Alamos Gold Inc (AGI) 2022 Q4 法說會逐字稿

Good morning. I would like to turn the meeting over to Mr. Jamie Porter, Chief Financial Officer. Please go ahead.

Thank you, operator, and thanks, everyone, for attending Alamos' Fourth Quarter and year-end 2022 Conference Call. In addition to myself, we have on the line today John McCluskey, President and CEO; Luc Guimond, Chief Operating Officer; and Scott R. G. Parsons, Vice President of Exploration. To address any questions with respect to our reserve resource update, we also have on the line today, Chris Bostwick, our Senior Vice President of Technical Services.

We will be referring to a presentation during the conference call that is available through the webcast and on our website. I would also like to remind everyone that our presentation will be followed by a question-and-answer session.

As we will be making forward-looking statements during the call, please refer to the cautionary notes included in the presentation, news release and management's discussion and analysis as well as the risk factors set out in our annual information form. Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Senior Vice President of Technical Services and a qualified person.

Also, please bear in mind that all of the dollar amounts referred to in this conference call are in U.S. dollars unless otherwise noted.

Now I'll pass it on to John to provide you with an overview of the quarter.

Thank you, Jamie, and good morning, everyone. I'm starting with Slide 3. We had a strong finish to the year with record production of 134,000 ounces and costs coming in at the lower point of the year in the fourth quarter. All of our operations performed well, including a standout performance from Mulatos and the low-cost La Yaqui Grande operation ramped up and operating at full capacity. La Yaqui Grande was a key contributor to our stronger consolidated free cash flow generation in the quarter of $18 million, along with a steady ongoing performance from Young-Davidson.

For the full year, we've produced 460,000 ounces of gold, in line with the midpoint of guidance, all 3 operations had a strong year, meeting their respective production guidance. Total cash costs of $884 per ounce and all-in sustaining costs of $1,204 per ounce, also met guidance and were both below the midpoint, a solid performance given industry-wide inflationary pressures.

As outlined in our reserves and resources updated earlier this week, we continue to add value through exploration. Mining depletion was more than replaced with a 2% increase in our global reserves to 10.5 million ounces of gold, along with a 3% increase in grades driven by higher grade additions at Island Gold and Mulatos. This marked the fourth consecutive increase in our year-end reserves with grades also increasing over that time frame as we continue to improve the quality of the overall reserve base.

Now looking at Slide 4. Last month, we released our updated 3-year production and operating guidance. Reflecting stronger outlooks at Island Gold and Mulatos, we increased our production guidance for 2023 and 2024. We expect production to increase 9% this year to approximately 500,000 ounces of gold and remain at similar levels in 2024 and 2025. Our 2025 guidance excludes the higher-grade PDA project, which as we outlined earlier this week, now contains a 70% larger reserve of 728,000 ounces. This represents potential production of the site at Mulatos, which we expect to outline in the development plan for PDA to be completed in the second half of this year.

All-in sustaining costs are expected to decrease 4% in 2023 and 17% by 2025 to approximately $1,000 per ounce, driven by low-cost production growth from La Yaqui Grande and Island Gold. Our declining cost profile helps us stand out in a sector that is battling industry-wide inflationary pressures.

A further increase in production and improvements in costs as expected in 2026, following the completion of the Phase 3+ Expansion at Island Gold, this expansion will be a game changer for the operation and for the company and will grow our annual production to over 600,000 ounces of gold per year once the shaft is complete. Longer term, through the development of the Lynn Lake project, we have the potential to increase our annual production to approximately 800,000 ounces per year.

Now looking at Slide 5. We demonstrated in the fourth quarter, we can more than fund our growth internally while generating solid free cash flow. We are taking a disciplined and balanced approach to growth by focusing on Island Gold such that at current gold prices, we expect to generate more than $100 million of free cash flow per year while funding the Phase 3+ Expansion.

With that, I'll turn the call over to our CFO, Jamie Porter, who will review our financial performance.

Thank you, John. Moving on to Slide 6. We sold 133,164 ounces of gold in the fourth quarter at an average realized price of $1,741 per ounce, $15 per ounce above the London PM Fix price, for record revenues of $232 million. Total cash cost of $810 per ounce and all-in sustaining costs of $1,138 per ounce were below full year guidance and the lowest level of the year, benefiting from higher grades at Island Gold and low-cost production growth from La Yaqui Grande. For the full year, we sold 456,600 ounces of gold at a realized price of $1,799 per ounce for revenues of $821 million.

Operating cash flow before changes in noncash working capital increased 14% from the third quarter and grew for the fourth consecutive quarter to $109 million or $0.28 per share. For the full year, operating cash flow before changes to noncash working capital was $362 million or $0.92 per share.

