Alamos Gold Inc (AGI) 2011 Q3 法說會逐字稿

Good morning. My name is Amanda. I will be your conference operator. At this time, I would like to welcome everyone to the AuRico Gold Incorporated third quarter results teleconference. (Operator Instructions) Rene Marion, President and CEO, you may now begin.

Thank you, operator. Welcome to the AuRico Gold's Q3 financial results conference call and webcast. We would also like to advise the listeners that the presentation today is available on our website. I am joined today with Scott Perry, our Chief Financial Officer; Russell Tremayne, our Chief Operating Officer Mexican Divisions; Peter MacPhail, our Chief Operating Officer Canadian and Australian Division; and Anne Day, Director of Investor Relations and Communications. Before we start, I'd like to refer everyone to slide 2, where you can take a look at our forward-looking statements and disclosure.

On to slide 3, Q3 was one of our best quarters in the history of the Company. To start off, we had record earnings before other items of $52.8 million or $0.30 per share. Net earnings of $62.6 million or $0.36 per share. That was also a record for 580% improvement over 2010. Realized production was almost 77,000 gold equivalent ounces, a 68% increase over the same period in 2010. Cash costs for gold equivalent an ounce, in Q3 was $487 an ounce higher than the same period in 2010; but largely due to the higher cost realized at El Cubo during its startup quarter.

$112 million in revenues represents a record for the Company, due to the near record production and as we realize high metal prices, slightly then even the average LME PM fix. This revenue was over 100% higher than the same period in 2010. Our margins continue to grow with a record $1,217 an ounce or 71%. Our operating cash flow of $52 million was one of our best ever, and represents a 66% increase over 2010. Company wide CapEx was $40 million, including $15 million of stripping at Ocampo and Chanate, largely heavily weighted to Picacho, which is now completed. $5.6 million in development costs at all 3 underground operations. $10.4 million in sustaining CapEx, including the expansions of Chanate, and $9.1 million in exploration. Net free cash flow was $11.6 million, or a 200% increase over 2010. Our cash position has increased to $145 million or up 42% from the last quarter this year.

On to slide 4. We completed the acquisition of Northgate Minerals, and it closed on October 26. We are now transforming ourselves into a leading intermediate producer with a significant double digit growth profile in the years to come. We are seriously poised for a significant rewrite. We have 2 significant milestones in recently, where El Chanate reported not only 1 million man hours, but no lost time incidents, but also over 365 days with no lost time incidents. We believe this to be the first Mexican-based mine to achieve such a high standard.

We had continued strong performance at El Cubo and we continued to explore level 2, the potential third underground operation We continue engineering work on the potential northeast mineshaft commissioning and mill expansions. At El Chanate, we completed Phase 1 expansion from 14,000 tons a day to 18,000 tons a day stocked. Phase 2 expansion 21,000 tons a day is ahead of schedule, and should be completed in February rather than the end of Q2. Phase 3 to 5 expansion potential is being reviewed, and a decision will be announced at the end of Q1, once we update our reserves.

El Cubo resumed commercial production on July 23, and the ramp up is progressing well. And updated engineering studies indicate that the targeted longhole conversion of 40% is now, more likely to be 90% to 95% by the end of 2012. The exploration program throughout the organization continues to report encouraging results. The Mexican, Australian operations remain on target to meet the low end of our guidance. With that, I would like to pass it over to Scott Perry, our Chief Financial Officer, to review the financials during Q3 before I give highlights on our operations.

Thank you, Renee. Good morning, ladies and gentlemen. It really is a pleasure to be reporting the Q3 results today. I would put forward that it really is an excellent set of results that the Company is reporting. In terms of Q3 gold production, our production results in the quarter were up 68%, versus the prior year corresponding period. This more than anything reflects the addition of El Chanate into our portfolio, as well as the recommencement of operations at El Cubo. On a realized basis, the Company produced 77,000 gold equivalent ounces during the quarter, [ex robust], cash cost of $487 per ounce resulting in a very strong margin of $1,217. These such cost of $487 per ounce, they're well below the industry average which is presently averaging north of $622 per ounce. It really does highlight the quality of AuRico's Mexican operations. The year-to-date period has demonstrated consecutive quarter-over-quarter production growth.

