Alamos Gold Inc. (AGI) on Q2 2021 Results - Earnings Call Transcript
Operator: Good morning. I’d like to turn the meeting over to Mr. Jamie Porter, Chief Financial Officer. Please go ahead.
Jamie Porter: Thank you, Operator and thank you to everyone for attending Alamos’ Second Quarter 2021 Conference Call. In addition to myself, we have on the line today, John McCluskey, President and CEO; Peter MacPhail, Chief Operating Officer; and Scott R.G. Parsons, our Vice President of Exploration. We will be referring to presentation during the conference call that is available through the webcast and on our website. I would also like to remind everyone that our presentation will be followed by a question-and-answer session.
John McCluskey: Thank you, Jamie, and welcome everyone. Begin with Slide 3, we have a solid first half of 2021 highlighted by a strong operational performance at Young-Davidson and remain well positioned to achieve our full year guidance. In the second quarter, we produced 114,200 ounces of gold and total cash cost of $791 per ounce and all-in sustaining costs of $1,136 per ounce. As previously communicated, costs were above the annual guidance in the quarter, reflecting the stronger Canadian dollar. It’s been a year since we completed the lower mine expansion at Young-Davidson and that infrastructure continues to perform well, meeting or exceeding targeted mining rates each quarter. Looking ahead, we expect Young-Davidson to ramp up to its designed to mining rate of 8,000 tons per day in the third quarter, contributing to stronger company-wide production in the second half of 2021. We generate company-wide operating cash flow $907 million in the second quarter, 117% increase from a year ago, with the prior year impacted by COVID-19 related downtime. Young-Davidson and Island Gold continued to generate solid ongoing free cash flow, which offset the increase in capital spending in the quarter, primarily at La Yaqui Grande. We expect stronger company-wide free cash flow in the second half of the year, reflecting higher gold production and sales. Moving on to Slide 4, we’re making good progress on our strong pipeline of North American projects. Construction is in full swing at La Yaqui Grande and it was on track to achieve commercial production in the third quarter of 2022. At Lynn Lake, we continue to advance permitting and expect us to be completed by the middle of next year, which would enable us to make construction decision thereafter. Exploration activities in Lynn Lake also ramped up in the quarter, focusing on drilling in proximity deposits as well as two regional targets.
Jamie Porter: Thank you, John. Moving on to Slide 5. We sold 107,600 ounces of gold at a realized price of $1,814 per ounce for revenues of $195 million in the quarter. Gold sales were approximately 6,600 ounces less than gold produced due to the timing of shipments with those ounces sold in July, we realize this revenue in the third quarter. Total cash cost of $791 per ounce and all-in sustaining costs of $1,136 per ounce were higher than annual guidance, mainly reflecting the stronger than budgeted Canadian dollar. As we’ve previously noted, our 2021 guidance was based on a Canadian dollar foreign exchange rate of $0.75 compared to the actual rate of $0.81 in the second quarter. In the first half of 2021, the stronger Canadian dollar increased our total cash costs by approximately $30 per ounce.
Operator: It seems that Mr. Porter has disconnected from the call.
John McCluskey: Should wait for him to get back on line or?
Scott R.G. Parsons: Yes, we’ll just gives Jamie, a moment to try and get back on the line. It seems as though Jamie is having trouble getting back on. So I will step to his portion of the call.
Jamie Porter: If you can hear me, sorry, my line just died, but I’m back now. So I’ll keep going.
Scott R.G. Parsons: Yes, please go ahead, Jamie.
Jamie Porter: Thanks, Scott. Excluding that non-cash impairment charge, foreign exchange gains and other losses adjusted net earnings were $39 million or $0.10 per share in the quarter. Capital spending totaled $84 million in the second quarter, including $27 million of sustaining capital, $50 million of growth capital and $6 million of capitalized exploration. Additionally, we paid $3 million of capital advances for working equipment, largely related to La Yaqui Grande. Capital spending is expected to increase into the second half of the year, consistent with full year capital guidance of between $354 million and $384 million. And this reflects the ramp up of development activities at La Yaqui Grande, as well as with the Phase 3 expansion at Island Gold. We were free cash flow neutral in the second quarter net of the increase in capital spending, the gold sales that we previously discussed that were deferred to the third quarter, as well as the $6 million cash tax payment in Mexico, which we do not anticipate to continue in the second half of the year. We expect increased free cash flow in the second half of 2021 driven by higher production and gold sales. We paid our quarterly dividend of $10 million and so far in 2021, we’ve returned more than $21 million to shareholders in the form of dividends and share buybacks. We are on track to return more than $40 million for the full year. We remain debt-free and ended the quarter with $234 million in cash, $22 million of equity securities, and $500 million of undrawn credit capacity. We remain well positioned to fund our internal growth projects, while continuing to grow our cash position and returns to shareholders.
Peter MacPhail: Yes, I’m back on now, Jamie.
Jamie Porter: Okay. I’ll turn it over to our COO, Peter MacPhail to provide an overview of our operations for the quarter.
