Detour Gold Corp. (OTCPK:DRGDF) Q4 2017 Earnings Conference Call March 9, 2018 9:00 AM ET
Laurie Gaborit - IR
Paul Martin - President and CEO
Frazer Bourchier - COO
James Mavor - CFO
Rahul Paul - Canaccord Genuity
Cosmos Chiu - CIBC Capital Markets
Dan Rollins - RBC Capital Markets
Don Blyth - Paradigm Capital
Josh Wolfson - Desjardins Securities
Kerry Smith - Haywood Securities
Thank you for standing by. This is the Conference Operator. Welcome to the Detour Gold Fourth Quarter and Year-End 2017 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 Laurie Gaborit, Vice President of Investor Relations of Detour Gold. Please go ahead.
Thank you, Operator, and good morning everyone. Welcome today to Detour Gold fourth quarter and year-end 2017 results, conference call and webcast. Paul Martin, President and CEO will review the results of the year. And following this, Frazer Bourchier, our COO; and James Mavor, our Chief Financial Officer will also be available to answer questions at the end of the call.
Today's presentation is available for download both on this webcast and on the company's Web site on the homepage. A news release, along with the financial statement and MD&A are also posted on our Web site.
Please note that certain statements to be made today by the management team may contain forward-looking information. Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that may cause the actual results to be materially different from those expressed or implied by such forward-looking statements. For more information, we refer you to our Detour cautionary note in yesterday's press release.
Please note that all dollar amounts mentioned on this call are in U.S. dollars, unless otherwise noted.
I will now turn the call over to Paul.
Thanks Laurie, and thanks everyone for joining our call where I'll briefly review the financial results of the year, and take the opportunity to update on our permitting and consultation progress with our Aboriginal partners, status of the optimization plan for improving 2019 and 2020 cash flows, and update on Zone 58N. We also have the pleasure of introducing Frazer Bourchier, the company's new COO, and provide him the opportunity to share his initial impressions on the Detour Lake operation.
But first, I'd like to start with our safety performance for 2017. Our total reportable injury frequency rate for the year ended at 1.78 per 200,000 hours worked, with an improvement in Q4 over Q3. This overall lagging indicator saw a slight increase year-over-year from 2016. And in 2017, we incurred eight incidents assessed as high severity, with four of those resulting in lost-time injuries. I am pleased with the vigor and commitment of the senior teams in this critical area of our sustainability. This includes several key hirings at the mine, as well as additional perspective that our new COO will implement. In 2018, we will bring a recommitment to safety behavioral training, and focus on the reduction of high-potential incidents whether they result in a loss-time injury or not.
The company released our operational results on January 16, 2018, so I do not propose reviewing these numbers in detail except to say that we had a record gold production year with 571,000 ounces produced, achieving the midrange of our guidance. We met our annual targets for mining rates with the last quarter at 294,000 tons per day, plant throughput just below 60,000 tons per day, and ended the year with a record Q4 head grades of 1.04 grams per ton, and gold recoveries remaining at 90%. Revenues for 2017 totaled $708 million based on sales of 561,974 ounces at an averaged realized price of $1,256 per ounce. Total cash costs of $716 per ounce sold and all-in sustaining costs of $1,064 per ounce sold were both within the midrange of the guidance. Capital expenditures totaled $174.8 million for the year, and included deferred stripping costs of $34.4 million.
The company realized record earnings of $88.2 million, or $0.50 per share, and adjusted earnings of $114.5 million or $0.66 per share for the year. We further reduced debt from cash flow by an additional $30 million in Q4 for a year-to-date total reduction of $88 million. Q4 marked the sixth of our last seven quarters that we have reduced debt for an aggregate reduction of $230 million. And we fully expect to continue this trend in 2018. Our hedging program has proven prudent with volatility of the CAD dollar. The currency and diesel hedging programs benefited our all-in sustaining costs by approximately $12 in Q4, and $11 per ounce for the full year. We have never been stronger financially, ending the year with $134 million of cash and cash equivalents, and $200 million undrawn from our bank debt facility.