Now, on reflection, we think back to Q1, we had production from just the 1 mine, being El Cubo. In Q2, we started seeing the impact of El Chanate, as we closed the acquisition of Capital Gold in the first week of April. Here we are today in Q3. El Cubo has started to contribute, along with a full quarter of production from El Chanate. Looking forward, we see more growth. Q4 will see growing production from all of Mexican operations, as well as significant contributions from our Australian mines, being Fosterville and Stawell. Then, by the end of Q1 2012, we will have a normal production from the Young-Davidson operation which will represent our sixth operating mine, and will underpin a significant production growth file well into the future.

As Rene mentioned, the Company's realized gold price for the quarter was a record at $1,704 per ounce. We actually did outperform the London average PM fixing price for the quarter, which really reflects the Company's fully un-hedged strategy on gold and silver. Which has once again, allowed us to fully participate in the strong metal price environment, and is obviously underpinning the strong earnings and cash flow generations that we are reporting this quarter. AuRico continues to enjoy a unique precious metals mix, offering full optionality on both gold and silver, but this most recent quarter, revenues from production representing 63% of the firm's overall revenue mix. This more than anything, is due to the addition of the El Chanate operation and its more pure gold production profile.

Transitioning to slide 7. Just in terms of the key headline financial results. As I mentioned at the outset, there was another outstanding quarter that featured record after tax earnings, as well as record earnings before other items. The after tax earnings results for the quarter of positive $62.6 million or $0.36 per share, which represents more than a five-fold increase over the prior year corresponding period. Again, this is largely attributable to the strong metal price environment as well as the addition of earnings from El Chanate, and the recommencement of operations at El Cubo. Which is particularly notable, in that this was El Cubo's initial return this quarter, and it was actually profitable in terms of generating positive after tax earnings during the quarter.

One thing I would like to highlight in terms of the income results, this is probably more so from the analyst community perspective, there are some one-off items. We had very strong foreign exchange gains that we booked the during the corner. We also had a strong other income results. Some members of the analyst community may seek to back date these results and adjust our earnings results. In doing so, it's important to note the tax impact associated with these items. For example, in terms of the foreign exchange gains of approximately $20 million that we recorded during the quarter, this also came of a tax expense impact of approximately $8 million. So, in terms of an after tax impact there you would be looking to add back, it would be close to $12 million in terms of foreign exchange gains.

Likewise, in terms of the other income, which predominately is associated with gains on security that we dispose during the quarter, there would be an approximate tax impact [here] of $4.5 million. Also during the quarter, we did have 2 one-off items. First and foremost, the acquisition costs associated with the Northgate transaction. They did equate, $2.1 million during the quarter. Also, in terms of stock based compensation expense, the amount of such expense during the quarter was $1.1 million. Consistent with the robust profitability across the group, our cash flow from operations was a positive $51.7 million, which is actually the second best result for the Company. This would have eclipsed the previous record, if it was not for the inventory of 11,000 ounces for sale in the fourth quarter.

Net cash flow generation during the quarter was $43 million resulting in the quarter end cash reserve balance growing from $102 million to an impressive $145 million. Even more so, just to put that in perspective, just like to remind our shareholders in the investment community, back on April 8, we actually closed the Capital Gold transaction wherein we had to make a payment of $68 million to the Capital Gold shareholders because we did incorporate a cash component. From a treasury perspective, I am very proud to be reporting that expanded cash balance of $145 million. From an overall financial foundation, the strong cash balance, and our available $100 million credit facility, together with the positive cash flow really does insure that the Company is in a very strong financial position.

Transitioning to slide number 8. More than anything, the key purpose of this final slide is really to illustrate that on an asset by asset basis, each of the individual operations contributed positively to earnings and operating cash flow. Again, what I think is particularly notable is that El Cubo posted positive earnings in its first quarter since returning to operations, which is obviously well received. From a cost structure point of view, Ocampo and El Chanate continued to produce gold at lower cost structures with their respective operating costs being well below $500 per ounce.

