Kirkland Lake Gold, Inc. (OTCPK:KGILF) Q1 2016 Earnings Conference Call May 13, 2016 10:00 AM ET
Suzette Ramcharan - Director of Investor Relations
George Ogilvie - President and Chief Executive Officer
Perry Ing - Chief Financial Officer
Doug Cater - Vice President of Explorations
Jennifer Wagner - Corporate Legal Council
Phil Ker – PI Financial
Michael Siperco - Macquarie Research
Raj Ray – National Bank Financial
Good morning, ladies and gentlemen and welcome to the Kirkland Lake Gold Earnings Call for the First Quarter of 2016. 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 at that time. Please note that this call is being recorded, Friday, May 13, 2016, at 10:00 AM Eastern Daylight Time.
I would now like to turn the meeting over to one of your hosts for today's call, Suzette Ramcharan, Director of Investor Relations. Please go ahead.
Thank you, operator, and thank you to everyone for joining us this morning. Today’s call will take approximately 15 minutes. We will then allow an additional five to ten minutes for Q&A.
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. We refer you to our detailed cautionary note regarding forward-looking statements in our press release issued last night, a copy of which is available on the Company website at klgold.com.
You are cautioned that actual results and future events could differ materially from the respective conclusions, forecasts or projections. I’d like to refer everyone to the section on forward-looking statements in the Company's latest MD&A and other filings that are available on SEDAR, which set out the material factors that would cause these results to differ.
During the call today, we will make reference to non-GAAP performance measures, such as average realized price per ounce of gold sold, cash operating cost per ton and cash operating cost per ounce sold, all-in sustaining cost per ounce sold and free cash flow. These are common performance measures in the mining industry, but do not have any standardized meaning.
A reconciliation of these non-GAAP measures are available within the earnings release issued last night as well as within Appendix B of the MD&A dated March 31, 2016. Please also note that a recording of this call will be available for replay and the details of which will be posted on the corporate website. Again, as a reminder, we changed our year end from an April 30th fiscal year end to a December 31st calendar year end effective January 1st 2016.
As such, for comparative purposes, we are comparing to the closest reporting period in the previous year. For example, our Q1 2016, which is a three months ended March 31, 2016 is being compared to fiscal Q4 2015, which would be the three months ended April 30, 2015
We are now reporting in metric and have provided the conversion calculations for short ton and troy ounces in the press release and MD&A. Please also note that all dollar figures disclosed are in Canadian dollars unless otherwise noted.
On the call with us this morning, we have George Ogilvie, President and CEO.
Good morning. This is George.
Perry Ing, Chief Financial Officer.
Good morning, this is Perry Ing.
Doug Cater, Vice President of Explorations.
Good morning. This is Doug Cater.
And, Jennifer Wagner, Corporate Legal Counsel.
Good morning everyone. This is Jen Wagner.
I will now pass the call over to George to summarize the highlights for the quarter.
Thank you, Suzette, and good morning, everyone. I am very pleased to be able to discuss what we believe has been a strong first quarter for us at Kirkland Lake Gold. We pre-released our production results on April 14, 2016, which showed us on track to meet our production guidance for the year including our Macassa Mine Complex and our East Timmins Operations.
We also released guidance metrics for the full year and I am happy to say that we have met and exceeded most of those in the first quarter. Please note that as of the acquisition of St. Andrew did not closed until January 26, the consolidated financial information only considers the East Timmins operations from January 26 to March 31.
Chris Stewart, our VP of Operations is unable to join us this morning. So, I will summarize the quarter highlights and go through the operational results. I think first and foremost, I’d like to highlight some of the key milestones from our financial results. We sold 69,309 ounces at an average realized price of Canadian 1584 or US 1154 for revenues of 109. 8 million Canadian.
Our operating cost per ounce of 846 or $616 US dollar per ounce was inline with the guidance. We generated 43.7 million in operating cash flow and realized free cash flow generation of 23.6 million. Net and comprehensive income was 12.5 million and 12.6 million or $0.12 per share.
