Alamos Gold Inc (AGI) 2013 Q2 法說會逐字稿

Good morning. My name is Denise and I will be your conference operator today. At this time I would like to welcome everyone to the AuRico Gold second-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. Anne Day, VP of Investor Relations, you may begin your conference.

Thank you, operator, and good morning, everyone. Thanks for joining us today for the AuRico Gold second-quarter earnings results conference call and webcast. On the line today we have Scott Perry, President and CEO; Rob Chausse, CFO; and Peter MacPhail, Chief Operating Officer. They, along with other members of the senior management team, will be available during the Q&A period at the end of the call. At the end of the presentation, the operator will provide instructions for those who wish to ask questions. Today's presentation, financial results and press release are all available on our website at AuRicoGold.com.

Before we begin, I will go through an abbreviated version of our forward-looking statements, which are also provided in the press release and today's presentation. 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 presentations. 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 Risk Factors in our latest of MD&A, and other filings available on SEDAR, which set out the material factors that could cause results to differ.

I will now turn the call over to Scott Perry, CEO.

Thanks, Anne, and good morning, ladies and gentlemen. As we pre-released in July, AuRico and all of our employees are very pleased to report another quarter of solid production that was in line with expectations at both of our operating assets. On the chart on slide 4 illustrates, the Q2 result marked the third consecutive quarter of delivering increased gold production from both of our operations. More importantly, I think we are continuing to demonstrate an asset base that is well-positioned for delivering on our commitments of reliable, sustainable and consistent results.

Young-Davidson is obviously our cornerstone asset. And Young-Davidson continues to ramp up better than expected, with productivity metrics at or above expectations. The underground operations at Young-Davidson averaged in excess of 1,600 tons per day during the quarter, which is well above plan. We are really seeing the benefits of an ore body that lends itself well to highly productive bulk mining methodologies, which really allows for a highly mechanized operation with very low manning requirements. In the second quarter, the majority of the underground mining took place in the fifth and sixth stopes in the upper boundary zone. Just these two stopes alone were some 60,000 to 80,000 tonnage stopes, which we were mining on 30,000 to 40,000 tonnage panels. Again, an operation and an ore body that's really going to lend itself well to bulk mining moving forward, which will bode very well in terms of unit productivities and unit cost efficiencies.

At the mill processing facility during the quarter, we operated at a throughput rate in excess of 7,000 tons per day. This is a targeted throughput rate of some 6,000 tons per day. This is approximately a 15% favorable outperformance. On the mill recovery efficiency front, we're continuing to perform well, and especially so in the month of July where we've seen recoveries averaging up to 90% after the implementation of some new recovery improvement initiatives which will bode really well for future performance.

The commissioning of the Young-Davidson underground midshaft crushing and hoisting system remains on schedule, such that the underground operations will be in commercial production at the end of the third quarter. This will be a key milestone for the operation that will drive a significant increase in underground production volumes, accompanied by favorable underground unit cost improvements, given the advantageous cost profile of skipping production to surface versus the current phase of trucking production to surface. Our mine plan and production outlook for Q4 is positioned very well. And with the commencement of commercial production Q4 will be our first opportunity to showcase how the underground operation is positioning for driving the future profitability potential of the operation.

Like most of our peers, I think it's appropriate to comment on the current gold price environment and how that's impacting our business. AuRico itself is in a very fortunate position given our streamlined asset base. The strategic divestments completed in 2012 have streamlined the Company's asset base, established a peer-leading balance sheet, and accordingly a fully funded growth profile. The divestments have allowed the Company to significantly reduce G&A expenditures, exploration investments, and other nonessential spending requirements, in addition to eliminating significant capital investment obligations associated with these divested assets. This year's capital investment programs will really unlock the potential of Young-Davidson and position the company for success going forward.

Production from Young-Davidson will continue to grow for the next four to five years, which will be accompanied by significantly reduced capital investment requirements, as we now exit all stages of construction. This increase in production at lower cost and lessened capital requirements should ensure that the Young-Davidson operation is best positioned to respond to future gold prices. As I'm mentioning, I really do think this positions AuRico favorably in that we're fortunate to be in a position where we can really focus on running the business with a view of long-term value maximization for the benefit of all of our shareholders.

This is a good segue into our dividend policy. Our dividend policy remains secure. And I think it really does demonstrate how shareholders will continue to benefit today from the well-timed divestitures, and how our shareholders will continue to benefit into the future as Young-Davidson grows its production profile. The dividend program is unique. And it is presently yielding in excess of 3%, such that in the first six months of this year AuRico has already paid in excess of $18 million in dividends to our shareholders. Commencing in 2014, our dividend distributions will be linked to operating cash flow, which ensures that flexibility is built in, but it also provides excellent leverage for our shareholders to the gold price of the day. Together with our attractive dividend reinvestment program, and based on shareholder feedback to date, we know that our dividend goes some ways to setting us apart.

