Equinox Gold Corp (EQX) 2019 Q3 法說會逐字稿

Welcome to the Equinox Gold Third Quarter 2019 Results Conference Call and Webcast. (Operator Instructions) The conference is being recorded (Operator Instructions)

I would now like to turn the conference over to Rhylin Bailie, Vice President, Investor Relations for Equinox Gold Corp. Please go ahead.

Thank you very much, and thank you for everybody for joining us today to discuss our third quarter financial and operating results. We will, of course, be making a number of forward-looking statements today. So please take a moment to see the continuous disclosure documents on our website, on SEDAR and now on EDGAR after we did our U.S. listing in September.

I'll now turn the conference call over to our CEO, Christian Milau.

Yes. Thanks, Rhylin, and welcome, everyone, today. It's an exciting day for us. We've come a long way in the last 2, 2.5 years. And from a single-asset developer roughly 2 years ago, we now have 2 operations in California and in Brazil, and we soon have a third one on the way. So it's a good milestone for us today. The strategy has been clear, and we've been focused on growth in the Americas. We wanted to build a company during this sort of period of disinterest in the gold sector, and I think we've come a long way in 2 years.

So very proud of the team and all the supporters along the way and want to thank them here in Vancouver and at our sites, both in California and Brazil. And I also want to thank all the shareholders and stakeholders who've been patient and supportive of us through this process. A lot has happened in the last 2 years.

So today, we hit 2 key milestones. Some said Aurizona wouldn't work, and some said that Castle wouldn't go back into production. Look, today, we hope we start to dispel those myths, I guess. First, we had a strong quarter from Aurizona, its first quarter of actual commercial production in Brazil. And we also started construction at Castle Mountain during quarter 3. And today or yesterday, we announced official construction. We'll start putting some photos on the website soon that you'll be able to see that progress.

We continue to move towards our goal of producing 1 million ounces per year, and I think we've come a long way in the first 2 years of this plan. We've still got 3, 3.5 years to go to get that million-ounce production profile, but we've come a long way to start.

So when you look on Page 4, at the operating results. We're pleased with this quarter, another safe quarter, no lost-time injuries. We produced just over -- almost 63,000 ounces of gold. A few ounces below expectations for the quarter, but it does exclude about 3,000 ounces of gold at Aurizona that were poured on October 1 that really relate to September production. Also, please remember that our guidance for the year for Aurizona did include pre-commercial production ounces of 6,000 to 7,000 ounces.

So overall, our combined cash -- or all-in sustaining cost is $953 per ounce, so in line with plan. And obviously, we've been selling gold at close to $1,500 per ounce at both mines. So the top line has been very strong for the quarter.

At Mesquite, we produced 33,000 ounces of gold. And we continue its gradual improvement quarter-on-quarter, and we expect quarter 4 to continue that improvement. Overall, all-in sustaining cost at Mesquite was $855 an ounce, so good cost management for the quarter and well within our expectations.

At Aurizona, we hit commercial production on July 1, so a good milestone. We had a very quick ramp-up. So very pleased with how Aurizona has performed in the third quarter. Produced almost 30,000 ounces of gold, but again, that excludes the 3,000 ounces that were poured on October 1. And the all-in sustaining cost was $1,053 an ounce.

Turning over to the development and corporate highlights for the quarter. In terms of development, now that we're producing cash flow at Aurizona, we've been able to reinvest some of that money back into Tatajuba. And Scott's been given some money to go and explore Tatajuba this quarter. So he's got a 6,000-meter drill program that's underway. 2 to 3 drill rigs have been on the ground for the last 6 weeks.

We commenced early works at Phase 1 construction at Castle Mountain during quarter 3. We've only spent about $3.5 million so far, but we have quite a plan for the rest of the year. We initiated the Phase 2 feasibility study. So that will go in parallel with the construction of Phase 1 at Castle Mountain.

And obviously, we've updated our non-sustaining capital guidance expenditure to almost $75 million. And the main change -- or virtually all of the change is the $28 million we've added for Castle Mountain Phase 1 construction.

