Alamos Gold Inc (AGI) 2010 Q3 法說會逐字稿

Good morning, my name is Tracy and I will be your conference operator today. At this time I would like to welcome everyone to the Gammon Gold third-quarter 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)

I would now like to turn the call over to President and Executive Officer, Mr. Rene Marion. You may begin your conference.

Thank you, operator. I would like to welcome all listeners to the Gammon Gold third-quarter conference call. But before we begin the presentation I would like to remind everybody that this presentation contains forward-looking information and I really encourage the readers and listeners to take a look at that forward-looking information statement.

On the call today are Scott Perry, our CFO; Russell Tremayne, our Chief Operating Officer; and Anne Day, our Director of Investor Relations. I will present an update on our operations and then pass it over to Scott who will present an overview of our third-quarter financial results. Note that the presentation is available on our website and via the webcast. And then we will follow this with a quick Q&A.

Over to slide six as an overview. Production is improving quarter-over-quarter this year despite Q3 being the wettest quarter on our records. We saw a 24% increase in metal over Q1 and a 10% increase over the second quarter, and total cash costs continued to decrease despite the cost pressures on diesel and other energy. Our cash costs came in at $411 an ounce, which is a 3% improvement over Q1 and a 4% improvement over Q2.

Now taking silver as a byproduct credit we would have produced 27,000 ounces of gold at negative $121 an ounce. In other words, a margin of 110% over the spot price for gold during the quarter.

Earnings before other items and $4.9 million in costs from El Cubo were $0.12 a share, a $0.14 a share improvement year and over. And excluding costs of $4 million, operating cash flow was $35 million or $0.25 a share. Our net free cash flow for the quarter was $3.9 million or $0.03 a share.

All our unit costs are performing well at Ocampo and our capital expansion program is largely complete. Russell will be commissioning the fourth filter later this month in the processing plant. Q4 is continuing along this positive momentum and we maintain our guidance for 2010 of 100,000 to 110,000 ounces of gold and 4.4 million to 4.95 million ounces of silver at a cash cost of $410 to $435 per gold equivalent an ounce, assuming a 55-to-1 ratio.

Specifically over to the underground at Ocampo, our underground tonnages have continued to increase; Increased 16% over Q1 and 6% over Q2. And in fact, at 1,600 tonnes a day we are ahead of our target of 1,500 tonnes. Development has increased by over 68% for the year with the addition of the El Cubo contractors.

We maintain drill-ready inventory underground at 210,000 tonnes and we are producing from 12 long-hole and two cut-and-fill stokes with an additional two cut-and-fill stokes being developed as we speed. Santa Eduviges is progressing quite well. We are on the third ore horizon and we are on target for ore production commencing later this quarter starting at about 250 tonnes per day.

The Ocampo pits; during the rains the north wall of the Plaza de Gallos pit did fail along a fault line and so during the months of August and September we mined down that affected area during daylight only and removed approximately 1 million tonnes. What we had to do was resequence from the other pits -- Picacho, Conico, Refugio -- and as such we are limited on our heap leach feed for that quarter. But at such, now that we have removed that material, October has averaged 99,000 tonnes per day with 11,300 tonnes per day going to the heap leach.

On the Ocampo mill site our mill is operating near targeted levels. There were no real significant impacts during the rainy season and the expansion program, as I mentioned earlier, is largely complete. Gold recoveries remain strong at 96% and silver recoveries continue to improve at 81%.

In the redundancy program, including automation, the new leach tank, thickeners are all done with the commissioning of the filter taking place this month.

Then over to slide 10 on the heap leach. It was an interesting quarter; we finished the quarter by converting to a valley fill and there was no material impact due to the rains. The conversion to valley fill and filling in the pregnant pond solution with crushed ore reduced solution turbidity and therefore did not impact the overall gold production. It demonstrates that our expertise of efficiently managing high-lift heap leaches in the rainy season.

The tonnes stacked, I said, have decreased but they have come right back up in October as we have access now to heap leach material in Plaza de Gallos.

Some recent highlights with regards to the Capital Gold acquisition we announced earlier, the definitive agreement fully supported by the Board of Capital Gold. Capital Gold did conduct an extensive go-shop process. For consideration it will be a combination of shares of 0.5209 Gammon shares per Capital Gold share and $0.79 per share.

