Superior Gold Inc. (OTCQX:SUPGF) Q3 2022 Results Conference Call November 28, 2022 10:00 AM ET
Chris Jordaan - President and Chief Executive Officer
Russell Cole - General Manager Plutonic and VP, Operations
Paul Olmsted - Chief Financial Officer
Andrew Bigg - VP, Business Development and Long Term Planning
Mike McAllister - VP, IR
Conference Call Participants
Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Superior Gold Third Quarter 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference all call is being recorded and broadcast live on the Internet.
I would now like to turn the conference call over to Chris Jordaan, President and Chief Executive Officer. Please go ahead, Mr. Jordaan.
Thank you very much. Good day, everyone, and thank you for joining us to discuss Superior Gold's third quarter 2022 results. As a reminder, please refer to slide two of our presentation, which is posted on our website to view our cautionary language regarding forward-looking statements. In addition, please note that all amounts discussed are in U.S. dollars unless otherwise noted.
I'm pleased to say that I'm being joined today by four of our executives, being Paul Olmsted, our CFO; Russell Cole, VP Operations as well as General Manager of Plutonic; Andrew Bigg, our Vice President for Business Development and Long-Term Planning; and Mike McAllister, our Vice President for Investor Relations.
To start off, I'd like to discuss a few of the third quarter highlights. Firstly, our safety performance improved markedly with our total recordable injury frequency rate reducing 27% since the previous quarter and it's down 56% since December 2021. Production increased from quarter two at 15,946 ounces of gold, which represents a 5% increase over the previous quarter and sales of 14,875 ounces of gold at an average realized price of $1,877 per ounce.
Total cash costs were $1,789 per ounce sold and all-in sustaining costs were $1,989 per ounce sold, representing similar costs through Q2. Cash generated from the operations was $1.9 million after working capital changes, and exited the quarter with a cash position of $11.6 million. We also secured AUD10 million debt financing from Auramet International, and that is similar to the previous debt financing of 2020.
In the third quarter, the company realized an 8% improvement from the previous quarter's mill throughput following the successful mill shutdown in the first half of the year. Post period, development rights have increased markedly in the underground mine as operations continue to implement the improvement program which included the [delivery] (ph) and commissioning of a new jumbo development rate. The higher development rates are expected to add additional stope inventory in time to the mine, while providing greater operational flexibility. We are on track to meet our revised 2022 annual production guidance of between 62,000 and 65,000 ounces.
At this point, I'd like to hand over to Russell Cole, our VP for Operations, to elaborate on the operational highlights. Over to you Russell.
Thanks, Chris. As we mentioned, the Plutonic Gold Operations produced 15,946 ounces of gold in the third quarter, which is a 5% increase over the previous quarter, mainly due to higher milling rates. Production was down 18% when compared to the 19,379 ounces of gold produced in the same period in 2021. The decrease is largely a result of lower grades and tonnes milled from both the underground and open pit operations with operational underperformance impacting the Main Pit Deeps project.
Operationally, we achieved a stope grade of 2.6 grams per tonne, up 6% on quarter two, slightly below our targeted stope grade of 3 grams. This was mainly as a result of the wake from lower development in Q2 into Q3 due to labor impacts from COVID, which reduced the availability of higher grade stope inventory. As Chris mentioned, post-period, we have continued seeing a marked improvement in the underground development rates.
Our mill grade in the third quarter of 2022 was similar to Q2, however, lower over the comparable period of 2021, mainly due to lower underground grade and the inclusion of legacy development ore. We expect the mill grade to improve in Q4 as we progress into 2023, reflecting the impact of higher underground grades and tonnes. Gold recoveries remained strong in the third quarter of 2022 at 86%.
Finally, the total ore milled in the third quarter was 8% higher than the same period in 2021, reflecting the successful mill shutdowns in the first half of the year. Directionally, production rate from the underground is increasing in Q4 to date versus Q3.
I'll now hand over to Chris to recap the production and financial position.
Thanks, Russell. The first nine months of 2022 was softer due to the planned mill shutdowns, unprecedented rainfall, high absenteeism due to COVID-19 and labor shortages, as well as decision to temporarily suspend the open-pit mining. Heading into Q4 and 2023, the operating focus will revert solely to the underground mine. Our goal is to accelerate developments on [indiscernible] to more higher grade stopes.
As previously mentioned, we are realizing success in improving the development rates, which is expected to add additional stope inventory to the mine over time, while providing greater operational flexibility. Our cash position, as I said before, was $11.6 million at the end of September and had decreased 43% from the end of the third quarter in 2021, reflecting the lower production revenue and higher sustaining exploration capital expenditures. The company successfully secured a $10 million debt financing with Auramet International on October 2, 2022, which provides enhanced financial flexibility.