Our reported net earnings of $41 million in the fourth quarter or $0.10 per share included unrealized foreign exchange gains of $12 million recorded within deferred taxes and foreign exchange, partially offset by other losses of $5 million. Excluding these items, our adjusted net earnings were $34 million or $0.09 per share. Our full year adjusted net earnings were $108 million or $0.28 per share.

With the ramp-up of construction activities on the Phase 3+ Expansion at Island, capital spending increased to $85 million in the fourth quarter. This included $27 million of sustaining capital, $50 million of growth capital and $8 million of capitalized exploration.

For the full year, capital expenditures of $314 million came in below the guidance range with some capital for the Phase 3+ Expansion deferred into the next few years.

Free cash flow increased to $18 million in the fourth quarter, up substantially from earlier in the year, driven by the ramp-up of low-cost production from La Yaqui Grande and a strong ongoing contribution from Young-Davidson. This included $29 million of free cash flow in the quarter from Mulatos and another $24 million from Young-Davidson. For the second consecutive year, Young-Davidson has generated more than $100 million of free cash flow.

We remain debt-free and ended the year with $130 million in cash, $19 million of equity securities and $500 million of undrawn credit capacity. With higher production and lower costs expected over the next several years, we remain very well positioned to continue generating solid free cash flow while funding our high-return growth projects and supporting ongoing returns to shareholders. This included returning $47 million in 2022 through dividends and share buybacks.

With that, I'll turn the call over to our COO, Luc Guimond, to provide an overview of our operations for the quarter and year.

Thank you, Jamie. Moving to Slide 7. Young-Davidson produced 44,600 ounces in the fourth quarter and 192,000 ounces for the full year, in line with the midpoint of guidance. The operation generated another $24 million of mine-site free cash flow in the quarter bringing the full year total to more than $100 million for the second consecutive year.

Total cash costs of $942 per ounce and mine-site all-in sustaining costs of $1,284 per ounce in the fourth quarter were up from earlier in the year, but both were in line with guidance on a full year basis. As previously guided, we expect similar production in 2023 of between 185,000 and 200,000 ounces with a similar rate of capital spending and slightly higher costs, reflecting industry-wide cost inflation.

With a strong outlook in a 15-year reserve life, Young-Davidson is well positioned to generate $100 million in free cash flow per year in 2023 and over the long term.

Over to Slide 8. Island Gold had a strong finish to the year producing 40,500 ounces in the fourth quarter at a total cash cost of $605 per ounce and mine-site all-in sustaining costs of $863 per ounce. This brought full year production to 133,700 ounces near the top end of guidance. Full year costs were slightly above guidance in large part reflecting the processing of lower-grade stockpile ore at Young-Davidson. While very profitable, these ounces carried a higher cost structure, contributing to the higher-than-guided costs. The operation used $15 million of cash in the quarter and $9 million for the full year given the ramp-up in capital spending on the Phase 3+ Expansion. Excluding $24 million of exploration spending during the year, Island Gold more than self-funded the expansion.

In 2023, we expect Island Gold to produce 120,000 to 135,000 ounces, consistent with what was outlined in the Phase 3+ study. As with Young-Davidson, all-in sustaining costs are expected to increase slightly from 2022, reflecting industry-wide cost inflation.

Over to Slide 9. Work on the Phase 3+ Expansion continues to ramp up with significant progress made in the quarter. This included completing the shaft precinct down to its final depth of 42 meters in November. We also completed shaft site earthworks and critical path concrete foundations.

As you can see in the photo to the right, we are now in the process of erecting structural steel for the hoist house and hoist drive cooling building. Our focus during the first half of 2023 will be on construction of the hoist house and headframe, with the sinking of the shaft expected to commence in the latter part of the year.

We are making solid progress on what is a lower risk expansion with the majority of the earthworks completed. The tailings facility already expanded and far less unknowns with this being an operating mine. The expansion remains on track to be completed in 2026, after which Island Gold will be among the largest, lowest cost and most profitable ore mines in Canada.

Moving to Slide 10. The Mulatos district produced 49,100 ounces in the fourth quarter, a 15% increase from the third quarter with all-in sustaining costs decreasing 19% to $922 per ounce. Collectively, the Mulatos district generated sharply higher cash -- free cash flow of $29 million in the quarter, with La Yaqui Grande being the driver. Full year production of 134,500 ounces was in line with guidance while costs were below guidance, again, given strong performance from La Yaqui Grande in the second half of the year.

