Torex Gold Resources, Inc. (OTCPK:TORXF) Q3 2016 Earnings Conference Call November 3, 2016 9:00 AM ET
Gabriela Sanchez - VP, IR
Fred Stanford - President & CEO
Jeff Swinoga - CFO
Jason Simpson - COO
Rahul Paul - Canaccord Genuity
Dan Rollins - RBC Capital Markets
Josh Wolfson - Dundee Capital Markets
Andrew Breichmanas - BMO Capital Markets
Thank you for standing by, this is the conference operator. Welcome to Torex Gold Resources Third Quarter 2016 Results Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Gabriela Sanchez, Vice President, Investor Relations. Please go ahead.
Thank you operator, and good morning everyone. On behalf of the Torex team, welcome to our conference call to present our third quarter financial and operational results. We have in the room Fred Stanford, President and CEO; Jeff Swinoga, Chief Financial Officer; and Jason Simpson, Chief Operating Officer. Following the presentation they will be available for the question-and-answer period. This conference call is being webcast and will be available for replay on our website. This morning's press release and the accompanying financial statements and MD&A are posted on our website and have been filed on the SEDAR.
Please note, that certain statements to be made today by the management team may contain forward-looking information. Please refer to our detailed cautionary note in today's press release. Also, note that all amounts mentioned in this call are U.S. dollars unless otherwise stated.
I will now turn the call over to Fred.
Thank you, Gabriela and good morning all. I'll start-off by reporting on safety. Earlier this week we sadly reported that Mr. Jose Martinez, an employee of our explosives contractor had suffered a fatal injury in a rock slide from the high wall of the Guajes open pit. Our hearts go to the family and support will be provided. The investigation is ongoing but early indications suggest that there was a pattern of faults that created a localized zone of weakness that failed instantaneously. The high wall of the pit is monitored daily by technical personality personnel and twice an hour by technology that measures movements as small as one to three millimeters. The instantaneous nature of the failure did not give this technology an opportunity to provide a warning.
The processing operations were unaffected and received feed from stockpiles during the curtailment of mining operations which resumed at the beginning of this week after a safety pause in all of our mining operations. It's not easy to transition from discussing a fatality to more positive note but environmental protection is continued at a very high level. There were no accidences and the water has been well managed through a very heavy rainy season that is now behind us. Government community relations also continue to be very productive, and in last quarter we moved forward together on a number of initiatives.
Moving on to the operating results, we're well on-track to meet guidance of 275,000 ounces in our first year of production. Gold production was 77,915 ounces and gold sales was just more than 80,000 ounces. Average realized gold price was $1,308 per ounce and revenues were $108 million. Cash costs, $517 per ounce sold and all-in sustaining cost for $699 per ounce sold. Quarter-end cash position was $112 million. Mine to-date reconciliation of the reserve model is 4% more in ounces from a positive 1% reconciliation on grade and 3% more tons and predicted. This quarter the team managed well through our first rainy season which was 68% heavier than average.
Processed tons averaged 10,134 tons per day for the quarter, recovers -- recoveries averaged 89% in the quarter, nicely above design levels of 87%. Mining rates have or increased by 27% in Q3 versus Q2. Size of the stockpile remain unchanged but the grade of the stockpile increased 2.11 grams per tons to 2.34 grams per ton. Mining rates for waste accelerated by 44% in Q3 versus Q2, most of that increase is related to pre-stripping of El Limon and getting it ready for production next year. Grade control processes have also been well executed and the grade delivered to the plant averaged 3.13 grams per ton for the quarter.
Copper continues to be managed through the use of reagents; engineering has well advanced for our conventional SAR plan to remove this copper as a saleable product. As the design has progressed, the capacity of the plant has been increased by 50% to protect against variability. The expected CapEx is $25 million and long lead time items have been ordered. The SAR plan is expected to be operational by the end of 2017 and will pay back in less than two years. Much of the payback is from the reduction in the extra $96 per ounce of cyanide and metabolic bisulfide that we are currently consuming.
Now turning it over to Jeff for comment on the financials.
Thank you, Fred. During the third quarter we sold 80,064 ounces of gold at an average realized price of $1,308 per ounce. The revenues were $108 million. Costs of sales including royalties and depreciation for the third quarter were $64 million. Total cash costs per ton of ore processed in the third quarter was $44 per ton. Mining costs are tracking better than Q2 at $2.17 per ton. Processing costs excluding inventory movements are $24 per ton milled [ph]. Depreciation of mineral properties, plant and equipment totaled $21 million for the third quarter. Royalties were $3.2 million representing approximately 3% of proceeds from gold and silver sales.
