Alamos Gold Inc (AGI) 2013 Q3 法說會逐字稿

Good afternoon. My name is Tiffany 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.

(Operator Instructions)

Anne Day VP Investor Relations you may begin your conference.

Thank you operator and good morning everyone. Thanks for joining us today for the AuRico Gold's third-quarter earnings results conference call and webcast.

On the line today we have Scott Perry; President and CEO, Rob Chausse; CFO, and Peter MacPhail COO. 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, a 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 presentation.

You are cautioned that actual results and future events could differ materially from their respective conclusions, forecasts, or projections. We refer you to the section entitled 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, and good morning everyone and thanks for joining our call today.

Okay thank you Anne, and good morning everyone and thanks for joining our call today. Today's call comes to you from Toronto and I just want to inform everyone that your executive management team, as well as all the males in this office, are all sporting mustaches. We're all participating in Movember. It's a great cause to men's health. I just wanted to give you that perspective because we make for an interesting site right now.

In terms of AuRico Gold, we are very well positioned right now. I can't tell you how pleased I am in terms of how the company is positioned, but especially so in terms of our cornerstone asset. The declaration of commercial production in the underground operation and all of the pieces of the puzzles are really starting to come together. If you have viewed one of our recent corporate presentations, the presentations are titled Ready, Set, Go, because we really feel that with all these pieces coming together now we are now at the starting line of what's going to be a great journey moving forward.

We've had a lot of questions from shareholders, and analysts, and everyone we would advocate and I think everyone acknowledges it has been a very smooth ramp up and commissioning and quite often we get the question, how come you have had this smooth ramp up. I think by and large what we always point to is people. All the body of geology aside, people is the biggest asset in the Company.

It has always been a core value that we win as a team and as a result we've always been very focused on safety. We've had two very important highlights and milestones that we have achieved during the third quarter. Whereby at Young-Davidson as well as at El Chanate, both operations have achieved 1 million hours loss time incident free.

It's an important milestone and myself and the executive management team, we challenged the sites to achieve this milestone, and we made a friendly bet that if they achieve this we would come down and cook them lunch, we would cook a barbecue during the shift change and Peter, and myself, and management, we are now going to be making good on that promise. So, things are going well on the safety front and I put forward that is always a leading indicator for the quality of the operations.

Looking at slide 4, just talking about some of the highlights, one of the big things that I've really been messaging, is this a great asset base moving forward and one of the key things we want to be demonstrating is reliable, consistent, stable production. If you look at those charts there on the right on slide 4, I think we are really demonstrating a good track record in such regard. At the Young-Davidson Mine, we've achieved quarterly increases in our production output quarter-over-quarter. Throughout the last four quarters and likewise in the chart there, at the bottom right hand corner at El Chanate, you can see we've had rising quarterly increases in gold output profile.

On a company wide basis, Q3 marks the fifth quarter of consecutive growth in production. The assets are performing very well and in line with targeted levels. The other key milestone during the quarter was the declaration of commercial production at Young-Davidson. This is a key milestone in that it really does mark that period in time when all the construction phase is really behind us. Also, a lot of the associated technical risk is behind us. I think what we are most buoyant about is it really allows us to showcase the operation moving forward, especially so in terms of impressive productivity and unit cost efficiency.

The last point here on slide 4, we did recently declare our third quarterly dividend, and just looking at this calendar year alone we have distributed in excess of $25 million in dividends to our shareholders. We continue to be very focused on shareholder value creation, as well as ongoing shareholder friendly initiatives.

Just transitioning to our next slide on slide 5. This is a chart or a slide that I personally and I think I am speaking on behalf of our COO, Peter MacPhail, we take a lot of pride in this slide. Under Peter's stewardship, you can see that we have now achieved five quarters in a row of rising gold output profile from both operations or even on a company wide basis. If you look at this chart, we are actually providing a forward-looking quarter in terms of Q4.

