Alamos Gold Inc Q2 FY2022 Earnings Call

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

Thank you, operator, and thanks, everyone, for attending Alamos' Second Quarter 2022 Conference Call. In addition to myself, we have on the line today both John McCluskey, President and CEO; and Peter MacPhail, Chief Operating Officer. 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 Q&A 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 MD&A 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 the dollar amounts mentioned in this conference call are in U.S. dollars unless otherwise noted. Now I'll turn it over to John to provide an overview of the quarter.

Thank you, Jamie, and welcome, everyone, to the call. Starting with Slide 3, we had a strong second quarter on several fronts, achieving our short-term operational goals while also advancing two key growth initiatives: commencement of production at La Yaqui Grande and the announcement of a larger, more profitable Phase III expansion of Island Gold. These achievements have reinforced our positive outlook, indicating increased production and reduced costs. As we enhance production, we are also aiming to lower our greenhouse gas emissions with a target of a 30% reduction by 2030, as outlined in June. Our second quarter production of 104,000 ounces of gold met our expectations, and our total cash costs of $895 per ounce and all-in sustaining costs of $1,170 per ounce were significantly better than our quarterly guidelines, marking a notable improvement compared to the first quarter. This performance was driven by our Canadian operations, which saw a substantial boost in production and lower costs at Island Gold, along with a robust start at La Yaqui Grande. With continued ramp-up at La Yaqui Grande, we anticipate consolidated production to rise between 115,000 and 125,000 ounces of gold in the third quarter, with further increases expected in the fourth quarter and a decrease in total cash costs due to La Yaqui Grande’s lower cost structure. We are on track to meet our full year production and cost targets. Looking at Slide 4, La Yaqui Grande is positioned as a major contributor to enhanced production and lowered costs in the near term, while Island Gold will continue this momentum in the long term. We announced the Phase III-plus expansion of Island Gold to 24,000 tonnes per day at the end of June, which will create a larger, longer-lasting, and more profitable operation. After the shaft completion in 2026, we expect production to more than double from current levels to an average of 287,000 ounces of gold per year, with all-in sustaining costs benefitting from a 43% increase in mineable resources and reduced capital costs per ounce, all leading to a much more valuable operation, currently valued at $1.8 billion at present gold prices. Notably, Island Gold will not only expand its production capacity but will also become a greener mine, with the expansion projected to reduce life-of-mine carbon emissions by 35% compared to the existing smaller operation. Moving to Slide 5, this development will transform Island Gold into one of Canada’s largest and most profitable gold mines. Once the expansion is complete, Island Gold will rank as the seventh largest gold producer in Canada, the lowest cost producer, and the fifth most profitable. This asset is truly exceptional and, like Young-Davidson, one of the most valuable operations in Canada. Turning to Slide 6, both La Yaqui Grande and Island Gold are key to our optimistic outlook, with increasing production and declining costs. By next year, we expect to produce close to 500,000 ounces of gold annually at progressively lower costs, with all-in sustaining costs anticipated to decrease by 18% to around $1,000 per ounce by 2024. After the Phase II expansion, we foresee annual production exceeding 600,000 ounces of gold while further cutting costs. Lynn Lake remains crucial to our long-term growth strategy, with the potential to boost production to about 800,000 ounces per year. In the near term, we are adopting a conservative approach to growth by postponing significant capital expenditures at Lynn Lake until the Phase III expansion progresses, allowing us to self-fund this growth while maintaining strong free cash flow in the coming years. I will now hand the call over to our CFO, Jamie Porter, to discuss our financial performance.

