OceanaGold's (OCANF) Q2 2016 Results - Earnings Call Transcript

| About: Oceanagold Corp. (OCANF)

OceanaGold Corp. (OTCPK:OCANF) Q2 2016 Earnings Conference Call August 4, 2016 5:30 PM ET

Executives

Sam Pazuki - IR

Michael Holmes - COO

Mark Chamberlain - CFO

Analysts

Michael Slifirski - Credit Suisse

Chris Thompson - Raymond James

Michael Gray - Macquarie

Jeff Killeen - CIBC

Operator

Good morning and good afternoon, ladies and gentlemen, and welcome to OceanaGold Q2 2016 Results Webcast and Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 4, 2016, Eastern Standard Time.

I would now like to turn the conference over to Mr. Sam Pazuki. Please go ahead.

Sam Pazuki

Hello, everyone, and thank you for joining us today. Welcome to the rescheduled webcast for our second quarter 2016 financial and operating results. My name is Sam Pazuki, Director of Investor Relations at OceanaGold.

On the call with me today are Michael Holmes, Chief Operating Officer, Mark Chamberlain, Chief Financial Officer, Darren Klinck, Executive Vice President, Corporate Development, Edward Sidboon, Corporate Controller, and Jeff Sansom, Investor Relations Analyst. Due to our rescheduling conflict, Mick Wilkes, President and Chief Executive Officer, is unable to join us today.

For those wishing to ask questions, we will be taking them through the telephone only and following the conclusion of the formal presentation. Before we proceed, note that all references in the presentation which you're about to hear adhere to International Financial Reporting Standards and all financial figures are denominated in US dollars unless otherwise stated.

Also note that the presentation contains forward-looking statements which, by their very nature, are subject to some degree of uncertainty. I will now turn it over to Michael Holmes to begin the main portion of the presentation.

Michael Holmes

Thank you, Sam. Good morning and good afternoon. As Sam mentioned, I'm Michael Holmes and I'm the EVP and Chief Operating Officer at OceanaGold. Before I start, I would like to acknowledge Tipiwai Stainton, the operator that was involved in the tragic incident at Waihi. Tipiwai was the son to Dean and Diana Stainton and the loving partner to Ana-Lee Hemopo and father to son, Shiden. Tipiwai was a longstanding employee of Waihi Mine and commenced with the operations in 2007. He was an integral part of the crew on the underground team where he worked and was seen as a leader, being a member of the Waihi Mines rescue team in which he was appointed to the role of the Health & Safety Committee. Our thoughts and prayers are with Tip's family, his friends, our employees, and the whole Waihi community.

Okay, I'd like to go now through the Quarter 2 and H1 results. Starting from slide 3 of the slide pack, OceanaGold continues to deliver on its commitments. Haile Development is on schedule and budget to have the first ore delivered into the mill by the end of the year. Didipio Underground development is advancing well and is on track to produce from the first start by the end of 2017. The operations are on track to achieve production and cost guidance. We will continue to focus on our health and safety across our business and safety of our people is our top priority.

Our consolidated all-in sustaining costs improved to US$722 per ounce sold and is within guidance. Our operating cash flows increased 44% to $123 million and we increased our liquidity with the same banks and at the same terms.

As mentioned, our safety is and still remains a major focus. From the consolidated performance on slide 5, our production half on half, we had a 27% increase to 225.3 thousand ounces. Over the three years our costs have decreased 17% and remain on time and within guidance.

In the financials, our EBITDA is improved from $100.9 million to $155 million and our profits from $23.5 million to $63.2 million driven by the higher gold production and the higher gold prices.

On slide 6 we have a picture of the Haile Development. To the left-hand side is the picture of the overall process plant in construction and to the right-hand side is the MSE retaining wall which will have the crusher foundation and the ROM pad off to the left of that picture.

For Haile development, current capital spend is $246 million and we have spent and committed $330 million out of the $390 million. The engineering, procurement and PAG Cell phase one have been completed. The structural, mechanical and piping is in progress and is 40% complete with a completion date in the final quarter.

The electrical, instrumentation and controls and mining infrastructure have commenced and the

tailings storage facility is currently 60% complete, slated for completion in quarter 4. So we are on track for the first ore through the mill by the end of 2016 and commercial production early 2017.

The slide 8 shows you a picture of another view of the Haile construction. On the left hand side you can see under the blue wrappers the [ball] [ph] mills that have been put in place and we poured the mill deck and we're working through the grinding, the final grinding, the CIL tanks, 7 have been completed out of the 8. And we're looking at 95% of the concrete has been poured and as mentioned, 40% of the structural steel installed.

