Teranga Gold's (TGCDF) CEO Richard Young on Q4 2015 Results - Earnings Call Transcript

| About: Teranga Gold (TGCDF)

Teranga Gold Corporation (OTC:TGCDF) Q4 2015 Earnings Conference Call January 29, 2016 8:30 AM ET

Executives

Trish Moran – Head-Investor Relations

Richard Young – President and Chief Executive Officer

Navin Dyal – Vice President and Chief Financial Officer

Paul Chawrun – Vice President-Operations and Technical Services

Analysts

Ernie Molesh – PMG

Mike Neary – Neary Asset Management

Mohamed Abo Daff – Macquarie Canada

Operator

Good morning and welcome to the Teranga Gold’s Conference Call for the Fourth Quarter and Full Year of 2015. As a reminder this conference call is being recorded today, Friday, January 29, 2016.

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

Trish Moran

Thank you operator and good morning everyone. With me on today’s call is Richard Young, Teranga’s President and Chief Executive Officer. Following our presentation this morning we will open the lines up for question.

I would like to remind everyone to please view Page 2 of the operating highlights slide presentation to view our caution regarding forward-looking statements and the risk factors pertaining to the statement. And now over to Richard.

Richard Young

Thank you Trish. And welcome everyone. Thank you for joining us today to discuss our fourth quarter and full year operating results. 2015 was mixed year. We were successful in controlling those factors that were within our purview and as a result, we improved our liquidity, we handily met our feet, our cost guidance, we replaced reserves and we significantly improved our life of mine cash flows. We advanced our organic growth initiatives and we did it safely. We have now achieved a record 2.5 years loss time incident. This is a remarkable feet for the first gold mine in Senegal.

I’ll talk more about these achievements in a moment, but let’s start off with production, the one area which I’m very disappointed. At the halfway point of this year, production was going according to plan. Mining had commenced Gora and with plans for strong fourth quarter, driven by high grade Gora material, we were on track to achieve the top end of our production guidance.

Fast forward to October and two factors dramatically changed the landscape. Firstly, lower throughput during the rainy season due to the plasticity of the Masato ore when wet. And secondly, changes to the Gora mine plan in part had account for artisanal activities.

In total, 20,000 ounces were deferred into 2016 at that time. As a result we guided to the bottom end of our production range with a caveat that additional artisanal activities post a potential risk to achieving this guidance. And that caveat come to reality as our artisanal mine was removed just over 20,000 ounces of gold, down 45 meters from surface, which was more than 50% over and above the 12,000 ounces that we had already estimated. Accordingly, our fourth quarter production was negatively impacted by 13,500 ounces of which 5,500 ounces were deferred.

We’ll now blow the artisanal workings and reconciling well to the reserve model. As well in December, we experienced a localized rock fall at Masato that kept us out of the pit for most of the month. This caused a deferral of another 4,500 ounces. The vast majority of the production shortfall will be carried over into 2016. Only a small portion, about 5% of these ounces have been loss.

Despite the lower production and gold prices in 2015, I am pleased with what we’ve been able to with our balance sheet. In the first quarter, we paid down the last of our debt, during the second quarter we secured a revolving line of credit with SocGen, increasing our liquidity by $30 million. And then at the beginning of the fourth quarter we completed a $17 million, strategic private placement with a corner stone investor.

David Mimran and his family, are the largest, private employer in Senegal and they’ve been operating successfully for 60 years. David brings on parallel knowledge and relationships to the company, which will serve to benefit us overtime. Accordingly, we ended the year with $44 million in cash, or nearly $58 million on a pro forma basis, if you include the VAT receivable.

Our balance sheet strength also lies in the 400,000 ounces of gold in stockpiles, which represents a valuable asset as they provide operating flexibility and our very low-cost ounces given that the mining costs have already been incurred and paid. Our balance sheet is strong as enter 2016. In spite of the lower production, our unit costs were record, the lowest in our history.

In addition to the currency and fuel tailwinds we had in 2015, the team delivered real cost savings from our business improvement program. We ended up with more than $20 million in savings and this is more than $100 per ounce. As a result, the mining costs improved by 14%, milling cost declined by 18% and we reduced total cash costs by 10%.