In terms of corporate updates. Obviously, one key milestone for quarter 3 was we commenced trading on the New York Stock Exchange American under the symbol EQX, so we have the same symbol on both stock exchanges. And we're looking towards a potential TSX listing in the near future.

So with that, in terms of corporate visibility, we've really increased our liquidity and market visibility. Our volume has gone from several hundred thousand dollars a day of trading well into the millions, so $2 million to $3 million a day. So we've been very pleased with the reaction from that listing.

Looking at the financial results on Slide #6. Very strong results, we're very pleased with these for this quarter. Revenues were almost $92 million for the quarter. And all our operating earnings, our EBITDA, our net income and our cash flow from operations have been very strong, a big quarter-on-quarter improvement obviously with having the 2 mines in operation this quarter.

Cash and cash equivalents have increased to $45.5 million excluding the restricted cash, and that's up from $33 million last quarter. We're very pleased with that result considering we've just ramped up Aurizona and we started to reinvest obviously in Tatajuba drilling as well as Castle Mountain Phase 1. We still have $30 million available to draw on revolving credit facilities. And our convertible notes are in the money after the recent share price performance being fairly strong for over USD 6 a share and that conversion price is $5.25. So again, a good performance there.

Turning to Slide #7. Looking at it on a quarterly basis, I don't want to spend a lot of time on this, but I think the key takeaway from this slide is the trends that are developing. On a quarter-on-quarter basis, we've shown a real positive move in terms of all of our financial metrics and our operating metrics on this page. The quarter-on-quarter growth in terms of our revenues, our earnings, our EBITDA, our cash and our cash flow from operations have all been very positive. So pleased to see that.

Looking a little more closely at the mines. We'll look at Mesquite first, so on Slide #9. Looking at quarter 3, we continue to show an increase over quarter 1 and 2 to 33,000 ounces of gold of production. As I said before, we'll be increasing that again in quarter #4.

In terms of development activities, we've continued to drill the historical mineralized dumps and leach pads to identify economic-grade material. We're well over 100,000 ounces that have come out of that material so far, and we'll be updating that with our year-end reserve and resource update. We've also implemented measures to increase production, which has started to come through, as we've seen in the quarterly results. We've been stacking a higher percentage of oxide material. We've been increasing solution flow and extending the leach cycle. So we've been able to leach more ounces, and we'll continue to see that trend in quarter #4.

In terms of guidance, we expect to meet the lower end of guidance for production. And in terms of costs, we're well within the guidance range there. In terms of the rest of 2019 and the outlook, we'll continue executing on these opportunities to increase production and reduce costs. Solution management obviously has been a focus of ours, and we're working on bringing in a third well here, as we mention at the bottom, around year-end. So that will continue to enhance that ability to leach more of the pad.

Turning to Aurizona now. Aurizona started production in May, hit commercial production on July 1. We produced almost 30,000 ounces of gold excluding those 3,000 ounces poured on October 1. So a good first quarter. We're very pleased with that. Our first gold sale for this mine actually hit the 5-year gold high of almost $1,390 per ounce in June. So again, perfect timing for that ramp-up.

In terms of development, we've been optimizing the plant. Looking at the SAG versus AG mill, configuration with the ball mill, we've obviously now brought the ball mill into the circuit. And we're actually operating a SAG-ball mill combination, which will allow us to manage the grind size as we move forward here and the consistency. We've also been ramping up the mining with our local contractor. We're now at pretty much full capacity, and we're preparing for the rainy season so they will have an articulated fleet that will also supplement their current fleet of 777 trucks.

We've also initiated the next tailings storage facility lift, the 35-meter. That's well underway and on track during this dry season here in the last part of the year. And we've also recommenced, as I mentioned, exploration at Tatajuba, and hopefully, you'll start to see those results early in the new year.

In terms of guidance, we expect to meet the lower end of guidance, as mentioned. Please take note that that does include the 6,000 to 7,000 ounces of pre-commercial production ounces. The grade has come up in the fourth quarter here. We're now mining in the heart of the pit and the main part of the pit. So we're mining around that reserve grade where previously in the early part of this year, we were actually processing material from our stockpile, which was between 1.1 and 1.3 grams per tonne. We're also expecting to meet our all-in sustaining cost guidance of up to $1,025 an ounce.