Meanwhile, El Cubo continues to ramp up, which is expected to result in reduced operating costs in future periods. Also important to note, during the quarter at El Cubo, a little under one-half the tons processed was sourced from higher cost stock piles, with the remainder being from direct underground ore feed. The Q3 cash costs per gold equivalent ounce, was approximately $1,083. This is estimated to comprise of $872 per gold equivalent ounce, in terms of the ounces that were direct mined, versus $1,385 per gold equivalent ounce being sourced from those higher cost stock piles.

It's anticipated that these costs will continue to decrease over the coming quarters as the underground operations continue to ramp up to full production, as well as the contribution from longhole mine as that contribution increases. Our CapEx continues its track record of strong operational cash flow generation reflective of the recently augmented underground production capacity, which is favorably enhanced by the positive operating cash flows that were recording at El Chanate and El Cubo. Likewise, on the earnings front, Ocampo generated a significant share of the Company's positive earnings, which was also favorably complemented by the 60% increase in third quarter earnings at El Chanate.

Concluding, the strong cash flow performance across AuRico's operations continues to accrue, and has facilitated the growth in quarter end cash reserves to the record $145 million, which is placing the Company in excellent stead as we continue forward executing the Company's various growth objectives. With that, I will now pass you back to Renee Marion, our President and CEO.

Thank you, Scott. I'd like to start off with slide 10 and get some highlights on our operations starting with Ocampo. Ocampo produced approximately 25,000 ounces of gold and almost 1.1 million ounces of silver, for production of just under 49,000 gold equivalent ounces at a cash cost of $436 per gold equivalent. Our margins there increased to $1,257 per gold equivalent ounce, or 74%, as you can see in the top right-hand chart. Our operating cash flow is extremely strong with the open pit and underground to the mill representing 77% of that operating cash flow. In fact, as the underground production rates continue to increase, we anticipate underground having a larger contribution towards the operating cash flow.

Slide 11, specifically underground during the quarter, averaged 1,940 tons per day. In fact in October, we are up to 2,200 tons per day. That's progressing quite well, and development rates at all 3 underground operations at Ocampo remain quite high, and progressing very well. The open pit continues to outperform at over 100,000 tons per day. The pushback at Picacho is essentially complete, and we are now on the main ore benches. Mill productivity averaged under 3,200 tons per day, but that includes a 72 hour shutdown for our annual maintenance during the quarter. Having said that, gold recoveries continue to be robust at 97%, silver continues to improve, now at 90% recovery. The heap leach continues to improve, and now that we have access to the main ore benches at Picacho, we anticipate this increasing over the coming months.

To slide 12. Chanate. The current mining rates continue to hold at over 80% of the 2010 average. We have increased the area under irrigation in the month of October, by up to 23% from the month of May. As I mentioned, Phase 1 was completed ahead of schedule, and we are running at a crushing and stacking rate now, at 18,000 tons per day. Phase 2 remains ahead of schedule. We anticipate now completing Phase 2 by the end of February, about 3 to 4 months ahead of our schedule.

All of [cell 20] now is under irrigation, and we have 285,000 square meters under irrigation and which month-over-month is about another 12% increase. Barium solution pumping is now running at 31,000 cubic meters, up from 24,000 cubic meters, an increase of 29%; with the installation of 2 new pumps, we are targeting 40,000 cubic meters by year end. This will allow us to have 67% more of the leach pads under leach. Thereby, further increasing our ounces. The new ADR plant should be commissioned in February, and that will give us the additional 67% capacity for gold recovery.

