Kirkland Lake Gold's (KGILF) CEO George Ogilvie on Q2 2015 Results - Earnings Call Transcript

| About: Kirkland Lake (KL)
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Kirkland Lake Gold Inc. (KGILF) Q2 2015 Results Earnings Conference Call December 8, 2014 11:00 AM ET

Executives

Suzette Ramcharan - Director of Investor Relations

George Ogilvie - Chief Executive Officer, Director

John Thomson - Chief Financial Officer, Executive Vice President, Director

Analysts

Derek Macpherson - M Partners

Guy Wilkes - Pareto Securities

Kent Neale - Dundee Capital Markets

Raj Ray - National Bank Financial

Operator

Good morning, ladies and gentlemen and welcome to the Kirkland Lake Gold earnings call for the second quarter of fiscal 2015. At this time, all lines are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Instructions will be given time. Please note that this call is being recorded today. Monday, December 8, 2014 at 11:00 AM Eastern Time.

I would now like to turn the meeting over to one of your host for today's call, Suzette Ramcharan, Director of Investor Relations. Please go ahead.

Suzette Ramcharan

Thank you, operator and thank you to all participants for joining us this morning. Today's call will take approximately 15 minutes. We will then allow an additional five to 10 minutes for question-and-answers.

Before we begin, I will go through an abbreviated version of our forward-looking statements. Some of today's commentary may contain forward-looking information for Kirkland Lake Gold, Inc. We refer you to our detailed cautionary note regarding forward-looking statements in our press release issued today, a copy of which is available on the company website at www.klgold.com.

You are cautioned that actual results and future events could differ materially from the respective conclusions, forecasts or projections. I refer everyone to the section on forward-looking statements in the company's latest MD&A and other filings available on SEDAR, which set out the material factors that would cause these results to differ.

Please also note that a recording of this call will be available for replay, the details of which are posted on the corporate website.

On the call with us this morning, we have George Ogilvie, President and CEO.

George Ogilvie

Good morning. This is George Ogilvie.

Suzette Ramcharan

John Thomson, Chief Financial Officer.

John Thomson

Good morning. This is John Thomson

Suzette Ramcharan

We will also have Chris Stewart, our Vice President of Operations available during the Q&A session. We will begin the call with a brief overview of our second quarter and operational highlights from Mr. Ogilvie. Mr. Thomson will then discuss the financial results, after which we will deliver closing remarks and open up the call for questions.

I will now pass the call to George for highlights of our second quarter results and an overview of our operation.

George Ogilvie

Thank you, Suzette. Good morning and thank you for joining us today. Before I begin, please note that all dollar figures disclosed during the call are in Canadian Dollars unless otherwise noted. I am happy to be able to report a second quarter of positive earnings and positive cash flow from operations, which resulted in free cash flow for the company. I will let John Thomson go into more details on the financials. I would like now to discuss our operational highlights for the second quarter and first half of fiscal 2015.

We previously started production results for the second quarter of fiscal 2015, with gold sales of 38,335 ounces of gold or 76,878 ounces for the first half of fiscal 2015. This represents a 26% improvement year-over-year and is in line with the previous quarter. While our cash operating cost per ton remained fairly consistent with previous quarters, our cash operating cost per ounce achieved during the quarter of $889 per ounce was a reduction of 20% over the same period in fiscal 2014. Our cash operating cost per ounce after the first two quarters in fiscal 2015 as CAD836 or $764 per ounce.

A total of 36,393 ounces were recovered from 92,146,000 tons at a head grade of 0.41 ounces per short ton or 14.1 grams per ton in the second quarter compared to the same period in fiscal 2014, we realized 16% increase in production boosted by a 37% increase in head grade. The increase and a significant factor contributing to our continued success as the new mining horizon on the 5,400 level in the higher grade South Mining Complex. We now have two stopes in production on this level and plan to have a total of five in production at the end of fiscal 2015.