I will now turn the call over to our [Technical Difficulty] discuss our financial results for the quarter. Over to you, Paul.
Thanks, Chris. During the third quarter, revenue totaled $25.7 million from the sale of 14,875 ounces of gold, a decrease of $8.5 million from $34.2 million from the sale of 19,379 ounces of gold in the third quarter of 2021. Our gold revenues were slightly lower as a result of 4,407 fewer ounces being sold as a result of lower gold production, as well as a decrease in the realized gold price to $1,722 per ounce from a lower number than that in the prior period.
Cost of sales were $29.5 million for the third quarter of '22, an increase of $1.2 million from $28.3 million for the third quarter of 2021. The increase in cost of sales in the current period versus the same period in 2021 was primarily due to increases in mining, processing and depreciation costs. These increases stemmed from higher contractor mining costs associated with the Main Pit Deeps project, which increased tonnages of ore and waste relative to the comparative quarter, as well as increased mill throughput following the mill maintenance shutdowns early in the year.
In addition, site services cost increased from the comparative quarter as flight and accommodation costs associated with the contractor for the Main Pit Deeps project were incurred. Adjusted net loss for the quarter was $4 million or $0.03 per share compared to adjusted net income of $1.8 million or $0.01 per share in the three months ended September 30, 2021, again, primarily due to the lower operating income in the current period.
During the three months ended September 30, 2022, cash generated from operating activities after working capital changes was $1.9 million, a $4.4 million decrease over cash from operating activities after working capital changes of $6.3 million for the three months ended September 30, 2021. Decrease in cash generated from operating activities was predominantly a result of lower operating earnings, offset by working capital changes, which reflected an increase in accounts payable due in part to higher capital expenditures in the quarter, as well as the timing of production versus sales at the end of the quarter. As at quarter end, the company had a cash balance of $11.6 million.
And I will now turn the call back to Chris to discuss our revised production and cost guidance.
Thank you very much, Paul. The production guidance will remain between 62,000 and 65,000 ounces as we reported on previously. A detailed review, and this is very important, of all cost inputs across the operation has identified several opportunities, many of these have already been implemented, that's specifically targeted to reduce cash cost in the fourth quarter, and also importantly, into 2023 as we primarily focus on the underground operations.
And jumping to the last slide. To summarize the quarter, we were faced with several ongoing challenges in the third quarter. The impacts of absenteeism due to COVID-19 during the first half of the year, as well as wider labor and skilled contractor shortages affecting Western Australian mining sector combined to continue to negatively impact our development production and cash flow during the quarter.
The labor shortages resulted in lower lateral development that reduced the developed higher grade stope inventory, thereby negatively impacting mined head grades and resulting in lower gold production. Additionally, operational underperformance of the Main Pit Deeps project resulted in reduced tonnages and lower grades being delivered to the mill.
Looking ahead to the remainder of this year and into 2023, our operating focus reverts solely to the underground mine. Our goal is to accelerate development to unlock new mining areas of the mine as been identified in previous exploration programs.
I would like to add, post-period, we continue to see a marked improvement in underground development rates following the delivery and commissioning of the new development jumbo late in the third quarter as part of the execution of the broader development improvement plan. As we target sustained high development rates, we expect to add additional stope inventory into the future for the mine, providing greater operational flexibility.
With that, I would like to conclude the presentation portion of the call. Operator, you may now open the line for questions. Thank you very much.
Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions] Your first question comes from the line of [Greg Orel] (ph) from OCM. Please ask your question.
Chris, give us an idea of, first off, how is it going this quarter, if you can? And then secondly, what does it take to be on a cash flow positive manner to where you're actually putting cash on the balance sheet and not increasing liabilities. And so, what is the -- what does the business have to look like to do that in terms of development and ore grades mined, et cetera?
Greg, I think that's a great question. So primarily, if you look at the challenges that we've had up to now, it's mainly focus around the stope inventory that we had available, specifically for the underground. We have developed and implementing an improvement program, which, as I said, also include the purchase and commissioning of a new jumbo. And more importantly also that this jumbo is furnished with vectors that give us more advanced cut that we take. So we nearly think you see an uptick there in development. And I think that the first [indiscernible] is the fact that our development rights have improved significantly. In fact, October, we achieved the highest development rate for the -- in a month.
We continue to focus on standardization of the approach to development on the back of appropriate development plans to see that number increasing even further to enable us to sustain a larger inventory of stopes ahead of us. So to answer your question, the first thing is to get development right. The second thing is, that will enable us to have a larger optionality or larger optionality insofar as which starts with target within a specific month. Now needless to say, given the fact that we'll be improving our development, it will give us access to a larger number of higher grade stopes.