Peter MacPhail: Thank you, Jamie. Moving on to Slide 6. As John mentioned, we completed the lower mine expansion at Young-Davidson one year ago. And since then underground mining rates have consistently met or exceeded targeted grades. In the second quarter, mining rates average 7,500 tons per day, right on target. And in the first half of the year, mining rates average 76,050 tons per day, exceeding target. Another mining horizon is currently being added and will enable underground mining rates to increase to the long-term rate of 8,000 tons per day starting in the second half of this year. In the second quarter, we produced 45,100 ounces of gold generating $19 million of mine site free cash flow. Total cash costs $941 per ounce in mine site, all in sustaining costs of $1,157 per ounce. We’re above the annual guidance in the second quarter due to the stronger Canadian dollar, planned mining lower grades and lower mining rates in the first half of the year. Grades mine and underground mining rates are expected to increase over the remainder of the year driving production higher and costs lower in the second half of 2021. With the $41 million in mine site free cash flow through the first half of the year, strong results expected in the second half. Young-Davidson remains on track to generate record mine site free cash flow of more than $100 million in 2021. Over to Slide 7. Island Gold produced 33,200 ounces of gold in the quarter generated $14 million of mine site free cash flow. As previously guided grades mined and process decreased from the first quarter. Grades are expected to remain at similar levels in the third quarter before increasing the fourth quarter average reserve grade of approximately 10 grams per ton for the full year. Total cash cost of $502 per ounce in mine site, all in sustaining costs of $830 per ounce were both slightly higher than annual guidance, largely reflecting the stronger than budget Canadian dollar. Phase III expansion work continues to ramp up with the pre-sink of the shaft expected to begin mid next year. Current focus remains on permitting detailed engineering of the shaft, associated infrastructure and procurement of long lead items. Capital spending total $14 million in the second quarter and included completing expansion of the tailing facility. Capital spending is expected to increase in the second half of the year, consistent with annual growth capital guidance of $80 million to $85 million. We received our first batch of 2021 expiration results in June and Island did not disappoint returning the best foal drilled to date. In a few moments, Scott Parsons, VP of Exploration, will discuss these results in more detail as well as encouraging early results we’re seeing at Young-Davidson.
A - Scott R.G. Parsons: Thank you, Peter. We had a successful quarter from an exploration perspective with excellent results of Young-Davidson and Island Gold, which I’ll discuss briefly. Starting with Young-Davidson on Slide 10. Our focus over the last several years is in completing a lower mine expansion. With that complete and more cost effective access to drill from underground now available. The $7 million budgeted for expiration this year is the first significant exploration program at Young-Davidson since 2011. Over to Slide 11. The success we were having is on two fronts. Drilling has been successful in an intersecting gold mineralization, downplunge from existing reserves and resources within the syenite that host the Young-Davidson deposits. The drilling that began in 2020 extended mineralization 220 meters below resources at that time into the first half of 2021 drilling extended mineralization a further 150 meters below our 2020 drilling. We’ve also intersected other styles of gold mineralization outside of the syenite hosted in the high-grade structures within the hanging wall, mafic, ultramafic stratigraphy of the Tisdale assemblages and also within structures developed in the footwall sediments.
John McCluskey: Thank you very much, Scott. That concludes the formal part of our presentation. I’ll now ask the operator to open line for your calls.
Operator: Thank you. And the first question is from Cosmos Chiu from CIBC. Please go ahead.
Cosmos Chiu: Thanks John, Jamie, Peter and Scott. I guess my first question is on the Canadian dollar here. Two-parts. Number one, we all know that you there’s been a lot of strength in the Canadian dollar. As you mentioned, your guidance is based on a exchange rate of 0.75. So far it’s been closer to 0.8. Maybe a question for Jamie, when would you consider updating your guidance for the actual foreign exchange rate that’s been realized so far?
Jamie Porter: Yes. Thanks, Cosmos. Yes, I mean, that has been, I mean, if you adjust for the Canadian dollar strength, we’re well within our guidance range. And if you look at it on a year to date basis, we’re pretty close. I mean, our operations has done a really good job keeping costs low despite the Canadian dollar strength and inflation in some areas. On a year to date basis, we’re running at $773 total cash cost relative to the top end of our guidance is $760. And on all-in sustaining costs, we’re running at $1,079 relative to the top end of our guidance of $1,075. So we’re within $4 or within 1% on both cash costs and all-in sustaining costs. So we are expecting similar costs in the third quarter and a much lower costs with higher grades at YD in Q4. So I think we’ll reevaluate at the end of Q3. But we still got a chance to – despite the impact of the Canadian dollar strength, I think we’ve still got a shot at being within the top end of our guidance range.
Cosmos Chiu: Of course. And then Jamie as a follow-up. You and I have talked about this in the past. You have talked about potentially being opportunistic in terms of heading your see dollar exposure. We’ve seen Canadian dollar sort of a weaken a little bit, it strengthened again today, very volatile. How should we take a look in terms of your hedging program? Have you tried to be opportunistic in terms of adding to it?