Our corporate G&A expense in the third quarter was $4.4 million similar to the previous quarter. Our total cash cost of the quarter were $517 per ounce. Net income was $23.6 million or $0.30 per share. By adding back an unrealized foreign currency loss and a gain on drip of contracts to income, net of tax we obtained are adjusted net earnings of $24.8 million or $0.31 per share. Our operating cash flow before it changes the non-cash working capital was $54 million, of the $54 million $20 million was spent on capital expenditures, $25 million went to reducing accounts payables, and the remaining dollars resulted in a $9 million increase in our cast balance to $112 million. We expect the operations to continue to generate positive free cash flow in the fourth quarter.
All in sustaining costs for $699 per ounce. Sustaining CapEx in the third quarter was $9.4 million; $5 million was for pre-stripping at El Limon, $1.4 million for a mining fleet management system, $1 million for a mobile crane, and minor amount for water management and other infrastructure. The remaining $10.2 million of CapEx relates to activities for the El Limon mine post commercial production and include construction activities, mobile equipment, pons and infrastructure. For the fourth quarter, we expect sustaining capital to be approximately $10 million. Regarding non-sustaining capital in the fourth quarter, we expect to spend approximately $15 million largely for El Limon mining fleet and construction activities. During the quarter, the remaining $12.9 million of restricted cash in response reserve account was returned to our corporate bank accounts.
Now regarding the VAT loan; $18 million remains available to be drawn, if we choose to do so, by early December. During the quarter we complete the interim completion test and our lenders have accepted the results. As of September 30, we had approximately 128,000 ounces of gold hedge contracts, remaining at an average price of $1,241 per ounce. These contracts will be concluded by the end of the first half of 2017. As of September 30, the company also had approximately 1.5 billion of peso hedged contracts at a contract price of 18.6 Mexican pesos per U.S. dollar until December 2018. Approximately $800 million will be settled within one year, $500 million in the second year, and $200 million in the third year.
In summary, the company is in a strong financial position. And now I'd like to turn the call back over to Fred.
Thank you, Jeff. Looking past the ramp up to growing the resource and the business; in Q3 of this year we started a 5,500 meter drill program of 26 to test the area under the El Limon sill [ph] that has been described as the arch. We will have results reported in late Q4 or early in 2017. In Q1 of next year, we will start a tunnel into the side of the El Limon ridge to access the resources that lie beneath the El Limon pit. The contractor has been selected and is now mobilizing to site.
In Q2 of next year, we anticipate receiving the permits which will allow the start of an exploration ramp into Media Luna, approximately one year after the start of the ramp we should be in a position to issue a drill program to begin the process of upgrading Media Lunar and further resources to the measured and indicated category. We're excited about these opportunities to grow the resource and to grow the company.
In closing, a special thanks to all of our teams and partners who have delivered so admirably as we transition from explorer to developer, and now to intermediate producer. I look forward to their continued success as they complete the last leg of the ramp up, and then move to the next stage of growing a resource and the business. The floor will now be turned over the operator for the question-and-answer portion of the agenda.
Thank you. [Operator Instructions] The first question is from Rahul Paul of Canaccord Genuity. Please go ahead.
Hi, everyone. Hi Fred, you spoke about your decision to oversize the stock plant. I'm just wondering if you could talk a little more about the rationale to do that. It looks like the culprit is being managed now -- and my understanding is the benefit of the stock plant is going to be lower operating costs, lower reagents and stuff like that. I mean do you see any additional benefits to going with a larger plan?
The initial plant, the numbers we gave for the costing on the initial plant were very, very preliminary. And we're based on sort of average levels of copper. But as you know there is variability in the cooperate quantities in the in the ore body, so we don't always get average. So we're just upsizing the plant a little bit to make sure that we can deal with the higher levels of variability the occur occasionally.
Fair enough. Has the design been finalized at this point?
Very close, we've ordered the long lead time items.
Okay, thanks. And then maybe a question for Jeff; just looking at your cash flow statement, investing activities you've got that line of working capital of property plant and equipment. But $19 million -- I'm just wondering if you could clarify what that item is?
Sure Rahul, its Jeff here. That's really -- part of that accounts payable we talked about during the opening comments. So if you add that to the accounts payable that's in the operating section, you get about $25 million. So we're paying down accounts payable Yes?
Okay, thanks. That's all that I had.
The next question is from Dan Rollins of RBC Capital Markets. Please go ahead.
