Alamos Gold Inc Q3 FY2022 Earnings Call

Good morning. I would now 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’ Third Quarter 2022 Conference Call. In addition to myself, we have on the line today John McCluskey, our President and CEO; and Luc Guimond, our 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. With that, I will turn it over to John to provide an overview of the quarter.

Thank you, Jamie. To start off the call, I want to introduce Luc Guimond, who was appointed Chief Operating Officer in September. Luc has a long history with Alamos, a deep knowledge of our operations, and an excellent track record leading the development and operation of a diverse range of gold mines. Luc has hit the ground running, as can be seen by our solid third quarter operational results, and we expect to continue with even stronger results as we approach the fourth quarter. I would also like to recognize Peter MacPhail for his leadership and invaluable contributions to the company as our former Chief Operating Officer. Peter oversaw our growth into an intermediate producer while driving significant improvements across our operations, such that our outlook has never been stronger. Peter retired in September, but will be staying with the company as a consultant to ensure a seamless transition. On behalf of the entire Alamos team, I would like to thank Peter, and I look forward to his ongoing contributions over the next year. Starting with Slide 3, we had a strong third quarter led by another solid performance from Young-Davidson and a standout result from La Yaqui Grande in its first full quarter of operation. Production of 123,400 ounces of gold was near the top end of guidance and represented a 19% increase from the second quarter. Total cash costs were $868 per ounce and all-in sustaining costs were $1,178 per ounce, both below our annual guidance and down approximately 7% from the first half of the year. Young-Davidson continues to be a steady performer, generating $23 million of mine-site free cash flow in the quarter and is on pace to generate $100 million for the second consecutive year. La Yaqui Grande is ramping up, having doubled production from the Mulatos district quarter over quarter, and it is the key driver of our consolidated production growth and decrease in costs. Looking at Slide 4, we expect strong performance to continue into the fourth quarter, with La Yaqui Grande driving another increase in our production to a range of 125,000 to 135,000 ounces. Despite industry-wide inflation, we also expect a further decrease in our costs in the fourth quarter, reflecting the ramp-up of low-cost production from La Yaqui Grande, higher grades at Island Gold, and the weaker Canadian dollar. Combined with our stronger year-to-date performance, we are on track to achieve our full-year production and cost guidance. We are not immune to the inflationary cost pressures being felt across the industry but have several key things working in our favor, the first being the nature and location of our operations. Approximately 70% of our production is coming from underground mines in Ontario, which are less energy-intensive, have smaller mobile fleets, and are connected to clean grid power, meaning we are less reliant on fossil fuels. Given the majority of our production is coming from Canada, we are also benefiting from the weaker Canadian dollar. Lastly, all of the production growth we are bringing on is at lower costs. Looking at Slide 5, La Yaqui Grande will be a key driver of higher production and lower costs over the next few years. Island Gold is going to continue that trend over the long term through the Phase 3 expansion. I was on-site last week and saw the progress firsthand with work in the shaft area really starting to take shape. The shaft that has been colored is more than 90% complete, and the concrete foundation work and the surface infrastructure is well underway. This expansion will be a game-changer for the operation and the company. Following completion of the shaft in 2026, we expect our annual production to increase by about 600,000 ounces per year with a further decrease in costs. Longer term, we have the capacity to increase our annual production to approximately 800,000 ounces per year with the development of Lynn Lake. We are taking a staged approach to developing our growth projects, and currently, we are focused on Island Gold, ensuring we can continue to fund this growth internally while generating solid free cash flow over the next several years. I will now turn the call over to our CFO, Jamie Porter, to review our financial performance.

Thank you, John. Moving on to Slide 6. We sold 122,780 ounces of gold at a realized price of $1,740 per ounce, $11 above the London PM Fix price, for revenues of $214 million in the quarter. Total cash costs averaged $868 per ounce, and all-in sustaining costs were $1,178 per ounce, marking a significant improvement from the first half of the year, reflecting strong ongoing results from our Canadian operations and the benefit of a full quarter of production from La Yaqui Grande, as well as a weaker Canadian dollar. We expect a further decrease in costs in the fourth quarter to the lowest levels of the year, driven by higher grades at Island Gold and additional low-cost production growth from La Yaqui Grande. Operating cash flow before changes in non-cash working capital increased to $96 million or $0.25 per share in the third quarter. This marked the highest level in the year despite the lower gold price. We reported a net loss of $1 million, which included a non-cash after-tax inventory adjustment of $8 million and Mulatos unrealized foreign exchange losses of $23 million recorded within deferred taxes and foreign exchange, partially offset by other gains of $2 million. As was the case in the second quarter, given the further decline in the price of gold during the third quarter, a review of the carrying value of the Molatos leach pad inventory was undertaken, resulting in an $8 million non-cash inventory adjustment. Excluding this and other non-cash items, our adjusted net earnings were $27 million or $0.07 per share. Capital spending totaled $73 million in the third quarter, similar to the second quarter, with the ramp-up of spending on the Phase 3 expansion offsetting the decrease in capital allowed us, with construction of La Yaqui Grande now complete. We expect the rate of our capital spending to increase on the Phase 3 expansion in the fourth quarter, while our full-year spending is likely to be lower than guidance at Island Gold, with some of the construction capital deferred into the next few years. Our balance sheet remains solid with no debt, $117 million in cash, and $500 million of undrawn credit capacity. Combined with growing cash flow from operations, we remain well-positioned to fund our growth projects internally in any gold price environment while supporting ongoing returns to shareholders. This includes returning $38 million year-to-date through our dividend and share buyback. I will now turn the call over to our COO, Luc Guimond, to provide an overview of our operations.