Our tons per day, which averaged 1,050 tons per day for the quarter is still approximately 10% below our target. However, we expect the tons to increase as more working places become available. We also expect to see productivity improvements from our two single boom electric hydraulic jumbos.

During the quarter, 70% of our tons and 74% of our ounces were generated from the South Mining Complex. The number of tones mined from the South Mining Complex is expected to average approximately 65% of total tons during fiscal 2015. Our operations continued to perform well and we are moving in the right direction with grade increasing and striving to reduce our costs further.

I will now pass the call over to John Thomson, our CFO to deliver our financial results. Thank you.

John Thomson

Thanks, George. Good morning, once again, everybody. The company reported quarterly revenues for the Q2 of CAD53.5 million and on a year-to-date basis, we report CAD107.5 million. The average price per ounce sold in Canadian dollar terms, year-to-date is CAD1,390 per ounce or in US, $1,278.

In terms of costs, we report our cost on an all-in cash cost basis using the ounces of gold produced. Please refer to our Appendix B of our MD&A which shows methodology we following in calculating this metric. During Q2, our all-in cash costs were CAD1,374 which is equivalent to $1,243. For the first half of fiscal 2015, our all-in cash costs were CAD1,308, or $1,196.

In terms of profitability, pretax income was CAD4.4 million in the quarter and year to date we have reported pretax income of nearly CAD10 million. Net and comprehensive income was CAD2.7 million or CAD0.04 per share in Q2 and CAD7.7 million CAD0.11 per share for the first half of fiscal 2015.

In terms of cash flow, cash flows from operations were CAD16.3 million during the quarter and are CAD33 million for the first half of fiscal 2015. We generated free cash flow for the quarter of CAD5.9 million and nearly CAD11 million in the first half of fiscal 2015.

Cash and cash equivalents reported at the end of Q2 were CAD41.4 million, a small increase over the prior quarter. This balance may reduce slightly in Q3 given the move fall in the price of gold and because of an interest payment on our convertible debentures which is due before the end of December. However, we have taken care to protect our margin risk and cash flow going into Q3 by pricing a portion of our Q3 production at above our average all-in cash cost guidance for the fiscal 2015. So despite the challenging environment, we continue to track well in line with our guidance numbers.

We announced one small change to our guidance this morning. We are reducing capital expenditures by CAD5 million for this fiscal year to CAD53 million. This change is a consequence of cost saving initiatives and will not impact our production guidance. I will now hand back over to George for closing remarks.

George Ogilvie

Thanks, John. We have now seen two quarters, back-to-back, with positive earnings and free cash flow. We are on track or favorable to meet all of the guidance parameters we gave the market for this fiscal year, which for Kirkland Lake, is a true turning point. Importantly, we have further productivity and efficiency gains yet to be realized that will benefit us as we move forward. We also continue to forge ahead with our other exploration programs and we will provide an update on the drilling programs and our mineral reserve and mineral resource estimates early in calendar year 2015.

We have developed an internal leadership program and improved the medical services for our employees in the town of Kirkland Lake. A number of initiatives have also been undertaken during the four months and we have also improved services with realizing cost savings, which is a win-win for both our employees as well as our shareholders. The team has worked hard and they have been connected and they have shown significant improvements at operations and need to be thanked, both at the operations management and at the board level. This is undoubtedly an invaluable turnaround story.

I will now pass back to the operator to commence the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Derek Macpherson with M Partners. Your line is open.

Derek Macpherson

Good morning, guys. Just I guess one quick question on the CapEx, the CAD5 million. That CapEx was deferred into 2016 and 2017? Or just mostly into 2016?

George Ogilvie

Derek, at the moment, we are only seeing that CAD5 million deferral being assigned to [indiscernible] 2015. This therefore takes us to the end of calendar April of next year.

Derek Macpherson

Okay. All right and then I guess the second question is more on the operations and on throughput. Where did you guys exit the quarter? And how are things going in fiscal Q3?

