SEMAFO's (SEMFF) CEO Benoit Desormeaux on Q2 2016 Results - Earnings Call Transcript

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SEMAFO Inc. (OTCPK:SEMFF) Q2 2016 Earnings Conference Call August 10, 2016 10:00 AM ET

Executives

Robert LaVallière - VP, Corporate Affairs & IR

Benoit Desormeaux - President & CEO

Martin Milette - CFO

Michel Crevier - VP, Exploration & Mine Geology

Sylvain Duchesne - VP, Construction & Engineering

Patrick Moryoussef - VP, Mining Operations

Analysts

Ovais Habib - Scotiabank

Kevin Chiu - CIBC

Andrew Breichmanas - BMO Capital Markets

Lawson Winder - Bank of America Merrill Lynch

Don Blyth - Paradigm Capital

Robert Reynolds - Credit Suisse

Operator

Good morning, ladies and gentlemen, and welcome to the SEMAFO's Second Quarter 2016 Results. 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 today, Wednesday, August 10, 2016 at 10:00 A.M. Eastern Daylight Time.

I would now like to turn the meeting over to Mr. Robert LaVallière, Vice President, Corporate Affairs and Investor Relations. Please go ahead, Mr. LaVallière.

Robert LaVallière

Thank you, Simon, and good morning, everyone. Members of SEMAFO's senior management team joining me for the call today are Benoit Desormeaux, CEO; Martin Milette, CFO; Michel Crevier, Vice President, Exploration and Mine Geology; Sylvain Duchesne, Vice President, Construction and Engineering; and Patrick Moryoussef, Vice President, Mining Operations.

I would like to remind listeners that some of the matters to be discussed during today's call may contain forward-looking statements. Forward-looking statements include, but are not limited to items such as our expectations regarding the price of gold, time tables, expenses, capital expenditures, guidance, and resources and reserve estimates. Such statements are given as of the date of this conference call, and involve risks and uncertainties. A number of factors and assumptions were made in preparing such statements, and actual results could differ materially. Accordingly, you should not place undue reliance on forward-looking statements.

For additional information with respect to forward-looking statements, risks and assumptions, please consult our 2015 Annual MD&A as updated in our first and second quarter 2016 MD&A and other filing made with Canadian Securities Regulatory Authorities and available on our website at www.semafo.com. SEMAFO disclaims any obligation to update or revise any forward-looking statements except as required by law. I made this cautionary statement on behalf of all SEMAFO's spokesperson who may address you during this conference call today. All dollar amounts are referred to U.S. dollars otherwise stated.

With that said, I would like to turn the call to over Benoit Desormeaux.

Benoit Desormeaux

Thank you, Robert. Good morning everyone and thank you for joining us. This morning we announce another strong set of numbers largely similar to the first quarter and in line with our plan and guidance. We generated $37.4 million in cash from operating activities in the quarter compared to $35.2 million in the first quarter 2016 both representing $0.12 per share.

From a production standpoint, Mana delivered another robust quarter, we processed more than 600,000 ton of ore at an average rate of 3.3 gram per ton from the TU and profit [ph] with an average recovery rate of 95%. Quarter reproduction totaled 61,300 ounces of gold same as in the first quarter at the total cash cost of $547 an ounce and all in sustaining cost of $742 per gram.

From a financial perspective this was another solid quarter where our operating performance coupled with our ability to control cash generated strong cash flow per share. Speculation surrounding Brexit in the second quarter out fueled the further go price rally which boosted our average real life gold price on a year-over-year basis by 6% to a $1260 per ounce and by 5% on a quarter-over-quarter basis.

Gold sales in the quarter reached $77 million, a 3% increase compared to the first quarter in 2016. This quarter and quarter increase is caused by higher realized selling price, partially offset by the lower ounce or so. Our share price appreciation in the quarter increased our share based compensation expense which together with lower revenues lowered our second quarter operating income to $14.4 million.

In the first half of the year, total cash cost and all in sustained cash to $526 and $719 per ounce respectively in line with our 2016 guidance. We ended the quarter with cash equivalent of $254 million compared to $167 million at year end 2015 after reimbursing $30 million in debt. The increase in cash balance is mainly driven by $91 million deal financing and ongoing free cash flow generation. In the quarter we also paid a $10 million dividend to the government of Burkina Faso, representing their 10% interest in the Mana mine thereby strengthening our partnership.

