. But right now as we stand today we roughly have a stockpile of the higher grade material of about 20,000 tonnes on surface of Bell Creek and we also have a lower grade stockpile of about 27,000 tonnes.

Kerry Smith - Haywood Securities

And what would this rough grade be versus high grade versus low grade?

Dan Gagnon

Yeah. The grades, in the high grade it’s a little over 4 grams per ton and the low grade material would be in the 2 to 2.5 range.

Kerry Smith - Haywood Securities

Okay, okay. Yeah so you'll work through that this quarter then obviously you’re going to roll out there?

Dan Gagnon

We're not going to, we've got a lot, we've got a good supply of ore coming from underground. We don’t plan on touching the low grade material.

Kerry Smith - Haywood Securities

Okay. So that wouldn’t be milled at all then?

Dan Gagnon

No.

Kerry Smith - Haywood Securities

Okay.

Dan Gagnon

We expect the mines to produce in between somewhere around 3,000 to slightly over 3,000 tons a day. We are seeing that from our mines on average throughout the quarter.

Kerry Smith - Haywood Securities

Right. So you’re able to produce 3,000 tonnes a day on a pretty sustainable basis there?

Dan Gagnon

On a sustainable basis, yes.

Kerry Smith - Haywood Securities

Okay. And then Tony I guess there is only about $10 million of capital less to spend issue to get to the $90 million, is that roughly correct?

Tony Makuch

That's roughly correct and it maybe plus or minus a few million either way.

Kerry Smith - Haywood Securities

Okay. And then you gave this ref number earlier, sort of $40 million to $55 million of capital next year like it’s a big range. Is there something in the $55 million number that aren’t in the $40 million or like what was sort of the sustaining CapEx be as a portion of that and what's the extra for?

Tony Makuch

Well, I guess I gave the range as we still haven’t finalized all of our ranges et cetera numbers for the year to give you some sense. I think that going forward, $1,000 an ounce all-in-sustaining cost or around $1,000 in assets, that's kind of a number we look at and we believe pretty confident that we can achieve. So it will be derived between capital and operating cost will be in there. But you can pull the numbers out of that, the sustaining cost within that most of our, we don’t have very much non-sustaining cost in our capital now going forward.

Kerry Smith - Haywood Securities

Okay. And can you give me any sense as to what your grade expectation might be for next year like even a range?

Tony Makuch

I would say 4.5 to 5 that's what we expect.

Kerry Smith - Haywood Securities

Okay. So that's…

Tony Makuch

Basically we’re able to, if you look at what our reserve grade between Timmins Mine and Bell Creek and the proportion of what we expect to achieve, we see ourselves achieving our reserve grades now plus or minus a few percent.

Kerry Smith - Haywood Securities

Okay. And what was the cost per ton in Q3?

Tony Makuch

Go ahead Marie.

Unidentified Company Representative

(inaudible)

Kerry Smith - Haywood Securities

So Marie is not coming through very clear, but did she say...?

Tony Makuch

Just somewhere in the mid $90 per ton to $95 and $100 a ton.

Phil Yee

That’s all in it includes the mining, the trucking and the milling.

Kerry Smith - Haywood Securities

Right and so G&A I guess too right there?

Phil Yee

It’s everything in terms, the only thing not in there is our corporate cost.

Kerry Smith - Haywood Securities

Right okay. And is that Canadian dollar or US dollars?

Phil Yee

Canadian dollars.

Kerry Smith - Haywood Securities

Canadian dollars, okay that’s helpful. and then just one other thing on the recoveries year-to-date they have been sort of about a point lower than what they were year-to-date last year and what would your expectation be for the mill? Like are you kind of thinking that the mill recovery will be modestly less than what the old mill was or as you get the mill commissioned do you think that the recoveries will come back up to 96% rate?

Phil Yee

I mean we expect them to come back to the level we’ve been achieving in the past. Some of the mill recoveries are function of the split between the Bell Creek ores and the Timmins -- ore and how much that goes through. There ,is we still have to work on a gravity circuit in the sag mill, we don’t have that fully operational yet as part of trying to get the plant running at optimized levels throughout the plant. We do have [gravity] recovery in the secondary mill, but not on the primary. So there are few things there that could be worked but overtime we expect our recoveries to be in a range of I think we actually target about 95.5% recoveries.

Kerry Smith - Haywood Securities

That’s your target, okay.

Phil Yee

Yeah Slow recovery to Bell Creek, Bell Creek ores have seen 93% and 94% recovery and the Timmins ores are slightly higher, so sometime it’s the function of the split.

Kerry Smith - Haywood Securities

Okay. That’s great. Thank you.

Phil Yee

Okay.

Operator

(Operator Instructions). We do have a question from [Greg Witch] from Scotiabank. Please go ahead.