Thank you, John. Moving on to Slide 7. We sold 102,164 ounces of gold at a realized price of $1,871 per ounce for revenues of $191 million in the quarter. Total cash costs averaged $895 per ounce and all-in sustaining costs were $1,170 per ounce, a significant improvement from the first quarter, reflecting higher grades at Island Gold, the strong start at La Yaqui Grande and the weaker Canadian dollar. As previously guided, we expect our second half costs will be lower than the first half, with the ramp-up of low-cost production from La Yaqui Grande being the largest driver. Operating cash flow before changes in noncash working capital was $85 million or $0.22 per share in the second quarter. Our reported net earnings were $6 million and included a noncash after-tax inventory adjustment of $15 million in Mulatos. Unrealized foreign exchange losses of $13 million recorded within deferred taxes and foreign exchange and other gains of $4 million. Given the decline in the gold price during the quarter and higher costs at Mulatos, a review of the carrying value of its leach-pad inventory was undertaken, which resulted in a $15 million inventory adjustment, which is a noncash reduction. Excluding this and other noncash items, our adjusted net earnings were $29 million or $0.07 per share. Capital spending totaled $69 million in the second quarter, including $20 million of sustaining capital, $43 million of growth capital and $6 million of capitalized exploration. With the ramp-up of construction on the Phase III-plus expansion at Island Gold, we expect capital spending to increase in the second half of the year. We generated $7 million of free cash flow in the quarter, reflecting the strong performances at Young-Davidson and Island Gold. With the ramp-up of production from La Yaqui Grande, we expect stronger free cash flow in the second half of the year. We returned a record $18 million to shareholders during the quarter, consisting of our quarterly dividend of $10 million or $0.10 per share on an annualized basis and $8 million in share buybacks. We continue to have a strong balance sheet with no debt, $122 million in cash, $23 million of equity securities and $500 million of undrawn credit capacity. We are well positioned to fund our internal growth projects while supporting ongoing returns to shareholders. I'll now turn the call over to our COO, Peter MacPhail, to provide an overview of our operations.

Thank you, Jamie. Moving to Slide 8. Young-Davidson had another strong quarter with mining rates averaging 8,160 tonnes per day, exceeding design rates of 8,000 tonnes per day for the fourth consecutive quarter. This drove production of 46,400 ounces and record mine-site free cash flow of $31 million. Mill throughput averaged 7,750 tonnes per day, lower than tonnes mined due to planned liner change in the mill. This resulted in a stockpile being built up on the surface, which will be processed in future quarters. Given the strong overall start to the year, costs in the quarter and through the first half of the year remain towards the lower end of annual guidance. Young-Davidson remains on track to meet its full year production and cost guidance. Over to Slide 9. Island Gold produced 37,300 ounces of gold in the second quarter, a 52% increase from the first quarter. This reflected higher grades, which averaged 10 grams per tonne and higher processing rates of 1,260 tonnes per day. Costs were also down substantially from the first quarter and consistent with that annual guidance. The higher production and lower costs contributed to mine-site free cash flow of $20 million in the quarter. With similar grades expected through the remainder of the year, we remain on track to achieve our full-year guidance. Over to Slide 10. Construction activities on the Phase III expansion will continue ramping up through the second half of this year. As we've seen in the photos, site clearing and preparation work is well underway and expected to be completed in the third quarter. The pre-sink is expected to begin in August and shaft sinking to start in 2023 with first production from the shaft in 2026. We've made significant progress on the expansion to date with the bulk of the earthworks completed. The tailings facility already expanded and more than 30% of the project capital already committed. Combined with the fact that this is an operating mine, this is a lower-risk expansion, which is going to create a bigger lower-cost operation that will be among the most profitable and valuable gold mines in Canada. Moving to Slide 11. Production from the Mulatos District totaled 20,200 ounces in the second quarter at costs roughly in line with first half guidance. This included 15,200 ounces from Mulatos and 5,000 ounces from La Yaqui Grande. We expect substantially higher production from La Yaqui Grande in the second half of the year as stacking rates continue ramping up. Consistent with guidance, we expect approximately 65% of full year production from the Mulatos District to come in the second half of the year at significantly lower costs. Moving to Slide 12. Construction of La Yaqui Grande was completed in June, ahead of schedule. Total capital for the project is expected to come in at around $160 million, 13% higher than the initial 2020 estimate, primarily due to scope changes. This included the decision to build a new crusher instead of refurbishing the El Chanate crusher and the construction of a new camp to help mitigate the challenges with COVID-19. With the early completion of construction and higher grade stack of 1.6 grams per tonne, production of 5,000 ounces and total cash costs of $450 per ounce exceeded expectations. Grade stack are expected to average closer to the reserve grade of 1.2 grams per tonne in the second half of the year. With stacking rates continuing to ramp up to design rates of 10,000 tonnes per day, La Yaqui Grande is expected to drive significant production and free cash flow growth within the Mulatos District. With that, I'll turn the call back to John.