On mining costs we're $2.99 per ton mined, and were impacted by higher diesel costs and higher repair costs for support equipment, and also the absorption of contract ore crushing costs required due to the primary crusher mantle downtime in Q4. Milling cost of $10.59 per ton milled were higher than planned due to the mantle repairs of the primary crusher and associated lower mill throughput. And as you'll recall, the company engaged the productivity efficiency firm in early 2017 to assist in improving our operating processes with a focus first on the mining operations. This initiative has resulted in improved systems and procedures for drill and blast with higher productivity of the [indiscernible] fleet.
In 2017, the year can be described as achieving higher utilization of the overall mining fleet. And in 2018 and onwards, the focus will be to increase availabilities of that fleet while further improving utilization, with particular focus on drills and shovels which will lead to improved outputs and lower unit costs. The company issued its guidance on January 16th, and we budgeted for this year at CAD1,562 per ounce, so we're thrilled to see the CAD dollar gold price having recently surpassed $1,700.
However, it would appear that both the Canadian premium for geopolitical stability combined with what we expect will be another strong cash flow and production year, particularly as a result of higher grades, seems to be going unnoticed by the market. There was a point in time when higher margins and making money would positively impact valuations. However, Detour is trading at a 0.5 to 0.6 NAV, much lower than our peer group.
On the permitting, I'm pleased to say that we have now completed and signed revised agreements with Taykwa Tagamou Nation and Wahgoshig First Nation supporting the future development of the West Detour project, an exploration on our claim block. And I wish to thank them again for their support in this process. Engagement with Moose Cree First Nation has been progressing, and I remain confident in a positive resolution for all parties. And following a recent chief and council site visit at the mine, I see a positive trajectory and target alignment on key aspects of the West Detour project by year-end 2018.
And in the company's current evaluation of further optimizing the mine plan, we are looking to retain permitting flexibility in that plan related to such areas as north -- the North Pit and Walter Lake. And the reason for this is to allow both parties the time to continue discussions on upcoming critical decisions.
On the optimization plan, as a refresher, the purpose of the optimized life of mine plan is to evaluate if we can bring forward ounces from '21 and '22 to improve near-term cash flows, particularly into 2019 and 2020, without introducing execution risk. However this evaluation is not simply a 2019-2020 assessment. And more so, it is not an ounce-chasing exercise. It is a cash flow evaluation exercise. Our focus is on overall cash flows over the next five to seven years. And with the plus-20 year mine life, our vision is focused much further than the next three years. And of course we need to asses the relative risks of any alternative plan, knowing that the current plan bring financial risk and apparent lack of investor traction due to our current three-year cash flow horizon.
And it goes without saying, any optimized plan must be evaluated against the current mine plan from an operational perspective. So one option is to progress down the south wall of the pit to access higher grades sooner, and with performance gained in 2017 we are of the opinion now that we can consider to do this. And we will continue to have large benches, approximately 120 meters wide with two access ramps with this option. And we're making good progress with our review, and our focus includes evaluation of the associated capital and operating costs of this work-in-progress production plan. So, we're targeting Q2 for completion of our assessment and announcement of a decision whether this is a go or a no-go.
On Zone 58N, as you recall, we completed an additional 4,750 meters of drilling at 12.5 meter spacing in Q4. We logged a portion of the core, and now we're re-looking at the block model with these results. And we expect to have an initial mineral resource estimate in Q2, and would then evaluate the benefits and methodology of an advanced exploration program to test the underground mining potential of Zone 58.
As mentioned before, we will proceed with the permitting of West Detour before we advance Zone 58N. And for 2018, we're planning to spend $10 million in exploration mainly on drilling programs on a number of key targets on the Detour Lake property and on Burnt Bush.
So now, I'll hand the call over Frazer to share some of his initial thoughts since joining Detour on January 3.