In terms of the outlook for the rest of the year, we're stockpiling ore. We hope to have a 750,000-tonne stockpile by year-end, preparing for the rainy season through preparing our roads, exposing higher ore in the pit and closer to the actual plant and also working on water diversions. As well, we're advancing the underground studies, which we hope to make available to the public in the first half of 2020. So we're excited that we'll be able to get that potential growth opportunity out into the market.

Now the new topic for us really this quarter is Castle Mountain, and I just want to refresh everyone on that on Page 13. This is about 1.5 hours from Las Vegas on a paved road, very easy access from Las Vegas. It's a past-producing mine from the Viceroy days in the 1990s. It still has permits in good standing, and that's something key to remember here. And it's about a 4-hour drive from Mesquite.

So this is a 3.6 million-ounce deposit. This is 3.5x the size of Aurizona already. We have our key permits in place to resume production. We have all the permits we need to resume construction, which obviously we've started about 6 weeks ago. And it has a long life at 16 years and a good low cost as well.

One of the keys when we actually acquired Mesquite was actually how Castle and Mesquite would fit together. And I think we'll start to realize some of those benefits next year when this comes into production around Q3. This is only 200 miles away from Mesquite. We'll be able to smelt the gold from Phase 1 down at Mesquite, so we'll truck the loaded carbon down there. We're going to look at joint purchasing. Obviously things like cyanide, tires, other supplies like lime, we'll be sharing between the 2 sites. And as well, there'll be some shared back-office services, et cetera, and some tax consolidation. So a lot of benefits from having these 2 sites in California.

Looking at Slide 14 in terms of how we're approaching this. We're looking at it as a Phase 1 and Phase 2 for this project. Phase 1 is underway. It'll produce 45,000 ounces a year for years 1 to 3 of this overall mine life. Years 4 to 16 will be 200,000 ounces a year when we get to the full-scale capacity. But one thing to note for Phase 1, we've done all the engineering work and the studies. We've obviously got locked-in contracts with a lot of our contractors. And with our life of mine for this, we could go for up to 9 years with this kind of level of production.

$58 million of CapEx, so well within reason versus our PFS study that we put out 1.5 years ago. It will be a run-of-mine heap leach operation, very similar to Mesquite, obviously on a smaller scale. We'll be processing 12,700 tonnes per day. And we'll be trucking that loaded carbon down to Mesquite and actually taking advantage of the capacity and the facility down at Mesquite to smelt the gold. And we'll be able to make money from Phase 1 on a stand-alone basis. This will be a stand-alone operation that will have a return.

For Phase 2, the slightly larger scale, we'll go to run-of-mine plus a small mill that will basically process 2,300 tonnes per day of higher-grade material that will be over 3 grams. It will be about $175 million of CapEx. Plus, we'll be leasing or buying a fleet from someone like a Caterpillar or another supplier. The key thing for us for Phase 2 is getting the feasibility study done, which is going on in conjunction with the construction of Phase 1.

We'll be able, on the back of starting production, finishing that feasibility study, submitting our permit amendment to the EIS for Phase 2. And it's only an amendment, remember. It's not a full new permit. We'll be in operation with existing permits. We'll also be drilling for more water. We have all the water we need for Phase 1. We'll be drilling for more water in 2020, and we're expecting permits to be able to drill late this year or early next year. And obviously, as a fallback, we'll be looking at piping-in options in terms of piping in water from nearby areas and communities.

Looking at Slide #15. Our focus here really for Q3 is now turning our attention to this as our new project and our key internal growth. We've started early works, as we mentioned. So detailed engineering is complete. We now have a 9-year mine life for Phase 1 if we need it. Contractors are mobilized to site. The top soil has been -- removal has been completed. Road upgrades are complete. We have first deliveries of pipe and liner to site. So there's real activity, and you'll see photos of that very soon on our website.

