Alamos Gold Inc (AGI) 2012 Q3 法說會逐字稿

Good morning, my name is Matthew and I will be your conference operator today. At this time, I would like to welcome everyone to the AuRico 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 questions and answer session.

(Operator Instructions)

Thank you. Anne Day, you may begin your conference.

Thank you, operator, and good morning, everyone. Thanks for joining us today for the AuRico Gold third-quarter earnings results conference call and webcast. On the line today we have Scott Perry, our President and CEO; Charlene Milner, our VP Finance and Interim CFO; Russell Tremayne, Chief Operating Officer Mexico; and Peter MacPhail, Chief Operating Officer of Canada. They will also be available during the Q&A period at the end of the call. At the end of the presentation, the operator will provide instructions again for those who wish to ask questions. Should you wish to follow along via our webcast, it is available on our home page at AuRicoGold.com.

Before we begin, I will go through the abbreviated version of our forward-looking statements which are also provided in the press release and today's presentation. Some of my commentaries -- some of today's commentary may contain forward-looking information for AuRico. In this respect, we refer you to our detailed cautionary note regarding forward-looking statements in our press release and presentation. You are cautioned that actual results and future events could differ materially from the respective conclusions, forecasts or projections. We refer you to the section entitled the risk factors in our latest MD&A and other filings available on SEDAR which set out the material factors that would cause results to differ.

I will now turn the call over to Scott Perry.

Thank you, Anne. Welcome, ladies and gentlemen, and thank you for attending our call. I'm just going to start off on slide number 4 and I'm just looking to recap some of AuRico's recent highlights. From an operation's perspective, the key quarterly highlight was that on September 1 our Young-Davidson mine declared commercial production. In Young-Davidson's first month of commercial operations, being the month of September, the mine produced in excess of 9,000 ounces at cash cost of $639 per ounce. On the back of this positive transition into commercial production, the favorable monthly performance continued in October where again the mine produced in excess of 9,000 ounces at similar operating cost levels. Mill feed grades are continuing to increase through a combination of higher grade open pit ore and the initial production contributions from the underground. Young-Davidson is transitioning smoothly on commissioning underground operations and, during the fourth quarter, the Company has targeted mining 90,000 tonnes of underground production at grades in excess of 3 grams per tonne. This included the 12,000 tonnes mined in the month of October at grades averaging 4 grams per tonne.

We're looking forward to reporting production for November and December where production levels should be favorably underpinned by the increased presence of higher grade tonnage being mined from the underground operation.

The key corporate development highlight during the quarter was that on October 9, the Company entered into a definitive agreement with Minera Frisco pursuant to which Minera Frisco will acquire the Ocampo mine as well as a 50% interest in the Orion advanced development project for total consideration of $750 million in cash.

As previously communicated, this transaction will allow AuRico to deliver a meaningful return of capital to our shareholders while significantly enhancing our liquidity position and ensuring the optimum level of financial flexibility to support our current operations. This transaction is expected to close in early December and it will be at this point in time that the Company will be looking to provide specific details on the exact form of shareholder capital return. In terms of other asset sales, in the month of October, we were opportunistic in monetizing our non-core shareholdings to further bolster the Company's liquidity position whereby the Company sold its entire equity interest in Endeavour Silver Corporation and Crocodile Gold Corporation on a block trade basis for gross proceeds of $105 million.

On the exploration front, we recently provided an update on exploration activities at our two core operating assets. At El Chanate, this year's exploration program focused on understanding the potential for extending the open pit mineralization beyond the existing ore body. To that end, three new discoveries were announced at El Chanate that are directly on trend from the open pit and represent a strong indication of potential resource growth.

This year's exploration program and the success based plan proposed for next year will continue to focus on follow-up drilling to further evaluate the exploration potential at El Chanate. Meanwhile at Young-Davidson West, the drill program continues to demonstrate that mineralization extends beyond the existing resource. Additional work will be conducted to further test the continuity of the Young-Davidson West Zone to the west and at depth and this will be a key objective in next year's exploration program.