The next picture on slide 9 shows the crusher, the MSE wall and the ROM pad. The retaining wall has been completed and the crusher has been installed. To the right of that picture you can see the transfer tail foundation in the recline area. Construction is on track.

Slide 10 shows the real time [indiscernible] pit. We are currently working that and that has gone to a 24-hour mining operation. We have now a backhoe excavator has been employed. We have stockpiled 0.19 million tons of oxide ore and we are on track to have 0.15 million tons of ore ready for processing by the end of the year.

Slide 11 shows PAG cell phase 1 has been completed and is currently receiving PAG material. And in the foreground there is the Pond 465 which is operational.

Slide 12 shows the TSF, well advanced, nearing 60% complete and the construction of the TSF as mentioned is progressing well, in line with our schedules.

For the operational performance for quarter two 2016, starting with Didipio on slide 14, we had gold production of 44,000 ounces on track, slightly below due to the finalization of stage 5 and a slightly lower head grade. Gold sales roughly 44,800 ounces and that's due to higher concentrate sales. Copper production was slightly higher as well as copper throughput, and copper sales, due to the higher concentrate sales.

So we're currently working, as mentioned, finishing stage 5 and commencing the final stage of the open pit which is stage 6. Our year to date all-in sustaining cost is $264 per ounce which is on track with guidance. From the operating statistics, for the mine performance we had less ore mined in quarter two as we're finalizing stage 5 and similar waste movement as we're bringing down the stage 6 profile. Throughput through the mill was at 971,000 tons with continued good recoveries on good grade profiles.

Slide 16 shows a picture of Didipio Underground and that's tracking very well with the expected completion by the end of 2017. We're currently about 2 kilometers down the decline with the total development needs around 2.6 kilometers. We have completed the first vent rises and we are moving to the other vent rises to be completed this year. We now have two jumbos operating underground and as mentioned, we are on track for the first underground spoke to be commenced by the end of 2017.

Slide 17 shows the Philippines Exploration and the plans that we have with the surface works and planned drilling underground. We are aware that the DENR is completing audits of all operations in the Philippines. We welcome these audits and we will fully comply with the regulators. As we comply with and operate to international, Canadian, Australian and New Zealand standards which we are very proud of.

We are also aware there was a petition to the DENR Secretary by the affected landowners. We always welcome discussions with the landowners and happy to answer any questions the regulators may have.

Moving onto slide 18, the Waihi quarter two results. Gold produced was 26,540 ounces for quarter two. Sales being similar. This is due to more work done in waste mining than in ore mining, developing accesses to Correnso Deeps, Daybreak and Empire. Our all-in sustained costs year to date were $734 per ounce which is line with our forecast. And through the quarter, we transitioned to owner-operator on the 1st of July for the underground employees.

Slide 19, from the operation statistics, as mentioned, you can see the upper portion of ore mining versus waste mining as we develop the Deeps and Empire accesses. This performance was a function of the mill fed from the mine and the grade profiles and recoveries remain similar and these are dependent upon the position of the spokes and the ore development.

On slide 20, from the exploration program, we're focusing on three areas. The Waihi underground drilling, that's the vein drilling and resource expansion in the areas of Correnso Deeps, Empire, Daybreak and Royal. On the surface we have four drill rigs operating, testing the resource potential beneath the open pit, making and understanding the structure of the major lodes, the linking veins and the stock work zones.

And then the third arm of the process is the regional which is through the panning stages looking for new deposits and the major party there is on the WKP which we expect to commence drilling in quarter four. Our total budget for 2016 for drilling in the Waihi region is $10 million.

On slide 21, from Macraes & Reefton, the gold production has decreased quarter on quarter due to putting Reefton on care and maintenance and some lower grades at Macraes. So it produced 32,000 ounces. The 44,000 ounces sold was basically due to drilling down of the Reefton concentrate that was produced at the beginning of the year, in quarter one. All-in sustaining costs are $1,140 per ounce and we also have continued positive drilling results at Coronation North which we demonstrated in the preceding slides.

The key operational statistics on slide 22, the volume of waste has increased and that's due to the next phase on the Coronation piece and the mining of waste mills and the with the waste stripping due to the mine sequencing. The reduction in the head grade down to 0.4 in the mills but the recovery is showing they remain strong at 81%. So with the decline, the graders were able to maintain good recovery.