Thank you, Peter. That concludes our formal presentation. I'll now turn the call back to the operator, who will open the lines for your questions.

Thank you. The first question is from Trevor Turnbull from Scotiabank.

I wanted to ask about the Lynn Lake feasibility study that you said would be released after the EIS approval. Should we expect the feasibility study to come out fairly soon after that, or might it be delayed since you mentioned earlier that you don't plan to commit significant capital to Lynn Lake until you're further along with Island Phase III? Would you consider holding off on the feasibility study to keep it as current as possible when you begin spending?

Hey, Trevor, it's Peter. We're currently updating the feasibility study. Sometimes when it comes to permitting, there are certain commitments we need to incorporate. I can see that happening, but I believe we aim to release it fairly soon after obtaining the necessary permits.

The next question is from Fahad Tariq from Credit Suisse.

One thing I noticed that wasn't mentioned in the presentation or the press release was the topic of inflationary pressures, which is a positive sign. Can you discuss this further? I understand there are some offsets due to higher production in the second half and that Island Gold grades are performing better than expected. Could you talk a bit about any underlying inflationary pressures you might be experiencing?

Yes, it's Jamie here. Across the industry, we're experiencing higher prices for diesel, cyanide, and grinding media. We have managed the impact of inflation this year, benefiting from a weaker Canadian dollar and some effective diesel hedging that has reduced our costs by around $20 an ounce. We also have long-term supply contracts in place. While we are recognizing inflationary pressures, the factors I mentioned, along with low-cost production from La Yaqui Grande, are helping to offset those impacts. Overall, we are performing well in terms of costs. We anticipate inflation to affect our costs by about 5% next year, but we will explore strategies in our annual budgets to mitigate that.

Okay. And just a quick follow-up. One, like some of your peers are talking about labor inflation and labor tightness, particularly in Canada. Just curious if you're also noticing any specific pressures that are difficult to retaining employees, et cetera?

We have not had any specific challenges at our operations. I think some of our peers have noted that with contractors that that's a challenge. And we are seeing that in terms of both contracted underground development and exploration drilling. But overall, it's not having a significant impact on our operations.

The next question is from Lawson Winder from Bank of America Securities.

I have a couple, maybe a few questions. So first off, on La Yaqui Grande, congratulations on getting that started. But just how have you prepared LYG for the upcoming rainy season in Sonora?

Yes. We're nearly finished with it. The rainy season typically wraps up in late July or early August, and we've managed to get through it. We have set up ponds for our heap-leach operations, including a preg pond, a barren pond, and a large event pond to handle any rainfall contingencies. Additionally, you may have noticed in the pictures that there's a sizable heap-leach area covered with plastic and no ore yet. We have redirected any rainwater that falls in that area around the facility. Overall, we're in good shape.

And I mean, since you've now had an opportunity to observe how the leach pad performs with the rain, have you noticed any dilution or the need to use excess cyanide?

Well, we've been producing down there since 2005. It's not our first rainy season. And we learned how to manage pretty well that from time to time, you'll get a really unusual rainfall that will happen on one particular day, and that can have a very, very short-term effect on what we do. But other than that, I think we've got that rainy season issue well in hand.

We're still in the early stages of the heap-leach process. There isn't much ore stacked on the pad right now, and we have minimal water and solutions to manage. It's just beginning, so we redirect the excess water away from the area.

Okay. I wanted to ask about return on capital. So if I just kind of look at return on capital since 2019, it's been quite consistently around 9% of operating cash flow. And I just wanted to ask like, is that how you guys think about capital return as a percentage of operating cash flow?

