Alamos Gold Inc (AGI) 2011 Q1 法說會逐字稿

Good morning. My name is Alisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gammon Gold first 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). Thank you.

Mr. Rene Marion, President and Chief Executive Officer, you may begin your conference.

Thank you, operator, and good morning, ladies and gentlemen. Before we start, I would like to refer our listeners to the Gammon's forward-looking statement disclosure on slide two.

Moving to slide three, joining me here at Ocampo is Russell Tremayne, our Chief Operating Officer; and in Toronto are Scott Perry, our Chief Financial Officer; and Ann Day, Director of Investor Relations. Please note that the presentation we will be using is be available on our website and via the webcast. I will present an update of our operations and then pass it over to Scott Perry, who will present the overview of our first quarter financial results. Then after the call, I will return to the operator to open up the lines for Q&A.

On slide four, you know, please note that in our press release issued today that we used a gold/silver ratio of 55 to 1 for comparative purposes. This presentation will include the realized ratio of 43 to 1.

In the first quarter, we had earnings before other items of $23.5 million, or $0.17 a share. That's a 93% improvement year over year. Earnings before El Cubo charges of $7.6 million, $19.3 million or $0.14 a share, a 29% improvement over last year. Net earnings of $12 million, or $0.09 a share, was a ninefold improvement over Q1 2010.

And cash from operations before the Cubo charge of $ 41.2 million, or $0.30 a share, was 174% improvement over last year. Ocampo's cash from operations of $51.6 million was $0.37 a share, or over 100% improvement over last year. And our net free cash flow, including the $7.6 million Cubo restart charge and $9.9 million of discretionary exploration, was $6.4 million or a 200% improvement over last year.

Moving over to slide five, at Ocampo we had a strong quarter, with 26,000 ounces of gold produced, 18% improvement over last year, and silver at 1 million ounces, or an 8% improvement over last year;for a gold equivalent production of just under 50,000 ounces or a 36% improvement over last year. And at 55 to 1, 44,700gold equivalent ounces, still a 14% improvement over last year.

Our cash costs came in at $382 an ounce realized, and at 55 to 1, it came in at $427 an ounce, which is largely in line with our costs over a year ago. And that's despite increases in labor costs over the last year; energy costs going up tremendously, including electricity up 17%; and of course, consumables. Our total cash costs per gold ounce, taking silver as a by-product credit, came in at negative $572 an ounce.

Our margin per gold equivalent ounce was over $1,000 an ounce, or a 54% improvement over last year, which came in at $652 an ounce. And if we take silver was a by-product credit to our gold product, we had a margin of $1,958 an ounce. Significantly improved over last year. An operating cash flow of $51.6 million at Ocampo represents a 208% improvement over last year once again.

Over to slide six, specificallyon the unit operations. On the underground at Ocampo, we averaged 1,968 tons per day. That's a 43% improvement over the same period of last year. And our grades are now stable at reserve grades, and we continue to work on improvements on minimizing dilution.

And it was a fabulous quarter for development. We did a total of 7,291 meters of lateral development in the three underground operations here at Ocampo. That's almost 100% higher than what we did the previous year. The open pit continues to perform well, averaging 107,000 tons per day, or a 14% improvement. And the stripping on the final layback at Picacho is nearing completion, and we will see improvements on access to the heap leach ores at the Picacho pit.

The mill averaged 3,053 tons per day. During the quarter we had three major mill relines, resulting in the decrease, but it was still a better quarter over the previous year's similar quarter. And recoveries continue to improve. Last quarter, we had 97% gold recovery and 81% silver recovery. And when I look at April and May, for the last 40 days, we're maintaining the 97% goal recovery, but silver is now up to 88%.

The heap leach averaged 3,500 tons a day, and as I mentioned earlier, we will be getting more and more access to heap leach material, so that by the third quarter we will be running at our designed rate of 10,000 to 12,000 tons a day.

I would like to go over to slide seven and give a brief date on Chanate. The integration program is going extremely well, and one good metric is to take a look at, were theyable to meet the Gammon standard for the cost report for the month of April? And, in fact, they did meet our standard on completing the cost report by the fifth business day.