I think that speaks to our assurance or our confidence that we expect that trend to continue on a quarterly basis. And with the important milestone at Young-Davidson, now that we are in commercial production of the operations and we have got access to the shaft hoisting facilities and capabilities, this is a trend that you will see on a year-over-year basis continuing moving forward for the next three to four to five years.

Looking at the cost profile there at the bottom of slide 5, I think the third quarter is great performance in terms of our fiscal management, just comparing our cash cost relative to the second quarter. You can see quarter-over-quarter we actually achieved reductions in the operating cost profile. If you look to the right of that table, just looking at where we are positioned year-to-date, be it production or level of cash cost and in contrast to the guidance for the full year, I think we are very well positioned.

Even if you did a very simple extrapolation of where we are at year-to-date shows that we are well-positioned against that guidance. The other additional benefit we have is Q4, we expect that quarterly growth in production and that favorable growing denominator should really underpin the good level of cost performance moving forward.

Just transitioning to the next slide on slide 6, just to sort of get a little bit more granular on Young-Davidson. The executive management team, we were up at Young-Davidson last week, and we spent a couple of days outside just looking at all the impressive infrastructure that's now being put in place and commissioned, and I've got to tell you, we really came back with some big smiles on our faces. It's very impressive, what we've built up here, and it's going to be an asset that's going to present very well for the long-term, for the long-term, moving forward.

In terms of the first bullet point here, I think the key milestone is we have commissioned mid-shaft loading project. We commissioned this in October as a result of our commissioning we've declared commercial production, and I think everyone knows, but I will emphasize that this is a key milestone moving forward for the Young-Davidson operation on a number of fronts. It's a key catalyst in that now the construction phase, the heavy lifting in terms of the capital investment and the capital expenditures, that's now behind us. The associated technical risk of that project, that's now behind us.

Looking forward, we now really have all the pieces of the puzzle. It's going to be a key infrastructure, in terms of growing our level of productivity moving forward. It's going to be also key in terms of the unit cost efficiency moving forward. Just to give you some context in terms of the efficiency, when I was up at the site, I was watching these skiffs, they are 20 tons in terms of their capacity. These skiffs up to surface in three minutes.

The dual skiffing system, it's a friction hoist system, and so when one skiff is at the surface unloading 20 tons of production, you have its sister skiff down in the loading pocket being filled with another 20 tons of production. And so, every three minutes you've got these two skiffs going up down, up down. We look forward to taking our shareholders and our analysts off to the side and trying to give you more perspective on what a welcomed boom this is going to be for the company and the operation.

Again on safety I just want to highlight this is a three-year construction project. Throughout the entire three years, the project was lost time incident free. We are very proud of that and we've got to give props to our third-party contractors there, Cementation. They just did a great job and we are very pleased with where that positions us moving forward.

The key thing that the shareholders, the analysts, the investment community, what we are looking for, is demonstrating Q4 underground production of exiting the year averaging 2000 tons per day. I can tell you that myself and the management team are feeling very confident that we will have no problems delivering that level of productivity, and likewise that's going to present really well in terms of the unit operating cost structure at Young-Davidson. As we move forward into next year, it rules they are feeling pretty comfortable as well, in terms of the growing productivity and I will get to that shortly.

The second bullet point is in terms of Paste Backfill Plant, this is another key item of infrastructure. We've had a lot of success here in that it looks like we are going to have this commissioned in the very first two weeks of December and will actually be pouring first paste. This is something we have -- in terms of our guidance, we have been scheduling that it may be commissioned in Q1 of next year. But, our team at the site has had a lot of success, have managed to bring the project forward into this year and get it fully commissioned, as well as the associated capital investment.

It actually looks like it's going to be coming under budget. We are very pleased with that. Again, just in terms of safety, the Paste Backfill Plant, this was a key construction project and this, too, has been lost time incident free. So, the site is really, our sites are really leading the way, in terms of safety performance.

The third bullet point, just on where we are positioned in terms of development access throughout the underground operation, a lot of our shareholders and analysts, you may appreciate it, you've heard it a lot from me that the key to Young-Davidson is development, development, development. We've got to always ensure that we have got lots of developed access in front of us, both on a vertical basis, as well as laterally. And that's what is going to give us the utmost flexibility from a sequencing and phasing perspective.

