Teranga Gold's (TGCDF) CEO Richard Young on Q2 2014 Results - Earnings Call Transcript

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Teranga Gold Corporation (OTCQX:TGCDF) Q2 2014 Earnings Conference Call July 30, 2014 5:30 PM ET


Richard Young – President and CEO

Navin Dyal – VP and CFO

Paul Chawrun – VP, Technical Services


Mike Kozak – Cormark Securities

Ovais Habib – Scotia Capital

Gary Leverington – GR Research


Good afternoon and welcome to Teranga Gold’s Second Quarter 2014 Results Conference Call. I would now like to turn the meeting over to Mr. Richard Young, President and CEO of Teranga Gold. Please go ahead Mr. Young.

Richard Young

Thank you operator and good evening to whose of you joining us from North America and Europe and good morning to those joining from Australia. And welcome to our second quarter conference call.

I’m joined by Navin Dyal, our VP and CFO and together we will discuss our second quarter operating and financial results. Paul Chawrun, our VP Tech Services also joins us today. And will help address any operating questions you may have.

Before we begin, I’d ask you to please turn your attention to our forward-looking statements on the first slide.

2013 was a transformational year for us, highlighted by the long awaited merger with our neighbor, the Oromin Joint Venture that closed in the first quarter of this year. Our focus for 2014 and beyond is to execute on our Phase 1 and 2 growth initiatives that we’ve laid out over the past several years.

We’re progressing on all four fronts of our phase 1 growth plan, which is focused on integrating the OJVG to leverage our existing infrastructure to increase production to between 250,000 and 350,000 ounces at all-in sustaining costs of about $900 per ounce.

Specifically, we’re looking to one, improve mining productivity and cost, two, mill optimization to improve throughput by 5% to 10%, three, heap leaching at a rate to 30,000 to 15,000 ounces annually and four, expansion of our reserves both high grade mill feed as well as low grade heap leach feed.

We believe that these growth initiatives will result in higher production, better costs and higher free cash flows than contained in our base case, combined 43-101 Technic Report that we filed in the first quarter.

Before we review our progress of these growth initiatives, let’s review the second quarter results and our guidance for the balance of the year.

Operationally, we remain on track to meet our production and cost guidance for the year but a result of operating issues during the second quarter, we expect to come in at the lower end of our production guidance and the higher end of our cost guidance.

Higher grades and throughput are expected result in about 130,000 ounces in production in the second half of the year, lower cash and all-in sustaining cost per ounce. Offsetting the weaker second quarter in which we produced about 40,000 ounces at cash cost of $815 per ounce and all-in sustaining cost of $1,060.

The weaker than expected results were due to lower grades mined and lower tons processed during the quarter. During the second half of the quarter, total ore tons and grade mined were lower than planned as mining activity was focused on a peripheral area in Phase 3 at Sabodala.

This peripheral area of the ore body has shown less continuity than in other peripheral areas previously mined. Greater variation in grades, thickness and complexity and geometry and continuity resulted in lower than expected grades and ore tons mined.

We have changed some of our operating procedures, improved ore recovery in these areas. In addition, access to a high-grade area scheduled for mining in the second quarter was deferred into the third quarter due to bench access constraints which required a small design of Phase 3. This modification brings forward about 1.3 million tons of waste into the 2014 mine plan that was previously scheduled for Phase 4 in the Sabodala pit.

While ore tons mined for the quarter were 15% higher than same prior year period, as a result of the improvements made in the crushing circuit last year, throughput was lower than the first quarter due to about 10 days of scheduled and unscheduled maintenance in May.

With the major shutdown now complete, we expect higher throughput through the balance of the year.

Total mining cost for the full-year is expected to be approximately $7 million higher than planned due to changes in the mine plan that result an additional 2.6 million tons of material mined. Half of which as I mentioned earlier relate to the small redesign of Phase 3, and the balance relates to earlier access than planned Masato.

As a result, total production costs are expected to be at the higher end of our guidance range of $155 million to $165 million.

Overall unit mining, processing and administrative cost, remain on plan. Throughput is also on plan and capital expenditures remain within our original guidance at $33 million despite the additional costs related to our growth initiatives as the operating team has been able to optimize capital spending.

Moving on to financials, I’ll now turn the call over to Navin.

Navin Dyal

Thank you, Richard. Gold revenues for the second quarter were $57.5 million, below the prior year quarter due to lower gold sales and lower spot gold prices. Overall, from an earnings perspective, our second quarter was a breakeven quarter before a non-cash charge. A non-cash inventory write-down to net realizable value and lower revenues resulted in a loss of $12 million, $0.04 loss per share for the quarter ended June 30, 2014.