As a percentage of operating cash flow, we have targets and we are evaluated annually by our board regarding our return on invested capital metrics. We have been in a significant investment phase, and we are beginning to see the benefits of that. Young-Davidson has shown strong performance for five consecutive quarters, generating over $100 million annually. La Yaqui Grande has achieved an IRR of over 60%. We are starting to see these returns coming in, so I would say we are aiming for increases in our overall capital returns in the coming years.

But as a percentage of operating cash flow.

Well, we don't specifically pin it to that. But for example, we took advantage of very low share prices to get more active with the share buyback, and we've been opportunistic on that front. And so you might see some variability in shareholder return on that basis alone.

Yes, when we look at our return on capital metrics, Lawson, we're looking at free cash flow, not just operating cash flow.

I wanted to ask about Lynn Lake. You've delayed the project to extend the CapEx commitment so it can be fully funded internally, which makes sense. I'm curious about the slide showing gold production growth that indicates full development for Lynn Lake in 2027, suggesting spending will start in 2024. However, I understand that 2024 is expected to involve significant expenditures on the Island expansion. Am I thinking about this correctly? Could 2024 be a year where you need to rely heavily on the balance sheet?

Lawson, yes, I'll take that. No, not at all. I mean we're in great shape now. Now with La Yaqui Grande up and running, we should be cash flowing $100 million annually from Mexico. We're getting $100 million annually from YD. And at current gold prices, Island funds the majority of the Phase III plus expansion. So we're free cash flow positive net of all the expansion spending over the next couple of years. We could easily start Lynn Lake in late 2024, early 2025 and finance that from existing operating cash flow. There wouldn't be a need for us to materially draw down our cash balance or access our credit facility.

So I guess that as the question, I mean could you start even a little earlier? Like I mean could next year still be a reasonable time frame for spending on Lynn Lake?

It could be. But as we've been saying for about 6 months now, our focus is on Phase III plus. That's the highest return development project we have in front of us. So we want to get going on that and move that forward before we start focusing on Lynn Lake as well.

And the next question is from Kerry Smith from Haywood Securities.

Jamie, just on the reporting, you have split out La Yaqui Grande this quarter. Is that the plan on a go-forward basis to separate that from the main pit then in terms of the reporting?

Yes, Kerry, we'll assess that going forward. We did decide to separate the physical, but I think some of the financial metrics are blended, but we do separately disclose our cost on La Yaqui Grande and Mulatos. I mean the reality is, going forward, La Yaqui Grande is going to be 80%, 85% of our production in Mulatos. So it may not make sense to have them separate, just given the Mulatos' production metrics will be somewhat immaterial. But we'll assess that going forward.

Okay. You mentioned trucking some ore from Island to the mill at YD. Can you provide a general idea of the costs involved, such as the expense for trucking or the cost per tonne?

Yes, I view the trucking cost as approximately a gram, which amounts to about $60 per ton to transport it there. While you lose a gram on the head grade being processed, you actually benefit in terms of operating and mill costs since it's a larger and more cost-efficient mill. This approach allows us to advance cash flow, and those are higher-cost ounces we are moving forward because we have maintained a stockpile at Island for about two months since acquiring it five years ago. The mine is performing well, and I don't foresee a scenario where we will regret not having that stockpile ready for the mill at Island. The mill at Island has a permitting limit of about 1,200 tonnes a day, so it logically makes sense to process the material a bit earlier if possible; otherwise, it will just remain unprocessed until we expand the mill in 2025.

Right. And you can benefit from a bigger stockpile at YD as well so that would obviously help.

Yes.

Okay. And just one last question, I'm not sure if you can answer it, but you mentioned some drilling that was conducted on the nearby targets around Mulatos, Carricito, and Halcon West, and possibly Refugio as well. I’m curious if there have been any interesting findings from those drill programs or how that program is progressing.

There's lots of really interesting stuff around the Mulatos District. It's a big land package that we have there and continues to surprise us. So all I'd say is maybe stay tuned, we'll put out results on when we have something to share.

Yes. The only thing I'd add to that is we published that underground reserve at the start of the year, carried at 430,000 ounces at 4.5 grams. I think there's potential for us to look to increase the size of that deposit. We're evaluating that in the second half of the year.

Okay. And that's pretty down year, right?

Yes.

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