SEMAFO Inc. (SEMFF) CEO Benoit Desormeaux on Q1 2019 Results - Earnings Call Transcript

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About: SEMAFO Inc. (SEMFF)
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SEMAFO Inc. (OTCPK:SEMFF) Q1 2019 Results Earnings Conference Call May 8, 2019 10:00 AM ET

Company Participants

John Jentz - VP, Corporate Development and IR

Benoit Desormeaux - President and CEO

Martin Milette - CFO

Sylvain Duchesne - VP, Engineering and Construction

Patrick Moryoussef - VP, Mining Operations

Richard Roy - VP Exploration

Conference Call Participants

Kerry Smith - Haywood Securities

Lawson Winder - Bank of America Merrill Lynch

Felix Waechter - Sprott

Bryce Adams - CIBC

Don DeMarco - National Bank Financial

Operator

Good morning. My name is Sylvie and I will be your conference operator today. At this time I would like to welcome everyone to SEMAFO's Q1 2019 Results Conference Call. [Operator Instructions] Thank you.

Mr. John Jentz, you may now begin your conference.

John Jentz

Thank you, Operator. Good morning.

Members of SEMAFO senior management team joining me today for the call are Benoit Desormeaux, President and Chief Executive Officer; Martin Milette, Chief Financial Officer; Sylvain Duchesne, Vice President, Engineering and Construction; Patrick Moryoussef, Vice President, Mining Operations; and Richard Roy, Vice President Exploration.

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 expectations regarding the market price of gold, timetables, mining operation expenses, capital expenditures, guidance and reserve and resources 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 2018 annual MD&A as updated and other filings made with the Canadian Securities Regulatory Authorities and available on our website at semafo.com.

SEMAFO disclaims any obligation to update or revise any forward-looking statements except as required by law. I make this cautionary statement on behalf of all SEMAFO spokespeople, who may address you today during this conference call. All dollar amounts are referred as U.S. dollars unless otherwise stated.

With that said, I’ll now turn the call over to Benoit Desormeaux for the presentation portion of the call, followed by Q&A session. Benoit?

Benoit Desormeaux

Thank you, John, and good morning everyone. Thank you for joining SEMAFO's first quarter 2019 results conference call.

First quarter of 2019 was a record for SEMAFO in three important ways, first, we achieved the record production of 102,000 ounces our first quarter over 100,000 ounces of production in the company's history. Our flagship asset, Boungou made a strong contribution in the quarter and we look forward to see many more as we look to achieve our 2019 guidance and longer term targets.

Second, we started the acquisition of Savary in the quarter and closed it on April 30th. Savary represents a low cost accretive addition to our development pipeline and when combined with our Bantou property result in a property package that is approximately 25 kilometer east west and approximately 50 kilometres north south that's a 1,250 square kilometres under Hounde belt.

The Hounde belt is a prolific gold belt that hosts Mana where we have mined over 2 million ounces of gold over the past 10 years. We see this combined property package as a district scale mining area that is going to be part of our future for many years to come.

Third, we achieved record financial performance in the quarter. Cash flow from operating activities was $79 million or $0.24 per share, the highest in the company's history. Net income was $17.7 million or a $0.05 per share and this include a $15 million non-cash deferred tax charge and we excluded this charge, net income would have come in at $32.7 million or $0.10 per share.

All-in sustaining costs fell by over 30% on a quarter-over-quarter basis to a record $745 per ounce in line with our expectation. Gold revenues in the quarter were also a company record at $138 million based on an average realized price of a $1,306 per ounce.

What is equally impressive is that our team has managed all of these records and accomplishments while maintaining a conservative capital structure and clean balance sheet that remains 100% exposed to the upside in gold price.

Net cash continues to increase, we repaid $15 million of debt in the quarter and the remainder will be repaid no later than 2020 and potentially earlier. Exploration wise, we were active in the first quarter, as we indicated on April 30, we have now three drills turning at Bantou. We look forward to providing an update in early June when DAC completion and geological interpretation are completed.

Our team is excited to have recently started exploring Bantou, and to have discovered a new zone just north of the Bantou zone. Recall the Bantou zone is where we announced the maiden inferred resource of 361,000 ounces at 5.35 gram per ton.