Well I'm speaking to you today with a lot of confidence because our sites have actually outperformed our expectations in terms of their development advance. Probably a key metric to put in perspective that if you look at the mine plant for 2014, and where we are currently positioned we've got development access put in place to 2/3 of next year's stokes. So, we are well ahead of ourselves. That gives us a lot of flexibility, just in terms of our mine planning and our sequencing moving forward. Bottom line, it really does de-risk the operation and it really does allow us to accelerate the ramp-up of the underground operation.

Again, key takeaway, with all the infrastructure coming in place, we continue to guide that we will be exiting this year at 2000 tonnes per day, and I think we are very well-positioned to meet that. As you go into next year, with a lot of accelerated development already put in place, I think we are very well-positioned to continue growing that level of production next year up to a year end rate of 4000 tonnes per day. Obviously we'll continue to grow year after year.

And then I think just the last bullet point, here, it really is a key bullet point just in terms of the evolutioning of the Young-Davidson asset. Q4, the fourth quarter earmarks the initial first quarter, when the level of metal production from the underground operations will surpass the level of metal production from the open pit operations. Thereafter, it will continue to be like that into perpetuity, which is obviously the key to Young-Davidson asset value moving forward is the underground unit operation.

Just moving on to my last slide, slide 7 before I pass it over to Rob. Side 7, I just want to highlight, I guess I'd put forward this is a lot of the criteria that the investment community would typically look to when making any kind of investment consideration. I think a repo presents very well against this criteria. We do take a lot of these boxes. First and foremost, jurisdiction, our assets are located in North America, very well-positioned from a jurisdictional perspective. On the back of Young-Davidson, in terms of our asset base, we've got rising gold production profiles year-over-year for the next four to five years.

The asset base presents well in terms of its growth profile. In terms of our cash cost per ounce, or our cost profile, we are at -- we're below the industry average, so we present well in that regard, in terms of indicative profitability as we move forward. One of the things that I really like is we've got very long- lived assets, especially under the Young-Davidson asset, which we would see as having a strategic asset life of some 20 years or more.

Balance sheet, we've got a good financial foundation. You know we've got plenty of liquidity in terms of this business model moving forward, or that production growth profile that I mentioned. We are fully financed. I think the last two bullet points there, depending on your view on gold prices moving forward, I think it's an asset base that is going to present very well in terms of the growing profitability and free cash flow potential. Likewise, I think we have demonstrated for the costs this year, we are focused on shareholder value creation, very focused on shareholder friendly initiatives. We have got the dividend policy in place and I think that, again, positions AuRico well.

With that, I'm going to wrap up and I'm going pass over to Rob Chausse, our Chief Financial Officer, and Rob will walk you through the Q3 results.

Thanks Scott and good morning.

Before we get started I'd like to note that for comparative purposes I'll be speaking to the results of operations classified as continuing for the prior period, and not those that are classified as discontinued. The third quarter of 2012 continuing that operations comprises a full quarter of El Chanate and one month of the Young-Davidson open pit, whereas the third quarter of 2013 is as a full quarter for both assets.

Turning to slide 9, third-quarter revenue for continuing operations was $54 million driven by the sales of approximately 40,000 ounces of gold at an average realized price of $1332 per ounce. Total production for the third quarter was approximately 49,000 ounces, including 10,000 ounces of underground preproduction from Young-Davidson. Total gold ounces sold for the third quarter was approximately 50,000 ounces, including 10,000 underground preproduction ounces from YD.

Revenue sales and production were higher than Q3 at 2012 largely due to the prior period having one month of commercial production. Third quarter adjusted operating cash flow was approximately $22 million, or $0.09 a share, compared to $0.00 per share in Q3 of 2012. The company recorded a net income of approximately $15 million or $0.06 per share during Q3 compared to a net income $0.15 per share in Q3 of 2012.