Over to El Cubo on slide 13. Mill processing at El Cubo started on July 23, ahead of schedule with 75,000 tons of ore stockpile. Those ore stock piles will be depleted mid this quarter. 2 months of production during Q3, and we are ramping up to 1,800 tons per day by mid 2012. In Q3, we averaged over 1,100 tons per day, and we are progressing quite well. Our conversion to longhole is advancing well with 2 new drills on site. We anticipate converting all mining methods -- or approximately 95% of our mining methods by year end next year, to longhole. So, on the longhole front, during the third quarter, 14% of our production came from long mining. We are now blasting in 2 stopes, drilling in 3, and prepping 2 more. Out of the 47 active stopes that we currently have, 7 are already longhole. We have trained fully, 6 drillers and are currently training, 2 more.

Over to Australia on slide 14. At Fosterville, in Q2 and Q3, they were record quarters of 29,000 and 30,000 gold ounces produced. They have also produced their half-millionth ounce of ore production this year. Harrier development is on track, and the second mining front should be in production this quarter. At Stawell, we have improved quarterly production in Q3 of 20,000 ounces, and we anticipate Q4 to be a higher production and lower cost. During the third quarter, Australia returned AUD16.25 million and 2 traunches back to Northgate. As a business unit, we anticipate net free cash flow positive during fourth quarter and into next year.

Then briefly over to Young-Davidson, on slide 15. Young-Davidson is a world-class deposit, in the second largest mining district globally. A district that has historically produced, and has current reserves of over 200 million ounces. We remain on target for early production in late Q1 2012, with a 15 year mine life. Which will increase substantially with year end reserve cancellations. Average life of mine production is anticipated at 180,000 ounces, with a cash cost of $400 an ounce, but these will be higher in the initial 2 years as the majority of ore is sourced from the lower grade open pits. We've embarked as of last week, on several optimization studies.

So, on to slide 16. The optimization studies that the team is embarking upon is materials handling optimization in the MCM shaft and Northgate shafts. Also, [up the main decline], we are embarking on studies to looking at bringing forward underground production and mining rate optimizations. We are also reviewing all underground mining methods, and looking at completing the Northgate head frame. The one thing that underpins all of this is we have launched an investigation into designing and constructing perhaps a paste backfill plant. What this does, is allows us to rationalize all of the mining methods. It allows us, perhaps, to reduce the reserve dilution, which currently stands at 20%. It is management's belief that there are several improvements that can be made there.

Also improve mining recovery, the feasibility added 73.8% mining recovery, and we believe we can improve on that with these engineering studies and the introduction of paste backfill. These both result in higher grades and increased ounces. We will endeavor to update the year end reserves during the first quarter, to make sure that they reflect all of these engineering studies. There will also be productivity improvements through better designs on ore passes and materials handling. And reduction and cost for surface scaling storage. We will, also, be conducting ventilation studies investigating mill throughput optimizations. We set up the project teams on all of these, and will endeavor to complete these along with updating reserves by the end of Q1, so that we can communicate to the market what a new development plan could look like.

So, off to my concluding slide on slide 17. Our short-term strategic engineering and operational initiatives include at Ocampo, completing development plans and updating reserves on level 2. So, that we can go to the Board on potential commissioning in 2012. We are, also, conducting engineering studies and costing studies for commissioning, potentially, the northeast shaft and looking at potential mill expansions in the future. At Chanate, our priority is to complete reserves, and complete Phase 2 to 21,000 tons a day, and make a decision by the end of the first quarter on Phases 3 to 5 that could potentially increase production to 26,000 tons a day. We're almost doubling historic production.

At El Cubo, we are targeting 95% conversion to longhole mining, and productivity continues to ramp up. We anticipate continued quarter-over-quarter improvements there. As I mentioned Fosterville and Stawell, they are currently net free, cash flow positive. We are reviewing all discretionary spending as we speak. This is the time of year we work on budgeting programs. We are currently valuing the strategic direction that the Company will take.

At Young-Davidson, our first priority is for commissioning. So, we have continued focus on achieving production at the end of the first quarter next year. We are looking at potential acceleration of underground production, by looking at availability of manpower, equipment, and moving laterally verses vertically. We will be increasing the expiration budget for 2012, focused initially on Young-Davidson West. So, once again, I'd like to reiterate that we are seriously poised for a re-rate. That will be underpinned, by a stronger management team that we have. In fact, 5 of the top Northgate executives have agreed to stay on and join us in this journey. So, with that, I'd like to turn it over to the operator and open up the call to Q&A.