Our long-term debt stands at $60 million and we have access to additional $60 million through risk to build net [ph]. Our balance sheet is in excellent shape providing us with financial flexibility. I would like to use this time to reconfirm guidance for the year ago production of between 225,000 and 240,000 ounces at a total cash cost of between $535 and $565 an ounce. An all uncertain gap of between $720 and $760 per ounce. Turning to the Natougou project. Firming process is very much on track for completion by the end of the year.

We have already have public hearing so the process is two-thirds through with no significant concerns extra. The final milestone will entail the National Commission of Mine reviewing feasibility study, environmental and social study and communication action plan. If these fulfill all their conditions then the commission will issue a favorable opinion leading to the issuance of the permit.

Development of Natougou project has commenced strongly and is on-track and on budget. Our team is progressing well with the detailed engineering process and has completed 17% to date. The down payment has already been made for critical only items such as the sagmill, crusher and tower mill which will be delivered to the site in the second half of 2017. The Natougou project represents an important component of our growth platform with potential for more than 226,000 ounces during the first three years and we look forward to updating you as we achieve additional milestones. Exploration-wise our grade focus lies on the Natougou project more proximate areas.

In the second quarter we advance our mapping of this Cacua permit and completed the second portion of an airborne geophysical survey. More than the map of the entire 2016, our drilling program at Natougou has been carried out on the Trend 045, a northeast trending structure that crosses the property to the south of the Natougou deposit. When the rain season subsidies, exploration on the Trend will resume through an RC drill program with results expected in the fourth quarter of 2016.

RC drill programs deals yielded significant results in the quarter in the west and Bongou. Exploration drilling continues while weather conditions permits and we expect to have a fuller appreciation of the results after the rainy season. The quarter saw us complete an interim program and also maiden reserve statement for the Yama deposit located six kilometers from the Fofina deposit. As of June 30, 2016 mineral reserves at Yama totaled 662,000 at 1.81 gram per ton for more than 38,000 ounces. In the Mana project area result from other drilled and RC programs carried out on the second quarter on the North permit did not support additional drilling so this program has been discontinued. Overall our exploration program has slowed down and will resume after the rainy season.

Semafo has a strong track record of creating value from the drill bit although the new slow and exploration front has recently been slow and remained consistent in the quality of our asset. Through our expanded exploration budget we continue to lay the foundation to keep the light under geological prospectively. On the community relation side the second quarter was marked by the central foundations rolling out its most important water project to date.

Water supply network that has been designed to boost water supply during the dry season until the year 2035 for a village of 11,000 residents close to the Mana mine. The network which is powered by solar panels which serve as an important legacy for the local population for long after the mining activities have seized. The foundation steam continues to strengthen its presence and impact in the Natougou area in the quarter when it carried out its first education center project.

Construction of a new primary school and distribution of an initial consignment of bicycles to needy students. I would like to sum up the quarter with a few key points. First, we have another quarter with positive financial results and free cash flow. Second, development of the fully funded Natougou project is progressing in the village in Mana and on budget. We are expected to break first ground at the end of the year.

Third, our exploration program which was increased to $18 million as a potential further might increase Mana in Natougou and fourth, our CSR initiatives continue to have sustainable value and build and serving community partnerships. Operator this concludes the presentation portion of this call.

I will now like to open up the line for question and answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ovais Habib of Scotiabank. Your line is open.

Ovais Habib

Thank you. Guys congrats on a great quarter again. Just a couple of questions to start off with. We saw the grades improve nicely from Q1 to Q2. Are the grades expected to continue this trend going into the end of the year?

Benoit Desormeaux

No, it is not expected to stay at the same level as what you have seen in Q2. Keep in mind that we have announced the guidance at the beginning of the year. But we have the grade we had announced, like 2.2, because we had a lower grade in Q1, just above 3000, it was expected that at some time in the year it will go back to higher than the average of what we have announced but you should expect something closer to what's in the middle of Q1 and Q2 and depending as well on the gold price because we may as well process this more low grade as to-date it's more [ph], but we are expecting to be within guidance, both in production and cost but don't expect the next two quarters to be similar to the second quarter just based on grade.

Ovais Habib

Perfect, okay. Thanks and call you tell us in terms of I believe in Q1 and Q2 most of the material was coming from Siou and Fofina. Is that expected to go into the second half of the year or is Wona Kona expected to come online in as well?