The non-cash write-down on long-term low-grade stock pile inventory totaled $13.4 million and was a result of an increase in costs added to low-grade ore stock piles during the quarter. The ore ounces were mined during the quarter had not resulted in an increase in the per ounce cost of inventory including overhead and depreciation.

Higher per ounce inventory cost have a greater impact on low grade stock pile values because of the higher future processing cost required to produce an ounce of gold.

The non-cash write-down represents the portion of historical costs that would not be recoverable based on the company’s long-term forecast of future processing and overhead cost at a gold price of $1,237 per ounce. This price includes the impact of the Franco-Nevada gold stream.

Fluctuations in the mine plan result in wide fluctuations in the per ounce cost of our long-term ore stock piling. During periods where fewer ounces are mined, per ounce cost rise while during those periods when mining takes places in higher grade areas, per ounce cost all.

We expect a portion of this non-cash write-off to reverse over the course of the balance of the year, as mining takes place in higher grade areas of Sabodala and Masato. Conversely, should long-term gold prices decline or future costs rise, there is a potential for further net realizable value adjustments.

In terms of liquidity and capital resources, we ended the quarter with $28.4 million in cash after significant working capital outflows, debt repayments and capital expenditures. Cash flows used in operations were almost $10 million for the quarter compared to $21 million provided in cash flows in the same prior year period.

The decrease in operating cash flow was mainly due to lower revenues in the current quarter and higher net working capital outflows mainly as a result of payments of annual royalties to the government of Senegal during the second quarter. Capital expenditures totaled $6.8 million including deferred stripping while debt repayments totaled $9.2 million for the quarter.

With anticipated stronger second half cash flows to be generated as a result of higher production and lower cost, we expect to have sufficient cash flow to fund approximately $80 million in one-time payment.

Year-to-date, the company has made a total of about $35 million to ward (ph) these one-time payments which include $16.4 million in debt repayments, $2.1 million in payments to the government of Senegal and one-time payments related to the acquisition of the OJVG including $9 million for transaction, legal and office closure costs and $7.5 million to acquire Badr’s share of the OJVG.

It should be noted that we have about $30 million in debt outstanding comprised of the $20 million load facility and $10 million remaining on the equipment facility. We are therefore almost in a net cash position and we continue to work towards paying off our debt facility by year-end as well as other one-time payments.

As we execute on our Phase 1 and Phase 2 growth strategies, we will continue to access our capital structure but retiring our debt by year-end remains a priority.

I’ll turn it over to Richard to talk a bit more about that.

Richard Young

Navin, thank you. We made significant progress in terms of moving our growth initiatives forward during the quarter. First and foremost is the integration of the OJVG, which is proceeding very well. During the quarter, we completed development in Masato, the first of the OJVG deposits to be mined. And we expect to begin mining in September.

As part of the integration process, the technical team is now looking at the 2015 mining plan for opportunities that may result in lower material movement, lower capital expenditures and higher free cash flows in 2015 and beyond as compared to the base case Tech Report that we filed in March of this year following the merger.

The Sabodala mill is now operating at designed capacity of 3.5 million tons of hard rock. But what we have seen is that when we crush, when crush stock piles are nearly 100% full, we’ve experienced sustained periods of 480 tons per operating hour throughput compared to the current plan of 430 tons per operating hour.

Preliminary analysis to plant data, show that there is a correlation between the crusher downtime and mill throughput and you can see that on the slide, which is directly related to the inventory level of crushed ore stock piles for feeding the mill.

Sustained high crushed stock piles could potentially result in a 5% to 10% increase in overall throughput. The test work is underway and we expect to have the results back in the third quarter and be in a position to make a decision on whether we move forward before year-end.

We’re also very excited about the potential for heap-leaching at Sabodala. Our life of mine plan shows a significant amount of both oxide and sulphide low grade reserves that were mined during the operating period but not processed until the end of the mine life. In addition, there is significant potential to increase the near surface oxide ore reserves along 8-kilometer mineralized structural trend covering both of our mine licenses.

A comprehensive test work program is in progress to evaluate heap leach potential. And this could result in ore being brought forward from later in the life of mine plan.

These, one of the test work will form the basis for determining the optimal economics for oxides and Phase 2 of the analysis will examine the sulphide ore. The test work is being carried out by KCA at their facilities in Reno, Nevada, their experience in testing and designing heap leach facilities throughout the world including West Africa.