We are very pleased to show that we remained profitable and continue to generate cash to further strengthen the balance sheet.
Taking a closer look at the operations, I’ll start with Macassa. The Macassa Mine Complex produced 41,054 ounces during the quarter at a head grade of 15.3 grams per ton. Production was split between the SMC and the 04 Main Break and showed that the SMC contributed 80% of the ore tons at an average grade of 16.1 grams per metric ton.
Development on the 5400 level and the 5600 level is progressing well and two new battery operated haulage trucks are providing additional muck handling to make this process easier.
At our East Timmins operations, we realized production of 21,221 ounces at an average grade of 5.1 grams per ton. The operations performed well during the quarter and the grade at Taylor remained on the high end at 7.6 grams per ton with recoveries of approximately 96%.
We are working to increase our production rate at each of the East Timmins operations throughout the course of the year, while our focus remains to ensure a successful integration of our people and systems between our business units. On a consolidated basis, our head grade was 9.1 grams per metric ton, extremely strong.
Our operating cost per tonne was positively impacted by the contribution of the East Timmins assets. We realized the cost per tonne of $262 per ton in Q1 and an operating cost per ounce of 846 or $616 US dollars.
We reiterate our guidance for 2016 of production between 270,000 to 290,000 ounces of gold.
I will now pass the call over to Perry Ing, our Chief Financial Officer to review our financial results.
Thanks, George. I’ll go through a brief summary of our key financial metrics for the first quarter and try to give a bit of color to the financial results post the St. Andrew acquisition.
George has provided the revenue figures earlier in the call and I’d just like to highlight that while we did not include production from the first 25 days of our operations from East Timmins, we did sell those ounces of approximately 7,000 after the acquisition date.
So the revenue and associated costs are excluded in our first quarter income statement. In addition, those ounces are fully costed based on purchase price accounting. In terms of costs, on revenue of the 110 million, our production expenses totaled 78 million.
The 78 million is broken out as 59 million in operating cost, 15 million in amortization and depletion and savings 4 million of royalties.
Just breaking down the figures on an asset basis, in terms of cash cost per ton milled, we are looking at approximately $350 an ounce at Macassa and cash cost per ounce sold of approximately $800 an ounce. Those costs include royalties.
From our East Timmins operations, cash cost per ton milled is approximately $137 and cash cost per ounce sold is approximately $975. In terms of asset breakdown, among East Timmins, the Holt mine on a cost per ton milled basis was $124, Holloway, $174,and Taylor $129, cost per ton.
In terms of cash cost per ounce sold including royalties, the Holt mine was 1044, Holloway was 1448 and Taylor was 647 for an average of 975.
Overall, our all in sustaining cost per ounce was Canadian 14 - $12.46 per ounce sold or $907 US for the first quarter. It should be noted that we excluded approximately $1.9 million in transaction cost relating to the St. Andrew acquisition from our all-in sustaining calculation in accordance with World Gold Council Standards.
Therefore, we believe, we are well positioned to meet our all-in sustaining cost guidance for the year of 1300 to 1350 per ounce. We do expect a modest increase in mineral property and PP&E components to our all-in sustaining cost per ounce in the upcoming quarters as we spent approximately $20 million of our $120 million budget for these items during the first quarter.
So proportionately, you will see a modest increases in those amounts in the remaining quarter of the year. This is mainly due to the timing of delivery of equipments. We are making significant progress on the integration of our East Timmins operations and currently expect synergies realized in 2016 to be in excess of one-time cost associated with the transaction.
Currently, we are on track for over $4 million in annualized savings compared to the G&A of Kirkland Lake and St. Andrew combined. While we have realized some obvious savings in terms of executive staffs, corporate office and public company cost, we are also starting to make excellent headway in terms of operational synergies from our increased size and purchasing power. Current examples include, insurance costs, employee benefits, refining cost and general mine supplies.