We have increased the mining fleet. As of the -- as we sit today, we had two 777 Cat trucks arrive on April 20. Two more on May 5 May 5. Our first production drill arrived on April 20 and our second on May 7. We also received two Cat 992 loaders, and they have arrived in the first week of May. That's nine pieces of mobile equipment, as well as receiving some of the equipment that was in for rebuilds, now being commissioned in May.

But despite having all of this new equipment in, we actually weren't using any of that new equipment during the month of April. And in April, we saw a 48% increase in the average tons mined. From 37,600 tons per day as an average for 2010, we averaged just under 56,000 tons per day. So you can imagine what it's going to look like when we deploy all of this new equipment throughout May.

We are also currently preparing the heap leach pad number two to accept the ROM stockpiles. We have 3.8 million tons of ROM stockpiles that we will start stacking next week and put under leach by June. And we will also commence re-leaching of the old pad.

We are currently working on optimization studies for increasing capacity at the crushing and stacking plant, and debottlenecking the entire facility. And we are still on target for finishing those engineering studies, so that we can provide a better outlook by mid-July.

And on the exploration front, we have one RC drill on site currently. We will be moving a second drill in by July. The interesting thing is Chanate is located on a megashear trend, with similar structures as Ocampo. And after several days of mapping, we've concluded that it's controlled by duplex shear [sets], verysimilar to Cortez Hills, and the ore is not limited to rock types. So we will resume mapping in June to finalize an exploration program in early July, and we will communicate what our strategy is at that time. But we already see that we are open a long strike to the east, three to four kilometers to the property boundary. And in fact, three kilometers south of the main pit, there's an old underground oper -- mine called [Charro] that has never been explored. So it's going to be an exciting couple of years building our resource base there.

Over to El Cubo over on slide eight. We continued to ramp up. We completed, during the first quarter, over35,000 hours of training with our workforce. They are now underground. The refurbishment underground is virtually completed. It was not nearly as bad as it could have been. And we commenced development and mining activities as of May 1 and are stockpiling up on the surface.

We have a brand new management team, very competent, on site, and the recruitment process is progressing extremely well on a number of vacancies. We remained on target for processing in the third quarter, and at the same time we will be converting many of the mining areas to long hole mining. In fact, we have moved three trainers from Ocampo to El Cubo, and have retained three more trainers for a total of six, and we will be training our employees on [jumbo] drifting and long hole mining. We target 1,800 tons a day of in-situ ore by the second quarter 20612.

And with regard to the Los Churros contract milling contract, we will be bringing in ore over the next few months, targeting 36,000 tons delivered by the third quarter when we start the processing plant. Exploration will resume in the second quarter, and we will be in a position to provide a further outlook by mid-July, at the same time as the El Chanate mine.

I would like to move over to slide nine. Our first four months of exploration has have been truly exciting. We completed just under 57,000 meters of core drilling on 10 underground targets. We remain focused on 13 new underground targets located in five distinct areas, as well as six new open pit targets.

What's really exciting, you will see on the previous press release of May 5, is Belen Upper. When we take a look at Belen and Altagracia, and run optimizations on Picacho, the Picacho pit actually wants to extend into Altagracia and then go north on to Belen. And it's because of these great results that we had. We had a hole of 24 meters of 2.76 gram per ton gold equivalent ounces, 10.7 at 2.66, 32.6 meters at 1.56, and 6.7 meters at 9.1. So we are currently drilling the entire area to 25 meter spacing and be able to take a look at the impact on the open pit reserves and resources later this year.

But it doesn't end there. We had great success at Aventurero, with grades of 105 gram a ton, 11.8 gram a ton, 48.1 gram a ton, and 17.8 gram a ton. San Amado continues to prove quite robust as well. We have pulled 25.2 gram a ton, 54.9 gram a ton, 35.4 gram a ton, and an amazing 64 gram a ton. And there were very similar sits at Rosario, San Jose and El Rayo.