After adjusting for one-time charges that I will review in more detail shortly, net earnings were $800,000 in Q3 compared to a loss of $1.2 million in the third quarter of 2012; on a per-share basis adjusted net earnings were $0.00 in both years. Due to the higher gold prices as compared to Q2 of this year, the company's third-quarter net earnings were increased by $7.4 million. This reduction of cost is related to the reversal of the net realizable value adjustments for heat leach and long-term low grade stockpile inventory it recorded in Q2.

Turning to slide 10, our year-to-date revenue from continued operations was $177 million, driven by sales of approximately 121,000 gold ounces at an average price of $1440 per ounce. Total production for the first nine months of 2013 was approximately 143 ounces, including 28,000 ounces of underground preproduction ounces at YD. Total gold ounces sold were approximately 149,000 with 28,000 ounces coming from the underground preproduction ounces from YD.

Revenue sales production were higher in the first three quarters, again, largely due to the declaration of commercial production at YD during Q3 in 2012. YD -- excuse me year-to-date adjusted operating cash flow was approximately $61 million or $0.24 per share compared to $0.02 per share for the first nine months of 2012. Year-to-date the company recorded a net loss of approximately $70 million, or $0.28 a share compared to $0.12 per share the same period 2012. This loss was primarily related to the non-cash impairment charge we recorded in Q2 of this year.

After adjusting for one-time charges net earnings were $18 million, or $0.07 per share for the first nine months of 2013. Adjusted earnings for the same period last year were $0.01 per share.

Moving to slide 11, as previously noted, the operation results include the results of our El Chanate and Young-Davidson mines in the current quarter, and the El Chanate Mine -- the El [Siafre mine], one month of the Young-Davidson open pit in the prior quarter. Also cash cost per ounce metric do not include inventory NRV adjustments.

Young-Davidson open pit produced 19,600 gold ounces in the third quarter. The underground also produced 10,000 preproduction ounces in the third quarter for a total of 30,000 ounces. Young-Davidson realized cash cost of $666 per gold ounce during the quarter. El Chanate produced approximately 19,000 ounces, or 3% fewer than Q3 2012 primarily due to lower grades.

Total cash costs at El Chanate were $588 per ounce in the third quarter of this year, a 25% increase over Q3 last year. The increase is primarily due to the application of higher quantity solutions to accelerate gold recoveries and reduction in capitalized stripping costs. Combined, our operations achieved cash costs of $628 per gold ounce in the third quarter, which is in line with our previously stated guidance.

For year-to-date on slide 12, the Young-Davidson open pit produced approximately 60,000 gold ounces during the first three quarters of the year. Underground also produced approximately 28,000 ounces of preproduction gold ounces for a total of 88,000 ounces. For the first nine months 2013, Young-Davidson realized cash cost of $692 per gold ounce for the open pit. Chanate produced approximately 55,000 ounces, in line with production of the first nine months of 2012. Total cash cost at El Chanate were $586 per ounce, a 31% increase over the same period last year.

Combined, our operations achieved cost of $640 per gold ounce, which is in line with our previously stated guidance. And as mentioned in Scott's remarks, AuRico is well-positioned with regards to our full-year production and cash cost guidance, particularly when taking into account the expected ongoing production growth in Q4.

Moving to slide 13, the slide provides a detailed reconciliation of our adjusted earnings for the quarter. As noted the reported income from continuing operations for Q3 was $15 million or $0.06 per share. The adjusted amount deducts $7.3 million of deferred tax expense associated with changes in FX rates. Non-cash inventory adjustments mentioned previously of $7.4 million and $3.9 million of unrealized gain on the option component of our convertible notes. Other adjustments added back include $2.5 million of unrealized gains on foreign exchange and $2 million of tax adjustments related to the items above. After taking all in, all those items into account, the adjusted net earnings result of Q3 of $800,000 or $0.00 per share.