Looking at slide 23, for Macraes Exploration, there's a lot of activity there and the recent results for Coronation North and Frasers Underground, so the extension and target opportunities that we have in those areas and the other areas highlighted for further potential. We have a budget of $3 million there to continue the exploration in and around the Macraes area.

I'd now like to hand over to Mark Chamberlain who will go through the financials.

Mark Chamberlain

Thank you, Michael. So looking at page 25, we'll talk about the balance sheet position at the moment. Our total liquidity at the end of the second quarter was $221 million comprising $104 million in cash and the undrawn facility of $117 million. That compared to liquidity at the end of the first quarter of $195 million.

We saw a decrease in our cash holdings from $195 million to $104 million and that's due to the major outlays which was Haile CapEx at some $71 million, Didipio almost $12 million, a dividend payment of $24 million, and our investment in new legacy in April which was around $5 million US.

And also in the period we had expended some $6.4 million in exploration. So we've got liquidity of $221 million which is more than sufficient to complete Haile by the end of the year and maintain our target of at least $100 million in liquidity at that point.

Moving to the other side of the page which sets out our total debt which now stands at $228 million, the increase from the previous quarter is primarily due to the sale and leaseback of our equipment at Haile which raised $35 million for us.

We also took the opportunity during the quarter to increase our credit facility to an overall commitment of $300 million. That's up $50 million. It's on the same competitive terms and conditions as previous and involves the same banks stepping up equally.

Moving to page 26, we have the financial summary. Our revenues were some $8 million, increased from the previous quarter, and that's due to the around about $50 average higher gold price received. And EBITDA between the two quarters, the first and second, was almost identical at $77 million each quarter.

But our net profit for the second quarter was almost $40 million compared to $23.5 for the first quarter and that is primarily due to a decrease in the unrealized losses relating to the fair values of hedges and also to our lower depreciation and amortization charge.

The gold sales, $144.6 million in the second quarter, slightly up on the first quarter, and again, relates to the higher realized gold sale price. Copper sales were up $28 million compared to $23 million. That was due to increased sales. All-wise issues are summarized on the table on page 27. Gold production in the second quarter was 102,000 odd ounces compared to 122,000 ounces. That was around 10,000 less at Waihi and 7,000 less at Macraes-Reefton as previously forecast.

Copper production was up some 300 odd tons. The gold price between the two quarters there, again, just $50 higher. But the copper price received was some $0.12 per pound lower.

This feeds through to the income statement. As we mentioned, revenue was slightly up. Our operating costs you'll see there, there's an increase of around about $8 million. A lot of that was due to a stronger New Zealand dollar.

We were looking at $0.665 in the first quarter compared to almost $0.70 to the US dollar in the second quarter. Some less, some lower pre-strip capital and some higher electricity costs which are a seasonal effect in New Zealand.

Depreciation was down some $5 million between the two quarters and that's due to the lower production at Waihi and less pre-strip amortization, and the net interest & finance cost was up some $300,000 which simply reflects the costs of increasing our facility by $50 million. All in all earnings before tax, $46 million compared to some $42 million.

Again, the figures show for the net profit $39 million, $39.7 million compared to $23.5 million and the big impact there as shown is the gain, or I should say the loss, on the fair value on designated hedges. $1.8 million only in the second quarter, compared to $18 million in the first quarter. So a very healthy situation leaving us with net profit at the end of the first half of some $63.2 million.

Moving to slide 28 shows the cash flow performance. The operating cash flow was much higher at $91.5 million for the second quarter. The investment cash flow was up, driven again by Didipio and Haile, to $122.5 million. We've given you a breakdown of capital expenditure there, increased as you can see. $93.9 million the first quarter compared to $117.2 million in the second quarter.

And then we have capital expenditure by operation. Haile primarily is all to do with the building. $71.5 million of that $73 million was non-sustaining. At Macraes we had non-sustaining of around about $15.5 million and pre-strip of $6 million to give us a total around $25 million after we added some exploration. At Didipio, non-sustaining there was $8 million odd to do with the underground, and Waihi. Overall, our expenditure on exploration was around $7 million for the quarter.

I'll now hand it back to Michael to sum it up with our 2016 priorities.

Michael Holmes

Thank you, Mark. So the priorities for the rest of the year in 2016 is to continue with the solid cash flows from the operational point of view. And to focus on safety, safety is our priority. And to deliver on guidance and cash flows. From development is to continue with the construction of Haile and to deliver the Haile Gold Mine with first ore through the plant at the end of this year. And to continue the advancement of the underground, Didipio Underground construction, which is progressing well, for delivery of first starting ore into the mill by the end of 2017.