Thanks very much, Paul. I am extremely excited to join Detour returning to Greenstone belts of Northern Ontario where I started my career in gold mining 28 years ago with many stops in between including open pit and underground mines both precious and base metals, Canada, Americas, Africa, Asia-Pacific. I had in fact back when I worked 17 years with Placer Dome in the early 1990s, had onsite exposure to Detour Lake mine when it was an underground operation.
Of course, the operation, scale, footprint, and strategy were very different back then. So, my notable takeaways of Detour Gold in fact maybe somewhat obvious to the informed industry observer, we have a deeply skilled board and management team with a quality asset boasting unique longevity well over 20 years within amenable topography despite the cold winters in a politically safe jurisdiction with support of stakeholders and a key energetic workforce.
Since my commencement in the new year with Detour, I have spent two thirds of my time at site with our site general manager and his team. This high volume approximately 1g/ton relatively consistent grade asset has a robust mineral resource model which has reconciled to within a few percent over the past four years. My plan to conduct an external review of the mineral resource is merely good corporate governance and business practices that one should conduct every two to three years to avoid potential complacency.
This due diligencing of the mineral resource with continuous new data and a fresh set of eyes as we mine the pit are expected to be merely conformity in nature. As for the fixed plant and mobile fleet, in my view this is a very well capital invested asset. The ultra class mining fleet of shovels and hold trucks plus ancillary gear and rigs when operating efficiently are certainly adequate to meet our life of mine, expect targets growing to +120 million tons.
Likewise, the process plant should meet our current life of mine targets. And I am currently reviewing and prioritizing the near term plant sustaining capital. Our external productivity consultants, which Paul referred to, along with our internal team have assisted in the second half -- starting in the second half of last year with increased utilization of our drill rigs and haul trucks.
We now move on to mainly the mine-to-mill interface interdependencies and that's the reduced throughput interruptions and reduced ore re-handle. And secondly, we are going to focus on mobile and fixed plant maintenance to improve availabilities and achieve benchmark metrics. So in addition to upgrading and enhancing some key site based systems including reliability and condition based maintenance monitoring, document control, operating standards et cetera, I am very excited about further unlocking more potential at Detour Lake mine while adding additional support for our site based team and ensuring efficient use through prudent management of our various contractors.
The ultimate goal is to reduce our mine operating unit cost and achieve or exceed industry benchmark metrics. You might be aware in mid 2017 we became signatories to the international cyanide code payment for certification in 2019. In addition, we have internal plans to adopt the international framework associated with the health and safety standards. That's what we term ISO 45001. And, environmental management standard that's what we term ISO 14001 with the intention to certify in due course.
Paul has already succinctly summarized the objectives and potential outcomes of optimization plan review. I have also fully immersed myself in this most important exercise to understand if the near-term five-year cash flow from operations can be accelerated and smooth in part driven by attempts to remove the current life of mine ounce production depth in 2019–2020 without adversely impacting the asset NAV or without introducing additional operating risk. We look forward to sharing the outcomes of that ongoing work in the second quarter of this year.
In closing, I note that coupled with my safety, environmental operating systems, employee and contractor focus, and despite my relatively short time in the chair, however, coupled with my nearly 30 years of operational experience, I'm confident this deposit has more value to unlock, profit margins to grow and will continue to benefit all stakeholders and our shareholders. So I look forward to further providing updates throughout this year.
Paul, back to you.
Okay, thanks, Frazer. So, just a couple of closing comments before we open it up for questions. As I noted earlier, 2018 is expected to be another good year for Detour Gold with strong free cash flow and we've estimated a $115 million at $1,300 gold at an FX exchange rate of 1.25 enabling us to further strengthen our already strong balance sheet.
Near-term operational priority is to raise the benchmark performance of the Detour Lake operation as Frazer focused on. And this will lead to driving down unit costs, but people, I think, have to be patient in expecting this to change quickly. This is a large mine and this mine requires some inertia to effect change. So I'm looking forward to the report of the results of the potential to improve our near term cash flows as well as our initial resource for Zone 58 North, and we strongly believe that these catalysts will contribute to reduce the valuation gap with our peer group.