We received the conditional use permit, approving modifications to the mine. We've also got the air emissions permit, which is required for operations. So we've again made progress on those kind of minor permits for operations for Phase 1. And we've commenced that feasibility study. So we have all the water we need for Phase 1. We have all the permits for construction, and we expect to start drilling for Phase 2 water in the first part of next year.

So our outlook for the rest of this year and kind of leading into next year is we're in full-scale construction right now, Board approved as of yesterday. We expect first gold pour in Q3 2020. So it's a really quick time line to gold production here. This is a small project. We've got firm quotes, so the capital budget is quite firm at this stage. We've worked in working capital, a 12% contingency into that budget. We've already spent $3.5 million. And one key thing obviously is we're fully funded into production here for Phase 1.

And something to remember as well, Phase 1 really is a key part to us starting Phase 2. So 50% of the capital expenditure is considered early build for Phase 2.

Turning to 16 to wrap it up and bring it all together here. 2019 has been a year full of catalysts. We've achieved a lot in 2019. It was an ambitious year. As you can see by, I think, all of the tick marks we've put on this page, we think we've achieved almost all of the items we planned to do at the beginning of the year. We have a couple months left here to finish off this list.

And one of the key things here for us in the new year, at the bottom, as you can see, we still have work to do on is work towards a TSX listing as well as index inclusion. We're not included in any of the indices in the U.S. or in Canada at this stage. But with our recent liquidity, with our U.S. listing, with the greater visibility of having 2 mines, going into 3 in the next year, we're getting more visibility for that purpose. And we hope to be looking towards index inclusion next year.

In addition, as we said, we want to achieve being a 1 million ounce producer by the end of 2023. So we've got our internal growth profile and assets. We're going to continue working on those and focusing on those, but we will start to turn our attention towards the acquisition front again. We would love to add another producing asset in the Americas.

So 2020 will be a busy year. 2019 has been a good year so far, and we're pretty excited about what we've achieved. And obviously, the gold price and gold markets improved alongside all the achievements we've had internally. So overall, I'd say it's been a really satisfying year, and I -- so far. And we've got 1 quarter to go, which we expect to be our best quarter for the year.

So I think with that, I'll sort of wrap it up and turn it over to questions.

Sure. So operator, if you can just please remind people how to ask a question.

(Operator Instructions)

Thank you. While people are queuing up for questions, I will ask a question. I was just down at the Silver and Gold Summit conference in San Francisco, which is in California. And lots of people said to us, how can you permit a mine in California? How can you move ahead with Castle Mountain? So can you just remind people, Christian, about the permit process?

Yes, sure. It's obviously very topical for us today. So remember, Castle Mountain's a past-producing mine from the Viceroy days in the 1990s, got only shut down because of the low gold price in the early 2000s when it was $250 an ounce. And has had exemplary reclamation. For any of you who have been to our site, we had a couple of site visits, you'll have seen that. It's been really well reclaimed.

So the permits remain in good standing. This is not a greenfield site. This is a brownfield site. So we're not looking for brand-new permits. We'll be relying upon the existing permits in place. And we have all the permits we need for construction. I think good evidence of that will be the photos that will be up on the website very soon here to show that we're actually making progress obviously with good dialogue and relationship with the regulators in San Bernardino County.

So hence, we've started construction. We also have all the water we need. The existing wells that were in place have been basically put back into production and have been tested, and we're happy with the water production from those wells. They've been reestablished.

So Phase 1, we're working within our existing permits. For Phase 2, we will be amending the permit, but again, it's an amendment to the permit. It's not a brand-new permit. Once we're in operation on the back of our feasibility for Phase 2, we'll amend that permit, but stay within our EIS boundary, which is one of the key things here. It's not disturbing much more land than we had historically had disturbed there.

So we're happy with where the permit stands. And obviously, with our investment and our commitment to this investment in the last day here with the Board, I think we're showing that.

Great. We'll take questions from the phone now, please.

The first question is from Bryce Adams with CIBC.