But we are also very excited about Santa LibradaSoutheast, a new area where we discovered a larger alteration zone of 850 meters long and 100 meters wide, where we have numerous [nomos] samples of gold and silver averaging between one and eight gram a ton. This area is [solissified], with all the same rock types and Pinos Altos. So we are currently working on a drill program and hope to commence drilling in the second half of 2011.

On slide 12 (sic), whilest our companywide budget is $40 million to $45 million, excluding Chanate for this year, the vast majority -- 70% to 80% -- is at our operating mines. But we've had success at some of the grass roots projects, like La Balleza, to the north on the Venus project, where we have pulled grades of 62 gram a ton gold and 2,700 gram ton silver, or 8.6 gram of gold and over 1,000 gram a ton of silver.

And, of course, we announced earlier this year the discovery down at the Gaby project, which is also the Venus -- or the Los Jarros property, lies 22 miles southeast of Ocampo, where we pulled significant intercepts from 36 meters, 26 meters and 50 meters. We are currently working on mapping and will resume drilling later on this year.

The interesting thing is if you take a look at the Frisco, the [Unico ego] and the Gammon mine position in this Ocampo belt, we have almost 80% of the land position, and we are pretty excited about working the prospects moving forward in the coming years.

So with that, I would like to turn it over to Scott Perry to give you an overview of the financial metrics during the first quarter. Scott?

Okay, thank you, Rene, and good morning, ladies and gentlemen.

Consistent with what you are seeing with most Canadian companies, Q1 marks the first quarter in terms of transitioning to international financial reporting status. And so subsequently our Q1 financial results have been reported under International Financial Reporting Standards, and one of the key standards we adopt here is the first time adoption of International Financial Reporting Standards. And there's a note number five in our financial statements which does illustrate some of the key reconciliations and differences in terms of transitioning from Canadian GAAP to IFRS, so I do encourage the readers to consult that.

Of interest, when we report on International Financial Reporting Standards, we do have to re-account for our 2010 results, and in terms of what we are seeing in terms of key changes and what have you, it looks like it's minimal in terms of the impact it's having in our financial results, especially so in terms of cash cost per ounce. It was a two-year project. A lot of work went into it. It was no mean feat. In terms of the prior year cash cost per ounce, it changed by a little less than $2 per ounce, sothat hopefully gives you some perspective.

So moving on to slide number 12, just to walk through our first quarter results, Q1 was another very strong quarter. I would actually advocate that it marked the fifth consecutive quarter of expanded productivity, and a track run now of very consistent quarterly results, especially so in terms of production performance that you're seeing from Ocampo.

Just highlighting some of those results and, again, really just referencing the gold equivalence realized during the quarter. We came in with total gold equivalent metal output of approximately 50,000 ounces, which was a little higher than the prior year corresponding result. But I think the key take away was the cash cost per ounce. In terms of our cash cost per ounce on a realized basis, we came in at $382 per ounce, which is a significant improvement over the prior year quarter, but also a significant improvement over 2010's results.

And I think, as Rene mentioned, that really does reflect the productivity improvements we've been pursuing, the cost efficiency programs, but also the very aggressive fiscal management process that we bring to the business. There has been a lot of inflationary pressures, especially some in Mexico, and Rene touched on those and, I think, in what we have seen in a rising metal price environment. We are seeing our margins continuing to expand as a result of the rising metal prices, unhedged status, but also the fact we've been aggressively that cash cost per ounce.

Just moving on to the next slide, on slide 13. Revenues for the quarter came in at $70 million, and these revenues were entirely generated from Ocampo. El Cubo, obviously, is in restructuring in terms of preparing for the restart of operations. El Cubo did feature in the prior year corresponding quarter, but the revenue is really a reflection of the stronger metal prices that we are realizing. We realized record metal prices on both our gold and silver.

In terms of earnings before other items, we came in just under $24 million, which is close to 100% improvement over the prior year period. Cash flow from operations was $33.6 million, and that's a significant improvement of the prior year corresponding quarter. Again, that's a twofold improvement despite the fact that we did consume a series of restructuring costs at El Cubo in terms of getting El Cubo restarted.