So before turning the call over to the operator to open it up for questions, I would ask that each caller respect the number of people on the line and limit your questions to two items. And if anyone requires a more detailed conversation, we'd be happy to address those items with our team after the call.
So, Operator, over to you to open up the lines.
Thank you. [Operator Instructions] Our first question comes from Rahul Paul of Canaccord Genuity. Please go ahead.
Hi, everyone. I understand you spoke about the alternative plan to bring ore tons [Ph] forward from 2021 to 2022, in your life of mine plan, you have West Detour coming online in 2025, so could we see West Detour development being brought forward assuming you receive permits earlier or is a quicker development of West Detour completely off the table?
Hi, Rahul, it's Frazer. I'll answer that. Look, I don't think right now at this point it's appropriate to get into the specifics of what that plan's going to look like. We'll be sharing that in Q2. However, what I will say is everything that we're doing will ensure that we retain all permitting flexibility and not put the operation at risk and all plans are always laid out that if there's an opportunity to accelerate we will.
And then, maybe not as it pertains to the plan, but even in 2018 and just basically going forward my understanding is you stockpile anything from 0.004 to 0.005 grams, and then you put the higher grade stuff through the mill, if you can get your mining rates higher would you be able to increase production and grade by raising the cutoff for the mill?
Well, those are things we'd always evaluate. The challenge of course when you raise cutoff to the mill is that for the size of the plant that we have I think you're just going to end up having a problem with some of our costs, because even though we can get 22 million tons per annum through now I think it's somewhat limited in terms of our cost profile. So for now I think it's appropriate our 0.005 cut-off grade in what we're putting through the plan.
Okay, thanks. That's all that I had.
Our next question comes from Cosmos Chiu of CIBC. Please go ahead.
Hi, good morning. Thanks, Paul, Jim, and welcome Frazer. My first question is on accounting here. There was a big adjustment for taxes, mining deferred taxes in Q4. I'm just trying to understand the nature of that adjustment, and what happened here? From my own investigation it looks it's a bit of a true-up, it looks like it is non-cash. I think that accounting entry here; would it be debit expenses, credit your deferred liability? Is that sort of what happened, Jim?
You're right, Cosmos, that it was a non-cash tax expense. It's a deferred tax, as you're referring to. And it really isn't a true-up. What went on was we have two things that are going on. We have the foreign exchange rate that moves around a fair amount from quarter to quarter, from year to year. And that's why you see our deferred taxes can swing from an expense to a recovery in any particular period. And then also the mine has now been in operation for about five years. And we are grinding through our tax pools faster than depreciation for accounting purposes. So that sort of offsets the other side of it.
But in terms of actual cash taxes, right now you're not paying any cash taxes yet?
No, there's no cash taxes, and I wouldn't expect there to be any for at least another three or four years.
Thanks, Paul -- sorry, Jim.
Got me, touché.
I do have a question for Paul.
Paul, as you've mentioned, 2017 production was good. 2018 guidance looks good. But I would agree with you that your share price hasn't fully reacted well. And so from that perspective, and in terms of capital allocation, would you consider some kind of NCIB or share buyback to take advantage of your current discount?
Cosmos, that's a really good question, and one that we looking at. As we pay down our debt, our debt level is very comfortable now. So some of the capital allocation decisions are do we continue on that pace. But there is the metric right now where the company is making very good cash flow but has a, say, depressed valuation. So that metrics says that that is something that we should be considering and it's something that we are discussing. But there are no final decisions on that at this time. I think, first of all, we want to get conclusion of the optimization plan out first, and then we would be looking at the capital allocation equation.
Great. Thanks Paul and team. That's all I have.
Our next question comes from Dan Rollins of RBC. Please go ahead.
Yes, thanks very much. Paul, just ahead of the optimization plan, I was wondering if you might be able to provide some metrics that you're going to be looking at evaluate if the risk-reward tradeoff is appropriate for the company at this time. Are you going to be focusing on the potential uplift in IR, is it a potential uplift in NPV, is the potential uplift in cash flow? What sort of metrics should we be thinking about going into this study?