With a full year of low-cost production from La Yaqui Grande in 2023, Mulatos district production is expected to increase 34% to between 175,000 and 185,000 ounces, a 21% lower mine-site all-in sustaining costs.

Over to Slide 11. La Yaqui Grande produced 37,300 ounces in the fourth quarter, a 47% increase from the third quarter at 22% lower all-in sustaining cost of $545 per ounce. The operation is fully ramped up and performed extremely well during the second full quarter of operations with stacking rates increasing to average 11,100 tonnes per day for the full quarter, above the design rate of 10,000 tonnes per day.

Following the start of operations in June, La Yaqui Grande produced 67,600 ounces at industry low all-in sustaining costs of just under $600 per ounce. With a similar performance expected in 2023 and over a full year, La Yaqui Grande is expected to be a key driver of strong ongoing free cash flow from the Mulatos district.

I will now turn the call over to Scott Parsons, our VP Exploration, to discuss the reserve and resource update.

Thank you, Luc. Over to Slide 12. We continue to have broad-based success with our exploration programs with reserves increasing 2% to 10.5 million ounces more than replacing 591,000 ounces of depletion. Grades also increased 3%, reflecting higher grade additions to Island Gold and Mulatos, more than offsetting a slight decrease at Young-Davidson.

Total reserves have now increased for 4 consecutive years, up 8% over that time frame. Grade also increased 8% as we continue to add higher grade ounces and improve the quality of our reserve base. Global measured and indicated resources also increased by 14% to 3.9 million ounces and slightly higher grades, reflecting additions at all of our operations and a new resource at our Golden Arrow project located near Young-Davidson. Similarly, inferred resources increased 2% to 7.1 million ounces.

Over to Slide 13. Island Gold continues to grow with high-grade reserves and resources increasing across all categories for a combined 4% increase to 5.3 million ounces net of depletion. This marks the seventh consecutive year that combined reserves and resources have grown with grades also increasing over that time frame. Reserves increased 9% to 1.5 million ounces net of depletion, the tenth consecutive year of growth. Grades also increased 6% to 10.8 grams per tonne.

Moving to Slide 14. The main driver of the increase in reserves and grades was the conversion of high-grade mineral resources in the middle portion of Island East. As shown in the long section, a further 204,000 ounces were added, doubling the reserves in this area of 410,400 ounces at similar higher grades, averaging 12.5 grams per tonne, 15% above the average reserve grade.

As can be seen in the very high-grade inferred resource block below it, we also replaced the majority of resources converted to mineral reserves in the Island East area at substantially higher grades. This inferred block now contains 1.9 million ounces with grades increasing 10% from a year ago to average 17 grams per tonne.

Several of the best tools that were drilled at Island Gold have come from this high-grade ore shoot over the past few years, contributing to the significant increase in resources and grades. These resources have been converting to reserves to greater than 90%. With this [ore] open laterally and down plunge, there's excellent potential for continued growth and higher grade reserves and resources.

Over to Slide 15. At Mulatos, growth of higher-grade underground reserves in PDA more than offset depletion of ore, lower grade open pit ore driving a 9% increase in total Mulatos district reserves and a 19% increase in grades. Reserves at PDA increased by 70% to 728,000 ounces with grades also increasing 4% to 4.8 grams per tonne. Since declaring an initial reserve of PDA last year, combined reserves and resources have grown rapidly to now total 1 million ounces, a 71% increase from a year ago.

With the deposit open in multiple directions and an expanded exploration program planned during the first half of we expect the PDA will continue to grow. The higher grade ore from PDA is expected to be processed in the existing mill at Mulatos, which will be expanded to accommodate the significantly larger reserve. The development plan for PDA incorporating the growth in reserves and resources is expected to be completed in the second half of this year.

Excluding PDA, the remaining mineral reserve life of the Mulatos district is approximately 5 years. We expect the PDA will more than double this. Globally, we have a $47 million budget for exploration in 2023, with more than half allocated to following up on the significant ongoing potential in Mulatos and Island Gold, we see excellent potential to continue adding higher grade ounces to our reserve base.

With that, I'll turn the call back over to John.

Thank you, Scott. I'll now ask the operator to open the line for your questions. Operator?

(Operator Instructions) And the first question is from Mike Parkin from National Bank.

Just congrats on the quarter, nice results across the board. At La Yaqui Grande, this asset certainly seems to be performing extremely well. Can you just give us some sense on what 2023 guidance is assuming relative to where you're kind of performing -- on Slide 11, it's noted there that you're exceeding design capacity rates. Is the design rate of 10,000 tonnes per day, what guidance is based off of?

Yes. Mike, it's Luc here. Yes, look, we've had a bit of over performance certainly to start in 2022, but our long-term design rate is to average 10,000 tonnes per day out of La Yaqui.