Now that the Savary acquisition is closed, our team is busy combining the geological information and database from Karankasso with Bantou. We expect this exercise will be completed in the third quarter, and will update everyone when it is completed. We would expect the existing $3 million budget at Bantou to increase.

Development we see on the ground is now almost halfway through, and progressing as expected on time and on budget. The mining permit for Siou underground is expected imminently following a successful hearing with the National Mines Commission in the quarter. We continue to expect first production at Siou underground in the early 2020

At Nabanga, PEA remains on track for the third quarter. All areas of the business including operations, development and exploration performed well in the first quarter and we are continuing that momentum into Q2 and beyond.

Operator, I would now like to open up the lines for Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will be from Kerry Smith of Haywood Securities. Please go ahead.

Kerry Smith

Benoit or maybe Patrick, just on the block model at Boungou, you had - the grade with 6.5 grams in the quarter. What sort of grade was the model predicting for Q1 relative to the 6.5 grams achieved.

Benoit Desormeaux

I don't have the exact numbers of what was it predicting but I know that reconciliation with the grade model and the RC control are very close and were within 5% of the variation. A lot of it has to do with the sequencing. But to date, in Q1 and as a matter of fact, when we reached the high grade zones in the West bit at the end of October in 2018, we've been very consistent in reproducing grade from the block model.

Kerry Smith

So I guess the grade is going to tail off over the rest of the year just based on the guidance you have given. But it's not going be a lot I guess.

Benoit Desormeaux

It'll be close to around 6 grams per ton. Yeah.

Patrick Moryoussef

It's not a surprise that the degree that we had in Q1 is not a surprise. It was as expected and the guidance we gave is pretty close to six grams. So it will remain in the same vicinity.

Kerry Smith

And the $25 million on the balance sheet of restricted cash just remind me what that's for. I guess some of that's for the debt repayment but can you remind me what the total is for.

Benoit Desormeaux

Kerry, It's related to the debt. So it's an amount that we have to keep separately in the account until the loan reach an amount of $90 million, which will happen at the end of June of this year. It will be a relief at the end of June.

Kerry Smith

So, all of it'll be released at the end of June, Martin. Yes.

Martin Milette

Yes.

Kerry Smith

So that will happen in June. And then the cash costs on a per ton basis at Mana dropped quite a bit in Q1 versus last quarter was 41 versus 49 a ton. Was there any particular reason for that or was that and if it was currency related or what exactly that was caused by.

Martin Milette

On our side is was fairly consistent with the budget we had. There might be a question of stripping because if I remember well, we were mining more Siou of course. There wasn't no Siou or that came in the in the budget this year, but of course last year was a big part of it. And Siou was a bit higher strip.

So, on a cash operating cost as it has in effect. All in cost of course it doesn't have much in effect as we're stripping Siou for the second half of the year. But those are probably the main items. Apart from that everything is fairly consistent.

Kerry Smith

And then maybe just one last question if I can. You talked about this interesting area that you were drilling two kilometers north at Bantou. They'll have some results in June. Is that area interesting because it's potentially better grade material that you could push through the plant early or it's just - it's looks like it could have some economic intercepts but not necessarily have agreed that would supplant or exchange for the current ore or in the current pit. I'm just curious, what testing means.

Benoit Desormeaux

Yes, we will have, we will have. Today we have some intercepts that are interesting it's difficult to see for now. This morning what will be the economics of it. But it was interesting enough for us to add another drill, and maintain a jewel that that was still working on Bantou itself. But you know, the combination of Bantou, Karankasso and what we're seeing on our property so far, it looks like -- I'm not talking about geology, and Richard maybe talk a bit about that later, but I'm not referring through geology, but the potential of these different areas look like a Mana.

So, you could add some zone high grade. You could have some zone at lower grade and we have a worn out type of deposit as well on the same ground. So, all depending on the grade and the strip ratio and all that it will make it very good group of properties based on that.

So that means we're not only looking at one type of ore and one type of geology, which open a totally different potential. And this is what we saw after a couple of years of exploration at Mana. And looking at Karankasso and Bantou and what we - the target would just identified recently. Yeah, looks similar in terms of potential. Richard, do you want to comment on.

Richard Roy

I just would like to add, Kerry, that for us the excitement is the fact that we're just starting exploration. It's the first quarter really to do grassroots exploration on the project. And we're looking at really good looking rocks and it's the - the variety of the styles of mineralization that is very exciting.