We expect to receive the initial results from Phase 1 during the third quarter and then be in a position to make a decision by year-end.

The development of our high-grade Gora deposit remains on track. We expect a permitting process to be completed in the third quarter. Initial engineering is underway and site surveys were conducted during the second quarter to allow for access road construction to begin in the fourth quarter for production and mid-2015.

On the exploration front, we continue to systematically work through our large exploration package and we expect to spend between $10 million and $12 million on our mine licenses and our regional land package this year.

In addition to the extensive work currently underway at Masato to in-fill the high grade zone and extend the mineralization long-strike. We’re also looking to increase reserves on other deposits on our combined mine licenses.

In-fill drilling at the high grade Golouma deposit is planned for the third quarter for the conversion of resources to reserves and evaluating the potential on long-strike.

RC and diamond drilling has planned for the fourth quarter along strike of the high grade Kerekounda deposit and at Niakafiri Southeast and Maki Medina, RC and diamond drill programs are planned for potential conversion of resources to reserves as well as Geotech holes for determining pit-wall slope designs.

We’re also looking at our exploration holes to the North of Masato deposit along the (inaudible) trend I mentioned to evaluate the extension along strike.

Overall, we’re targeting both high grade mill feeds as well as lower grade near surface oxide material for potential heat leach feed.

Moving into our regional package, we’re looking for multi-million out-standalone deposits. The exploration team is also on hunt for high grade Satellite mill feed.

And here is a brief overview of the highlights for the quarter. At Ninienko, an extensive mapping and trenching program took place during the quarter that outlined a 500-meter wide zone with gold mineralization occurring in flat line near surface court stains over strike length of 1,500 meters. And some of the elevated gold values can be seen on the slide.

Work is underway to develop a diamond and partially RC drill program for the fourth quarter. Additionally trenching and mapping will also be undertaken in the second half of this year.

At Soreto, following up on a small diamond drill program last year, we’ve embarked on a 15-hole diamond drill program we’ve got about seven holes complete. Several of these holes have intersected shallow dipping 25 to 35 degree altered shear zones with all the right ingredients including visible gold in places.

The shear zones coincide with the major North Northeast regional shear structure with an associated 6 kilometer long geochemical soil anomaly. Sampling and assaying is ongoing.

Just to recap, we’re on track to meet our production cost guidance for the year. We expect a strong second half with higher production and better cost. We’re on track for mining at Masato, the first of the OJVG deposits in September. Mill optimization results are expected in the third quarter and the development decision by year-end.

Initial heap leach results are expected in the third quarter and we also expect to be able to make a development decision by year-end.

Exploration of the combined mine licenses and the regional land package continue and we expect to update the market with some information in the second half of the year as we get assay results back.

Our focus remains on free cash flow generation, we’re working towards being debt free by year-end. And we believe we can improve free cash flows in 2015 and beyond, as compared to our current base case Technic Report. We’re excited about the path ahead. Thank you for joining us.

And we would be pleased to take your questions. Operator, we’ll turn it back over to you.

Question-and-Answer Session


Thank you. (Operator Instructions). The first question is from Mike Kozak from Cormark Securities. Please go ahead.

Mike Kozak – Cormark Securities

Yes, hi guys, just a couple of questions from me. First, the milling costs jumped a lot in the quarter. Is that a result just from all the downtime on the front-end and how many days was running of the plant down?

Richard Young

Mike, first of all, absolutely right. The unit cost was higher for the quarter simply as a function of lower material process. For the year we expect to be rate on budget at about $1850 a ton. As we are within guidance on unit mining processing and admin cost.

And in total we were down for about 10 days. And that represents both full day shutdowns as well as we work on both the primary and second crushers as well as the sag mills. So there were times when they came back up and were commissioned and came back down again as the technical team were working on some items.

But that was the major shut. We brought some items that were in the plan for later in the year forward and the major shut is now behind us. And we expect higher throughput through the second half of the year. And we expect on a unit basis, will be rate on plan about $1850 a ton.

Mike Kozak – Cormark Securities

Okay. And then, so what milling costs are you using now I guess to is where we call it impair test that low grade stock pile?

Richard Young

Those are 43-101 costs. So, they’re based on future processing as well as overhead costs. And the inventory movement under IFRS you don’t get to look forward. We see some of this reversing later on in the year and depending on next year’s mine plan that could continue to reverse, number one.

Number two, as we move forward with both the mill optimization heap leaching, we could see future costs decrease. And therefore the balance of this, reverse over time.

Mike Kozak – Cormark Securities

Okay. And then, as you get into the softer Masato material, I guess in September from certainly the end of the year, is any of that going to be free dig?