On the legal side, we resolved our only outstanding legal item wherein on the 5th of October we reached an agreement to settle the 2008 class action claim filed by Edward J McKenna. The settlement announced under the agreement is estimated at $13.5 million which will be offset by an insurance receivable of some $11 million. The last highlight covers our guidance for the full year and serves as reconfirmation that the Company's asset base is well positioned to meet our guided production levels to 2012. Being production of 78,000 to 88,000 ounces at El Chanate at cash cost of $430 to $460 per ounce. Whilst at Young-Davidson we're again reconfirming production guidance of 55,000 to 65,000 ounces at cash cost of $550 to $650 per ounce.

Moving on to the next slide, slide number 5, this slide really highlights AuRico's favorable attributes moving forward. On the back of the pending sale of the Ocampo operation, we had streamlined our asset base, and in doing so we have significantly traded up on the overall quality of the asset base which positions AuRico well for reliable, consistent, and sustainable performance. The Company offers many of the key attributes that drive shareholder value being North American jurisdiction. When we look at our two core assets being Young-Davidson and El Chanate, both assets are fully constructed and domiciled in North America.

When we look at the cost profile of this asset base moving forward, these assets are very well positioned on the world's industry average cost curve. We have an internal organic profile and it's a growth profile for the next five years. If you look at production per share count, we are expecting a grow -- we expect production per share to be growing over the next five years. One of the key attributes that I particularly ascribe to is mine longevity. If you look at the Young-Davidson operation just based on its in situ reserve profile, Young-Davidson has an indicative mine life of some 18 years whilst at El Chanate we have an in situ reserve life of some 8 years.

All of this is underpinned by a peer leading balance sheet on the back of this year's divestments -- on the back of this year's divestments, our Company has never been on a stronger financial footing moving forward. We have a purer gold portfolio and we are totally unhedged so we are fully participating in today's strong metal -- gold metal price environment. Looking forward, this is an asset base that should be generating a significant stream of positive cash flow on the back of the streamlined asset base and in particular the G&A cost savings and optimized balance sheet. All of which is expected to provide a solid platform for immediate as well as ongoing shareholder friendly initiatives, which we look forward to providing more details on as we progress forward.

This concludes my prepared introductory remarks. With that, I would now like to pass the call to Charlene Milner, our Vice President of Finance, who will walk us through the Company's third-quarter financial performance.

Thank you, Scott. Good morning, ladies and gentlemen. Before beginning, I would like to note the majority of the slides presented today will contain the results of both our continuing and discontinued operations. You may recall that we divested our Australian operations in the first quarter of this year. We also successfully divested two of our other non-core assets in the third quarter with the El Cubo and Guadalupe disposition closing on July 13. In addition as Scott mentioned, we announced the pending disposition of the Ocampo mine on October 9. Both the El Cubo and Ocampo mines contributed to AuRico's third-quarter results, El Cubo for 13 days and Ocampo for the full quarter. However, they have both been presented as discontinued operations in the Company's financials. Starting with slide 8, once again it's important to note that the operational results include the results of both our continuing and discontinued operations.

Consolidated gold equivalent production was lower than the prior year corresponding period, reflecting a lower production contribution from Ocampo and only 13 days of production at El Cubo prior to its disposition, partially offset by improved production at El Chanate and the production contribution from the newly commissioned Young-Davidson mine.

Total cash costs were $625 per gold equivalent ounce prior to a $72 per ounce reversal of the write down taken on the Ocampo heap leach inventory. You may recall that the Company recognized a $14.4 million write down in this inventory in the second quarter when it was determined that the cost of mining activities related to heap leach ore would not be fully recoverable. However, due to increases in metal prices in the third quarter, the Company reversed $6.1 million of this write down, $3.7 million of which represented cash costs in accordance with the requirements of International Financial Reporting Standards.