Jamie Porter: Yes. Yes, we absolutely have. I mean, if you go back and look at the Canadian dollar up until recently, it’s been on pretty much a straight line up since we put our budget together last September, October. So we have taken advantage of the recent weakness – the recent dip to increase our coverage perspective of our hedge program. I think going into the end of the second quarter, we only had 10% of our Canadian dollar exposure hedged. We’re now up to 45% between both $0.75 and $0.81. So we are working to try to protect – this is somewhere within that range for the second half of the year.
Cosmos Chiu: And then Jamie, you mentioned the I word inflation and that appears to be a concern for a lot of investors from a mining space. Could you talk about, you see any kind of inflationary pressure be it on labor or other input costs and how should we look at it?
Jamie Porter: Yes. So I think, my reference to inflation, it’s topical industry-wide. I think a lot of companies are reporting costume inflation. I think we’ve done a good job here today. I mean, Canadian dollar terms that at both Young-Davidson and Island Gold, were actually ahead of our...
Cosmos Chiu: Hello?
Peter MacPhail: It sounds like Jamie’s dropped off again. Can you hear me? Cosmos, it’s Peter?
Cosmos Chiu: Yes. Hi, Peter.
Peter MacPhail: Yes. I think to finish with Jamie’s thought there, we’re managing it. We have some – for most of our consumables, we have a longer-term contracts. So thus far it isn’t really impacting us. As we go forward, hopefully this is a temporary kind of cycle that we’re seeing in the supply chain that will revert to normal. I guess, time will tell.
Cosmos Chiu: Great. Yes, it’s good that you jumped in Peter, because I have a question for you as well. As we talk about – we’ve talked about the short-term impact or potential impact on inflation, how are you managing some of the potential longer-term impacts here on inflation on your projects, La Yaqui Grande, the shaft at Island Gold? How should we think of it?
Peter MacPhail: Yes. I think La Yaqui Grande, I’m not really concerned at all. We’re on budget, on target halfway through – we’re getting close to halfway through that project. We’re mining at a rate of 55,000 to 60,000 tons a day, pre-stripping at La Yaqui Grande were right on budget, that’s a contract mining rate. And we haven’t seen cost pressures in Mexico – in Mexico yet I suppose. I mean, really don’t – really not seeing anything we’re projecting right on schedule, right on budget there. The more longer-term ones, we’re just getting going at Island. A shaft sinking project is largely labor based. And labor rates haven’t skyrocketed in Ontario, we’re still, I think we had a 3% increase this year budgeted and that’s what we saw. I really don’t see big changes.
Cosmos Chiu: Great. Then one last question, maybe for Peter as well. The grade in Q2 at Island Gold and Young-Davidson both had the lower end of the full year sort of guidance. Could you comment, is it all due to mine sequencing and how has it reconciled back to your block model here?
Peter MacPhail: Yes. Thanks for asking that question. Yes, it is sequencing solely we get really good reconciliation at both those operations within the industry standard kind of 3% or so historically end in the quarter. So if some minor sequencing that put us at the low end of our guidance range for the quarter, it’s just what you would expect to see running any mine, you get some fluctuations from quarter-to-quarter based on the stope recipe that you happen to be mining.
Cosmos Chiu: Great. Thanks. Those are the questions I have. Thanks again.
Operator: Thank you. And the next question is from Kerry Smith from Haywood Securities. Please go ahead.
Kerry Smith: Thanks, Operator. Maybe Peter, just on the COVID situation in Mexico, has that had any real impact on the construction? I know you’ve got a lot of guys coming back and forth on the construction side. Is that been an issue for you there?
Peter MacPhail: The guys are managing it extremely well. We have a lot of people at site. Sometimes, you look at our entire population there of employees and contractors and other all are there at the same time, but it’s approaches 2,000 probably with well over 1,000 there at any given time. We instituted testing full PCR testing early on in this COVID pandemic at all three of our operations. And we continue with that all three of our operations. So we are able to screen these people that would be otherwise positive, which we’re able to screen them out prior to getting to site and running longer rotations within that site. We’ve had a few along the way cases slipped through. And then we keep them segregated and ship them back and they’re back two weeks past or back again. So there have been a lot of cases in Mexico and there have been a lot of cases within our workforce at Mexico, but we’ve managed to stream them out and the guys are doing a great job keeping it out of the – trip in and out of the camp.
Kerry Smith: Okay, good. And then there was a comment in the MD&A about the $45 a ton Canadian target at 8,000 tons a day for the mining costs at YD. Is that $45 number that you kind of expect to be at when you exit 2021 or that be sort of a target once you get things stabilized maybe into this back end of 2022?
Peter MacPhail: I guess we’ll see that is our target rate. That is our target rate at 8,000 tons a day. So I think we’re there – we’ll be at – we should well average 8,000 tons a day for the rest of the year and we’ll see where the unit costs come in, but that is the target and yes.
Kerry Smith: Okay, great. Thanks very much, Peter.
Operator: Thank you. Ladies and gentlemen, there are no further questions at this time. This concludes the morning’s call. If you have any further questions that have not been answered, please feel free to contact Mr. Scott Parsons at 416-368-9932, extension 5439. Thank you for assisting on the call today and have a great day.