And what -- can you give any color on what's driving that performance?

Well, just 30 stages of the pit operation. So we've just been a bit more productive. But as we continue to advance with the benches, we expect to be able to sustain a more reasonable 10,000 tonne per day on average.

The next question is from Kerry Smith from Haywood Securities.

Good morning. Luc, just at Island, the unit cost, the mining costs were, I think, CAD 152 in Q4, which was higher than the average for the year and then that 2022 average was higher than 2021. Do you think we've kind of seen the peak in the unit costs at Island here. Obviously, they will creep operation a little deeper in the mine. But are you kind of expecting like '23, '24 maybe we're going to be around $145, $150 a ton? Or should we be thinking about a higher number than that?

I mean, we've obviously had some cost inflation pressures in the business, Kerry. And so that's reflected a bit in that unit cost. I mean what's also affected, I guess, the results for Q4 that was less tonnes mined overall in the quarter, which affected obviously the unit cost as well. But look, as we continue to go deeper and obviously, once we bring on the shaft, the shaft infrastructure is going to be centralized. So from a unit cost basis we're going to be a lot more efficient than what we're doing currently with the ramp system falling out of the mine.

Okay. Yes. No, I was thinking more until the ramp comes in or until the shaft comes in, what we should think about for unit cost. Okay. That's helpful.

Yes, I would just add to that. I mean, I'd say similar to where we are currently, I wouldn't expect some significant increases. Like I said, some things have started to stabilize from an inflation point of view as far as some of our cost inputs for supplies.

Okay. Okay. And at YD, you've been mining below reserve grade for a while. I know the reserve grade came off a little bit with the higher gold price assumption this year. But when does that flip over and you actually start mining either reserve grade or slightly above reserve grades?

Well, as we continue to move through the mine plan, we will start to be above reserve grade. I mean it's really sequence-driven, just sound geotechnical mining as far as the extraction of that ore body. So as a result of that, the grades are what we see in front of us based on that sequence. But in the next couple years, we'll start to see some higher grades above reserve grade.

Okay. Okay. And then I'm not -- I know Chris is on the call. What was the dilution assumption that you assumed for the reserve calculation at PDA to get that 4.84 grams a tonne, like how did they calculate the dilution?

Yes, Kerry, we assumed a 20% dilution which is similar to what we experienced previously at San Carlos and 90% of mining extraction.

And the next question is from Harmen Puri from Bank of America.

Just given that we have detailed through your guidance out with the cost and CapEx and there's obvious free cash flow generation, can you sort of just remind us about maybe the capital allocation priorities aside from just the expansion at Island. So just maybe some color around capital returns and anything else that might be competing with your capital over that 3-year period?

Yes. Thanks for the question. It's Jamie here. I think over the next 2 years, I mean, the focus certainly is on Island Phase 3+. We are in great shape as we indicated throughout the presentation this morning, we're pretty much self-funding that expansion with cash flow from operations from Island. And at current gold prices, we'll end the year with a cash balance of close to $200 million. So I think our dividend is sustainable. We'll be able to maintain, hold the dividend for the next couple of years. We'll look for opportunities to potentially be active on our NCIB. But yes, the focus over the near term is certainly on Phase 3+ and longer term on Lynn Lake. So we'll be providing updates on that later this year.

And is there any color you can sort of provide on maybe the M&A outlook? Is there any interest in maybe transacting or if you see opportunity of that sort?

No, like most companies, we're always looking at what's going on in the market, but at the moment, there's nothing imminent or actionable. We're looking -- we look at M&A in a variety of ways. I mean internal to our operations, proximal to our operations. We're always looking at opportunities there. As far as bigger transactions are concerned, if you look at our past performance, we tend to transact when the market is pretty much at its worst. And right now, I wouldn't characterize the market that way at all. I think it's doing reasonably well. And we're certainly not getting any pressure from our investors with respect to M&A. They see we've got a pretty good growth profile in front of us with the gold expansion and the opportunity to build Lynn Lake after that.

And of course, even the PDA is starting to come into view. We don't obviously have anything on it quite yet. But with nearly 1 million ounces taking shape there, we're getting ready to gear up Mulatos adding a new source of mill production that can carry us well into the 2030s. So I think our growth prospects right now just from our organic growth, but look pretty attractive, and there's no pressure to do anything more.

There are no further questions registered at this time. This concludes this morning's call. If you have any questions that have not been answered, please feel free to contact Mr. Scott Parsons at (416) 368-9932 extension 5439. Thank you for your assistance on the call today. You may now disconnect your lines.