So, as Ben was saying, similar to Mana there's different style of mineralization and of course, you're going to get different grades accordingly, but that's the level of excitement that we're at right now.

Operator

Next question will be from Lawson Winder of Bank of America Merrill Lynch. Please go ahead.

Lawson Winder

Just first off on the through-put at Bantou, sorry Boungou. Would you expect that to ramp up fairly materially through the back-half of 2019?

Benoit Desormeaux

Yes, that's our plan and that's the way the budget has been built. So the throughput we have achieved in Q1 is as per our budget. So it's maybe just a bit better. Keep in mind we said one of the bottleneck we had at plant was the liners in the SAG mill that was limiting the throughput.

So the liners have been changed at the end of April. So, we are expecting to see an increase in throughput in Q2. There's other things that we're doing at the plant. So from one quarter to another it's supposed to increase and we're expecting in our budget to achieve more than 4,000 tons per day in the fourth quarter of the year. So, that's the way our budget has been built. And, with all the actions, the action plan we have in place. This is what we continue to believe will happen.

Lawson Winder

In terms of ore hardness at Bangou, is that lining up with what you would expect?

Benoit Desormeaux

Yes, it's fairly consistent. I would ask Sylvain to comment on it. But, in average I think it's fairly consistent.

Sylvain Duchesne

Yes, Lawson, it's essentially what we had in mind like we said. It's more about the SAG liners that we have to work a little bit. As you know bringing liners in Africa, -- it's a little bit -- it takes a long time. So as soon as we should see good results very shortly based on that.

But the hardness is fairly consistent with the study we had. And that's one of the reason why we've chosen Verti mill, which is offering with that kind of hard ore savings on energy. So, it was 30% savings.

Lawson Winder

And then just on the security situation in Burkina Faso. So, I mean you talked last quarter about the increased spending with respect to security. And I'm just curious in terms of what you're spending through operating costs on security. Has that been enough or is there a chance that could increase going forward?

Benoit Desormeaux

On the operational cost, I think what we have in place is what is required at this point. The expenses or the expenditures were more on the CapEx side, including of course the airstrip and a couple of others items that we had to improve to adjust to the situation. But on the operational side, it's we have security people already in place. I don't think it will change much unless the situation would go in another direction. But so far what we're seeing in the region and the type of security we have onsite. People feel secure onsite, and that's not a worry. And for our security of course is our priority to make sure that our employees feel safe. And I think we're doing all the steps that are needed for that.

Lawson Winder

And then just on the depreciation. The current level depreciation on a per ounce sold basis, is the Q1 level fair run-rate for what we might expect for the remaining nine months of 2019?

Benoit Desormeaux

Yes, that's correct.

Lawson Winder

And then just in terms of capital allocation, you in your prepared remarks, you talked a little bit about exploration likely to increase, you talked about potentially paying down the debt sooner. What you didn't mention was potential capital being allocated to additional acquisitions and also the dividend. So those sort of four big buckets how do you think about those and in terms of priority?

Benoit Desormeaux

If I think in terms of priority, of course exploration is always number one because we were the ones that strongly believe even in the past and today the best value creation always comes from exploration. Finding your own answers will be by far the cheapest way. And this is where you will be successful creating shareholder value. So that's first. Second, of course we have to repeat that. We always said that we are developing Siou underground, and we are keeping a conservative approach, so as we're progressing in the underground.

And we have the flexibility to repay the debt earlier. So we could decide to do it. Acquisition yeah – today we've just started Boungou, we start having good results at Bantou. We're going to keep an eye open, but it's not like we're desperate to do something. And so we'll see where we'll go with that, but this is not – it's not like top of our list and then comes dividend. So of course, we always said that probably starting 2020, this is maybe where we will start more thinking about that, after we've made our decision under that, and after we have started the underground.

Lawson Winder

And then, so if I'm hearing you right, I mean the plan is just to pay the debt down to zero as opposed to potentially refinance any of that, is that correct?

Benoit Desormeaux

That's correct.

Lawson Winder

And then just one more if I find it’s right sorry how many question?

Benoit Desormeaux

Okay.

Lawson Winder

Just on acquisitions. I mean you mentioned that you would take a look. I'm just curious like what maybe you just update us on the criteria, kind of – is for potential acquisition, size, location, sort of like position in the – where it is along the development cycle that sort of thing, and that would be it from me? Thanks.