As noted on slide 18 in the appendix for the nine months ended September, adjusted earnings were approximately $18.5 million or $0.07 a share. We have reported all in sustaining costs of $1210 per ounce for the third quarter and $1167 year to date. We expect to be in line with our previously stated guidance of $1100 to $1200 per ounce. You can refer to our non-GAAP measures section in the MD&A for details on these calculations.

Our consolidated effective tax rate for the third quarter was impacted by foreign currency fluctuations, as well as the utilization of losses available to shelter income at our Canadian site. As a result of recently announced changes in Mexico, we estimate that our going forward for 2014 forward, our Mexican tax rate will increase by approximately 4%. As the majority of our business is Canadian-based, the overall impact, or the impact on our overall rate is expected to be immaterial. Therefore, we are leaving our overall expected tax rate in the range of 25% to 30% consolidated.

As of September 30, AuRico was approximately $290 million in liquidity. The balance consists of $140 million in cash and cash equivalents, and $150 million available in credit facilities. In closing, I want to reiterate our commitment to operating of free cash flow. It's going to be what drives our -- the metrics and will determine our ongoing strategic behavior.

With that, I will pass the call back to Scott.

Okay. Thanks, Rob.

And I guess just referencing slide 15, and as I mentioned, I'm just so pleased with the quarterly growth in gold production. We now have five quarters behind us, and I guess I just wanted to repeat that slide. I really want to recognize in Q3, I want to recognize Peter and his operation team, the general managers. This was a quarter where they have really delivered, be it safety performance, be it the continued growth in quarterly gold production. I think most importantly, just where they have positioned the asset base moving forward, especially Young-Davidson, the fact that we've now declared commercial production.

This really is the best positioning that we have been in moving forward, especially in terms of the investments we've made, the accelerated development, the underground, I think we are all feeling very well, feeling very good about how it positioned as we close out this year and move into 2014. Then obviously, we really want to showcase the operations, so to the shareholders, analysts, don't hesitate. Reach out to Anne Day, and we can't wait to get you out to site and just to show you this asset and its great positioning.

So, with that, I'm going to turn the call back to Tiffany for any Q&A.

(Operator Instructions)

Paolo Lostritto with National Bank.

Scott, maybe we can get some guidance, in terms of the CapEx expected in the fourth quarter for each of the assets to just kind of help refine our numbers going into year-end.

Sure. So at El Chanate, I would say capital expenditure coming in just below guidance. I think guidance is $30 million to $40 million and come in just below that, that $40 million. At Young-Davidson, with the back flow plant projects being commissioned earlier than expected, you have seen some of that activity being pulled into this year. So, that's what's in play in the capital expenditures a little bit.

Really the key one there is really positioning the asset well from a development perspective, and maybe a little bit difficult for me to give you guidance on that, because it's still so soft it's really one of the big things I really push the guys on its side, you know get as much development in place in terms of establishing advance. I would dare to say that the CapEx guidance there it may be 15% to 20% higher than current guidance.

The other thing that poses well is the lower gold price this year. You may recall at the underground, in terms of the gold price from the underground those revenues have always being credited against the capital expenditures at the underground, and the gold price is lower than what we were assuming at guidance so that's hard put.

Hard put yes, okay and no change for 2014? You would imagine though that with a little bit extra development going into this year that you are going to benefit next year. Is that the right way to look at this?

We're definitely going to benefit in terms of the fact that we've really de-risked the mine plant going into next year. In terms of the guidance, we continue to reiterate that guidance, but I guess from an underground productivity point of view, we will be starting next year at 2000 tonnes per day and we'll be finishing the year at 4000 tonnes per day. We grow in a linear fashion and that's what we would encourage everyone to assume.

Thank you.

Cosmos Chiu with CIBC.

Scott, maybe following up on CapEx. Scott, Rob, I guess I noticed that the difference between cash cost and sustaining cost in Q3 kind of widened. In part, due to higher sustaining CapEx at Young-Davidson for Q3, I calculate that to be about $15 million. Is that just due to the fact that you have gone more underground now? Is that the number that we should be kind of looking at for sustaining CapEx on a go-forward basis?

