Gran Colombia Gold Corp. (OTCPK:TPRFF) Q1 2019 Results Conference Call May 16, 2019 9:30 AM ET
Mike Davies - CFO
Lombardo Paredes Arenas - CEO
Conference Call Participants
Derek Macpherson - Red Cloud, Inc.
Welcome to the Gran Colombia Gold Q1 2019 Results Webcast. My name is Ellen, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded.
I would now like to turn the call over to Mike Davies, Chief Financial Officer. Sir, you may begin.
Great. Thank you, Ellen. Good morning and thank you for joining us today for our 2019 first quarter results webcast. With me on the webcast this morning is our CEO, Lombardo Paredes. And I'll first go through our prepared remarks regarding our performance in the first quarter, and then Lombardo will be available as we open things up for the Q&A session.
Before we proceed with the presentation, I would first like to draw your attention to our legal disclaimer regarding forward-looking statements that may be made by us this morning during the webcast.
Last night, we released our operating and financial results for the first quarter of 2019. We’re pleased to be able to report another strong quarter as we execute our strategy. The record gold production, which we reported for the first quarter, led to new quarterly highs in revenue at $77.5 million and adjusted EBITDA of $35.2 million. Cost per ounce data was lower than expected and lower than the first quarter of last year, given the production performance. And all of this resulted in net income of $7.9 million and adjusted net income of $12.9 million, both of which were up compared to the first quarter last year. Our operating cash flow in the first quarter was $19.8 million. And after CapEx, our free cash flow was $11.3 million, both up from the first quarter last year, and this contributed to a $4.6 million increase in our cash position to $40.2 million at the end of March 2019.
Over the next few slides, we’ll take a closer look at the results we reported last night.
In April, we reported that we had set a new quarterly production record with 60,601 ounces of gold in the first quarter of 2019, a 15% increase over the first quarter last year. Last night, we announced that we produced the total of 20,472 ounces in the month of April with Segovia producing 18,371 ounces and Marmato producing 2,101 ounces.
This brings the trailing 12 months’ total gold production at the end of April 2019 to 230,283 ounces, up almost 6% over 2018’s annual gold production, and above the top end of this year’s production guidance.
It’s still too early in the year for us to be comfortable changing guidance at this point. So, we’ll continue to monitor performance over the next several months and reevaluate things as we see how this year’s trend is shaping up.
Our development and mechanization investments in the company operated areas at our Segovia operations, a cornerstone in our capital programs the last couple of years, continued to pay off in the first quarter of 2019 with increased production at both the Providencia and El Silencio mines. Material process at Segovia in the first quarter of 2019 increased to over 1,100 tons per day, up 19% over the first quarter last year and head grades increased to 18.8 grams per ton. The key contributor to the head grade increase was the Company-operated areas within the Providencia mine, which contributed 21% of the total material processed in the first quarter at an average grade of 34.8 grams per ton, up from 25.4 grams per ton in the first quarter last year.
We’ve started off the second quarter on the right foot. In April, Segovia’s production totaled 18,371 ounces with almost 1,200 tons per day of material processed at head grades averaging 18 grams per ton. Providencia continued to perform well with material from its Company-operated areas contributing about 20% of the total material processed to grades averaging 35 grams per ton.
Marmato’s production remained steady but the real focus at this time is the evaluation work being undertaken with respect to the underground expansion opportunity to incorporate the Deeps material.
Revenue reached a total of $77.5 million in the first quarter of 2019, up 20% from the first quarter last year. Gold sales volume was up 19% this quarter, driven by the production growth. Spot gold prices fell to $1,304 per ounce in the first quarter of 2019, down from $1,329 per ounce in the first quarter last year. However, our realized gold prices actually went up from $1,293 per ounce last year to $1,298 per ounce this year. The catalyst for this improvement, which equated to about $20 per ounce in additional revenue this quarter, was a change in refinery in January of this year.
We had been experiencing some performance issues with the previous refinery that caused us some concern and we took the decision to terminate the long-term supply agreement. In doing so, we completed an international competitive tender process amongst several refineries. And all of the refineries we received quotes from, showed us substantial savings. But just as improvement to us was ensuring we maintained a low credit risk profile in whichever one we chose to deal with. We’re happy with our choice of new refinery. And as you can see in our financial statements, not only did we collect $1.4 million of trade receivables long overdue from the previous refinery but our ongoing trade receivables and operating cash flow are benefiting from the payment terms [Technical Difficulty]. We were notified last week by the ICC that the previous refinery has requested that we proceed with an arbitration process as is their right under the contract in connection with the termination. But we feel we have solid grounds for our actions and we will defend our position in the arbitration.