Thank you, Jamie. This is my first quarterly call, and I’m looking forward to working with the team in this new role in supporting our continued growth as a company. Moving to Slide 7, Young-Davidson produced 49,300 ounces in the quarter and generated mine-site free cash flow of $23 million. Despite some operational challenges, gold production was 6% higher than the second quarter, and the operation remains on track to achieve full-year guidance. Mining rates averaged 7,000 tons per day and were affected by downtime to replace the head ropes at the Northgate Shaft, a scheduled change of underground conveyor belt, and a higher than typical number of shutdowns during peak electricity demand periods in Ontario as part of our energy management plan. Mining rates have increased and are expected to average 8,000 tons per day in the fourth quarter. This downtime was offset by the underground stockpiles we had built up on surface, allowing us to run the mill at 7,800 tons per day and maintain strong production rates. Given the solid performance year-to-date, Young-Davidson remains on track to meet full-year production and cost guidance. The operation is also on pace to generate $100 million of mine-site free cash flow for the second consecutive year. Over to Slide 8, Island Gold produced 31,400 ounces of gold, down from the second quarter, reflecting slightly lower grades processed and lower than planned recoveries. No recoveries were below guidance due to calibration issues with a newly installed automated line application system. The issue was rectified, and recoveries returned to budgeted levels prior to the end of the quarter, and in October, the new system is performing well, and recoveries are expected to be at budgeted levels in the fourth quarter. With grades expected to improve in the fourth quarter and gold recoveries back to budgeted levels, we remain on track to achieve full-year production guidance. Over to Slide 9, construction activities on the Phase 3 expansion are ramping up following the start of the shaft precinct in August. The shaft is now down to a depth of 40 meters and nearing its final depth of 42 meters. Concrete foundation work on the shop surface infrastructure, including the hoist and hoist house, is also underway. Detailed engineering on the pace plant began in September, and lateral development to support higher mining rates with the Phase 3 expansion remains ongoing. We have made significant progress on the expansion to date and expect to start syncing the shafts next year. As noted previously, this is a lower-risk expansion, with the majority of the earthworks completed, the tailings facility already expanded, and far fewer unknowns with this being an operating mine. Once the expansion is completed, Island Gold will be among the largest, lowest-cost, and most profitable gold mines in Canada. Moving to Slide 10, production from the Mulatos district increased considerably to 42,700 ounces in the third quarter. This was double what we produced in the second quarter and at significantly lower costs, driven by the first full quarter of production from La Yaqui Grande. Mining and stacking rates had been impacted at both sites by heavy rainfall during the quarter, which temporarily limited the transportation of consumables to the site. This was more than offset by a strong quarter from La Yaqui Grande. Over to Slide 11, La Yaqui Grande produced 25,300 ounces in the quarter at mine-site all-in sustaining costs of $699 per ounce. In addition to the production growth, this reduced Mulatos district costs to $1,137 per ounce, a 34% decrease from the first half of 2022. Stacking rates at La Yaqui Grande averaged 8,700 tons per day in the quarter, nearing the design rate of 10,000 tons per day. With the rainy season now over and mining and stacking rates at La Yaqui Grande continuing to ramp up, we expect a further increase in production from La Yaqui Grande in the fourth quarter at lower costs. Overall, the Mulatos district is on track to meet its full year production and cost guidance. With that, I will turn the call back to John.

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

Thank you. The first question is from Cosmos Chiu with CIBC. Please go ahead.

Thanks, John, Jamie, and congratulations, Luc. Maybe my first question is on the Canadian assets. You know, as you talked about Island Gold, some ore was transported to Young-Davidson for processing about 10,000 tons in the quarter. Can you maybe touch on some of the additional costs? I don’t think there are a lot. And then more importantly, longer term, you know, any kind of synergies that you can take advantage of, of the two operations that you can speak to or that you might be exploring at this point in time?

Yes, I can take that, Cosmos. And thanks for the congratulations, by the way. Yes, I mean, you know, the cost of running that ore over to Young-Davidson is about $1,000 an ounce, so it is still profitable in this gold market. As we have mentioned in the past, it is a stockpile that has been sitting there for a number of years, so there is revenue in the yard, and this was an opportunity to unlock some of that revenue and generate it earlier. We still plan to process some of that material in Q4. It has all been trucked now over to the site as far as what we were planning to send over for this year. But we will continue the milling process of that ore through the Q4 period and finish that up.