The other thing that's important that needs to be addressed from a cash position. Given the fact that we're comfortable that we've addressed all issues that we might have had with the milling circuit is focusing on reducing costs. There is a number of initiatives that we're driving forward and many of them have already been implemented. To name a few, on an annualized basis by restructuring the business purely focusing on the underground we have reduced our total expenses by more than $36 million on an annualized basis. In addition to that, at the end of October, we did a restructure in the business, whereby we delimited a number of roles, in fact, several roles that will ultimately give us the necessary structure to purely focus on the underground, but also then provide us with a more cost efficient labor bill.
In addition to that, we've also converted into campaign billing. Now campaign billing gives us an opportunity to reduce our consumable consumption and therefore reducing overall costs in the milling circuit. What we've also seen? If I look at the numbers on a quarter to date basis, we are seeing improved ounces from the underground mine. And that on the back of the process plant that's really running well. And we've demonstrated that this year -- that puts us on a very strong trajectory to achieve what we currently have in our forecast for next year. Now those forecasts are fully internal, we'll let the market know very early next year what that looks like. The important thing there is, once again unlocking the value from the underground by purely focusing on accessing more higher grade stopes, which is ultimately unlocked by driving our developments.
In addition to that, we've also instituted an additional production drill, which will enable us to do more stope drilling throughout the months going ahead. So once again, then addressing further down the value chain, firstly, getting to the stopes, and then secondly, getting into the stopes, drilling them, blasting them and getting the ore back up to the process plant. So, we protect us on a number of -- from a number of fronts. I mean, there's a whole host of additional initiatives that we're driving forward to reduce costs even further. And that is part and parcel of what we need to achieve to turn the business back to cash generation.
The last thing that I would like to add more specifically, because we're looking at not only this year, but moving into next year, there is one of the things that we had to do this year if we were to run the mill at full tilt was to start the build of an additional tailings [plant] (ph) or new tailings plane. The opportunity that the campaign billing has allowed us now is to kick that can further down the road, so we can -- Apologies. We can take or absorb that cost later in the year as opposed to this year. So once again, on a number of fronts trying to get the best we can from the underground mine, making sure we have the right kit available to be able to deliver the tonnes and the grade from the underground. And additionally to that restructuring and getting the organization aligned for the new operating model.
Great, Chris. Lastly, in terms of the areas that you're going in in terms of development, how much of that is -- would be from newly discovered areas that you've found over the last couple of years from aspiration versus going into remnant areas?
Yes. It's a bit of a mixed bag, to be quite honest. Clearly the remnant areas are the areas that require less development that will give us fast -- accelerated access to more stopes and high grade stopes. But in addition to that areas, like, Indian Access, etcetera, we will be targeting next year these stopes, I think, in the first quarter that's coming in, which is looking really positive for us and will have some impact without a doubt in Q1 next year. But primarily our short term focus is on remnant mining. The intent here is to take our development rights up further to get closer to about 250 meters per jumbo per month. That will enable us to then at a specific time, and that time will be a function of how much developed stock we have in front of us. We will then convert into capital or start capital lateral development, which will enable us to go into these new areas. So those areas are well defined. We know exactly where they are.
And the work that Andrew and his team did in the last few months has clearly shown that we evaluated area by area and so far as ounces available, the grade, the tonnes, as well as the profitability of these areas. So we have a very clear line of sight, which will be included into the sequencing of our underground mine to [indiscernible] the more lucrative areas sooner. So areas like [Tmall] (ph) area, I think it's 134, but I'd like to hand over to Andrew to expand a little bit on the piece of work there, because I think it's important to understand what the opportunities in there.
Yes. Thanks, Chris. I mean, you summarized it quite well, Chris, but effectively we went through a life of business planning process with the new resource and reserves. And that gave us a view of essentially how to optimize the mine over the life of the reserve. And we basically ranked and prioritized each of the operating zones. I've got 12 operating zones in the underground mine. And we rank them and prioritize them based on value.
So like Chris said, our mine plan moving forward including the remainder of this year and the start of the full calendar year ‘23 is based on value to the business and balancing short term cash with NPV. So priority zones for us is zones like Tmall, Area 134, Indian and Indian Access will be primarily mining out of next year.
Great. Thanks, Andrew. I'm assuming that is -- value is contained ore and development to get there.
Yeah. Exactly that balance –
So that’s correct. So -- Yes. That's exactly right. Sometimes these have access to trade off versus ounces, in area like Indian Access, which is relatively new. We've spent the time to do the mining engineering in the area. So we can extract the full value of the area rather than getting in early and potentially sterilizing or not getting the optimum design out. So they're all the things that we're going to consider and try it off in the plan.
Great. Thanks, guys.
Thank you very much, Greg.
[Operator Instructions] There are no further questions on the phone lines at this time. Handing it over to Mike McAllister for webcast questions.