After this reversal, consolidated cash costs were $553 per gold equivalent ounce in the third quarter. This result was higher than Q3 2011 reflecting the higher cash costs results at Ocampo and the inclusion of Young-Davidson's cash costs for the first time. In terms of metal prices, we realized the gold price of $1,664 per ounce during the quarter and a silver price of $29.87 per ounce, both being lower than the prior year corresponding period. And as a result, combined with the decreased production mentioned previously, our third-quarter revenues declined by $35 million over the prior year.

Turning to slide 8, the operational results noted on the slide includes the results of our core operations only, being the El Chanate and Young-Davidson mines in the current year and El Chanate mine only in the prior year. These core operations produced 29,291 gold ounces in the third quarter. This result includes production from Young-Davidson for the month of September subsequent to declaring commercial production on September 1. In the months of July and August, Young-Davidson also produced 7,922 gold ounces for a total of 17,825 gold ounces for the quarter. During the month of September only, Young-Davidson realized cash costs of $639 per gold ounce. Total cash costs at El Chanate were $434 per gold ounce in Q3 of this year, a $31 improvement over the prior year corresponding period when cash costs were $465 per gold ounce. Combined, our corporations achieved cash costs of $504 per gold ounce in the third quarter of 2012 and a margin of $1,169 per ounce.

Slide 9 illustrates the key financial performance highlights for the quarter and again please note that this slide includes the results of both continuing and discontinued operations. Earnings from operations decreased to just under $17 million versus the prior year largely as a result of the decrease in production and revenues mentioned previously and due to reclamation and care and maintenance expenditures of the Kemess South mine which is in the decommissioning phase. This mine was acquired in October 2011 through the Northgate acquisition and as a result doesn't appear in our prior year earnings.

Net earnings decreased over the third quarter of 2011 as a result of the lower earnings from operations that I just described and the $39.2 million deferred income tax expense that was recognized as a result of the pending disposition of Ocampo. This was offset by various realized and unrealized gains, most notably firstly the Company recognized $20.3 million in unrealized gains on the shares of Endeavour Silver and Crocodile Gold which were received on the disposition of El Cubo and the Australian operations in which were mark-to-market at the end of the period.

The Company also recognized the $24.1 million gain on the disposition of the El Cubo mine and the Guadalupe exploration property on July 13. And finally, the Company recognized a $14.4 million unrealized gain on the fair value of the option component of the convertible senior notes which resulted from a decline in the Company share price during the quarter. Our adjusted net earnings at $29.5 million for the quarter was also lower than Q3 of prior year and the next slide will reconcile this adjusted earnings result.

Lastly, cash flow from operations of $6.2 million was lower than the prior year corresponding period due to the decline in production at Ocampo, lower realized metal prices, and an increase in non-cash operating working capital. Before changes in working capital, our operating cash flow was $40.6 million for the quarter, as compared to $57.3 million in 2011. I will explain this adjusted cash flow from operations result in further detail a bit later.

Moving on to slide 10, on this slide we are illustrating our adjusted net earnings results segregated between continuing and discontinued operations, and when combined, gives us the company-wide adjusted net earnings result of $29.5 million or $0.10 per share. I will focus on the consolidated results which is the last column on the slide.

As mentioned in the previous slides, the reported net earnings result from both continuing and discontinued operations was $35.2 million or $0.12 per share with the key adjusting items as follows. The adjusted result adds back unrealized foreign exchange losses recognized in Q3 of $10.1 million which were due to the strengthening of the Mexican peso and the Canadian dollar during the third quarter. These unrealized foreign exchange losses arise primarily as a result of the translation of the Company's Mexican peso and Canadian dollar denominated deferred tax liability into US dollars.

The adjusted result deducts the unrealized gain of $14.4 million on the option component of convertible senior notes. The adjusted result deducts the unrealized gain on investments of $20.3 million, which arose primarily from the increase in the share price of Endeavour Silver from July 13 to September 30. The adjusted result deducts other unrealized gains and other expenses of $1.6 million and adds back $5.3 million in transaction costs related to the disposition of El Cubo and the pending sale of Ocampo. The adjusted result deducts the $6.1 million reversal of the second quarter net realizable value adjustment on the Ocampo heap leach inventory, as this reversal is not indicative of the Company's profitability performance. The adjusted result adds back the $39.2 million deferred tax expense recognized as the result of the pending disposition of Ocampo. This tax represents a portion of the taxes that will ultimately be owing when the Ocampo mine is divested and, as it is only a provision at this time, it is a non-cash item in the third quarter.