The first, starting on Mesquite, there's a line or a paragraph in the MD&A talking about the higher percentage of oxidized material has been stacked throughout the year. I was wondering if you could talk to the percentage of the oxide material quarter-over-quarter, how that's progressed during the year. I mean obviously, it's positive increasing. But can you quantify it for me?

I don't have the exact numbers off the top of my head. In the first part of the year, when we took over, obviously, they were focused on stacking the non-oxide material. So it was well, I would say, over 50%. In the last quarter or so, I'd say it's 80%, 90% at least would be in the oxides. And we'll continue with that for the rest of the year.

Okay. So that with this -- the continuing out through Q4 is going to help the Q4 number. Q3 looked good over Q2, but you will need a big Q4 to get to the bottom end of the guidance. Do you think that is achievable?

Yes. And I mean like I said, the key for us at the moment has been solution flow and being able to actually -- basically irrigate as much of the pad as possible because we stacked a lot of ounces. So you look there, we've got 180,000 to 200,000 ounces up there. So solution flow has been a key managing factor. And with the higher percentage of oxides in that 75% recovery, we do believe we will achieve that.

Yes. Regarding the windstorm that you had in September, there's a comment also on the disclosure that talks about offsetting the impact of the storm. What specifically was your reaction to the storm that can right the ship with that one?

Yes. Basically, right at the end of September, there was a windstorm -- electrical storm that put out the power, I think, for a couple of days. We worked on backup gen sets. But it just slowed the operations. And being a heap leach operation, you just have to ramp it back up to full capacity. But we don't expect any material change, but it's something that did happen and it's sort of a freak event in Southern California there. Obviously, we don't have any forest fires because there's no forests or trees around at all, but we do get the odd occasional windstorm or flash flood like that.

So that remediation work is all backward-looking now?

Yes, it's all done, it's all fine, operating as normal.

At Aurizona, given that it's pretty much into November now and the rainy period is coming around the corner, can you talk to the ore stockpile that you had on-site at the end of the quarter and then maybe how that's progressed to the current day?

Yes. I think at the moment, we're about 400,000 tonnes on the stockpile, which obviously has made a significant advancement since, I think, your visit about 4 weeks ago there to site. The fleet is actually operating at, give or take, 100,000 tonnes per day or more at the moment. Actually, it's more. And we've got all the 777s going. So it's piling up fairly quickly.

And by year-end, what's the target for the stockpile?

0.75 million or so, more if there's the capacity.

And the 400,000 tonnes you have at the minute, do you have an estimated grade for those tonnes?

I don't have an estimate. Historical, what we were putting through the plant was between 1.1 and 1.3. I think you'll see that grade maybe creep up a little bit, maybe 1.2 to 1.4 or 1.4 to 1.5.

Got it. One last question. You mentioned the potential for a 9-year life-of-mine for Castle Phase 1. Is that based on -- that 9 years, is that all based on previously mined material, i.e., mineralized waste from the former operation? Or would there be drill and blast component in that 9 years as well?

I'll let Scott answer that. Actually, he's actually here.

Yes. I mean we're currently looking into probably 4.5, 5 years straight from previously mined material, but it's fully permitted. There's a lot of high-grade ore exposed on surface that we can mine as well. So it contemplates chasing some of the higher-grade portions of that that are the highest margin.

What would be the mining cost difference -- delta when you go to mine the -- mine and stack the previously mined material versus fresh rock?

Drill and blast, slightly longer haul.

What's that in dollars per tonne?

I don't -- think it's a little bit early to give that out. I mean we'll put out guidance. But the PFS study gives you a good indication of kind of the difference between, I think, Phase 1 and Phase 2. And remember, Phase 1 is a contractor. So I believe that will probably be over $3 a tonne, and then Phase 2 will be a lot cheaper, more in the Mesquite type range of cost because it'll be on our operated fleet.

Your next question is from Andrew Mikitchook with BMO Capital Markets.

Congratulations on the good quarter. Just wanted to come back to Aurizona. I think we've gone through the whole stockpile thing, but I just wanted to make -- get some commentary from you. Is building that stockpile a priority to make sure that the Q1 rainy season gives you the utmost flexibility? Is that the goal? And to what degree would that relatively large stockpile likely be drawn down over Q1?