Benoit Desormeaux

No, Wona Kona is not expected in 2016. The guidance we have announced at the beginning of the year was on Siou and Fofina so you should expect this to continue through the remainder of the year. In terms of the mix you could expect probably Siou close to 50%, Fofina 40% and stock pile we have at 10%.

Ovais Habib

Perfect. And just moving on to the exploration side and congrats on the reserve but Yama, do you see additional upside at Yama or are you guys looking at expanding the footprint there?

Benoit Desormeaux

Yes. There is still potential there to increase and maybe find additional bits in the area. We still have some exploration to do so it is not because we have announced the reserve that is finished. Program will continue mainly after the rainy season but mainly we will see. But we are not seeing anything that could big with what we would discover at Wona or something, it's not even Fofina. But you could have more additional bits in there.

Ovais Habib

Okay. Sounds good. Thanks Benoit, that's it from me for now.

Benoit Desormeaux

Thank you.

Operator

Your next question comes from the line of Kevin Chiu from CIBC. Your line is open.

Kevin Chiu

Hi, good morning guys. Congrats on the quarter. Just a couple of questions from me. Just looking at the cost per ton, I know it crept up a little bit for this quarter. How should we look at that for the second half of the year? Is it expected to stay around the $49 per ton mark?

Benoit Desormeaux

The cash cost per ton is being influenced by the operational -- you see that the operational separation in the second quarter is higher than in the first quarter. So that's really, that is influenced a lot on acknowledge the same cost that remains the same. What you should expect in the next two quarters I would say is something similar to the average of what we have after six months.

Kevin Chiu

Okay. Fair enough and then just with respect to the Wona Kona pit. Understanding it doesn't come back in until 2017, what sort of work or is there any sort of work that is going into the pit ahead of 2017?

Benoit Desormeaux

That's a good possibility. We've made the decision for sure that we are going back in the Wona pit in 2017, so we may start a bit earlier, so that's something we are looking into these days. What's the plan going forward, it may change a bit as top right is going higher as well so we are looking at all the alternatives. What's the best scenario? What's the best cash flow generation scenario? So that's something that we are looking into. But yes, it is a possibility that Wona starts earlier but not providing any ore in 2016.

Kevin Chiu

Right. Okay and then just maybe a question on Natougou. In terms of the drilling that's kind of being done so far, anything interesting you would like to highlight from that?

Benoit Desormeaux

I would say, all the results we have issued where we see potential definitely on the Trend 045 based on other drill results, reason why we are going to follow this with our drilling. We see as well from the west side of the Boungou footwalls on, again these results are public. We are still working as long as we can until the rain is too high. But it's still early results. Lots of potential, we see the same potential at Natougou that we were seeing at Mana when we started almost 10 years ago. Used potential, but it still really works.

Kevin Chiu

Okay. Good to hear. Thanks for taking my questions.

Benoit Desormeaux

Thank you.

Operator

Your next question comes from the line of Andrew Breichmanas with BMO Capital Markets. Your line is open.

Andrew Breichmanas

Thanks. Good morning, Benoit. Just a couple of questions. First, it looks like you've been drawing down stock piles for the first part of the year and now that you're in the rainy season, I was just hoping you could comment a little bit about how you're positioned in terms of mill feed during the rainy season, both from stock piles and whether the mine has the ability to increase the amount of ore delivered through the rest of the year?

Benoit Desormeaux

You're right, that we've used a bit of stock pile since the beginning of the year. We're expecting to fill you some in the next six months. The rain season is always a bit slower because it's difficult working in the bits. It hasn't been too bad so far, but the biggest rain are in August or September. But in terms of our positioning to face the rain season, we're well positioned with 234,000 times on the stock pile. The mining will be able to maintain the speed, so we don't anticipate to have any issues on that side.

Andrew Breichmanas

Okay, good. Thanks. Then on the recoveries during the quarter, 95%. I think that's probably the highest since maybe 2009 or something like that. What drove the recoveries higher during the quarter and what should we expect going forward?

Benoit Desormeaux

We have 60% coming from Sue, the average recovery of 95%. We were in an area in Fofina where we have the very high recovery as well, above 93% and sea was 4.35 rep per time [ph]. So when you have that kind of rain, even the recovery gets a bit higher than 95%. That's what brought the average to 95%. 96%, lost 93% and the mix 60-40 is explaining that figure.