Thanks very much. Fred, I was wondering if you guys could provide a little bit of commentary around throughput of the mill and maybe post the abnormal rainy season you seem to encounter in Mexico this year. What you're seeing on the throughput level through October and what you still need to do to get to that 14,000 ton a day run rate, in both the front and back-end of the plant?
The grinding circuit can handle the 14,000 with relative ease, the lead circuit can handle it, the carbon circuit can handle it, the bottleneck occurs at the filter plant. This is a couple of issues that we need to do, one is us optimize the actual performance of the filters. There is opportunities to reduce the cycle time, there is opportunities to increase the density that are being fed to the units; and there is opportunities on the grind size that we're delivering to the units which just makes it filtering a little bit easier. The other big thing that we're looking at doing is in the current plant design, the filters are tied to the SAG mill as the filtrate that comes out of the filters has to go somewhere and where it goes right now is to the SAG mill, so the SAG mill needs to be running in order for the filters to run. We're trying to break that link, so the bottleneck is not tied to any other part of the plant. So we're doing some design work on that in the moment as well. So if we take the liners, the SAG mill down to say change liners or doing inspection, the bottleneck process can continue to operate through that period of time.
But you haven't see any real constraints on getting that 14,000 ton a day within the filter plant, it's just more consistently operating at that level, is that correct?
That is correct. The plant has demonstrated it can do it. It just has to do it every day.
Okay. And then with the rainy season, obviously abnormal this year, but what are you doing to address the challenges potentially in the future of that with respect to the run a mine or ahead of the mill and just sort of some of the day to day operations of the mill? What really are the key changes that need to be made?
So some of the key things that struck has looked this year is, there is a fine ore stockpile post the crushers. There is a dome that's designed to go over top of that, that construction is not completed yet; so it now keeps the rain off the mud pile then your -- you have less muddy ore that jams up the feeders. The belts that come to take the tailings away from the tailings; they've now been covered so that there -- we don't get more rain on the dried tailings, the head pulleys, some of them have been covered so that we don't have a spinning of the head pulley in heavy rain conditions; issues sort of like that. We also had some lightning strikes that took various pieces of electrical equipment down; we work on different isolations and different lightning arrestor protection.
Okay. Any challenges with the operation of the rope conveyer with the heavy rains or did that perform…
Not at all, that conveyer has a roof over its head. And so it prevents the rain from getting onto it and it has the capacity that is double what the plant can feed. We have no issues with that.
Great, thanks very much.
[Operator Instructions] The next question is from Josh Wolfson of Dundee Capital Markets. Please go ahead.
Hi, good morning. I just was looking for more color if it's available on some of the reconciliation trends which looks like they've reversed in the third quarter? I know its early days but are you able to cite I guess why variance changed from historical numbers to third quarter?
I think we were asked many times in the past if we were going to increase our reserves because of the positive variability and we always declined to do that because it's a variable ore body, and sometimes it's variable positive, sometimes its variable negative. We've just gone through a period of -- where it was variable on the wrong side and it's now back to behaving pretty close to what the geological models suggested it would. Nothing -- there is nothing new in it; it's just the variability that happens in a scar on our body. So now we've seen the positive and the negative. So far October is tracking that we're comfortable with our annual guidance.
Okay. In terms of just -- I guess the magnitude of the negative for 3Q having more or less I guess wiped out the majority of the positives before that; was there a particular sort of bench in the pit or anything that varied it or is this just normal -- within the bounds of normal variation?
I think what happens there Josh is, when you're at a particularly high grade zone and you miss a couple of high-grade blocks that weren't quite where they are predicted to be, you can get a pretty quick swing.
Okay, that's great. Thank you very much.
The next question is from Andrew Breichmanas of BMO. Please go ahead.
Thanks and good morning. Just a question going back to the feasibility study, one of the issues that have been identified there was having to sort of monitor the drainage from the waste struck piles, and I was just wondering having gone through a rainy season and I'm started to collect data on that -- was there any sort of update on how that was going?
That's tracked very well, there have been no accidences as what is always expected, I think we talked about before Andrew is that during the long dry season you can get some oxidization in the waste piles that gets flushed on the first rate in the air. We saw that happen this year and it was easily contained and nothing released to the environment.
Okay, thank you.
This concludes the question-and-answer session. I would now like to turn the conference back over to Gabriela Sanchez, Vice President, Investor Relations for any closing remarks.
Thank you, operator. On behalf of the Torex team, thank you all for joining us and have a great day. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.