There is significant synergies that have been identified, both on the equipment for the open pits at Chanate and infrastructure is we do further engineering next year to investigate optimal mining rights. Once the deal is closed we can launch all these programs early next year. The current status is we have filed the F4 to SEC for comment and we now anticipate closing in early January next year.

Also during the quarter, we increased our mid-year reasons by adding to Santa Eduviges Belen, Santa Juliana, and [Los Molinas]. The El Cubo labor stoppage was declared illegal during the quarter and we anticipate moving the employees from El Cubo -- from Ocampo back to El Cubo once we regain access to the facilities.

We also identified three new discoveries at Venus. La Boleta where 171 rock samples averaged 1.52 gram a tonne of gold and 21 gram a tonne silver for 1.9 gram a ton gold equivalent. At Santa Nino 150 samples averaging 1.16 gram per tonne gold, 7 gram per tonne silver for 1.29 gram per tonne gold equivalent. Roncesvalle was also discovered with 29 samples averaging 1.28 gram per tonne gold, 17 gram per tonne silver.

We are currently mobilizing a drill up to La Boleta and anticipate starting drilling later this month.

So that was just a brief highlight of the quarter which I thought was a very, very good quarter for Gammon Gold. Continued progress at Ocampo and Q4 is shaping up quite well. So with that I would like to pass it over to Scott Perry, our Chief Financial Officer.

Okay. Thank you, Rene. If I could just ask everyone to reference slide 13 and I will just walk us through the financial highlights for the quarter. I think as Rene alluded to, Ocampo is clearly demonstrating that the asset is stabilizing in terms of its operations performance and the mine side is really starting to hit its stride.

Quarter over quarter we are seeing marked improvement in terms of productivity and also in terms of operation efficiencies or our embedded cost structure at the operation.

In terms of our third-quarter results, we are reporting consolidated gold equivalent production of just shy of 49,000 ounces at a very strong cash cost margin. Cash costs at Ocampo actually came in at $411 per ounce for the quarter. Looking at our consolidated cash cost result of $419 per ounce, this does include some negligible production contribution from El Cubo.

In terms of our cash costs per pure gold ounce taking out silver as a byproduct, our cash costs for the quarter came in at $108 per ounce so we really are generating metal at significant margins. And as you can imagine, the Ocampo asset is generating a lot of significant positive operating cash flow which is underpinning the record quarterly operating cash flow result that we are reporting this quarter.

As Rene mentioned, we are reconfirming our production guidance for the full year and likewise in terms of our reduced cash cost guidance of $410 to $435 per ounce. This slide does illustrate our year-to-date results and you can see in terms of cash costs it does include the higher cost results from El Cubo. But if we back that out Ocampo's year-to-date cash cost is $422 per around so it's sitting nicely in the midpoint of our full-year cash cost guidance.

Likewise, in terms of gold equivalent production, all we would require is a similar result to what we saw in Q3 and that will see us come in line with our production guidance for the full year.

We are in an environment of record metal prices at present. Gammon is fortunate in that we are fully unhedged on gold and silver, so we fully participate in that record metal price environment and that has resulted in record realized gold and silver prices during the quarter. That is a good segue into slide 14 where I would like to walk you through some of the financial statement highlights.

So in terms of earnings before other items, we are reporting earnings before other items of $0.08 per share. One of the things we are doing in this quarter is we would like to sort of reference the results backing out some of the anomaly costs that are present in El Cubo. Most readers will be familiar with the fact that El Cubo was off-line for the entire third quarter, so if we exclude the $4.9 million in costs related to El Cubo earnings before other items is $16 million for the third quarter. Likewise, in terms of the net bottom-line earnings result, if we do exclude El Cubo our net earnings consolidated were $13.4 million or $0.10 per share.

Operating cash flow during the quarter was a significant result. If we exclude cash utilization of $4 million that El Cubo, the consolidated cash flow from operations was $35.2 million or approximately $0.25 per share.

Strong cash flow performance; it was our 12th consecutive quarter of positive operating cash flow so the business is performing well. All the turnaround programs that we have been putting in place in conjunction with all the capital upgrades are significantly underpinning our cash flow profile. We actually generated positive net cash flow during the quarter so we continue to accumulate cash on the balance sheet.