I mean we -- certainly, it's a priority. I mean as when we had the site visits, as everyone picked up, it's very much a priority for -- during the rainy season to have that flexibility. When you look at the historical operation here, for the 4 years it operated prior to our time as management here, they did operate during the rains. They had an articulated fleet. And like we indicated on the site visit, they could probably mine in, give or take, 50% of the normal rate. So this will add that flexibility of 3, 3.5 months of literally being able to process without any mine effectively. So it gives us lots of flexibility during that rainy period.

Okay. And maybe just to close out, one more question on Aurizona. How has the mill throughput been? Is it staying essentially above nameplate? Or as you're mining into more, I guess, harder rock, is it coming back? Or how is the performance of the mill?

Yes. The mill's continued basically -- it's continued at the same sort of rate. There's really been no change so far. I mean we're still mostly in the saprolites and the softer rock. But we've been tweaking this AG-AG, and it's coming towards 50-50, I guess. But it's still continued to be over that 8,000 tonnes per day nameplate. I mean I would say more in that 8,500 tonne per day range.

Your next question comes from John Sclodnick with National Bank Financial.

Just got a question on Mesquite again with this -- the historical dumps and leach pads. And just wondering what the grade is there that you're pulling from that and how long you expect to rely on those.

I'll let Scott answer that one.

Yes. I mean grade's variable. Like the story that we refreshed this morning on Castle, a lot of the historic operations in California were in a much different gold environment. And if you look back at historical grades mined, I mean some of the grades in the upper portions of the deposits were 1-gram, 1.5-gram type material, and they're cutoff material. Cutoff grades for them at the time, like Castle, were in that 0.5 gram, even plus type range. So it's quite variable. Obviously, putting resources and reserves on historical dumps is interesting, dare I say challenging, but it's quite variable.

But I think what you've seen for quarter 3 in that sort of 0.25 to 0.3 range is reasonable indication of what we're seeing?

Yes, it's nominally in line with the average grade of in situ ores at this point.

Okay. Fair, yes. And just with the heavy rains that you guys have experienced there and the kind of impact to the leaching, do you have any sort of guidance for recoveries there in -- for Q4?

No, we expect the same. I mean I think it was a fair -- a bit of a blip there. So we don't really expect any change. And we're seeing the actual pad performance is actually pretty good for October so far. We're pleased with it.

Okay. Great. And sorry, back to Aurizona with the stockpiling there. To achieve kind of that throughput rate of fresh material -- or mined material, I should say, what kind of mining rate are you expecting for Q4 and into 2020 in order to get the stockpile up there as well?

I mean I will comment on it. Jim, correct me if I'm wrong, but we're looking at that sort of 100,000 to 120,000 tonnes a day is probably a pretty good estimate.

Bring it on, that's where we're heading. It's 120,000, but yes, we're up well over 100,000 right now.

Right, okay. Perfect, that's great. Sorry, last one for me. Just with the BRL hedges there, I noticed -- if you could just give sort of a sense on what percentage of your costs that are denominated in reais are hedged there.

I'll let Pete answer that one.

The substantial part of our costs in Brazil is denominated in reais. A fair figure to use is touching up closer to 90%.

Okay. That's perfect. Great. Congrats on the good quarter.

Yes. Thanks, John.

Great. Well, we don't actually have any questions online today, which is unusual. So if somehow you think of a question after we're done, the webcast will be archived on the website for 3 months, and you can always reach us by e-mail or by phone. I will turn it over to you, Christian, now for closing remarks.

Yes. Thanks, Rhylin. Thanks for joining us today here. This is a key milestone for us today and yesterday here, hitting 2 key milestones by starting Aurizona and having a first -- great first quarter as well as getting into construction at Castle Mountain. So there'll be lots of news over the next sort of 6 to 9 months as we get cash flow into production, and we're excited for the next year coming up here. So thanks again, we'll speak to you soon.

Thanks for joining us today.