Yes, Dan, it's a good question. With the size of this asset it's hard to impact the NPV on it. So what we're focusing on is really two areas. So one is the near-term cash flow, so we can say five to seven years, how does that compare to the current plan. So that would be the first one. And then obviously it is, as we talked about, is the potential operational risk in the ability to smooth our gold production profile to take the rollercoaster out of what we currently have.
Is there sort of a level that you're looking at an uplift in cash flow, 5%-10% you'd be looking at or this is sort of -- this is something a work-in-progress?
Yes, no, really, Dan, it's not just -- we know we can improve '19-'20, but at the expense of what. So we need to look at a longer term than just the divot period, because we don't want to be short-term focused. You need to plan this pit and this mine long-term. So that's why we're saying five to seven years is the critical evaluation.
Okay, great. That's very, very helpful. Just to bring up the divot year, you brought up the strong Canadian dollar gold price. Any thoughts about putting in some protective hedges here, obviously we've seen some of your peers take advantage of cost-less callers or very low-cost callers over the last year to lock in between $1,200 to $1,400 or $1,300 to even higher. What are your thoughts on that, just to take a little bit of risk out of the balance sheet just ahead of this potential divot period if it does remain in place?
Yes, I think I have a couple of comments. Interesting, we haven't seen a lot of our peers going into the market with respect to the gold price, but we could dig again. What we have been consistent in our talking is that the balance sheet doesn't necessitate hedging of gold. We did that in the past, we had a very good rationale for it. So the only reason we would be doing it, which is the one you're raising, is if the gold price becomes extremely attractive and there is an opportunistic opportunity. So we could continue to monitor that. The Canadian price is teasing us a little bit right now, about $1,700 is an extremely strong gold price. But I think, again, first we need to get the optimization conclusion done first. Does that change the equation on the divot, if it does then that hedging or potential to lock in gold price has a little different perspective.
Yes. And I didn't -- if I said a lot of your peers have done it, I didn't mean to. But we have seen some take advantage of. Especially with the seasonal moves in gold over the last few years, I'm just surprised we actually haven't seen more take advantage of this low-cost option. But appreciate that.
And good luck, guys. Take care.
Our next question comes from Don Blyth of Paradigm Capital. Please go ahead.
Hi guys. I see that at Zone 58N you've drilled a portion of it to 12.5 meter spacing, I'm kind of wondering one would expect for drilling out reserves. I assume you did the higher density drilling because of the high-grade and sort of nuggety nature of the mineralization at Zone 58N. So can you make any commentary on how the grade profile may or may not have changed in that area that you've drilled to the higher density versus what you might have estimated at lower density drilling? And secondly, I guess is this a deposit that really you ultimately need to get in with an underground exploration drift to really understand it. And on that, any timing when you might pull the trigger on doing an underground drift there?
Hi, Don, it's Frazer. I'll answer that. Your first question, correct, that was why the additional drilling was done because of the potential nuggety nature of this deposit. So just to confirm what we felt we had at the top. Secondly, as we stated in Q2, we'll be announcing our maiden mineral resource on this deposit. And at that time we will then decide how we further progress, whether it's more drilling or a decline, that's yet to be determined. So I ask if you can be somewhat patient, and we'll share that later this year. But what you will see are the results initially in the maiden resource that we put out at that time.
Okay, certainly looks intriguing, looking forward to it.
So are we.
Our next question comes from Josh Wolfson of Desjardins Securities. Please go ahead.
Thank you. Maybe going back to the discussion of the optimized mine plan. I think you acknowledged the current mining plan has some financial risk. With the discussion about bringing the south wall of the pit or progressing down the south wall of the pit, how would you characterize the operating risk with that potential plan that's outlined?