One of the announcements that we made on Friday was that we have restructured our credit facility. It's now a credit facility of up to $100 million and I will provide some highlights on this shortly.

If I could now reference slide 15, slide 15 we have just included a waterfall chart which just illustrates the year-to-date cash flow profile for the Company. But I think, as we have always maintained, our underlying philosophy is to always ensure that we operate as an internally-funded business model.

You can see referencing this chart we commenced this year with $129 million in cash. You can see we have had a strong cash flow generation from the operations of $83 million in operating cash flow. Do bear in mind that that includes a negative operating cash flow result from El Cubo which has obviously been off-line for now the majority of 2010.

In terms of cash injections from options that were executed that resulted in additional $8.3 million of equity funding. And then the red increments here on this chart illustrate how that cash was utilized in the business. In terms of capital expenditure investments -- this includes open pit pre-stripping costs, underground development, fixed asset purchases -- we invested $63 million.

Our company-wide exploration program this year is a significant budget. It's approximately $30 million and so far in the first nine months of this year we have invested $17.4 million.

With the equity recapitalization that we did and the significantly strengthened balance sheet we have also been very focused on growing the business and we have made two strategic investments this year. That is what you see here is the $10.8 million in strategic investments which comprised an investment in Golden Queen and also an investment in Corex Gold Corporation.

In terms of G&A and other costs, such as taxes and debt servicing interest expense, that is a decrement of $19.5 million. And then the last decrement there is $3.3 million for principal debt repayments on our capital lease financing facilities. So as you may have seen on the balance sheet, we are finishing the quarter with $107 million in cash so we do maintain significant cash reserves moving to Q4.

Just lastly, if I can just reference the readers to slide 16, one of the significant announcements that we made recently on Friday morning was the restructuring of our credit facility. I view this myself, personally, as a significant stamp of approval from a key set of stakeholders. This is a syndicated credit facility between the Bank of Nova Scotia and the Societe Generale.

It's a credit facility of up to $100 million with $75 million being immediately available and this availment can increase to $100 million upon the successful closing of the Capital Gold transaction. It is a three-year term facility and it is fully repayable on maturity. There are no principal amortization repayment requirements during the life of this facility so it's very flexible from a cash flow management perspective.

In terms of the pricing, it's referenced to LIBOR plus a margin of 325 to 375 basis points and that is actually a 50 basis point discount over the previous facility that we had in place. There are no mine site operational performance covenants so it's also very flexible in that regard, and there is no restructuring restriction on the use of proceeds. So it is a true general working capital, three-year line of credit facility.

So with our existing cash balance and this available credit capacity the Company continues to enjoy what I would label a very strong financial position and I do believe we are well placed for funding our business strategy going forward. At a high level that concludes the financial highlights so with that I would like to pass you back to Rene Marion, our President and Chief Executive Officer.

Thanks, Scott. Just a brief update on the exploration front. On slide 18 you will see that we have completed about 65 km of diamond drilling in the underground targets to the end of September. We have already announced several new discoveries and due to the success of our drilling program, the Board of Directors have approved for an additional 40 km of diamond drilling.

We have, therefore, increased the number of drills from four to six and we are currently gaining access underground to San Amado, Belen, Santa Juliana, and Aventurero. When you take a look at some of the new drill results that we have had, at Aventurero we just pulled at hole OU-816 a length of 3.6 meters of 25 gram a tonne gold equivalent. At Santa Edugives pulled out three exciting holes, one at OU-821, 1.5 gram a tonne -- sorry 1.5 meters at 24 gram a tonne, and a couple of more holes at high-grade, double-digit intercepts.

And we are very excited about the Jesus Maria/Molinas complex. We have accessed this area separately from surface on level 2 and we have been developing there for quite some time now. Just establishing an additional ventilation source right now and we anticipate being out there early next year to start diamond drilling the four new vein complex that we found. Hopefully, by the end of next year be able to decide if this is indeed our third source of independent underground feed joining the northeast underground area and Santa Edugives.