Another highlight that I want to touch on during the quarter was the appointment of Alan Edwards to the role of Non-Executive Chairman. We welcome Alan to this new role, as Alan has always played an integral role throughout AuRico's transformational period. Alan has been an active Director since joining the Board in 2010. And since that time the Board was always benefited from Alan's extensive operational and board experience. We look forward to benefiting from Alan's ongoing leadership at the board level moving forward.

Wrapping up, I just wanted again reiterate AuRico is very fortunate. We have a good set of quality operations, strong cash position, and most importantly our fully funded growth profile. Our shareholders, like myself and the board, should draw comfort that the Company is well-positioned in this current market environment.

With that, I'd like to now turn the call over to Rob Chausse, our Chief Financial Officer, who will walk us through the quarterly financial highlights, following which we can then open the call up to Q&A. Rob?

Thanks, Scott, and good morning. Before we get started, I'd like to note that for comparative purposes I will be speaking to results for operations classified as continuing for the prior period, and not those classified as discontinued. In 2012, continuing operations were comprised of El Chanate only. Whereas 2013 includes both El Chanate and Young-Davidson.

Turning to slide 6, second-quarter revenue from continuing operations was $58 million, driven by sales of approximately 41,500 gold ounces, at an average realized gold price of $1,369 per ounce. Total production for the second quarter was approximately 48,000 ounces. Total gold ounces sold for the second quarter were approximately 51,000 ounces, which included 9,400 underground preproduction ounces from Young-Davidson. Revenue sales and production were higher than Q2 of '12, largely due to the declaration of commercial production at Young-Davidson in Q3 of last year.

Second-quarter adjusted operating cash flow was approximately $19 million, or $0.08 per share, compared to $0.00 per share for the same quarter last year. The Company recorded a net loss of approximately $103.5 million, or $0.42 per share, during Q2, compared to a net income of $0.03 per share in Q2 of '12. Included in this result are non-cash charges amounting to $105 million net of tax. After adjusting for the goodwill impairment and the other one-time charges that I will review in more detail shortly, net earnings were $6.1 million in the quarter, compared to a loss of $900,000 in the second quarter '12. On a per-share basis adjusted net earnings increased to $0.02 per share. The increase is primarily due to the Young-Davidson startup.

Due to the metal price environment currently being experienced, the Company's second-quarter net earnings were adjusted, as noted earlier, for non-cash impairments and revaluations. Of the $105 million recorded, $80 million is related to an impairment charge associated with El Chanate. This impairment charge was related to a reduction in the estimated short- and long-term metal prices used in our life of mine plans. And this charge is entirely charged against goodwill. The remaining goodwill at Chanate is approximately $26 million. The Company also determined that an impairment charge of $16.5 million net of tax was required for the retained interest royalty, and the future life of mine free cash flows of the Fosterville and Stawell mines, which were disposed of in 2012. The balance remaining on our books related to this is approximately $15 million. The remaining $8.4 million net of tax is related to the net realizable value adjustments for heap leach and long-term low-grade stockpiled inventories.

Turning to slide 7, year-to-date revenue from continuing operations was $123 million, driven by sales of approximately 81,000 gold ounces at an average price of $1,494 per ounce. Total production for the first half of 2013 was approximately 94,000 ounces. Total gold ounces sold year to date were approximately 99,000 ounces, including 18,000 ounces of underground pre-production from Y-D. Revenue sales and production for the first half of the year increases over 2012 were largely due to the declaration of the commercial production at Y-D. Year-to-date operating cash flow was approximately $39 million, or $0.15 per share, compared to $0.02 per share in the first half of 2012. The Company recorded a net loss of $85 million year to date, or $0.34 per share, compared to $0.02 per share for the same period in 2012. After adjusting for one-time charges, net earnings were $18 million, or $0.07 per share for the first six months of '12. Adjusted earnings for the same period last year were $0.02 per share.

Moving to slide 8 and our operating results, as previously noted, the operation results include the results of El Chanate and the Young-Davidson mines in the current quarter. And the El Chanate mine only for the prior-year quarter. Also, the per ounce metrics do not include inventory NRV adjustments. The Young-Davidson open pit produced 19,400 gold ounces in the second quarter. The underground also produced 9,800 pre-production gold ounces, for a total of approximately 29,000 ounces of gold for the second quarter. Young Davidson realized cash costs of $716 per gold ounce for the open pit during the second quarter. El Chanate produced approximately 18,700 ounces, which is 5% more than the prior-year quarter, primarily due to higher grades. Total cash costs at El Chanate were $602 per ounce for Q2 this year, an increase over Q2 last year. This increase is primarily due to the application of a higher quantity of solution, solutions aimed at accelerating gold recoveries, and a reduction in capitalized stripping costs. Combined, our operations achieved cash costs of $655 per gold ounce in the second quarter, which is in line with our previously stated guidance.