Josh, it's Frazer, I'll answer that one. I mean, in mining there's always risk of course, so I don't want to set the wrong expectation here. But really if this thing goes through -- we will not proceed with this if we think there's operational risk. Risk can be introduced in a few ways. One, if you think there's concern with the wall, we don't think there is. Two, is if your benches are too narrow for the size of the mining equipment that you have. Again, I don't believe that's going to be the case. And three, to make sure you retain flexibility and access in and out of the pit for your whole trucks, i.e., a couple of ramps going either direction, and that's something we'll be focusing on as well. So if we can maintain all that then we don't believe it would've introduced operating risk.
The other one, of course, was asked earlier on the call and it has to do with permitting without putting any undue, unnecessary pressure on permits. So we'll make sure all those conditions are satisfied. And if they are and we are happy with what we see, then we will -- well, irrespective we will be making announcement in Q2 on our results.
Okay. And then, I guess that leads me into the second part of the question. On the permitting side, the final sort of one to three partners with its sort of held out until now, what point -- and I understand the scheduling has outlined until year-end 2018 to receive the permit. But, at what point, would the current plant become a risk for Detour if the agreement was not signed by that third party?
Well, I guess there is two responses for that. I will do the second part first. The regulators always have the right and position to regulate and make decisions whether all parties are involved are not, but we've always stated that it is our strong preference to have alignment and that we currently and continue to work forward with. So, the critical areas of West Detour is 2025 and the current mine plan in Walter Lake is 2021. So, there still remains a significant breathing room with respect to those items. And let's see if we do go with the new plan, we would not be looking to accelerate those items that just doesn't help us out all.
Okay. But just to understand, I guess the higher capital and higher stripping in 2019 and 2020 is in part 4, I guess the achievement of those permitting milestones are led to that the higher production be released in 2021, is that fair to say?
Well, that's fair -- well, that's opening the pit up, right? So, the question is can we as we talked about is the option to go one side of the pit turnover smaller size benchmark frequently than the current plan.
Okay. And just to understand, so the Walter Lake in 2021 being the earlier of the two milestones, the work for that would not be affected in 2019 and 2020 as the permitting was not achieved by year-end 2018 or would be a potential challenge?
Oh, well, the current plan doesn't see us touching it until 2021. So, the answer is yes.
Okay. Got it. Understood. Thank you very much.
[Operator Instructions] Our next question comes from Kerry Smith of Haywood Securities. Please go ahead.
Thanks, operator. Paul or Frazer, you talked about adding the shovel and two trucks in Q1. I am just wondering if those trucks and shovel are commissioned now or there are still be commissioned in the last 20 days let's say?
Hi, Kerry. It's Frazer here. Yes, the two trucks are there. And they are operating and the shovel is imminent. So as we had said before, shovel will be operating in Q1.
Okay. Okay, great. And then, just on the lead nitrate in the oxygen system, is that -- ramp up in that implementation kind of going according to your expectations?
Yes, it is. That's been commissioned. There were few early hiccups. We are just smoothing that out over this quarter. But for now, we are pleased with what we see. There is always whenever you commission any section of any plant, there is always some additional tweaks that may have do. But fundamentally we are happy with what we are getting on recoveries as a result of it. That was to help offset the sulfides -- the copper and the sulfides that came through. But it'll always be work in progress, but we are generally pleased with the results, yes.
Okay. And Frazer, the job cuts on the South Wall that you are talking about, is it along the entire South Wall or just in the area of Southern Campbell pit?
Well, it's getting into detail. But, no, it's along the entire southwest side. So this is an issue when we optimize and looking what part of the pit, we are not changing the outer pit shale here. What part of the pit we can get access to the higher grades without introducing any operation risk. So, it's really all along the south and going towards the west Campbell that is a bit more on the east side.
Okay. Okay, that's good. Thank you.
This concludes the question-and-answer session. I would like to turn the conference back over to Paul Martin, President and CEO, for any closing remarks.
Okay. I just want to thank everybody for attending, and we look forward to speaking with you again with release of Q1. Thanks everyone, have a good day.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.