Richard Young

I’ll turn that question over to Paul.

Paul Chawrun

Mike, yes, there will be a little bit of that free dig on the first few benches because it’s Saprolite. And then, as we transition into the hard there will be minimal amount of drilling and then the standard drilling that we have as we go down maybe four or five benches.

Mike Kozak – Cormark Securities

Okay. And then, one more and then I’ll hop off and someone ask you question. Can you kind of maybe give a better idea of timing on when we can expect the exploration update, I guess just the asset is on that Masato High Grade core. I mean, I think you said some time before the end of the year, but I was under the impression there might be a bit more soon than that?

Richard Young

Well, I’ll turn over to Paul. The diamond drilling has been complete and expect to have the assay results back in the next week or so. The RC drilling is underway and we expect to have those assay results back by the end of August.

Paul Chawrun

Yes, well, we’re collecting some of that data, we’ll get some of the results from a diamond drilling at about a week or so as Richard said. And then there was another package sent out for the final that we’ll get probably by early September. Then we’ll start modeling and putting it together. And we’ll be able to update what the result is by the end of the third quarter.

Richard Young


Mike Kozak – Cormark Securities

Okay. All right, thanks. That’s it from me for now.


Thank you. The next question is from Ovais Habib from Scotia Capital. Please go ahead.

Ovais Habib – Scotia Capital

Hi Richard. Just a quick question. In terms of you’re expecting a pretty strong production in the second half. Are you, has the rainy season started and do you expect that to hamper production in any sort of way?

Richard Young

The rainy season has started. To date, we haven’t seen as much rain as we saw last year. We’re seeing about 25% reduction in the amount of rainfall. And we’ve now just come through Ramadan, which ended earlier this week. Overall, for the month, we’re going to probably process somewhere in the 290,000 tons which is a very good month for us.

So, I think over time the guys on site have really been able to address the rainy season, its less of an issue than it used to be back in 2010 and ‘11.

Ovais Habib – Scotia Capital

Okay, that’s it right now from me. Thank you.


Thank you. The next question is from (inaudible). Please go ahead.

Unidentified Analyst

Hi Richard.

Richard Young


Unidentified Analyst

I was just wondering, estimated capital cost for that new optimization?

Richard Young

Sort of originally we were thinking it would be 5 to 10, we think there is probably greater opportunities for higher throughput. And I think the numbers that we’re running internally are somewhere between 10 and 15. But until we get the results back from the test work that’s being done we won’t know for sure.

Unidentified Analyst

Okay. Thanks.


(Operator Instructions). The next question is from Gary Leverington from GR Research. Please go ahead.

Gary Leverington – GR Research

Good afternoon. I wanted to ask about your hedging strategy with gold prices. It appears that you’ve had a strategy in place. Is that still ongoing, your current strategy? Thank you.

Richard Young

Gary, thank you. That’s a wonderful question. There was, we’d inherited a hedge-book with the IPO that was put in place by the previous operator as part of the build-out of the project. Hedging is very difficult I think for us in that unless you can hedge both of your commodity price and your input cost, you are at risk as we saw over the last few years where both your input, your revenues and your costs rise.

Now that we’ve got our balance sheet and we’ll be debt free, we’re turning to be debt free at the end of the year, we don’t foresee any future hedging of gold. We’ve looked at both currency hedging as well as fuel hedging. But often not entering any of those type hedge arrangements and allow to, both purchase and sell at spot.

Gary Leverington – GR Research

Fabulous. Thank you so much for your input. I much appreciate it.

Richard Young

You’re welcome.


Thank you. There are no further questions registered at this time. I would now like to turn the meeting back to Mr. Young.

Richard Young

Well, first of all I’d like to thank everyone for joining us. And we’re trying to find a time that works for North America, Europe as well as Australia, so I apologize for the short notice with the results just going out just a few minutes ago.

But both our press release and MD&A have a lot of detail in it as to what took place in the quarter. And if you’ve got any questions please don’t hesitate to give us a call. But we do expect a very strong second half. We believe that we’re making very good progress on these growth initiatives and we’ve got information flow through the balance of the year.

And while our cash balance hasn’t been rising, we’ve made tremendous strides in addressing the right side of the balance sheet as we are not only paying down existing debt and payables, but really putting us in a very strong position as we enter 2015 being debt free.

So, we look forward to that. And we look forward to the balance of the year. So, thank you for joining us for the call. And if you have any further questions, please don’t hesitate to give us a call. Thank you.


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

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