On slide 9, for year to date, the Young-Davidson open pit produced approximately 40,000 gold ounces during the first half of 2013 and the underground also produced approximately 17,500 ounces of pre-production gold, for a total of 57,500 gold ounces year to date. For the first six months, Young-Davidson realized cash costs of $705 per gold ounce for the open pit. El Chanate produced 36,600 gold ounces, in line with production of the prior year. Total cash costs at El Chanate were $585 per ounce. Again, an increase over the prior year. Combined, our operations achieved cash costs of $645 per gold ounce for the first half of 2013, which is in line with our previously stated guidance.

Turning to slide 10, this provides a detailed reconciliation of our adjusted earnings for the second quarter. As noted earlier, the reported loss from continuing operations for Q2 was $103 million, or $0.42 per share. The adjusted result adds back $11.9 million of deferred tax expenses associated with changes in foreign exchange rates, the non-cash impairment and inventory adjustment of approximately $111 million, and $4 million of unrealized loss on the contingent consideration related to the El Cubo disposition in 2012. Other adjustments deducted included $8.7 million of unrealized gains on foreign exchange, a $4 million gain on the option component of the convertible notes, as well as a $4.5 million adjustment related to tax, the majority of the items above. After taking into account all the items noted on this schedule, the adjusted net earnings result for Q2 is $6.1 million, or $0.02 per share.

As noted on slide 13 in the appendix, for the six months ended June 2013, adjusted earnings were approximately $18 million, or $0.07 per share. We have reported all-in sustaining costs of $1,189 per ounce before NRV adjustments for the second quarter. We've applied the World Gold Council guidance to our all-in sustaining cost calculation and expect to be in line with our previously stated guidance for the full year of between $1,100 and $1,200 per ounce. Please refer to the non-GAAP measures section in MD&A for details.

Our consolidated effective tax rate for the second quarter was impacted by foreign currency fluctuations, as well as utilization of losses available to shelter income at our Canadian site. Going forward, our tax rate is expected to be in a range of 25% to 30%. As of June 30, 2013, AuRico had approximately $360 million in liquidity. The balance consists of $210 million in cash and cash equivalents, and $150 million available credit facilities.

Throughout the last two years AuRico has been trading up on asset quality, and has optimized and focused spending. This effort has allowed us to reduce our capital investment requirements and lower our exploration and G&A spend. We will continue to implement and assess opportunities that ensure our dollars are deployed effectively, and maximize free cash flow in any gold price environment. And in closing, I want to reiterate our commitment to operating and free cash flow. It will be this metric that drives and determines our ongoing strategic behavior.

With that, we will open the call to Q&A.

(Operator Instructions)

Cosmos Chiu, CIBC.

I've got a few questions here. Maybe, first off, if I can ask a question about the net realizable value, NRV, adjustment. To me, these appear to be writedowns of stockpiles and also inventory to what they are worth today. But, yet, if I look at the balance sheet itself, the inventory balance actually went up. Can you maybe walk me through the mechanics of how the two come together? I would imagine it's due to the fact that the inventory level went up, in terms of, for example, Young-Davidson. But if you can walk me through that, that would be great.

Sure. We continue to add to the stockpiles and add to the heap leach. So the average cost at the end of the quarter was taken, and taken against what we deemed to be the realized gold price plus -- the average cost, plus cost to complete and produce those ounces were taken and matched off against what we deemed to be the long-term gold price that we would realize. The difference was where the writedown comes from.

So, you continue to build inventories. And there is a cost that comes along with those inventories. And at the end of the quarter we take the cumulative impact and measure against the realized gold. Ultimately the ounces coming on, obviously, were costed below the average price, and that's what causes us to increase and not reduce that balance.

Okay. And, Rob, if I look at the inventory, if only for Young-Davidson itself, I see that the grade has come down to about, I think, 0.82. Would that be more at risk? Or is there a good chance that, given what has happened in the gold markets, that there's going to be further NRV adjustments, given that now it's a lower grade? But I guess, as you said, it's also dependent on the costing of the inventory.

Right. Is it at more risk? Obviously it depends on the gold price. For instance, if we were to take today's gold price, and it was the end of the third quarter, I would be writing that NRV up by $2 million. So yes, certainly lower-grade stockpiles are more susceptible in a downward pricing scenario. But there isn't a specific risk. Again, costs matter.

Okay. And then maybe if I can switch gears a little bit, maybe also a question for Rob. In terms of your CapEx budget, I believe you've in the past said for Young-Davidson $135 million to $150 million for the full year. If I look at what you've spent so far, I believe it's about $80 million-something. Does that mean -- I would believe things will slow down, but is that evidence that things will indeed slow down as you get through the mid level loading pocket and things like that? Is the CapEx in the second half going to be less than what we saw in the first half?