Finally, the adjusted result deducts the $24.1 million gain that was realized on the disposition of the El Cubo mine and the Guadalupe exploration property and, as a result of the consideration received, exceeding the book value of these assets. The notional tax effect of these items is a $6 million deferred tax expense, which results in a final consolidated adjusted net earnings of $29.5 million or $0.10 per share.

Slide 11 illustrates the operating cash flow result for the quarter and, again, please note that this slide includes the result of both continuing and discontinued operations. The bottom line cash flow from operations is $6.2 million or $0.02 per share, which is lower than the prior year quarter due to the decline of production at Ocampo, lower realized metal prices, and increases in non-cash operating working capital. The increase in working capital is largely due to the following items. As a result of the declaration of commercial production at Young-Davidson, $6.6 million of the mine's working capital balances, such as inventories, receivables, and payables, was required to be reclassified to operating cash flows. These working capital changes were previously classified in investing activities with capital expenditures. This is a one time adjustment only associated with the mine's transition into commercial production.

In addition, there was an increase in Ocampo's net receivable position of $4.7 million which was largely associated with increased tax receivable balances attributable to expected year-end tax refunds. The Company also recognized an $8.7 million receivable for additional proceeds related to the sale of El Cubo to Endeavor Silver, representing a working capital adjustment in accordance with the El Cubo mine sale agreement. And finally, there was an increase in the valuation of the various ore-in-process inventories at Ocampo during the quarter of $12 million. Excluding the non-cash working capital impact, operating cash flow per share was $40.6 million or $0.14 per share.

This concludes the financial overview section of this presentation. So with that, I will pass the proceedings back to the operator for questions.

(Operator Instructions)

Rahul Paul, Canaccord Genuity.

At Young-Davidson, what was the average open pit grade process in October?

It's Scott here. We haven't provided that level of detail in terms of our monthly updates for the month of October. I think one of the things that we try to be very transparent with on the market is that we have got to gradually start weaning away from these detailed monthly updates. I think on a go-forward basis, what you will see is disclosing the level of gold production. We were happy to disclose that and we will be providing just more narrative on a going forward basis.

Okay. But if I -- what I'm trying to get at is if I look at what you mined in Q3, the average open pit grade (inaudible) open pit was 0.88 grams. I'm just wondering at to what grades you are mining these days and if you think you can maintain open pit grades to the middle at the 1.5 to the 1.6 gram range in November and December because September the grades to the [middle] were 1.63. I'm just trying to get a sense of how long should I expect that to continue.

So directing your question, when you look at the Q3 mine grade from the open pit operations, it's very important to remember that we are also mining a blend of lower grade material which we've been stockpiling as part of that long term low grade stockpile. So that mine grade is not really indicative of what was being presented to the mill in Q3. The actual head grade that was presented was around 1.63 as you mentioned. I'm happy to confirm that in the month of October, the actual head grade that was presented to the mill was better than the 1.63.

Okay. That was -- that was including -- that was open pit?

Predominantly open pit and 12,000 tonnes from the underground where the average grade was just under 4 grams per tonne.

Okay. Thanks, Scott. And then just moving on and at Young-Davidson again, capital costs year-to-date are $264 million. The last guidance was $214 million. But it looks like we saw roughly $50 million in Q3 related to capitalized interest and carryover from 2011. What should we expect in Q4 including all items?

Capital guidance at Young-Davidson for the full year is up to $240 million. And our guidance that we gave at the beginning of this year is based on what we expect to be committing to. And so that guidance is still valid. When you are looking at that section of the MD&A, you have to bear in mind that that is the total cash outflow at the property. One of the key items there is that it also represents commitments made last year where the expenditure was already recorded as capital expenditure. So the accounts payable balances are now being paid in this year. So it's not really an apples-to-apples comparison.