Yes, it's definitely, the reason why sustaining CapEx is higher because the guides are getting more development put in place in front of themselves and that's something that we really encourage and really want to see them continue and actually try and grow that moving forward. That's what gives me the confidence when I am representing the other plan going into next year is knowing that we have that access developed in front of ourselves.

In terms of forward-looking guidance, we haven't really given guidance for next year. But, to sort of frame set it somewhat, I would think the development requirements for next year would be around 12,000 to 14,000 meters of development. That's what we really want to encourage the guides to shoot. If you look at our all-in development cost per meter, it's anywhere around $5000 per meter, give or take 10%. That is kind of a frame set for you. But bear in mind guidance for next year is not, we haven't made it public yet.

Sure. And maybe Scott, following up on the underground at Young-Davidson. Can you remind me once again how much of the underground ore is now coming from the ramps versus the shaft and how we should look at it, say, in 2014?

I think generally speaking, I heard Peter say it when we're up at site, he told the guys to throw away the keys for the trucks. So, that really is the answer. Everyone is coming up the shaft now from a production, an all production point of view. That's what you could assume moving forward.

Okay. Maybe switching gears a little bit on the Kemess I saw that you spent some money on it in Q3. Given the current volatility and the gold price, has that kind of changed your thinking in terms of how you could and would monetize Kemess?

Nothing has changed in terms of the strategy there, we are very focused on the permitting strategy, we see a lot of value at Kemess and we are doing, maybe doing our darndest to and try and surface that value and there is a subset of our management team that is very focused on determining strategy and we've liaising, and consulting quite heavily with the various stakeholders and I'm very pleased with progress, actually. It's been, they've been very supportive, so continuing to move that forward and as best possible trying to surface some value there.

Great. That's all I have. Thank you.

(Operator Instructions)

Trevor Turnbull with Scotia Bank.

I apologize. I'm coming a little bit late to the call and you may have addressed this. But I think I caught that you said that we should think about the underground contributing more than the open pit at Young-Davidson at this point. I just wondered if, I wasn't sure kind of what period you are referring to. Does that mean we should consider that to be the case for Q4?

Yes. I guess, my comment, Trevor, was I was kind of referencing it as a key milestone as we go into Q4 and thereafter into perpetuity the milestone being that in terms of metal contribution, the underground is going to be providing more gold per option than what the open pit provides. So, it's really just trying to highlight the other transitioning or the evolutioning of the asset that as you would expect, this is where the underground now takes over and will be the most significant contributor in terms of gold production. Do you know what I mean?

Absolutely. But, I just wondered if, I realize at this point, it's contributing more, but I just wondered for the Q4 period, for the entire period as a whole, if it would be considered to be the majority of production?

Yes. The answer is yes.

Okay. Sorry to be obtuse about that. That's all I had, Scott. Thank you.

Anita Soni with Credit Suisse.

Congratulations on a good quarter. I just was wondering if you could give us an indication of those underground mining costs per tonne.

I think in terms of the early guidance that we've been putting out there in the market, and in terms of how we've been managing expectations, we expect that Q4 underground unit mine costs will be under sub $45 per tonne. Thereafter as we move forward into next year and beyond, you know, we will be growing the dominator in terms of underground productivity quite considerably. We expect that to continue to trend down to eventually sub $40. So, that's the expectation. That's what we've been messaging. I think we're all feeling quite confident that we will be demonstrating that in Q4 that will be coming in at those levels or better.

So, just to reiterate on the throughput you expect to exit at about 2000 tonnes per day this year and then next year 4000 tonnes per day exit rate?

That's correct. I'm feeling very confident in that.

Could you give us an indication right now with the quarter of what you're running now that I guess everything is sort of tied in and, because there was a little bit of a downturn on the throughput that I expected that considering you were doing I guess the finalization of tying in some circuits and stuff?

I think as you look at where we are at, you know, quarter-to-date, we are seeing that target is very secure.

Okay. All right. Thank you.

(Operator Instructions)

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