I think one of the key important metrics is the net free cash flow item. The consolidated result was $6.4 millionof net free cash flow generation. And importance to note that this is after funding that -- the restart cost at El Cubo, but also in terms of our discretionary exploration program. We invested just under $10 million in the quarter in terms of companywide exploration, and so even after these discretionary investment programs, we still came in with a positive net free cash flow of $6.4 million.

Ocampo; you heard Rene really speak a lot about Ocampo's strong profitability. In terms of the cash flow that we're from Ocampo, it's excellent. The high silver prices is really we're seeing is really underpinning of this operation, and that's reflected in the cash flow of operations from Ocampo, approximately $52 million. And in terms of net free cash flow from Ocampo, we came in just under $26 million. Referencing the chart in the bottom right-hand corner of slide 13, I think that really reiterates the points on the previous slide, which iswhen you look at the cost per ounce, which is illustrated by the blue segment in these bar charts, you can see that over the last four quarters we have been aggressively driving that cash cost per ounce lower and lower. And that's obviously resulting expanding margins, especially given our unhedged status on gold and silver.

In the bottom right-hand quadrant of this chart -- of this slide, just illustrating our Q1 earnings. We have a net earnings, as reported on our financial statements, of $11.8 million. One of the ways we look at the business internally is we are adding back here the restructuring costs associated with restarting El Cubo. Obviously these are not what you would -- they are somewhat anomalous in nature, because it's a specialized phase that we are in at the moment in terms of restarting this operation. And also we had some one off G&A costs, which was largely associated with the Capital Gold transaction. If you add back the two, what I would advocated as anomalous items, it's approximately $8 million, so the real underlying profitability or notional earnings during the quarter was approximately $20 million, which equates to $0.14 per share.

In terms of the actual net earnings result, we came in at $11.8 million, which is approximately $0.09 per share. That is a ninefold improvement over the prior year corresponding quarter. If there was one item I would like to illustrate just on the face of the financial statements, it would be the tax expense that we did book in the quarter. The tax expense was higher than what you saw in the prior year corresponding quarter, and one of the key things that's driving this is the significant increase in earnings that we are seeing at Ocampo.

The Ocampo business unit generated approximately $45 million in taxable earnings in Mexico, and we have actually utilized all of our carry-forward tax losses at the Ocampo business unit. So when you apply the -- we are now paying tax under the Mexican regular income tax rate legislation, which carries a tax rate of 30%. So you are seeing that 30% of the $45 million, which is resulting in a tax expense initially of $13 million. Offsetting this is obviously a tax recovery at El Cubo, given that El Cubo is ramping up as we speak, and it's what resulting in that approximately $10 million of tax expense on the financial statements.

On the back of the positive free cash flow, we closed the quarter with $119 million in cash reserves. Shareholders in the Company may be familiar that we do have a credit facility in place that has a capacity up to $100 million. The drawn balance on the credit facility at the end of the quarter continues to be approximately $26 million. So we've got a lot of availability there that's not actually designated or earmarked for any purposes. But in terms of the available, companywide cash liquidity, we are sitting at $167 million. So definitely a very strong financial position at present.

Just moving on to the next slide, on slide 14. This is a chart that's particularly relevant in the current silver price environment. Ocampo has a unique stream of precious metals production, given the gold production stream and the silver production stream, and what we are illustrating with this chart is how we view Ocampo in terms of its underlying profitability or, alternatively, it's breakeven point from an economic perspective in terms of how the silver price really does underpin the business.

So at Ocampo, what we are illustrating here in this chart, just referencing the dashed line that moves to the left to the right. It is approximately $80 million, which it's the cash funding requirement to fund all of Ocampo's operating cash requirements. And Ocampo -- ifyou look at our annualized Q1 silver production, what it equates is that Ocampo produces between 4 million or 5 million ounces of silver per year. Just dividing that $80 million of cash funding requirements by the silver production, that really then equates what is your breakeven silver price in this operation. As you can see illustrated on the bottom of the chart there, the result is a silver price of just under $19. That's the required silver price to guarantee that, at a minimum, we will be able to fund all of our operating cash requirements at El Cubo.