Benoit Desormeaux

In terms of size, of course, we're looking at something that is similar to what we're producing with an asset today. So that would be between 150,000 to 200,000 ounces at least to have that potential. In terms of areas, of – so we're looking everywhere, we're looking for the best project. But at the same time, it has to make sense for us. We recognize that we have a no strong knowledge and [indiscernible] to operate in Africa so in West Africa first. But, that doesn't mean we will stick with West Africa. The best projects that makes more sense for us is elsewhere we're ready to go.

Specially if there is something of the size we're looking somewhere in Canada. That would be interesting for us, in terms of diversification, but as I said we're comfortable in Africa, and we've been there for many, many years. So, we know how to operate. So in terms of page of - yeah we have always said during all those years that our best part is of course the type of acquisition we did with Orbis. But at the same time, when we look today there's not that many quality assets that would fit our criteria.

So that's the reason why we're not in a hurry to do something like that. And keeping our mind that we have as well, Bantou and Karankasso that may offer the next mines for us depending on if we can go on that so we will keep that in mind as well. So it's not like a big focus on our side.

Operator

Next question will be from Felix Waechter at Sprott. Please go ahead.

Felix Waechter

One of our concerns that Boungou initially was its non-visual or obviously and that always creates issues and dilution your head rate over the past two quarters obviously is impressive, suggesting you've been keeping at very low. Can you just comment on with two quarters under your belt now and how you're managing dilution and whether that's an issue you feel like you have under control now for the rest of year?

Benoit Desormeaux

Yes, I will ask Patrick to answer that.

Patrick Moryoussef

Yes so previously I didn't have the response to the question on reconciliation. But in terms of great mine based on the reserves, we were at 7.7 grams per ton, sorry 7.7 grams per ton. We've actually mined out 7.9. So we've pulled out a bit higher grades than expected. What went through the mill basically on the mixture before from the ROM pad which has over 470,000 tonnes. We brought in a 6.5 grams per ton. Obviously, the focus is all on quality versus quantity. The control, the dilution we've put in place, BMM, which is blast monitoring technology using sensors in three dimension to be able to coordinate in 3D, the different blast, and direction of the blast.

We have pointers on size. We have an excellent geological grasp of the ore body in the block model. We've accounted for in our budgets. We've accounted for 5% loss of mine, and 18% total dilution. I think, we're coming slightly below those numbers in actual figures. And right now also with the RC, grade control that is being done onsite. We have a very good correlation between the RC grade model, the reserve model, and the actual jewel mine mining model.

Felix Waechter

And then just moving over to the cost of Boungou, slightly higher than expected. But from what I've read through from your release, that's due to high stripping in this part of the year. Just wondering, if you expect a unit costs kind of where you think they're going to be long-term. Now, if you think maybe with throughput increasing a little bit and sort of operations spending down that unit costs might also come down over the next six months or so?

Benoit Desormeaux

In terms of mining, in total we've moved the material we had to move – exactly as per our budget. But in the quarter, we've mined less ore compared to the next quarters so it will. That's the reason why the strip ratio will come down. In terms of unit cost on the mining side, we're going to be fairly consistent. On the throughput, of course, as the throughput will increase, cost per ton will decrease, because we have fixed cost, of course, that will be amortized over bigger tonnage. And so far, what we're seeing in the year that was one of our goal was to decrease re-agent consumption, because in the first quarter of production last year. So in the first quarter of Boungou production in its history, we were a bit above the design and the feasibility study.

What we're seeing now in the first quarter is we are below our budget in terms of re-agent consumption, and we'll continue working on it. So that will of course improve our unit cost. We have always said so far what you've seen is 2% more on recovery site. We want to optimize re-agent consumption, but not that the cost of losing of course any recovery. So if you have 2% a bit higher re-agent consumption – is quickly paid but we are of course continuing working on it. So you can expect – on the unit cost a decrease in the coming quarters.

Operator

Next question will be from Bryce Adams at CIBC. Please go ahead.

Bryce Adams

Wanted to rehash some of the grade assumptions of Boungou through the rest of the year gold was 5.7 grams per ton. I think from Kerry's question, you're saying that the grade profile should stay above 6 grams for the rest of the year, is that correct?