But should I mean in terms of the use of cash -- use of cash proceeds sort of a thing, should I review any more related to 2011 cash flow -- 2011 capital in Q4? Are you pretty much done?

Well the property is obviously fully constructed now in order to declare it commercial production. In terms of the capital expenditure guidance for this year on a committed basis it continues to be $240 million.

Okay. Thanks. And just one last question with the underground ramp up and then I will get back in queue. Obviously good progress there. Are your underground mining costs close to targeted levels? I think we were looking at around $30 a tonne with other [piece full plant]. Are they much higher at this stage?

Yes, so the underground unit mining costs in terms of guidance that we provided is under $35 per tonne. We have only got about three weeks worth of experience at the moment. We haven't actually been recording or been in a position to account for underground unit mining costs. From what we have seen the mine is performing really well. In fourth quarter of this year, we're targeting some 90,000 tonnes from the underground operations. That would imply that if you look at the month of November and December, we should be averaging close to 1,300 tonnes per day on a daily basis. In terms of the targeted underground unit mining costs, we think it's up $35. It's very achievable.

And then will you be expensing out costs for the underground in Q4? Or is some of that going to be capitalized?

Anything that's associated with operating will be expensed and obviously any sort of development for example the ongoing sinking of the shafts or development that's going to be for the betterment of the ore body or giving us access or ventilation will be capitalized. Just like what you'd see in any underground mining operation.

Okay, that's it for me. Thanks (inaudible).

(Operator Instructions)

Brian Christie, Desjardins Securities.

You alluded to lower G&A on a go forward. I'm wondering if you can give us a sense on that. And then maybe you can just refresh the effective tax rate for both fourth quarter and 2013.

Yes. Obviously with the disposition, Brian, of Ocampo, Ocampo was a significant asset within our portfolio so if you look at our G&A component both down in Mexico but also here in terms of corporate in terms of supporting that operation, it did represent quite an extensive presence. We are finalizing our budgets as we speak. But I would be comfortable guiding that you can expect to see a 20% to 25% reduction in G&A company-wide. In terms of the effective tax rates, I know it's difficult for those in the analyst community because there are so many moving parts in our financial statements in the continued and discontinued operations. I think on a go-forward basis as we go into next year and it's just the two core assets, the effective tax rate from an accounting perspective should be around 30%. And then on a cash basis, Young-Davidson again should be around 30% on a cash tax basis over the life of mine. But do bear in mind we do have some tax loss pools there so we don't expect to be paying tax for at least the next two years and likewise down in El Chanate we are paying tax under the regular tax regime and again the tax rate in Mexico is 30%. It's really quite an easy answer there for you, Brian. It's 30% for accounting, 30% for cash flow, but Young-Davidson should have tax shields the next two years.

Great. Thanks, guys.

(Operator Instructions)

Rahul Paul, Canaccord Genuity.

Hi, Scott, Peter. Probably a question for Peter MacPhail. At Young-Davidson, you mentioned on the underground you are averaging about 1,300 tonnes a day. Do you expect to be averaging about 1,300 tonnes a day for the rest of the year? I'm just curious as to what level can you get that throughput rate up before underground traffic becomes an issue? As far as I understand, you will be using the ramp to haul material out of the mine.

Thanks, Rahul. It's Peter here. The mining we are doing is in the upper levels of the mine. Most of the development is much further down so there is not a lot of impact there. However, that 1,300 tonnes a day, I think we get up to 1,500 tonnes a day or thereabouts before we have the shafts commissioned. That's where we will remain for the next while.

Okay. Thanks. That's it for me.

(Operator Instructions)

We have no further questions at this time. I will turn the call back over to Mr. Scott Perry for any closing remarks.

Thank you, operator. We'd like to thank everyone for joining us today and for your interest in our Company and with that, I will conclude the call and of course if you do have any further questions, please do not hesitate to reach out to us. Thanks, everyone.

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