I’d like to highlight that despite the gold price decline, had 2015 production, come in a little closer to the bottom end of our guidance range, we would have generated free cash flow. And that’s due to significant improvements in our costs.

Our 2016 guidance reflects the fact that we expect to deliver even better unit costs this year. One of the key objectives is to convert resources to reserves and I’m pleased to say, that not only we replaced reserves, we have significantly improved the life of mine cash flows.

We added high-grade mill feed through the conversion of high-grade underground resources to reserves. And we removed lower margin ounces to maximize long-term sustainable cash flows. As economic conditions change, we have the flexibility to add these ounces back into the plan. While we’ve included the mine physicals with last night – last evening’s release, detailed annual capital and operating cost summaries will be included with our year-end financial results in February. Timing, rather than the cost of certain capital projects remains outstanding. However, operating costs have been finalized.

Accordingly, our cash all-in sustaining cost over the 13.5 year mine life are expected in the $900 per ounce range. This is more than $200 per ounce lower then the previous life of mine plan.

As part of our growth strategy, we’re pursuing ways to increase throughput and production. And they all start with our large scale mill. By leveraging our existing infrastructure, we are investing in high return initiatives, such as the mill optimization, to maximize process capacity. The optimization which commenced mid-year is expected to increase throughput by more than 10% and lower costs. This important project is running on time and on budget with completion expected in the fourth quarter.

This project not only reduces operating risks, but allows us to bring some of the low grade stockpiles forward, in our mine plan and improve cash flows. The second initiative that we continue to advance is heap leaching and we recently completed an optimized pre-feasibility engineering study. The pre-feas concluded the technical viability of processing our low grade ore. A decision to proceed will be made once we convert sufficient material from resources to reserves.

During 2015, we also continue to explore mine license and our regional land package. A significant amount of work was completed during the fourth quarter with encouraging results, and we are strengthening the team as we move forward into the new year.

Moving out of Slide 10, production guidance is set 200,000 ounces to 215,000 ounces for the year. In addition of sourcing ore from the Masato, Gora and existing stockpiles 2016 production will also come from our newest deposit Golouma, which is scheduled to commence production in the first quarter.

But we do not expect any of the issues we encountered in 2015 to repeat themselves. I want assure you that we have taken steps to mitigate 2016 production shortfall. For example, we have included in the plan, a build-up of high grade stockpiles of approximately 40,000 ounces at three grams.

While we can generate free cash flow, at the midpoint of our guidance, if we need more cash, we have the flexibility to bringing forward this high-grade stockpile ore if we need to.

And moving on to costs. Our unit costs are expected to continue to improve. And we are looking at all-in sustaining costs of between $900 and $975 per ounce in line with 2015 was about $60 per ounce related to the completion of the mill optimization.

Moving on to Slide 11, in conclusion for all the things that we accomplished in 2015, and there were many. At least for the time being they are overshadowed by missing our top line production. However, I hope that as you digest our results, you’ll see what we see. A good year ahead with the conservative and flexible mine plan.

A plan that can generate free cash flow and further strengthen our balance sheet not only this year but over our life of mine. And a strong emphasis on the drill bit as we strengthen the exploration team. That wraps up my remarks. However, before we open up to questions I’d like to introduce Navin Dyal, our Chief Financial Officer as well as Paul Chawrun, our VP of Tech Services for the past three and a half years, who has since this fall been assumed responsibility for our Sabodala operation as the Company’s officer. Navin and Paul are happy to take any questions along with myself that you might have.

So I’ll turn over to you operator and open up to questions. Thank you.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we’ll now conduct a question-and-answer session. [Operator Instruction] Your first question comes from the line of Ernie Molesh from PMG. Please go ahead.

Ernie Molesh

Yes, concerning the losses that you have Artisanal miners. Do you have any insurance against those losses and what kind of security do you have a deal with it?