(Operator Instructions)

Our first question comes from Rahul Paul, from Canaccord Genuity. Your line is open.

Hello, guys. Question on the Ocampo underground. You mentioned that underground throughput averaged about 2200 tons a day in October, can you tell me what the grades were like?

Yes, we're - the grades have not changed much from the previous two quarters, Rahul.

Okay. And just moving on to Chanate. I just want to lead the life of mine strip ratio as per the Capital Gold technical report was around [2.81]. Did that includes capitalized pre-strip as well?

No, we have not updated that [I-43101], so that is always.

Okay. But then - your strip ratio I think during the quarter the operating strip is .56 to 1. Where do you see that going over say the next 3 or 4 quarters? Do you have a sense at this point?

Well, the capitalized strip is the east lay back. It's quite a large lay back. Under US cap, you wouldn't capitalize it under IFRS, (if) you would capitalize it. That lay back will continue on for a few quarters before we get down to the ore horizon. It's just the way the ore is dipping and plunging.

Okay, okay. So, if that's the case, then would I be right in assuming that Capital Gold may have included free strip in that 2.8 which you could capitalize at this point?

Yes, they did.

Okay. Thanks. And then, just moving on to corporate G&A, performa in the Northgate acquisition. What would you expect your steady state annual G&A - corporate G&A to be excluding stock based comp? I know it probably will be higher for the first two years or so, but on a steady state basis?

Hello Rahul. It is Scott here. Yes, (now that you) mention it, we are still finalizing our budgets, et cetera, for next year. But, if you look at the overall change in structure, and in terms of the Northgate employees as part of the AuRico team moving forward, I sort of want to guide you, that may be, sort of, 15% higher. The one caveat being that we haven't really sat down and finalized our budgets for next year.

Okay, okay. Thanks. That's it for me. Thanks, guys.

Our next question comes from the line of Mike Parkin from Bank of America Merrill Lynch. Your line is open.

Hello, guys. Congrats on the good quarter. I was just wondering if you could speak to how the staffing situation at Young-Davidson is progressing?

I will ask Peter McPhail to answer that.

Yes, hello. We've got - in terms of construction, there's about 750 people on site right now working on completing the mill facilities, the (drilling) facilities, and getting going on the open pit mining - facilities will be done in about two weeks, so that is good.

In terms of longer term staffing for the operations, we have a couple crews of miners underground on Northgate staff, and we're - we have just gone through a job fair in Kirkland Lake for milling on our mill crew. We have hired some supervisory level skill folks, and don't really see any huge challenges going up the rest of the ranks in the mill. It was a quite well attended job fair. So, it's coming well.

Having said that, all of the senior staff are on payroll.

That's true. All of our key positions have been hired and have been with us for a fair time now.

All right. Thanks, guys.

(Operator Instructions)

Our next question comes from David Haughton from BMO Capital. Your line is open.

Thank you, good day Rene and Scott. Thank you for the update. I've got a couple operational questions. At El Campo, noticed that the stacking rate was in that 6000 tons a day kind of range. Do you expect for it to grow toward a 10,000 tons per day rate through 2012?

Russell, you are just finishing off the mine plan right now, why don't you answer that?

Yes, we are looking at roughly the same rate for the rest of this year, and then next year building up to the 10. I think next year first quarter will be 10,000 tons a day once more. We are still completing a stripping in Conico and Refusio, so, that should finish off this - the end of this quarter, the fourth quarter.

And, Russell, while you are there, it sounds like Rene has relented in finally giving you approval for the shaft. What kind of savings can you envisage out of using that instead of holding up that valley?

Before you answer that, Russell has to go to the board and they have to approve it. But, Russell, go ahead.