George Ogilvie

Well, we exited the quarter as we indicated still performing at 1,050 tons per day. As we move through November, which is the first month of our new fiscal quarter, we have sent he tonnage stay at those weights but the overall head grade in November has come up 2.46, which is more in tune or more in line with the head grades seen in the first fiscal quarter.

Derek Macpherson

All right.

George Ogilvie

And as we have indicated in the announcement, I believe that's due to second stope coming online on the 5400 level which ahs the nomenclature 5612.

Derek Macpherson

Okay. Thank you. That's all for me. Thank you very much.

George Ogilvie

Thanks, Derek.

Operator

[Operator Instructions] Your next question comes from the line of Guy Wilkes with Pareto Securities. Your line is open.

Guy Wilkes

Good morning, George.

George Ogilvie

Yes. Good morning, Guy.

Guy Wilkes

Just a question on whether or not you see any benefit currently or indeed going forward from lower oil price?

George Ogilvie

Yes. That's a good question, Guy. We are seeing benefits to our cost structure from a lower oil price. Obviously, we use a lot of fuel at the mine and several months ago we would have been paying a CAD1.14 a liter and as of several weeks ago, that rate was down to about CAD1 a liter. And fortunately, our annual contract is coming up for renewal in the New Year. So hopefully, we will be able to see some significant savings there.

Also fuel impacts propane which we use obviously in the winter for heating the premises and the underground working. And also explosives are impacted by lower fuel costs. So we should expect to see savings as we go forward with a lower fuel price.

Guy Wilkes

Excellent. Okay. Thanks. That was all.

George Ogilvie

Thank you, Guy.

Operator

Your next question comes from the line of Kent Neale with Dundee Capital Markets. Your line is open.

Kent Neale

Good morning, George. Just wondering if you could give us an additional color? I am sure the grades from the two zones, like Main Break through SMC. I know you have given some really clear overall grade guidance. But I guess, 0.36 is something we can expect to see going forward from the Main Break?

George Ogilvie

Yes. I would say that would be accurate. Those are the type of grades that we are seeing coming from the Main Break. Of course we know in the South Mining Complex, the reserve grades are significantly higher. And I believe there we have seen some of our more recent stopes well in excess of 0.5 ounce per ton being mined. So when you combine both together and consider that 70% of the tons are coming from the SMC and therefore 30% from the '04 and Main Break. It is sort of giving us a weighted average grade of somewhere around that 0.43, 0.44 that we had seen year to date on average.

Kent Neale

All right. Perfect. Thanks very much.

George Ogilvie

Thanks, Kent.

Operator

Your next question comes from the line of Raj Ray with National Bank Financial. Your line is open.

Raj Ray

Thank you. George, for the breakup between SMC and Main Break, I see for Q3, you have provided a guidance of 60% from the SMC. My first question. What's the reason for the drop in Q3? And do see any impact on the grades, overall grades? Or should the new stopes make up for the lower tonnage from SMC?

George Ogilvie

Yes. It's just to do with the sequencing of the stopes in the second half of the year, Raj, that we have a few more tones projected on scheduled to come out of the '04 and Main Break. But with the higher grade stopes coming online on the SMC, we would still expect to see the head grade, year-to-date being maintained or even slightly improved upon as more stopes coming online on the 5400 level where there is reserve grade of 0.57 ounce per ton. So the second stope came in online on that level in late-October, early-November. There is a third stope planned before the end of January. A fourth stope planned before the end of February and our last stope comes in online before the end of April, which is the last month of our fiscal year.

Raj Ray

Thank you. That's it for me.

George Ogilvie

Thank you.

Operator

There are no further questions at this time. Mr. Ogilvie, I will turn the callback over to you.

George Ogilvie

Well, thank you everyone. We will be back to report to you in the New Year with our third first quarter results, which we believe will continue to show the trend of being profitable, having positive earnings per share, generating free cash flow and we look forward to additional efficiency gains as well. So happy holidays and all the best for the New Year. Thank you

Operator

This concludes today's conference call. You may now disconnect.

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