In terms of profitability, our pre-tax income for the quarter was approximately $20 million, compared to $8 million in the comparative quarter which was the fourth quarter of fiscal 2015. Our gross profit more than doubled from $14 million to $32 million due to the increased production and sales as well as higher realized prices.
In terms of G&A, expenses increased from $2.2 million to $4.2 million in the current quarter, but as I had mentioned earlier, this includes $1.9 million in transaction cost as well as approximately $600,000 in integration cost relating to the St. Andrew acquisition.
Acceleration cost increased from $1.8 million to $2.6 million and finance expense increased from $3.9 million to $5.5 million, primarily reflecting unrealized losses on our US dollar holdings of approximately $1.2 million.
It should be noted that at March 31, we held approximately $24 million US dollars which we intend to utilize for repurchasing our 1% Franco-Nevada royalty at our Macassa Mine in the fourth quarter of this year.
In terms of cash flow, cash flow from operations was $43 million for the first quarter compared to $21 million in the comparative quarter. To put that into perspective, our cash flow from operations for the entire eight months period ended December 31, was $49 million.
In terms of free cash flow, after capital expenditures, we generated $24 million compared to $8 million in the comparative quarter. On note, in terms of our NCIB on our convertible debentures, we are able to buyback approximately $0.5 million during the first quarter, during the brief period, they traded at the lower par. It’s interesting to note that both our 6% and 7.5% debentures now trade well above par in the 105 to 110 range.
With our cash balance at the end of the quarter of over $130 million, we still have approximately 15 and 21 months before the convertible debentures mature that we believe this puts us in great shape to manage the repayment of these debentures than 2017 as they do not happen to convert to equity at that point in time.
Now I will hand the call back to George for closing remarks.
Thanks, Perry. Our first quarter has started off on the right track. We’ve seen positive earnings and free cash flow generation to continue to deleverage the balance sheet. Our operations are performing well and we hope with a little extra effort, we will continue to show positive gains throughout the year.
Our goals for this year remain one, continued execution at the operation, two, complete a successful integration, three, continue to deleverage the company’s balance sheet and four, continue with the exploration success.
This story has certainly resonated well and we are confident that through the course of this integration process, we will be able to unlock further value for our shareholders from our new and our existing assets.
Our team at the operations have gone through tremendous amount of change over the past few years, but they have stuck to the plan and executed well and extracted significant value from our assets with more to be unlocked.
We have an excellent group of people and I am very proud of all the accomplishments of our company and the people within the company.
I will now turn the call back to Suzette.
Thanks, George. We will now be opening up the call for the Q&A session and I kindly ask the operator to please review the procedures for posing questions.
Thank you. [Operator Instructions] Your first question comes from the line of Phil Ker, with PI Financial. Your line is open.
Thanks operator. Good morning everyone. George, congrats on all the success ongoing up in Kirkland Lake and East Timmins.
Just a couple questions here. First, maybe for Perry, could you clarify the tax expense on the income statement for the quarter?
Sure, we recorded a tax expense of approximately 7.4 million in the year. If you look at the financial statement, in terms of rate rack, I think you will see the effective tax rate was a little bit higher, primarily because of the deferred tax adjustments on O&P.
I couldn’t point to, I guess, one specific thing. It’s really a accumulation of a few items that I would generally characterize as non-recurring, but it generally impacts the effective tax rate by about 10% and as I said, I don’t expect that some to be recurring.
Okay. So, going forward, what can we expect for taxes?
I would think you would see it come down to the normal effect of Ontario rate closer to 27%.
Okay. And then, just to clarify, you mentioned you brought up some of the cost per ton numbers here, when you started – were those in metric or imperial?
Those are in metric.
Okay. So then, in the MD&A and the breakdown for each of the operations the tons milled for Macassa is in metric Holt and Holloway is in imperial is that correct, is typo or?
We’ve reported everything in metric. So, if there is any reference in imperial, then we can correct that. But as far as I am aware, we’ve reported everything in metric.