Andrew Breichmanas

Okay. Lastly on the dividend that was paid to the government, could you just explain that a little bit more and what drives the timing of those payments?

Benoit Desormeaux

Yes. If you look on the balance sheet, you will see that we have an interest in which we account the 10% of the interest of the governing of Burkina Faso. At the end of 2015, that mine was close to $31 million. In the past we're the same before paying used dividend, we're reimbursing our own advents to the subsidiary and based on the profit we've made in 2015, we decided to pay that $10 million. That brought back in the amount controlling interest in $20 million, but if you look at what we have at the end of June, it's back to almost $25 million. You should expect at the end of the year to have something similar to let's say where we were at the beginning of the year. What will be the next dividend? We don't know yet. Nothing has been established, there is no obligation, but for sure we have to at some point pay that 10% of the profit of [indiscernible]. We have had very good years in '14, '15 and same in '16. This is what drives the dividend amount.

Andrew Breichmanas

Okay, thank you.

Operator

Your next question comes from the line of Lawson Winder with Bank of America Merrill Lynch. Your line is open.

Lawson Winder

Hi, guys. Again, thanks for taking the question and excellent results. Just on the balance sheet, you have a really substantial amount of cash in my view, especially in light of the cash flow that you guys are generating. First question, one, is reducing debt earlier than scheduled? Potentially one use that some of that cash could be your marked for? Or are you potentially evaluating uses outside of Natougou and just your ongoing sustaining CapEx and exploration spend, or is answer just that you're trying to be very conservative here?

Benoit Desormeaux

I would say all of these answers. We would definitely use this for the Natougou development. That was the goal of course when you have a construction of more than $200 million. To do that, make sure you have the cash. At the same time, we announced in the first quarter or second quarter that for sure we want to put more efforts on exploration. We see used potential at Natougou and we still see some potential at Mana and we don't want to be restrained by funds if we think we can create lots of value at Natougou increasing mine life. At the same time, we want to recruit it as well because we started the year or finished the year, 2015, we'd go for $1,050. It has been $1,350 maybe lately, but we will wait to see. Let's see the next six months what it does and then we can definitely take the best decision for the shelters [ph]. But main objective is create value first through our assets. Can we use this to do something else? We might if we see good opportunities as we did in the past. I would say your proposals, we are aiming on this.

Lawson Winder

Do you remain confident in the initial CapEx estimate of $219 million for Natougou?

Benoit Desormeaux

Yes, we are very confident of that.

Lawson Winder

And then finally, where does Nabanga now fit in your spending priorities?

Benoit Desormeaux

Nabanga was not the priority last year, because after we bought the orbit, of course priority was Natougou. We launched the first drilling campaign in the second quarter. We did a bit, but now it stopped because of the raining season. It has got to resume after the rain season probably in October. It will depend on what we see in terms of results and potential, but it's becoming another priority now that we know what we have at Natougou and we have financial flexibility as well to do some exploration.

Lawson Winder

Okay. That's great. Actually, if I might just ask one more quick question to follow up – or another question on the guidance. You maintain your total cash cost guidance which would imply that the second half would be slightly higher and if I'm hearing you correct, you're saying that the operating strip ratio will be about the same on average that it was in H1 and H2 and then in H2, the grades will be approximately the same – which would indicate to me that it should probably stay around where they are. Is there anything that I might be missing there, that might be driving higher unit per gold output cash cost in the second half?

Benoit Desormeaux

No. I don't think. If you look at the all-in sustaining growth factor, for six months we are at $719. That's the low-end of the guidance. Just by saying we maintained the guidance, I think it's just being prudent. We are up $719 and the guide is at $720.

Lawson Winder

Yes. I know it's not a lot higher. It is above the implied range for the second half, does seem to be a little bit above H1, but okay. I understand. It's just you guys trying to be prudent, which I think is probably the right course of action. Anyway, that's it for my questions and thank you very much for taking those.

Benoit Desormeaux

Thank you.

Operator

Your next question comes from the line of Don Blyth with Paradigm Capital. Your line is open.

Don Blyth

Hi, there. I guess most of my questions have been answered, but with the main Wona pit, that sort of averages around that sort of 2.25 grams to 2.5 grams. Is there any higher grade areas that you can access, or is this when you bring this in 2017, is it then going to be more of a last source or ore? Fill as much as you can from Fofina and Sue and then maintain the rest from Wona?