We expect it to come in on line with our guidance.

Okay. Making a good comparison, right? The $80 million that you've disclosed, that is the $80 million that I should be comparing to your full-year budget, correct?

Sorry, the what?

The $80 million, if I take what's --.

Yes.

And maybe one last question. In terms of grade, comparing the grade coming from the underground in the first half, it's slightly lower than your reserve grade for the underground. Would you expect the grade to come up to the reserve grade in the second half? Or is that being a little bit too optimistic at this point?

No, I don't think it's being optimistic, Cosmos. It's Scott here. In terms of the mine plan sequencing and what-have-you, obviously we're looking to be in commercial operations in Q4, in mine plan sequencing and what-have-you, we're very well-positioned for a robust quarter in Q4, both from a tonnage perspective, as well as the grade profile. You can probably appreciate, that's when our real opportunity to showcase the operations.

So in terms of the mine plan sequencing, et cetera, we are doing our best to make sure that some of our more higher-grade material and more profitable stopes will be ready for production in Q4. So, you'll definitely see the grade profile step up. And likewise, the tonnage profile, as well. We expect to exit the year consistently averaging around 2,000 tons per day from the underground operation.

Great. That's all I have. Thank you, Scott and Rob.

Paolo Lostritto, National Bank.

Good morning. Most of my questions have been addressed. But on continuing with the concept of higher throughput, at El Chanate it looks like your stacking rates have really increased. Is that sustainable? Or should we look at that as a one-off?

It's Peter here. Yes, we are stacking, crushing and stacking at 19,000 to 20,000 tons per day. And that's our goal going forward. And that's an increase from where we were a year ago. That's quite sustainable.

Okay. And then maybe a little as a follow-up to Cosmos's questioning about grade. Can you give us a sense of what the open pit grade a Young-Davidson looks like in the back half of the year?

I think you should assume a consistent grade profile as what you've seen in the first half of this year. It won't be a significant deviation.

Okay. So, it's the underground that's going to be driving this, and El Chanate reaching steady state with all the stacking that's been going on.

Yes, I think that's exactly right. Just expect steady-state production contributions from El Chanate. And at Young-Davidson you'll see a similar grade profile in the open pit operation. But on the underground operation you'll see a slightly higher grade profile in Q3, and especially slow moving towards the end of the year, and favorably complemented by increased tonnage, as well.

Thank you.

Dan Rollins, RBC Capital Markets.

A couple of quick questions, AuRico team. One would be just with respect to your capital budget for 2014 and '15. I know you've put it in your presentations in the past. But I was wondering if you might be able to give a rough split of what you will be spending at Y-D and El Chanate in both years.

You are correct, Dan. We haven't provided guidance for 2014, 2015. I am hesitant to provide any guidance. But one of the great things about the Company moving forward is there will be growing production year over year. And those capital requirements are definitely going to taper off.

All the significant growth capital, especially construction capital, we really are exiting all phases in that regard. If I was to look into my crystal ball, I would say the budget for next year may come in around $65 million to $85 million. But that's a number that's heavily -- got a heavy caveat associated with it. And that was just in regards to Y-D, which I think was the context of your question.

Yes. But just on El Chanate, this is really your big heavy years of spend with the pit layback. That, I guess, will be concluded by year end, and then you're really just more down to sustaining capital rates of what, about $10 million a year?

Yes, I think you'll have to wait until we issue our guidance for the next year. But, generally speaking, conceptually, I largely concur with what you are putting forward.

Okay, perfect. And just stepping -- I know it's not a big driver of value -- just with the open pit, the grades right now have been running below the reserve grade of 1.31. Yet you have been stockpiling lower-grade material. Are you getting negative reconciliation with grade from the open pit right now on either, given the block model, or is it just you're picking up in more internal dilution when you're mining?

It's more just sequencing and the phasing of the open pit operations, Dan.

Okay. So, what you're saying is you're at 1.31, you're stockpiling much lower, this year you're going to be running around less than 1.2. So I'm inferring that 2014 you're going to get a big kick?

Yes, you will see that as you get towards the end of the pit life and at the deeper horizons. In terms of the underground operations, I know it wasn't part of your question, but you could draw a parallel. We have been very reassured by the reconciliations to date on the underground production, both in terms of tonnage and grade profile. And I think when we had you guys at sight in terms of the analysts, you would have seen some data flow on that, so everything is reconciling really well versus the original geological block model.

Perfect, great. Thanks, guys. Have a good weekend.

There are no further questions at this time. I turn the call back over to presenters.

Thank you, operator. We want to take the opportunity to thank everyone for joining us today. As always, any time you have any questions feel free to reach out to us. We are happy to help. Thank you for your time today. And we'll now close the call.

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