Yes, just, the Page 2 of the MD&A, tons milled and ore milled were all the East Timmins operations that are – in imperial.
Yes, that would just be a typo, Phil. I apologize for that.
Okay, no problems. Just wanted to clarify that. Okay, that’s it for me. I’ll pass it on to the next question. Thanks guys.
Our next question comes from the line of Michael Siperco with Macquarie. Your line is open.
Hi, thanks guys. Just a question on hedging. I noticed that there wasn’t any commodity hedging in the quarter and a modest bit of currency hedging. What are your thoughts going forward on those fronts?
Hi, Mike. In terms of hedging, I mean, we have a small number of ounces hedged sold for the short-term in terms of delivery. I think, everything was for second quarter delivery. I think we’ve been opportunistic in terms of selling into strength on rallies in gold price especially in Canadian dollar terms.
But I don’t think you’ll see us ever hedging a large amount of gold. In terms of foreign currency, we are building up our US dollar balance with the view of buying back the Franco royalty, which we anticipate to be about $30 million at the time that we can exercise that on October 31st of this year. So, really that’s just effectively hedging us in terms of US Canadian dollar movements between now and then.
Okay, great. Thanks very much guys.
[Operator Instructions] Your next question comes from the line of Raj Ray from National Bank Financial. Your line is open.
Thank you, operator. Good morning, George and team and congrats on a great quarter.
Thank you, Raj.
Couple of questions here. First one is for Perry. Perry, what do you expect the going-forward G&A to be? I know in this quarter, it’s been higher because of the transaction cost, but what should we assume as a go-forward rate?
Yes, I would think, kind of in the $2 million to $3 million range per quarter is where I would expect and I would expect kind of on the lower end of that range, probably not getting up to past $2.5 million would be my view. But certainly, we are still working through some of the potential synergies from the transaction and we’ll have a better view on that as we get into the second half of the year.
Thanks, Perry. The second question is for George. I know, you guys have talked about the possibility of processing Taylor or at Macassa and my question was, are you undertaking a study towards that and how is that going in the second – if you do the site to process Taylor or at Macassa, then would you be also looking at $12 million – starting $12 million at Holt to back again?
Yes, Raj, we’ve sent a small sample of the Taylor ore to metallurgical labs where we are currently doing testing to see if the Macassa Mill where we grind and finite would actually lead to higher recoveries of the Taylor ore. At that point in time, we don’t have the results back, but we would expect those before the end of the second quarter and there is a small change and obviously some of the permits and we’ve started that application process on the basis that we can actually process the Taylor ore it makes economical sense.
Part of the reason why we would like to do that is as you know, we have a 2200 short ton a day or two, so it was a metric ton a day milled which is only being 30% utilized and if I could send 500 tons of additional Taylor ore there, certainly it would be running at 1500 tons a day which would lower the milling cost there from $30 a ton, probably down to $4 or $5 a ton.
We are also paying a contractor $5 a ton out of the whole Holt mill to actually crush the run the mine ore from Taylor. So we could save money there. Of course that would be a little bit more on the trucking cost, because round trip is probably about an extra 25 kilometers, but the savings in the increased recoveries, because the Macassa Mill runs at in and around 97% mill recovery, I think would more than offset the additional trucking cost.
So that helps us better utilize the Macassa Mill which makes a hell of a lot of sense, and we believe in the tenants area, there is a hell of a lot more opportunity up there for actually toll milling and over a more medium-term, actually increasing production from Holt and Holloway based on exploration drilling and capital development that we are doing this year. So I think that would put the company in a really strong position at some juncture in 2017.
Okay, that’s great, George. Thank you very much. That’s it for me.
[Operator Instructions] And I am showing that we have no further questions at this time. I’ll turn the call back over to the presenters for closing remarks.
Thanks, operator. Thanks again to everyone for joining us this morning and we’d like to sign-off. Take care.
This concludes today's conference call. You may now disconnect.
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