Benoit Desormeaux

This is probably what the plan will be. Like we've always said, Fofina will end in somewhere I think 2017. The main source for sure will still be Sue, so everything we can add from Wona will be to fill the availability of the mill. But you're right, the average grade is at that level, depending where we mine. We have always explained that there's different phase of the allotment at Wona and the best grade is when we're going at it deeper. In 2017, it might not be the best grade, but combine with huge, it's going to be a very good year. We're looking at all the different turns for 2017. Like I said, we might start earlier to make sure that we have enough ore next year coming from Wona to fill, to fill the availability of the plant, but I cannot really comment on what's going to happen exactly, but that's definitely the way we're going.

Don Blyth

Okay, perfect. At Yama, obviously pretty ounces [ph], that's maybe a couple of months' worth of feed for you guys. You went straight to reserves. Are there any additional resources that might convert and expand that even somewhat?

Benoit Desormeaux

There is a way to expand the actual Yama pit and there is also potential to find additional one like that, but we still need a bit of work. The main reason of course when you're doing all these exploration work, you don't know what we will end up with and at some point we want to increase the mining permit to make sure that when we want to mine this, we are entitled to. If we have to extend it later, then that's not an issue. The mining permit will have for us much bigger than the reserve area. We're protecting any further discoveries in that area to be able to mine this as we wish.

Don Blyth

Perfect. Thanks, guys.

Benoit Desormeaux

Thank you.

Operator

[Operator instructions] Your next question comes from the line of Robert Reynolds with Credit Suisse. Your line is open.

Robert Reynolds

Good morning, guys.

Benoit Desormeaux

Good morning.

Robert Reynolds

I have a couple of questions, but my first one is just on Yama. Does it fit at all into your Suerrent mine plan, or how might you see that playing out?

Benoit Desormeaux

Because it's fairly new, that's something that we will see how it fits. We have different places where we can mine. There is one in north, one at south, then Yama to fill what we have at the plant. Good thing with Yama is that first half is definitely very soft material with good recovery, so we may put this in the 2017 mine plan if we think it's the best in terms of cash flow. We don't want to expect this to be an issue on the permit side. We just want to be in a position to mine this if it's the best scenario.

Robert Reynolds

Okay and then just moving to Sue. What's the maximum mining rate that you can achieve for that pit? Just total ore and waste?

Benoit Desormeaux

It is probably an add we're going deeper. It will slow down, but it's probably 1.2 million, 1.3 million a year.

Robert Reynolds

That's of ore?

Benoit Desormeaux

Yes, ore.

Robert Reynolds

And then that's at the 19-to-1 strip ratio?

Benoit Desormeaux

That's probably the average, 19-to-1.

Robert Reynolds

Okay and then just when you go back into Wano, what does the strip ratio look like there over the first year or two?

Benoit Desormeaux

I think including the development we asked to do -- so in a total strip ratio is 11-to-1.

Robert Reynolds

Okay. And then just the stock pile, I think you gave the tonnage, but you have a grade as well that you can provide for it?

Benoit Desormeaux

It's 2.8 grams a ton.

Robert Reynolds

Is that material the sort of 80% recovery or does it have higher recoveries?

Benoit Desormeaux

It's higher recoveries because it's a stock pile made from Sue and Fofina and maybe a bit of Wona, but most of it is Sue and Fofina. So Sue is 95% and Fofina is probably 92%.

Robert Reynolds

Okay, great. That's all my questions. Congrats on a good quarter, guys. Thanks.

Benoit Desormeaux

Thank you.

Operator

There are no further questions at this time. I turn the call back over to our presenters.

Robert LaVallière

Thank you, Simon. I would like to take this opportunity to remind listeners that SEMAFO second quarter of 2016 MD&A and financial statements are available on our website. The audio webcast of this conference call will also be available for replay on our website for a period of 30 days. I would like to advise listeners that Benoit Desormeaux will be presenting at the Denver Gold Forum 2016 in Denver on September 20 at 2:30 pm. The presentation will be webcast on by the Denver Gold Group and will be also available on our website. I would like also mention to listeners that our third quarter financial and operating results are currently scheduled for publication on or around November 9, 2016. Thank you and have a good day.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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