Continue with our focus on growth, increasing our resource base through exploration as well as advancing our technical and optimization studies internally. And then from the stakeholders point of view is to continue to deliver the meaningful benefits to our communities and all communities in which we operate, and to deliver strong shareholder returns. So it's a very clear focus on the priorities that we have for the remainder of 2016. Thank you very much, everybody, for your attendance and I'll hand it back over to you, Sam.

Sam Pazuki

Thank you, Michael. Thank you, Mark. At this time we will open the line to take questions. For those of you seeking to ask questions, we will be taking them through the telephone only. So we're going to pause now just for a few moments while callers queue up and I'll turn it over to the operator to facilitate the Q-and-A process.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Michael Slifirski from Credit Suisse. Michael, please go ahead.

Michael Slifirski

Thank you. I've got three small ones if I may. Has the Macraes exploration results from Coronation, those 10 holes, is that all the holes you drilled? So I'm trying to understand I guess, all those grades, they look terrific. Is that representative of what you're expecting now in terms of what the resource grade might be? And if that's the case, how do you propose to mine it? Will we see those sort of grades come through for a period when it's mined or will that be blended out with lower grade material and thus see no change? That's question one.

Michael Holmes

Thank you, Michael. The Coronation North drilling still continues and we're excited by those results. At the moment we're still working through the resource model and the reserve model to finalize that. The idea is to look at the Coronation ore starting in 2017 and it will be blended with the other material from underground and from the other pits that we have operating.

Michael Slifirski

Given that the grades all seem to be significantly elevated compared to pit grades to date, we'd expect a significant step up or are suggesting that between blending we might see no change?

Michael Holmes

Michael, as I said, until we get the final sort of picture as to reserves, the grades are better, so overall it's a better grade pit than Coronation, so you can expect to see some improvement in the grades, yes.

Michael Slifirski

Okay, thank you. Secondly, moving on to Didipio, really good throughput. Was that simply a function of lack of maintenance compared to what you're predicting for the balance of the year? Or was that a further step improvement? So the number I guess that Wilkes has talked about in the past is a 3.6 million ton per annum annualized rate. Is that still the expectation or have you achieved something that makes you think you can do better than that on a sustainable basis?

Michael Holmes

Michael, it's been a combination of some throughput improvements as well as some maintenance. Through the remainder of the year we will be doing some further maintenance and have some maintenance added to that. So the idea is to try and continue with the 3.5 million tons continued throughput rate.

Michael Slifirski

Thank you. And then finally, the Philippines Exploration permitting issue, I don't know if there's any color you can add there. Is the reason it's agitated the locals to have it go, or is it just part of a normal process that always happens? I guess I'm, given your enthusiasm, Wilkes' enthusiasm last quarter when you got that permit, how do you see it panning out?

Michael Holmes

Michael, as I said, with a change of government there's always a refocus on different areas and the DENR made it clear that they want to review all the mining operations within the country. So we welcome that review, we are mining to international best practices with the ISO 14001 and the OHSAS 18001, as well as operating to Canadian and Australian standards.

We were awarded the top environmental award last year, so I think we're very well positioned and as I said we will welcome a transparent audit by the DENR to understand in their view what they want to look at as they're reviewing the whole mining industry within the Philippines. So for us its business as usual and a real opportunity to showcase the operations.

Michael Slifirski

All right. Thanks

Operator

Thank you. [Operator Instructions] Your next question comes from Chris Thompson from Raymond James. Chris, please go ahead.

Chris Thompson

Good afternoon, good morning. Just a couple of quick questions here. Just on Haile, could you just remind us again on the, I guess the timetable for the optimization study and the revised mine plan with resource updates. Are they going to be ready by the end of the year? Are they going to be announced by the end of the year, or are you going to be waiting until the new year for that?

Michael Holmes

Yes, Chris, there's a timing and technical study going on at the moment which is helping with the underground potential. We will be continuing that. That is planned to be understood by the end of the year. The optimization study which looks at the overall mining of the pit, the potential for underground and the resource and reserve update, the plan is that that program will continue through this year and those results will be released sort of mid-next year.

Chris Thompson

All right, so any revised I guess resources, reserve updates, we can anticipate with the revisions next year?

Michael Holmes

Yes, that's right, Chris.

Chris Thompson

All right. Then another question really quickly, and I do understand it's a very, very sensitive issue, so I apologize for asking it, but a little bit of the sense for the timeline for restarting operations at Waihi?

Michael Holmes

Waihi operations were recommenced last night.