Thank you, operator. We do have a few webcast questions today. The first one is asking, will the suspension of the mining in the Main Pit Deeps expect to cut the all in sustaining cost? If so, by approximately how much?
Sorry, Mike. Just repeat that question. Sorry, you broke up there on my side.
Certainly. It says, will the suspension of mining in the Main Pit Deeps cut the all in sustaining cost? If so, by how much do you expect that to cut the cost?
Well, to put it into perspective, we were spending to the tune of about AUD3 million per month on the open pit operations. And one come very quick to -- given the fact that we didn't achieve the specific grade and tons from the open pit, that ore came in at an elevated cost. If one then looks at or look at the reduction in cost and assume a realistic percentage of open pit ounces to the total production on a quarterly basis, one can quickly calculate what that impact is. At this stage, I don't have it off of my head, but it's should be something that we can -- that someone can calculate quite quickly.
Okay. Second question would be for Paul. Does the $11.6 million of cash equivalents include any drawdown from the new debt facility?
No. The closing of the Auramet gold loan occurred after the quarter end. So it wouldn't be within that $11.6 million.
Okay. The next question is, when do we expect the Indian Zone will be mined.
Andrew, can I ask you to fill that question, please?
Yes, absolutely. We're getting into Indian Access in Q1 calendar year ‘23. And like I mentioned earlier, we are mining in Indian and Indian access through the course of the calendar year.
Thank you. The next one is, could you describe the current labor market conditions and the impact they are having on the company?
Yes, I think I'll have a go at it and then give Russell an opportunity to expand on it. He's much closer to the fire so far as that's concerned. I think in general, we certainly seen a significant decline of people being impacted by COVID. I think currently running on about two employees -- Apologies, two employees who's positively -- who takes positive for COVID. So that impact has reduced significantly. And it's basically just normal illnesses that keep people away from work.
In addition to that, the market still remains hot in WI. Mining companies across the site is sold running [indiscernible] the hunt for capable and talented people remains strong. We have in some areas started to see some featuring of costs. So I think it's normalized to some extent and certainly not as significant as in the past. But roughly, if you can give a little bit more color on that, I'd appreciate it.
Certainly, Chris. The West Australian mining labor market is what most people are referring to is very hot at the moment. There were lot of projects being constructed and a lot of other operations going into production at the same time. As Chris said, we're starting to see a little bit of a drop off as some projects are coming to an end and we hope that trend will continue. We're only seeing the early signs of that at the moment, but I think most of the WI mining industry would like to see a bit of a drop off in that to allow a bit of a freeing up in the labor market. It's very, very tight at the moment. It's a very, very competitive market out there, which is just driving the price of the market up and forcing the closure of some projects.
I think maybe what I can add to that is that, with our restructuring, of course, we shut down the structure that was supporting the open pit operations. We were able to redistribute that people -- some of those people into [indiscernible]. So in fact, not only did we see reduced labor costs, we've also seen a reduction in preparing labor, the cost related to that and also saw a reduction in our vacancy rates.
Thank you. The next question is, the current changes you have described in the improvement program, would this allow to return to a normal state of production? If so, how many ounces would you estimate that a normal state of gold production would be on a quarterly basis?
Yes. I think the important thing there is, yes, we believe it will. The key for us is to complete the work that's lying ahead of us. Given the fact that we're really driving hard on our development, the scheduling for FY '23 isn't flushed at the moment and that could change given the availability of stope at certain times of the year. We will give the appropriate level of guidance and finish that work, you can imagine that that piece of work goes through a number of iterations of verification and validation. So we haven't finished that work yet and that will be completed in the next few weeks. In fact, some of our board members will be visiting the site whereby we will -- in December, whereby we will be having a review of the physicals for next year at that point in time. We expect to provide guidance for 2023 very early in Q1, probably around the middle of January without production results for Q4.
Thanks, Chris. The last question is, with the five management directors in this call, what is the total amount of superior gold shares that management combined is holding the company?
I can take that. Management and Board own about 1.53 million shares, which is about 1.2% of the company. Management has bought earlier this year. We have been in blackout period. Once the blackout period is gone, we would expect probably to see management continue to buy in the market.
That's it for questions from the webcast. I'll turn it back over to you Chris to close-up the call.
Yes, thank you very much. Mike, since there are no further questions, I would like to thank everyone for joining us today. While the third quarter of 2022 has presented management with some challenges, plans have been put in place, and I've explained that in some detail to focus on the [indiscernible] that will provide us with optionality and additional sub areas targeting improved rate and operational flexibility. Now we expect that these improvements will drive the continued improvement in our financial performance, especially for 2023.
Thank you once again for joining us on the call today and I wish you a great day. Thank you.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.