Overall, our first quarter 2019 cash cost averaged $621 per ounce, down from $670 per ounce in the first quarter last year. Our company average cash cost in the first quarter of 2019 benefited from the fact that 91% of our total sales came from the significantly lower cost Segovia operations. Segovia’s cash costs came down 7% to $570 per ounce in the first quarter of 2019 as the production increase helped to further reduce fixed production cost on a per ounce basis. And the incredible production associated with the grade increase in the Providencia mine came with very little in the way of additional production costs. Marmato’s cash cost is staying fairly steady above the $1,100 per ounce mark. However, we do expect to see much lower cash cost in the future once we implement the mine expansion strategy incorporating the Deeps mineralization.
From this chart, you can see some improvement in our all-in sustaining cost in the first quarter of 2019, down to $832 per ounce, benefiting from the lower cash cost per ounce this quarter and also a reduction in CapEx spending on a per ounce basis as a result of the production growth. Our trailing 12 months all-in sustaining cost is also decreased to $896 per ounce compared with 2018 full-year average of $919 per ounce.
And something I feel is important to highlight this morning is that we have adapted our all-in sustaining cost and all-in cost disclosure to the latest guidance update published by the World Gold Council late last year. This guidance update was largely issued to incorporate the impact of adopting the new IFRS 16 standard regarding leases in 2019. While IFRS 16 did not have any major effect on our total all-in sustaining cost in the first quarter, it did have a minor impact of the components of all-in sustaining cost, reducing reported cash cost by about $4 per ounce related to equipment and vehicles under operating leases and reducing G&A by about $1 per ounce related to office leases. The offset to all of this is that we now include about $5 per ounce of lease payments in our all-in sustaining cost as a separate line item.
Review of the updated guidance of the World Gold Council did cause us to take a look at a couple of other areas, and we decided to make two changes to better align our reporting with the updated guidance. First, we now include social contributions related to current production at Segovia in our all-in sustaining cost. Over the last couple of years, it is averaged about $22 to $24 per ounce. Second, we decided to separate our capital expenditures between sustaining and non-sustaining or growth CapEx, particularly given what lies ahead with the Marmato project and also the step-out and Brownfield drilling we’re are going to carry out in Segovia. We are applying these two changes retroactively, and you can see by this chart that they aren’t having a material effect on our metrics. However, to keep investors and analysts updated, we have included a table in our MD&A, which shows a reconciliation of the quarterly numbers from the old basis to the new basis for the preceding two fiscal years.
With the boost in revenue from the production increase in the first quarter of 2019 and the lower cash cost per ounce, our adjusted EBITDA also hit a new quarterly high of $35.3 million, up 29% over the first quarter last year. This brings the trailing 12 months adjusted EBITDA at the end of March to a total of a $110 million, up 8% over 2018’s annual adjusted EBITDA.
Cash flow metrics in the first quarter of 2019 were also better than expected with operating cash flow of almost $20 million, this after paying $16 million income taxes in the quarter. And after $8.5 million spent on CapEx in the first quarter, most of which related to Segovia, our first quarter 2019 free cash flow was $11.3 million, which was more than enough to meet our debt service obligations and purchase some additional shares in Sandspring, increasing our equity position to 18%. This left us with $4.6 million to add to our cash balance at the end of March.
And on this slide, you can see the progression over the last year in strengthening our balance sheet with debt now coming down steadily through the quarterly repayments of the gold notes and our cash position building through our free cash flow generation.
In April, we closed the bought deal private placement of convertible debentures, increasing our long-term debt by almost $15 million and our cash position by $13.6 million after cost and expenses of the financing. We will be deploying this cash over the balance of 2019 and through 2020 on the accelerated exploration program at our Segovia operations. We are initially completing some studies, including the AI work that we previously announced with GoldSpot Discoveries; and then, later this year, we will ramp up the drilling on the identified targets, focusing on reserve and resource additions and mine life extension at Segovia.
We currently have 48.3 million shares outstanding. And including the 2024 warrants, stock options and the shares issuable under the new convertible debentures, our fully diluted share count is now approximately 68 million shares. As of yesterday’s close, we have a market cap of $161 million. With Red Cloud’s analyst initiating coverage in April, we now have three analysts covering us, all with target prices well above the current trading level. And we remain focused on the key catalysts and as we execute our strategy to close the valuation gap to our peers.
On this last slide, before we open up the Q&A session, I would like to iterate that at this point early in the year, we’re maintaining guidance on production cost and we will be monitoring performance over the next several months to evaluate updates later on as warranted. Segovia continues to be our flagship operation and the results of the first quarter demonstrate why the implementation of our mine development and capital programs at these high grade mines is so important to us. With the debt financing behind us, our exploration team has already commenced the work required to expand the drilling program at Segovia in the second half of this year to accelerate our efforts to add reserves and resources and mine life. The work at Marmato on the evaluation of the underground expansion to incorporate the Deeps mineralization is proceeding nicely and we remain on track to have a PEA completed before the end of the year. We continue to work with Sandspring as they advance their projects and we are preparing ourselves to be in a position to return to Venezuela when the opportunity presents itself.