Chris Thompson

Okay, thanks. And then finally, just affirmation as far as Coronation North, tons from Coronation North. We can anticipate those being led into the mine plant early next year?

Michael Holmes

Yes, that's correct, Chris.

Operator

Thank you. Your next question comes from Michael Gray from McGuire. Michael, please go ahead.

Michael Gray

Hi, there, from Macquarie. On -- for Didipio Underground's drilling you mentioned that in the MD&A you'll be ready with the underground platforms in September, so exploration drilling 50 kilometers. What kind of dip length will you be able to test? And how much of that is outside the resource? And what kind of drill hole spacing will that be on?

Michael Holmes

Yes, Michael, the underground program will be on a couple of levels, so it's to do the infill drilling for the resource and the reserve as well as test the bottom extent of the mine which is still open a bit. So there will be an extensive program that will cover those two areas. And so the September program is to commence with the deeper drilling. At the moment the plan is to look at holes which are around about 150 meters in length and then just determine after the first hole what the opportunities are. So the two programs will be starting in September.

Michael Gray

That's helpful. And so Macraes on the exploration, you mentioned in the MD&A that the Melbourne target north of Coronation North has got a 900-meter long strike you're going to be testing and drilling. Has that been documented by drilling already? And if so, what kind of results have been yielded? Or is this really a brand new target?

Michael Holmes

It's an area that has been of interest and there are some previous holes around that area. But it really is an area that we're sending the programs through and testing that as well as other areas along the strike land. So we've run a program which has sort of had a look at the whole of Macraes' trends and identifying areas that we believe there's further potential with [Madon] [ph] being one of those.

Operator

[Operator Instructions] We do have a question. Our question comes from Jeff from CIBC. Jeff, please go ahead.

Jeff Killeen

Good afternoon and good morning. Thanks for your time. Just a couple of questions. I wanted to start with Waihi. One with respect to the throughput. I get the impression that it is expected to rebound in the second half. Do you expect that that's going to be fairly immediate in Q3 or will we more see those numbers gravitating up to Q4?

Michael Holmes

Thanks, Jeff. Probably you'll see a better Q4 than Q3 is what we're sort of planning. But the rebounds will be coming through quarter three, so a stronger quarter four than quarter three, yes.

Jeff Killeen

Okay, thanks. And then just on the cost side at Waihi, can you give us a sense for what magnitude of potential cost benefits you'll see from switching to owner mining say on a per unit or per ounce basis?

Michael Holmes

Not at the moment, Jeff. We've been working through as far as some opportunities when we sort of took control of the mine and working with the staff and the employees there for continuous improvement programs. With the other owner-operator he is forcing further focus on that as well as that generally is our business model for underground. But we will sort of continue to advance working with their workforce to look for further opportunities there.

Jeff Killeen

Okay, thank you. Then two quick ones on Didipio. Firstly, understanding there's a shutdown, maintenance shutdown coming in the second half, can you just clarify will that be a Q3 or Q4 impact? And I'm assuming it's only going to be about a 2-week type of event. Can you confirm that?

Michael Holmes

Yes, there will be some maintenance activities that happen both in quarter three and quarter four. And they generally have an extended period.

Jeff Killeen

Okay, thanks. And then just could you clarify, I'm pretty sure that's the case, but with some of the rumblings that have been coming out of the Philippines, they're all with regard to the exploration licenses that were granted, yes? And there's been no challenge or any type of that nature with the mine specifically, is that correct?

Michael Holmes

Jeff, as I mentioned, with the change of government there, they're reviewing and auditing all the mines within the Philippines. And so as part of the process with the regulator, the Department of Environmental Natural Resources, they've established order teams to go and review every mining operation.

And so with that, we welcome that audit, that transparent audit. We have been operating there now for 4 years and operating in the community. So as they are auditing, they'll be going through with the officers and officials from the Department of Environmental Natural Resources auditing all of the works and operations currently in the Philippines with their operations. So as was mentioned by the president that he is focused on mining, and responsible mining into Canadian and Australian standards, of which we are compliant.

Jeff Killeen

Okay, very well. Have you been given any guidance on terms of the timeframe this audit may take?

Michael Holmes

I think reading from the press is that the audits will be going on in the next couple of weeks. I think with the DENR wanting to present something to the president in August, towards the end of August.

Operator

There are no further questions at this time. Please proceed, Mr. Pazuki.

Sam Pazuki

That concludes the presentation for today. On behalf of the team at OceanaGold, I would like to thank you for your interest and participation. And should you have any further questions, please don't hesitate to contact us directly. Bye for now.

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