Obviously during the quarter, we realized a silver price of $32 it's per ounce. So that's what was really underpinning the strong profitability and cash flow performance that you saw at Ocampo. But it's also indicative of what you can expect to see as we continue to move forward, assuming that silver prices continue to sustain at their current levels. And that's illustrated in the top right-hand corner of this chart by the shaded triangle, and you can reference to that axis, just in terms of the incremental cash flow that you going see based on any sensitivity that you are running on silver prices.

Obviously the other key point that resonates here is this chart is ignoring all the gold revenues. So we are just really focusing on silver here. Ocampo this year we're forecasting approximately 110,000 ounces of gold. Again, we're fully unhedged in our gold, so with today's metal price environment, that'san additional $160 million per annum of additional cash flows that we are going to generate from our gold production.

So it really does illustrate on the back of my comments in terms of the companywide cash liquidity, that the business, the Company is really in excellent stead in terms of its financial foundation. It puts us in really good position as we continue to grow the business model and, most importantly, in terms of funding our future growth strategy.

So with that, I will pass you back to Rene Marion, our President an CEO.

Thank you, Scott.

On to slide 15. This is an exciting year where we will see production growth throughout the year, quarter on quarter. Ocampo continues to perform, with many records on most fronts. And in fact, at 55 to1, our cash costs of $427 an ounce came in at the low end of our guidance for the year at Ocampo of $4.25 to $4.55 an ounce.

El Chanate will come into the fold in the second quarter. We have moved very quickly in bringing in nine pieces of mining equipment. We'll be accelerating the exploration program. We are currently working on debottlenecking and expanding the crushing and stacking plant. And with the stacking of the run of mine material, we anticipate seeing ounces to increase rather quickly in the third quarter. And we continue to assume -- anticipate quarter over quarter improvements at Chanate.

El Cubo, we're right on schedule with mining starting at the beginning of this month. And we'll start to see the contribution of El Cubo early in Q3. Guadalupe y Calvo PEA will be completed on time, and we anticipate coming out with further insight into Chanate, Cubo and Guadalupe by mid-July.

As Scott said, we have excellent leverage to both gold and silver, specially when you think that our reserves are done at $16.60 per silver. We are currently sitting at $35 an ounce for silver. And, in fact, our resources are only calculated at $22 an ounce.

On the exploration front, as I mentioned, 70 to 80% of our exploration budget this year is focused on our operating assets, with the lion's share in the Ocampo district; on Ocampo, Venus and Los Jarros. Specifically atOcampo, we are focusing on 13 underground targets and six new open pit targets. And we continue to move along our grass root exploration projects as well, andwe will start seeing results not only this year, but in the years to come.

So with that, I would like to pass it over to the operator and open up the line for questions and answers. Operator?

Absolutely. (Operator Instructions). Our first question comes from the line of David Haughton with BMO Capital Markets.

Good day, Scott and Rene. Thank you for the update. I've got a few questions for you. I know you are still thinking through the transition with Capital Gold, but can you give us an idea as to what you think the stacking rates could be moving at El Chanate? Your fleet movement is improving there. It sounds like there's an ability to lift throughput. Just wondering if you could give an idea of where it could go to.

Yes, I will take that question, David. What we are doing right now is, obviously, we are focusing on the east layback and moving that forward along and getting the ROM onto the pad. But from the engineering standpoint, there's a couple of things we need to do. First of all, the hopper ahead of the primary crusher is only about a 60 ton capacity, and we are using 100 ton trucks. So the trucks take in excess of two minutes to dump a load. So we're looking at bypassing the fines, because there's quite a few fines in this material, and trying to in the short term increase capacity. But longer term, we are doing engineering studies from the current rate of 14,000 tons all the way up to 20,000 tons a day.

And the resource is there to support, it Rene?

Well, the resource -- the reserve is there today, but keep in mind the reserves were done at eightfold, the last ones. We are currently working through an update. We drilled just under 90 holes in holes since the last reserve update, so we're -- and they were fairly good. So we need to remodel that. But as well, with the in-pit resources and the open strike, specifically to the east, we believe that increase in the mining rate will not actually reduce the mine life. So it's a win/win scenario.