With that, Ellen, I would like to now open the lines for the Q&A session.
[Operator instructions] And our first question is from Derek Macpherson from Red Cloud Incorporated.
Good morning, guys. How are you? Congratulations on a strong. Could you maybe talk about the strong start to the year, both on a cost basis and a production basis, coming in sort of well ahead of the run rate for guidance, could you talk about why that is?
Yes, certainly. I think, as you saw in February when we made the announcement of our monthly production, we particularly highlighted that we’d come into an area of -- Company-operated area of Providencia where the grades were averaging almost 2 ounces a ton of material, much higher than the block model showed and a little bit unexpected. And that continued on for a little while and in early March started to come back a bit more to the block model. So, with those extra ounces, we were able to not only get ahead of ourselves in production. But, given the fact that they came from an area where -- it was simply a grade increase, no effect on cost per ton, there was minimal additional cost, really other than production taxes. And that helped to dramatically reduce the cost per ounce at Segovia to 570 in the quarter compared to what we thought. It’s for that reason that while we're very pleased with the outcome, because obviously it really helped deliver a strong quarter, we’d like to see another couple of months of performance before we decide how we’re going to alter the guidance that we’ve got for this year.
That makes good sense. And then, just my second question relates to the capital spend at Segovia along with the exploration spend. The $25 million to $30 million you provided in your guidance, does that include the originally planned 20,000 meters and then the money raised in the recent closed bought deal is supplemental to that?
Yes. No, it’s not quite that. Let me just go through, and I will just clarify because I have had a couple of questions about our capital spend planned for this year. We expect $25 million to $30 million of CapEx at Segovia this year. That doesn’t include the -- any of the exploration that we’ve got planned. That is the mine development and the infrastructure and the other CapEx that we’ve got going on. For the original, for that 20,000-meter program that was already planned for this year, sort of our recurring program, there is about another $5 million of expenditures to be incurred. We have about $1.5 million that we plan to spend this year at Marmato and another $2.5 million related to the technical studies and drilling of the project. So, if we assume the top end of Segovia’s production guidance, that brings us to about $39 million of CapEx, exploration and development spending this year.
Then, from the about $14 million of cash that we have available from the new money raised, I think, it’s probably somewhere in the area of $5 million to $6 million this year will be spent on the studies that we’re doing upfront and then getting into the expansion of drilling, and then the balance would be spent the following year. So, we’re looking at a total program including the additional accelerated exploration somewhere between $40 million and $45 million this year for the Company.
[Operator Instructions] Our next question is from Mike [indiscernible].
Hi. Good morning. So, I have three questions this time. The first one is, how is the machine learning exploration at the Segovia’s so far? How much you need to pay for the Company GoldSpot for this job?
Sorry, Mike. We didn’t quite get the first part of the question, if you don’t mind repeating it?
Sorry for that. Yes. So, my first question is how is machine learning exploration at the Segovia so far?
Yes. The machine learning that we’re doing with GoldSpot really has just gotten underway in the early part of May. So, it’s still little early to comment on how that process is going to go. It’s something that we expect we’ll start to see results towards the middle of the year. It takes a little bit of time to get all the information loaded in and do the analysis. So, it’s a little early but we’re quite confident based on the experience that GoldSpot’s had with other large mining clients that we should get some interesting additional information out of this process to help us prioritize our targets for this additional drilling.
Okay. So, can you tell me how much you need to pay for the company, GoldSpot, for this job, maybe you have budget?
We have a budget, it’s -- we don’t release contract information per se. But it’s not -- let’s put it this way, it’s not a very large sum of money for the nature of the work being spent. So, it’s less than $0.5 million for us to do this work with GoldSpot.
Okay. Thank you. The second one is Company plan to complete the Marmato underground mining operation PEA later this year and then maybe start mining in the fourth quarter. I’d like to know the budget for this Marmato project Company needed to buy new equipment for this project.
All right. There’s two elements to the information you just mentioned. First, we are working on the studies to lead up to a PEA for later this year. That’s on the larger full expansion incorporating the Deeps information. We will have better information on the total CapEx to build that mine later on through the process. We expect that it’s probably $200 million or less. But, at this point, we’re still in the early stages of the PEA process.
We will not start full mining from the Deeps mineralization this year. That’s going to come sometime afterwards. What is going to start in the fourth quarter of this year is a particular area that when we were doing the drilling from the existing mine, we identified a block with some higher grade material that we have said in our last release about the Marmato results. We will be able to start, and we have started readying the development for mining later this year. So, there's a small section of the zone that we’ve identified, we can start mining this year. But the main project will not commence this year. It’s probably still some time away after we complete the PEA.