Benoit Desormeaux

No, I didn't say it would say above 6 grams, I said, it should be barely in this – because what we have in the first quarter is higher than we had in our budget as Patrick said. The budget for the first quarter was 6 and it's fairly consistent during the year. So, you should expect something close to six. And as we're mining more ore, it will decrease, but we will stockpile the lower grade. And yeah it should be close to the 5.9, 6 grams.

Bryce Adams

And average for the full year or for the last three quarters?

Benoit Desormeaux

For the last three quarters.

Bryce Adams

And then a couple on you said you were planning to mine 7.7 for the quarter but you mined 7.9. So that equates to roughly 2% to 3% positive grade reconciliation. Is that the right way to think about that?

Benoit Desormeaux

Yes, that's right way.

Bryce Adams

On the Boungou, CapEx and stripping, I think, roughly half of annual guidance has been accounted for in Q1 $21 million full year guidance for stripping down about half of that in Q1 and, then for sustaining CapEx $2 million of about $4 million full year guidance. Do you think that’s the full year guidance estimates for stripping and sustaining CapEx are still good?

Benoit Desormeaux

Definitely yes, what you've seen in the quarter is what – I said that we're mining 7 million tonnes of rock every quarter. What happened in first quarter, it's only the accounting side of it that you saw. So we were stripping more on what we call the capitalized stripping. As opposed to the next quarter, the next quarter will be more operational stripping and since we will be mining more ore. Of course, the stripping issue will decrease.

Bryce Adams

All right.

Benoit Desormeaux

So our guidance on CapEx and our guidance and all in and the guidance on the sustaining CapEx are still good.

Bryce Adams

That will see a step down for Q2?

Benoit Desormeaux

Yes, because you will have more operational stress.

Operator

[Operator Instructions] And your next question will be from Don DeMarco at National Bank Financial. Please go ahead.

Don DeMarco

Just a follow up question on the ore hardness. I wonder if you could comment on the variability of the hardness over this year and over maybe the first three years of the mine life?

Benoit Desormeaux

At Boungou?

Don DeMarco

Yes, at Boungou, yes.

Sylvain Duchesne

Well it's -- I would say Don, it's Sylvain. The variability step that -- we've done in DFS essentially, we had the same kind of recoveries. We don’t expect too much variations on that part. Obviously, it's the beginning of the operation and we'll see how it goes essentially, but no surprises so far in terms of hardness that we had.

Benoit Desormeaux

And we're not expecting much variability. We're fairly consistent.

Don DeMarco

So it's not as though right now you have the softest ore going through?

Benoit Desormeaux

No.

Don DeMarco

But what you're seeing now is going to be consistent of what you see over the next few years and over the mine life.

Benoit Desormeaux

Add to that just recall that there was 99% of fresh rock material on the project. There's a slight variability of hardness when we are mining in the East bit as opposed to the West bit, but it's in line with what's being presented in the DFS. And right now, focus for the next three years in our five year mine plan is mainly in the starter pit. So what you've seen in terms of hardness in the last six months is basically the same type of hardness going forward. We're looking at a variability of 18 to 21 in bond work index.

Don DeMarco

And final question. The liner was changed at the end of April. Is this is the liner wearing at the pace that you would expect?

Benoit Desormeaux

No, it's the essentially the design. We've been having so far it's -- liners, we had some plugging between the liners. So it's essentially slowed down the troop. So we've been designing with Metso, a new type of liners to in order to avoid that. So essentially it's been installed at the end of April. So that's why we expect to see that the throughput will improve as we're going moving forward. But it was not a main decision. It was an optimization decision. Yeah.

Operator

And at this time we have no other questions. So I would like to turn the call back over to our hosts.

Benoit Desormeaux

I'd like to take this opportunity to remind listeners that our first quarter 2019 MD&A and financial statements are available on our website or on SEDAR, sedar.com and the audio webcast of this conference call will be available for replay on our website for a period of 30 days.

I'd also like to mention that our Annual General Meeting for shareholders will be held tomorrow 10:00 a.m. at Club St. James in Montreal. Additionally, we'll be holding two Investor Days, one in Toronto on June 6th, one in London on June 10th. Currently our 2019 second quarter financial and operating results are scheduled for publication on are about August 6, 2019. Thank you and have a good day.

Operator

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again thank you for attending. And at this time we do ask that you please disconnect your lines. Enjoy the rest of your day.