All right. Probably moving more into Scott's area, thinking about the Capital Gold transaction, will we see some transaction costs coming through in the second quarter of this year?

Yes, that's correct, David, you will.

Obviously we close the transaction on April 8. So in terms of -- to give you an indicative feel, the key costs are going to largely be related to the advisory fees there. There will be some ancillary costs associated, legal and what have you. If I was to give you -- guide you, I would guide to you $4.5 million in terms of additional expense that you will see hitting the financial segments.

All right. And in regards to depreciation rates, I saw that you -- in one of our appendices, item 16, you had identified $470 million in transaction value. You had some goodwill of $165 million. What should we be thinking about for depreciation? Would it be that acquisition less the goodwill over the reserves as an indication going for going forward, or is there something else we should be thinking about?

When -- that note, note 16, relates to the Capital Gold acquisition. I guess you're correct, the majority of that relates to El Chanate. In terms of -- thekey item there to reference is the long-lived assets, which is approximately $250 million. I don't have the split between El Chanate, Orion and Saric, but the majority of it is El Chanate. And that's really your carrying value in terms of your depletable base moving forward at El Chanate. Goodwill is not amortized. That's just sort of frozen on the balance sheet, but we do have to assess that at the year end.

All right. So if we were to use a depreciation rate in the order of $160, $170 per ounce, that would be fair enough at this stage?

Yes. If you take the long-lived assets portion and allocated that over the current proven and probable reserve at El Chanate, that is going to give you a generalized ballpark, yes.

Okay. In regards to the higher tax rate, should we be thinking about the overall corporate tax rate at around about 30% going forward, or what would you guide us to?

Yes, so in terms of our tax expense going forward, as I mentioned, Ocampo has fully utilized all it's carry-forward tax losses. So going forward, when you're modelingOcampo, the effective tax rate will be the Mexican tax rate of 30%. But one of the things that we are working on is better -- optimizing our tax base in Mexico, and we have a couple of initiatives that we're implementing as we speak. And I think you'll see some good deductions resulting from those initiatives such that the effective tax rate will be closer to 25% moving forward. But if you want to be conservative, David, 30% will be the number.

All right. Thank you, guys.

(Operator instructions). Our next question comes from the line of [Sarah Schramm] with Macquarie Capital Markets.

Hi, good morning. This question is for Russell. I was wondering if you could talk to whether or not you will be coming one a new guidance on El Chanate based on your own analysis, versus what Capital Gold had. And also if you could talk to the synergies that you will be expecting.

As Rene pointed out, (inaudible -- technical difficulties) new equipment -- the extra equipment in. So what we are going to see is an upward trend, and pretty rapidly. Long term, it's a very easy pit, it's very easy to expand the leach pad operations. It's not like Ocampo, where you have to repel to put the plastic. This is an extremely easy operation to run. I see us going way upwards of the 15 and in the near future aiming for 20.

And just to answer your comment on synergies, there are definitely synergies. First and foremost is we are currently working on centralizing procurement in Mexico. We have already seen some excellent successes on procurement for Chanate. And the net impact on that will have to be kind of broken in or the coming quarters, but we envision, obviously, quite a bit of savings there. And then naturally, the G&A costs of Capital Gold goes away.

Once we have finished our long-term accelerated stripping here at Ocampo -- we have moved in excess of 25 million tons of extra waste in the last few years. When that concludes, and we get some mobile equipment freed up here, we can also move that equipment, and looking at going to more and more owner mining.

Okay. Great. Thank you.

We have no further questions at this time. Mr. Marion, I turn the call back over to you.

Thank you, everybody, for joining us today on our first quarter conference call. I would like to reiterate we are making great progress at Chanate and now at Cubo. In fact, as Russell commented, Chanate is a very simple operation, and we believe that we can affect change and improvements rather quickly.

So with that, if there are any questions after the call, please feel free to contact Ann Day at the number at the bottom of our press release. And once again, thank you for joining us.

And this concludes today's conference call. You may now disconnect.