So, the last question is, Company likes to help Sandspring so far. Can you tell me if the Company likes to increase the Sandspring equity? As far as I know, Sandspring needs more cash for the exploration. Also, can you tell me when Sandspring plans to start mining operation at Chicharrón Project, which located within Segovia?
So, let me tackle the first part and I’ll let Lombardo speak to the second part. So, the first part in terms of will we increase, I think, we’re quite comfortable right now at our 18% position. If Sandspring does some form of equity raise, obviously, we will take a look to see what it is and how we participate in that, but still too early to say. Let me let Lombardo speak to the second part in terms of what Sandspring is doing on Chicharrón.
Lombardo Paredes Arenas
Okay. There are two issues here. One is Sandspring, the [Technical Difficulty] we get and the other is Chicharrón. Chicharrón, we do some exploration. Where’s that chart, exploration? And basically on that result, we develop a plan. So, we're hiring a mining contractor who will work in Chicharrón probably in a couple of months.
Then, we will add another short exploration program for Chicharrón. This is basically shallow wells. It’s not a big deal. But, to answer the question is, yes, Chicharrón, we will start mining Chicharrón this year, or within the next two months.
And related with Sandspring, probably you know that we split the project, one is front [ph] place, which will include Sona Hill, which is a new area, which is a Toroparu project. And then we are developing a PEA, we will continue with feasibility study. Now, we are developing a project execution plan, a complete cost estimate analysis and risk analysis. Also our plan is to try to incorporate a mining contractor to perform the mining in Guyana and also to hire an independent power producer, which will take care of on a take or pay basis of the power production. We are planning on that. In relation with the plan, because the planning -- it’s a big item, because the planning from $90 million to $110 million is -- will be not rotation we see in plant. And there, we’re planning to use second hand equipment like for the SAG mill, for the ball mill [indiscernible] Our idea is trying to reduce at minimum the capital -- the capital expense, the capital project, to make the project more bankable. That is the whole about Sandspring.
The next question is from Michael Kirk, [ph] representing himself.
Hello, guys. Congratulations and thanks for these very good quarterly results. I have one question about the Maria Dama plant, which is in expansion now and will be finished in about 4 to 6 weeks. If the production increased to about 1,500 tons per day, how it will affect the future production?
Lombardo Paredes Arenas
Yes. Maria Dama plant now is able to process around 1,300 tons per day. We have treated the plant with around 1,200 tons a day. By the end of May, the plant will be ready to process 1,500 tons per day. And that is our idea, during the course of this year to increase the amount of mineral that Maria Dama will process. Because while new area that we’re incorporating, we are incorporating some more -- more contract mining, it’s more mining. So, the idea is that. The idea is to increase Maria -- not the idea, the fact is that Maria Dama is starting with June 1st will be able to process 1,500 tons per day.
Okay. We should expect probably in -- little bit higher production, is this correct?
Lombardo Paredes Arenas
Sorry. Could you repeat that, please?
Yes. I think with higher processing, I think the production will grow a little bit, 10% to 15% or what’s the expectations from this?
Lombardo Paredes Arenas
I think we don’t have anything planning to -- plan to change the Maria Dama performance. We will continue to process mineral and the mineral from mining contractors, nothing different.
Yes. I think, Lombardo, the additional part to that is that while we have the capacity of 1,500 tons a day, we don’t immediately think that it’s going to be 100% utilized. So, I think, we’ll see the production growing and staying up maybe around 1,300 or so tons a day for the balance of this year, but we’re really setting ourselves up that in 2020 we have capacity for additional material discovered during this year’s drilling.
Lombardo Paredes Arenas
Okay. But, I think what you think is that probably the grades should stay at these levels which we have or what are you expecting? Because if the rates stay at these levels, and this means production will grow. But if the grades go lower and this is the reason for the expansion, then we will have the same production or what’s the reason for this expansion?
Lombardo Paredes Arenas
The reason for this expansion is we are developing Sandra K for example. Sandra K is mine which is still in review. We are also drilling deep El Silencio in which we will find new material. And we are drilling some another areas which will add material. So, in relation to the lower grade -- the lower grade, well, it will be depend on how much material from the mining contractor will be incorporated into the process. Because we do not expect reduction in grades in El Silencio or in Sandra K. On Providencia, we will continue the same production this year and 2020. In other words, the new material will come from exploration.
And we have no further questions at this time.
All right. We would like to thank everybody for joining us this morning. Our contact information is in the materials on our website. So, if you’d like to follow up with anything afterwards, we’d be more than happy to get back to you. Thank you. And we’ll look forward to hearing again at the next quarterly webcast in July.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.