On the open pit side, we are adding new reserves at Estrella along the south wall, Conico-Refugio-Plaza de Gallos along the north wall, and Picacho. We have completed the drilling on Los Molinas and have drilled almost 23 kilometers to the end of September. Also, the Board of Directors have recently approved the addition of 35 kilometers of diamond drilling and we are increasing our drills from four to seven. We are working on several new targets, such as Picacho, the extensions, and the deeps, Santa Librada, Altagracia, Stockwork Hill, and many more. This is an exciting period; a very aggressive drilling program at Ocampo.

And just briefly over to Venus and Los Jarros on slide 20 you can see the significant land package. We have increased our land position by over 300% now having the southeast extension of Pinos Altos and the northwest extensions of Frisco. On Venus itself we have discovered, as I mentioned earlier, the three exciting new targets that we will begin drilling as we speak.

We have also started doing some fieldwork on Los Jarros to the south where we announced one historical hole that was drilled quite some time ago showing 200 meters of mineralization. So we are excited about the exploration program we have got going in the Company.

We have got what we believe is a strong pipeline of exploration projects. Post the acquisition of Capital Gold we will have two exciting new projects with Orion and Guadalupe y Calvo and strong production growth at our current operations.

Our costs are being maintained despite energy cost pressures out there. We have got good traction on all unit operations and Q4 is progressing quite well. We anticipate still to be on target on getting Guadalupe y Calvo (inaudible) by the end of the quarter. And we will be able to advise on the timeline for the Capital Gold acquisition once we hear back from the SEC for comment on the F-4 filing.

So with that I would like now to move to the Q&A portion of this call. Operator, can you please provide the instructions please?

(Operator Instructions) Brian Christie, Desjardins Securities.

Good morning, guys. Just wondering if you can give us a sense of the exploration spending for Q4. It sounds like it's going to be on the order of about $13 million. And remind us what gets capitalized, what gets expensed.

And then, Rene, can you give us a sense of the gold grades and the silver grades for the open pit and the underground for it the Q3 please?

Yes, Brian. It's Rene. Right now a lot to be able to say. I can spend $13 million in one quarter on exploration and that is definitely close to where Peter Drobeck's team would like to get to. Having said that I assume we will be lucky to get about $10 million spent. That includes the exploration development underground.

With regards to third-quarter grades, the underground came in at 2.2 and 127 gram a tonne. That includes all the low-grade development ore. And on the open pit side grades came in 0.73 gold and 41 gram silver. And I will pass over to Scott to talk about capitalization.

Hi, Brian. So in terms of exploration you would be safe to assume that 100% of that will be capitalized. The majority of the drilling programs that we are currently embarking on we have in existing reserve and/or resource areas and under Canadian GAAP that makes it eligible for capitalization.

Thanks, guys.

Kwong-Mun Achong Low, Scotia Capital.

Morning, guys. Just on the accrual, I noticed you had $4.1 million in processing costs even though you guys weren't really making anything there. That (inaudible) and is that going to be going on in the future?

Scott here; I can answer that question, Rene, if you like. In terms of the expense that you are seeing there that does comprise a lot of ancillary costs associated with this labor disruption but there is some key items in there that you should be mindful of and one of those is severance expense.

Obviously, it was some carryover severance expenses that were booked during Q3. You may be familiar with the fact that the Las Torres mill processing facility -- we actually lease this off Fresnillo or Penoles and in terms of the quarterly rental obligation there was a $0.5 million payment there as well. We will continue to make those payments going forward because we do expect at some point in the future we will be requiring this facility again, so we do want to keep that contract in good standing.

Then you have got some of the various other costs like utility fees, consulting costs, legal fees, etc. So that is really what comprises the quarterly amount that you are seeing there. Then in terms of a cash utilization rate going forward, you will be looking at -- we are currently projecting around $750,000 on a monthly basis.

All right. And then you will be backing that out from your earnings?

It will continue to be expensed going forward in future quarters. But, as you may have heard in my commentaries, in terms of when we look at the business performance metrics we do tend to back that out because we do view it as a discontinued operation in some respects at present, albeit our strategy is to bring it back on as a continuing operation.

So on that you guys seem upbeat on moving back the Ocampo [to El Cubo]. What would you guys do differently so that El Cubo runs at a steady state?

This is Rene, Kwong. Our strategy is pretty clear and I think we have articulated that while we will not deal with the national mineworker's union. We want the local employees to represent themselves. And so we are more than happy to meet and discuss with them on a return to work strategy as long as it's not under the banner of the mine workers' union. We are more than happy to deal with them in some other union vehicle of one sort or another.