Unidentified Analyst

I just have a question. I’d like to find out, we are doing so well, about the shareholders, is there any good news that you could tell us? I am from Timmins.

Tony Makuch

What do you mean by good news, the good news is that basically the operations and I think when we started in Timmins we came there to discover gold, we have been able to do that, we discovered gold in Timmins. We were able to take and turn it into a resource and what we call the reserved, then we demonstrated that we can develop mines in Timmins and build mills in Timmins and actually technically deal with the underground mining, mining methods all will be in Timmins and now we are proving to the people in Timmins and to our shareholders is that we can actually turn this into an economic mining and business right, that actually generates cash flow. I think that is pretty good news.

We haven’t been our gold over the last two years has been to complete our capital programs, set the company up stabilize our operations and really set it up that we generate cash flow and make a variable business. We haven’t been looking for new orders and looking for expanding resource and reserves. We have our resource and reserve at Timmins west , might have a support up to 8 to 10 year mine plan. As we progress throughout the year and we complete our work and stay I’d say come up reliable operations will be turning to growth now and looking for new discoveries and there is all kinds of opportunity in terms of what we think we can find lot of potential there.

So I don’t know what and I think that’s good news that we've been able to come and demonstrate that we can discover gold in Timmins, develop it and then now demonstrate that it's an economical reliable to mine there and we can make money doing it.

Unidentified Analyst

Yeah. It's great because I mean I have been following it pretty close as a shareholder and I am just wondering how long do like stocks when are they going to go up, like I have seen that the profits are so good, when are we going to see increases going forward?

Mark Utting

It’s Mark Utting, the VP of IR. Well look at we, I think from our standpoint, we have to function in the market like everybody else that we focused on what we can take care of, which is getting our company to the point essentially we are at now, where we've got our production, no expansion done, our production increased and our cost down and generating free cash flow. We are also I can tell you in conjunction with me getting to this pivotal point, going to be very aggressive in terms of marketing, storing and getting and talking to investors, like you saw as much as we can. And we're going to work very hard at that. If hopefully, we also will get some help from the gold price and between all those efforts, we'll see some joy then.

Tony Makuch

I think (inaudible) as shareholders and driving shareholder value, it’s important to us and I think important to shareholders have been waiting for us to get at this point, where okay, now it's our business now which is generating free cash and generating that showing that building up the cash balance in the company now and really demonstrating what the potential is for what we can achieve in Timmins. I think, that alone have had significant impact in terms of what we can go forward in terms of demonstrating value for the company and the gold price is something we can’t control.

You can see based on our cost and our cost forecast and the infrastructure and the mines we've built, we built this infrastructure to survive gold price as much lower than what they are currently, we talked about all-in sustaining cost of the $1,000 an ounce that’s good. We're generating free cash flows not many junior companies in the gold space, not many gold companies per say in a gold space that actually can say they’re generating free cash, we are and we think that should come back in some of that value to start being recognized in share price.

Unidentified Analyst

Well, thank you very much and keep on going.

Operator

Thank you. The next question is from Kerry Smith from Haywood Securities. Please go ahead.

Kerry Smith - Haywood Securities

Thanks. I'll take the opportunity Tony (inaudible) on the line. What I am not sure (inaudible) could give any thought to it or what his comments will be, but I am curious what gold price you think you might use for your reserve calculation at year-end for 2014?

Tony Makuch

Still not finalized, we are still working on the (inaudible) that we're looking at something (inaudible).

Kerry Smith - Haywood Securities

Okay. And just remind me the price you use last I apologize I don’t have the numbers in front of me but the price used last year?

Tony Makuch

1,400.

Kerry Smith - Haywood Securities

1,400. And how sensitive will the reserves be roughly can you give me any sense there I presume would be that sensitive but?

Tony Makuch

Yeah, I don’t because of we've had some reductions in cost to the mill and the mining, I think it sort of offsets the declines that we've seen in the gold price. So I am not expecting the changes in cut upgrade.

Kerry Smith - Haywood Securities

Okay.

Tony Makuch

And maybe it might changes but not that was significant that wasn’t cost of the changes in itself.

Tony Makuch

Okay, that's great. Thanks.

Operator

Thank you. There are no further questions at this time. I would like to turn meeting back over to Mr. Utting.

Mark Utting

Thanks very much operator. First of all, thanks for participating in our call today. We’ll be issuing our year-end production results in January and then have our next conference call with our year-end financial results in early March. We look forward to that. We think we are having a very good fourth quarter and we are looking for additional results.

Just one final comment. I understand there was an issue with the slides on the webcast at the beginning of the call, I apologize for that, the slides have been corrected. You may need to refresh your screen, if you do not aren’t looking at the correct slide right now, but they should be there and again I apologize for any inconvenience on that. And with that, we can end the call and we look forward to talking to with you again soon thanks.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.

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