Richard Young

Ernie, thank you. So in terms of insurance to cover Artisanal losses, we don’t have any. We certainly have insurance to cover a range of potential operating issues that would occur through Mars, which is the largest insurer in the industry in the mining industry. But nothing in specific was related to what Artisanal’s talk. What I would say is that that is now behind us. We are now below the areas that were affected by Artisanals and in Phase 2, 3 of Gora there is limited Artisanal impact. And that is the only deposit that does have any Artisanal impact.

In terms of security, At Sabadola, we do have significant security presence not only around the mine site which is fenced off, but the joint arms are low fitted at our dates, there is an active team that was 35 that has been expanded recently. And there is significant joint arm presence in the region. And so we certainly feel that we’ve got a secure location.

Ernie Molesh

Okay. And my second question is concerning the impact of low oil cost are you getting any benefit of that or are you still paying above market prices for your oil?

Richard Young

Ernie, that’s a good question. I’ll turn it over to Navin Dyal, our CFO to give you that answer.

Navin Dyal

Sure. Ernie, yes we – while we did see some benefit of lower fuel prices last year. The government does that pricing in country. But going forward and what we’ve just received in December and then in January was, we are now exempt from a fuel levy that have been previously applied to the gazetted price. And what the fuel levy had done in the past was, basically artificially inflates and keep the price that we would pay in country at an artificially high level. The levy was used as means of the as basically a levy to support the local power infrastructure in country. And we’re not benefiting from that.

So we successfully have been able to remove that levy going forward. So starting at 2016, we’ll see lower fuel prices more closely matched to the market oil price as well as January the government lowered their fuel price by 12% that gazetted price. And again that's going to just further help us in terms of reducing our overall energy costs for the year.

Ernie Molesh

And then in terms of your mine plan for 2016, what’s your average head grade into the mill that you project for 2016?

Paul Chawrun

Just slightly – its Paul Chawrun here. Just slightly under 2 grams and the reason is we’re mining about 3 grams. But we’re actually planning some stockpile. So I think the exact number is 1.93.

Operator

Your next question comes from the line of Mike Neary from Neary Asset Management. Please go ahead.

Mike Neary

Hi, I just have a couple of questions. So after 2016, the CapEx dropped by $20 million because the mill optimization has done, if we don't move forward with the heap leach.

Richard Young

Yes, capital does fall off. Paul, do you just want to walk through.

Paul Chawrun

Yes, the only real capital items that we have in a long range plan after the mill optimization is just a little bit on sustaining for equipment replacements just general sustaining for the mill. And then the major capital that beyond that would be for the underground and then what we do Niakafiri for the relocation of the village. There aren't any significant capital costs and all the pits have been developed, Gora has been developed. So it's very minimal capital cost moving forward.

Mike Neary

Okay. And my…

Richard Young

And then…

Paul Chawrun

Go ahead, go ahead, Mike.

Mike Neary

And your life of mine production numbers doesn’t include the 10% bump you're looking forward from the mill optimization.

Paul Chawrun

Yes, it does.

Mike Neary

Okay. And then on the heap leach, can you share a little bit of the economics on that. And whether it makes sense to deal with these prices or whether you're just getting it teed up for, if there's better prices?

Richard Young

That's exactly right. We are teeing this up, so that when we do the drilling and we have an – if potentially we have an excess amount of oxide ore and the economic conditions change such that our power costs are higher. Then heap leach makes sense. At the moment, we have all the engineering done, fully optimized, we have a solid understanding of the capital costs. And then we have an understanding of what the process would be. So right now, at this moment, we’re having very low capital operating costs due to the energy. But as that changes then we’ll be taking a look at where the optimization as it fits in.

The other consideration is, if we build up a large amount of low grade oxide, we can then process it and see the advantage of that early on in the long range plan. But these variables fluctuate as we go through with the changing economic conditions.

Mike Neary

Okay. And then you've talked a bit about looking for other opportunities and it is an interesting time in the industry there are things popping up. I'm little curious how we can buy anyone given that we have accretively at least given that we probably have the cheapest [indiscernible] producer at least I know of. So I'm just wondering kind of what you're thinking about when you talk about other opportunities.

Richard Young

Yes, Mike. In terms of – there's no question that we're certainly non-acquire. But some what we may be able to do is, look at some earnings where we can put some dollars forward and earning on projects, that don’t require us to issue any equity. And there are opportunities like that that may make sense for us. But in part that is one of the reasons that we are looking to strengthen our exploration group.