The strategy would be very simply, once they are willing to return to work, they will have to take certain concessions in the historical collective agreement. But until we sit down with them face-to-face it's difficult to say where that will be. What we do propose though is putting in a similar bonus system that the contractors have for example, which pays for exemplary performance. Right now they get capped out so they don't get any benefit for doing more units of production and that is why the union has historically been about 32% less productive than our contractors.

So we have articulated to the people a willingness for them to come back to work but, again, under a different mindset and a different union.

All right. And any timeline on that?

I fully anticipate being able to give people guidance on a timeline on that within the next three to four weeks.

All right. Last question is on G&A. I [noticed] it was a bit higher than the first half of this year. What would you expect for Q4 and going forward?

It's Scott here again. You know G&A did step up during Q3; there was a couple of events there to be mindful of. One of the principal ones was that we had some tax receivables that were declared non-recoverable so we actually wrote those off during the quarter. That is related to the commodity tax regime in Mexico.

Also, professional fees was slightly higher. Obviously that is associated with a lot of the business development activity that you saw during the quarter, but particularly so with regards to the Capital Gold acquisition. Sorry, also I should mention the transition to IFRS as well. We are seeing additional professional fees there.

And you may note that stock-based compensation expense also increased with the new four directors that have been appointed to the Board. There was some initial inducement options that were awarded to those appointees and you are now seeing a full quarter reflecting the additional stock-based compensation expense associated with those appointments that was not there -- that was not present in the first two quarters.

In terms of G&A costs for the fourth quarter, what I am targeting is approximately $6 million as a quarterly expense.

All right. Sounds good, thanks a lot.

Steve Willis, BMO Capital.

The majority of my questions have already been answered but just with respect to El Cubo you mentioned providing guidance for a timeline in a few weeks from now. I was just wondering since the decision that the strike is legal what have you done in the meantime in terms of steps to right the situation there?

What they have got is an indirect amparo, or an indirect appeal, that is going through the courts; that will take quite a while. So that in itself is not a solution.

The steps forward have been to increase visibility in Guanajuato, making sure that the employees understand their rights under the labor law and ability to come back to work when they want, and have really been providing a bit of education along the way. They still maintain control over the key picket areas and we are not doing anything there to elevate or aggravate the situation.

Okay, thank you.

Steven Green, TD Securities.

Good morning, everybody. Just a question on capital. You spent I believe it was about $26 million in the quarter on capital. Wonder if you can break that down between development spending on the mill expansion and sustaining capital?

Hi, Steve. It's Scott. Unfortunately, I don't have those numbers readily available in front of me on a quarterly basis. What I can say is in terms of capital spent on any remaining mill equipment items, it was negligible compared to the quarterly capital investment number.

What I will do, though, is I will send you an e-mail breaking it down between open pit development, underground development, and exploration.

Okay, great. And do you kind of expect similar amounts going forward into next year?

Rene, do you want to talk to next year's capital budget?

Yes, we are in the midst of doing the budgets. In fact, we will be up at site next week to review the first drafts, but there will be -- the last phase pre-strip on Picacho next year and that will be largely behind us by midyear. As you know, we have done about a 20 million tonne accelerated stripping program in the last two years and that is finally coming off the table, which is indeed one of the synergies with Chanate because we will have excess equipment.

Exploration levels next year will be approximately the same as this year's in the $35 million to $40 million range spread out over all assets assuming Capital Gold does close early in January. But the rest of the underground exploration development and with regards to any of the projects that Russell has got, for example, backfill commissioned a shaft. I will be honest, I haven't seen those numbers yet and I won't see them until next week.

Okay, great. And just lastly, on the Capital acquisition, I guess there is the -- the Capital Gold shareholders have to approve the deal. Is that the only kind of hurdle remaining?

Well, the F-4 and definitive agreement has been filed, and that is like 264 pages long, so that goes to the SEC. We anticipate probably a four- to six-week turnaround on that. Then once that is approved then we can mail a circular and it will be -- the shareholder vote will be then called.

So the timeline, because of Thanksgiving coming up soon, looks like it's going to be early next year. That is the shareholder vote by Capital shareholders is the only hurdle, if you want to call it, after we get the approval of the F-4.