It's - I couldn't actually give you a cash cost. All of the savings are invisibles like ventilation, congestion. If you look presently, we are holding 4000 tons a day up there in trucks. If we can get that off the ramp, then there is a huge upside there on ventilation. I don't honestly know.

We are still working that out. We are still working out the cost of the shaft. We have had engineers in to do a study on it, and we have to complete the design of the underground handling system. We have to put a ramp and a crusher in, so it's still a bit early to say, Dave.

But, Dave, I will add that the reason why it is kind of invisible is the surface haulage from the patio up to the crushers and back to the mill. That is included in the open pit mining cost, (finer rock) so, it becomes invisible.

Got you. Over to El Cubo now. You are kind of getting your arms around production there. What kind of rate do you see it going up to? Can we get to the 1800 tons a day level through next year?

I see no great problems with that, Dave. The long haul has started very successfully. The ground is lending itself extremely well to long haul. We're getting a lot reduced dilution compared to the original cut and till method, so we are targeting 1800 next year. Mid year we should be there.

And can you see the grades moving up from where we are now?

Yes, I do, because, what's going to happen is we are going to get less dilution and less ore loss. I would see that the grade in the rock will remain the same, but we will just do a better job at getting less waste to the mill.

All right. On to El Chanate. It looks like you are doing a combination of heap leach and dump leach. And, just wondering whether we should see anymore dump leaching going forward or whether this move to the 21,000 tons a day is going to make that less attractive for you?

Currently, where we stand, Dave, is there is still 2 million tons of (run of) mine stockpile that needs to go onto the old heaps. So, you will see that going on over the next year. And, now with the additional solution and once the new ADR plant gets commissioned, we can put that under leach. So, the 21,000 ton a day nominal crush and stack is the regular material.

Okay. And I am presuming that having that low grade material direct stacked had kind of pulled back your grade and also recovery ratio for the period?

Well, what happened is as our stacking rate goes up, we didn't have any extra solution, so they were putting everything under irrigation, which means, basically your solution grade goes down and really you've got to look at the percolation rate. Now with a higher solution rates with the 18-inch line, we are seeing solution grades come back up to 0.4 grams a ton, and the higher ounces coming through. That is why we are hurrying up with the ADR plant on getting it on site and commissioned as fast as we can.

We have a low-grade pond that would be commissioned by the end of this month, and that will allow us to further increase solution grades, because that will be pumped back onto the heap versus in through the ADR plant. So, it's - we are trying to balance ADR plant, balance solution and solution grades. But, that will be virtually all done including the initial two pumps and 40,000 cubic meters by the end of this month, early next month.

Okay. So, on the back of that we should be seeing a reasonable improvement through the fourth quarter and some benefits I guess, going into first quarter next year?

Yes. And you will start seeing a new cost structure coming on in the third - fourth quarter and into the first quarter.

Okay. Something in your exploration caught my eye. Orion. Is it fair to say that is on the back burner now?

Our strategy for next year in our draft budgets, it's 110,000 hectares, so it is a large land position. Our priority is field work next year to look at seeing, are there any other targets that we should be addressing? And then we will approach the board with an un-budgeted AFE on that.

So, it is more of a results oriented. 400,000 ounce asset itself as it stands, obviously, is not a core asset. We've got to really take a look at the entire land position, and make that decision based on any project generation, exploration can do. So, isn't not a high priority, but it's a priority to be able to rationalize the land positions.

All right. Great. Thank you, Renee.

We have no further questions in queue. I would like to turn the call back to Rene for closing remarks.

Well, thank you, everybody, for joining us on the call, and we look forward to the next few quarters as we integrate a new management team, new assets within the organization, deliver on Young-Davidson, which we think is extremely exciting, and with respect to that, I have been up once and I am back up next week. And I must say the Northgate team has done an exemplary job on holding high standards and putting together a good operation.

So, we really look forward to seeing Young-Davidson coming into the fold here in the second quarter, and really being the core asset that provides us some double-digit growth profile in the coming years along with a support function at Ocampo. So, with that think you very much for joining us, and have a good day.

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