On its own, we've got an awful lot of targets we've got a large land position with a lot of targets that we're working our way through but to accelerate that program as well as look at what might be some other opportunities both in country and the region, we will be strengthening that group and with the new optimized mine plan we are generating the free cash flow that can allow us to start to look at some of those programs. So that's what we'll be focused on those type of opportunities, not anything that – issue equity.

Mike Neary

Great, thanks. I appreciate that.

Operator

Your next question comes from the line of Mohamed Abo Daff from Macquarie Canada. Please go ahead.

Mohamed Abo Daff

Guys, couple of very quick questions. On the mill optimization, can you just remind me again that how much is left to be spent by Q4 2016? And the other question is on the cost for the new mine plan. You mentioned that you guys finalized the operating costs there. But the numbers will come out in February but can you kind of give us an idea of how are they looking relative to the Oakland like how is it kind of completely different?

Navin Dyal

Yes, so Muhammad sorry it’s Navin. I’ll just answer the first question and perhaps turn it back to Richard and Paul to answer the left of my question. So on the mill optimization, we have between $11 million and $12 million to be spent this year, we’ve spent just over $7 million and we expect that to come in on-budget this year.

Mohamed Abo Daff

Perfect, thanks.

Navin Dyal

And then in terms of the unit cost moving forward there won’t be – they will be similar to what we’ve got in our guidance for 2016. Essentially 2016 doesn’t necessarily reflect the cost savings tied to the mill optimization, but, so we may see some improvements on milling costs. But mining costs will move around next year’s number depending on pit sequence where you are. But we believe that in this current economic environment we run fuel at about $42 a barrel and currency at one tenth to the euro, we’ve got between 40% and 50% of our costs euro denominated that unit cost should be similar to what we’ve got in our forecast for 2016.

Mohamed Abo Daff

Great. One last question if don’t mind and kind of this is more of a big picture. But when we go up to 2016 guidance what would be the number one thing that you would worry about? What could really happen that gets to you – that may impact 2016 guidance?

Navin Dyal

Well, I think some of the issues – the artisanal issue was a significant issue moving into Gora. That is a satellite deposit that’s 25 kilometers from mill that’s further than anything we’ve ever done before. The mining map that was 2.5 meter benches and just for the benefit of those on the call, Sabodala with 10 meter benches, Masato was five. And then so moving out of 2.5 meters we’re now below the artisanal cell. We do believe now that we’ve been operating at Gora for the last four or five months, we certainly are a comfortable with mining in a satellite deposit, we’re comfortable with ore body. And we believe that we have the risk, the mining rates in ore and that these are achievable numbers.

We are opening up Golouma, which is a new deposit, it’s a high grade deposit, but we’ve got a lot of drilling in that. We’ve already accessed that and we’re comfortable with what we’re seeing today. The balance is just completing Masato and stockpiles. So the mill is operating well. So we certainly believe that we don’t have the issues we had a year ago. And that we’ve got the right team on site. So from an operating perspective we do feel comfortable with the guidance that we’ve given. I think that if you talk to any mining company, their number one focus will be on dilution control and ensuring that they recover the gold that is in their block models. And despite the production shortfall last year, we did very well against that at Masato, Sabodala and we’re seeing that we’re recovering – we’re reconciling well below the artisanals at Gora.

So those are some of the key items that we’re focused on, that’s for all of us in the industry. Commodity price is always an issue, but with this plan that we’ve put forward if gold prices do move down materially lower, we do have the ability to produce more from this stockpile that we’re putting aside at three grams. And so as Paul mentioned, the average grade of material process is less than two, the stockpile is three gram material, so that does give us some cushion, that protects our balance sheet, if gold prices were to move materially lower. Or alternatively if we’ve got some growth initiatives that we want to fund, we’ve got to believe that, through the use of the stockpile.

Mohamed Abo Daff

All right. Thank you, very much guys

Navin Dyal

Thanks Muhammad.

Operator

There are no further questions. This concludes our conference call for today. Please disconnect your lines and have a good day.

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