Okay, great. That is all I have, guys. Thanks.

Anita Soni, Credit Suisse.

Good morning, Rene and Scott. Just a question with regards to the tax rate in Q4. What can we expect for the normalized tax rates?

So from an earnings perspective, if you are modeling earnings, typically what we expect is around 33%. The current corporate tax rate in Mexico is 30% but I typically assume a little bit higher than that just to allow for our Canadian-based G&A, that portion that cannot be claimed within Mexico.

And then the recoverables of $881,000, that was tax -- sorry, the receivables that you had written off in the quarter, is that tax receivables you were talking about?

Yes, so the commodity tax receivables or in Mexico it's called [EVA]. So that was receivables relating to more than three or four years ago that we have tried to claim during that time period and we have been unsuccessful. So we now elected to fully reduce that amount to zero as a recoverable balance.

And then in terms of the underground development for Santa Edugives, it's at about 1,300 meters and it's around 2 kilometers away and you expect to get some ore from that deposit into the fourth quarter. How much in terms of tonnage can we expect in the fourth quarter?

Russell? Okay, we must have lost Russell. You won't be getting much in the fourth quarter; it will be just starting in December. But I think when you -- you will see it ramp up fairly quickly to the 400 or 500 tonne level into next year.

Okay. And then the grades at Ocampo they are starting to -- in the open pit they are starting to trend down, it looks like, in the last three quarters. Will we expect that similar in the fourth quarter? Are you starting to get more higher-grade ore now from -- are you into the Picacho pit yet or, sorry, the Plaza de Gallos pit?

Yes, we are working in four pits right now and the grades are coming in pretty well as planned. They are not that far off the reserve grades where we sit down at a 0.4 gram a tonne overall and 16 gram a tonne. But that is life of mine because there is an awful lot of heap leach material in that number.

We should be maintaining the grades to the mill in the 1 to 1.5 gram gold and 60 to 80 gram silver. We came in at an overall grade in the third quarter of 0.73 and 41, that was because we had less heap leach material. So as we go back to the 11,000, 12,000 tonnes a day I would anticipate the grades in the mill being maintained, grades in the 0.4 gram a tonne gold and 26 to 30 gram silver.

So on a weighted basis still higher than reserve grades because the mill feed material is at the front end of the next four or five years.

Okay. And then lastly, in terms of recovery rates on the open pit, what would you say is a normalized recovery rate? It seems like it's kind of moving up and down between -- I guess in the last couple of quarters it has been over 100% and then at the low end around 60% for the gold grade.

You broke up quite a bit but I think I understood you, Anita. Typically recoveries go down during the third quarter because of the rainy season. Typically recoveries are higher in the fourth quarter because it's still warm, the leach kinetics are good, and the cold weather doesn't come until December.

We have a monthly leach curve that goes right back to when we started stacking and confirming that we were within 2% of our gold and silver life-of-mine recovery rates on the heap leach pad.

What were those again? Just remind me; I am modeling, I think, long-term 80% and 63%.

You are a little high on the silver. I think it's about 58%, 59% on silver. The 80% is about right for gold.

Okay so in the third quarter, based on what you stacked and obviously leach pads have a delay, but just based on what you stacked and then what you pulled out, getting about over 100% recovery rate on the gold. So is that expected to reverse and normalize in the fourth quarter?

We have had months of 120% so, yes, it's a matter of ounces stacked versus ounces produced. It's not that simple, but where we got to during the month of October is with stacking 11,400 tonnes a day into now November we see the ounce profile come straight back up again.

Great. And the [11,400] I was going to ask you about, is that all ore or is that waste and ore?

No, that is ore.

All ore, okay.

Yes. So it's a complicated algorithm, but you typically see higher-than-modeled recoveries during the fourth quarter. So if your model life-of-mine is 80%, typically we would get more than that.

Okay, thank you very much.

With that, operator, I would like to thank all the listeners during the call. If there is any follow-up questions, please feel free to contact Anne Day or Scott Perry.

If there is no further questions at this time I turn the call back over to Mr. Marion.

Thank you very much, operator. I would like to thank the listeners for joining us today.

This concludes today's conference call. You may now disconnect.