And then, longer term, anything you can speak to or?

Yes, Cosmos, it is Jamie. I would say, you know, we have benefited from a number of synergies just from having two mines, you know, a six-hour drive apart in Northern Ontario, especially with respect to personnel. I mean, we have been able to take our key technical people, move them back and forth between the sites. A great example of that is we just took our mill superintendent from Young-Davidson and transitioned him over to Island Gold. So we benefit from that; there are obviously purchasing and operational synergies as well. But yes, from a workforce perspective, there are meaningful synergies there.

Maybe a question on La Yaqui Grande. You kind of mentioned that you touched on it, but as you said, you are targeting 10,000 tons per day; that is your design capacity. Are you going to get there in Q4? Can you comment on that?

Yes. Our expectation is that we will be there in Q4, Cosmos, with regards to that stacking rate.

Okay. So at the end of Q4, or could you actually average 10,000 tons per day?

We will average 10,000 tons per day through the quarter.

Great. And then also La Yaqui Grande, as you mentioned, you are stacking 1.23 grams per ton, meeting expectations. Can you touch on the consistency of the grade at this point in time, what you are seeing as you open up the pit?

Yes, I mean, our expectation is to continue with that stacking grade through the fourth quarter. I mean, we are in the early stages, but we had seen a little bit of overperformance in Q3 regarding what we started, but moving forward, we are certainly expecting at least reserved grade as far as stacking rate.

Great. And then maybe one last question on the financial side. Jamie, as you mentioned, there is $500 million on the undrawn line of credit. Could you remind us what the interest rate on that undrawn line of credit is? And would you need to tap it for your development projects? And if you do, what sort of the timing of that?

Yes, so the rates just based on, obviously, it varies depending on financial ratios, but given the fact that we have no leverage right now, it is a little under 2% over LIBOR. We have no plans in the near term to draw on the facility. I think I mentioned through my part of the script that at current gold prices, we are well-funded to complete the Phase 3 expansion at Island Gold without needing to draw on the facility. So it remains there as a backup for us but we are in great shape with our cash flow from our existing operations, financing the growth and production at Island.

Great to hear, and those are all the questions I had. Thanks a lot.

Thank you. The next question is from Kerry Smith with Haywood Securities. Please go ahead.

Jamie or Luc, could one of you just explain to me how the energy management program works at Young-Davidson? I assume that because you don’t need much power at Island, it doesn’t get impacted. But is this something that we will likely see on a go-forward basis where you will have periods of time where you won’t be able to run the facility at the rates you would like because of this program? We are just trying to understand how it might impact your production going forward.

Yes, hi Kerry, Luc here I can take that. I mean, this energy management plan that we talked about with regards to the peak periods we have been in Young-Davidson has been involved in that since 2016, and Island Gold is now part of that as well. What typically happens is that we need to monitor the peak load in the province of Ontario when that occurs in a specific one-hour window. We need to have the facility down for that one hour to get that cost benefit. So typically, we need to shut the facility down for about four hours. It is not the entire facility; it is the non-process, the hoist, and the paste bind in the Young-Davidson case and at Island, it is the mill. We need four hours to be down to get that one-hour peak period. Typically, we need to shutdown probably anywhere from 10 to 15 times in the period to capture those peaks. In this case, we had more shutdowns required to capture the peaks, and they were longer in duration, meaning the local load in the province in that period was pretty flatlined. So typically, it is a four-hour window shutdown; we had a couple of them this year that were about six hours due to that, in order to capture that peak. But that is something we plan for and it is part of our business plan on an annualized basis. The bigger impact in Q3 was the head ropes having to be changed out; that job was really what led to the mining rates being at 7,000 versus 8,000.

Yes. The other point to make there Kerry, is the benefit of shutting down during those peak periods is significant. I mean, we save millions of dollars every year on our power costs if we can capture those five peaks, and we have been successful most years in doing so. So this is nothing new; we just had to be shut down more than what we had budgeted this quarter, but it is still worth doing. We again save millions of dollars on power costs.

And are you seeing, even doing this since 2016, you said, right?

In Young-Davidson’s case, yes.

And so over that period of time, let's call it six years, have you seen the frequency of these energy management shutdowns increasing over time? Because obviously, we have got GDP growth in Ontario, and I’m not sure what Hydro One is doing with the power infrastructure, but I can only assume that it is a disaster. And I’m just wondering if there might be a situation where you are seeing a gradual trend higher in terms of the number of shutdowns that you have to implement. And if that might sort of impact your milling throughput on a go-forward basis more than what you are already budgeting for?

Yes. I mean, like I said, typically they have been 10 to 15 a year, and it is by choice. I mean, we manage that decision. I mean, we don’t see the cost benefit but at this point, based on market conditions, we see the benefit of taking that shutdown and realizing the benefit on our power bill.

Okay, that is helpful. And then just this was kind of the first full quarter of La Yaqui Grande. Are you planning to use this reporting formatting that you have used in the Q3 report where you split out the La Yaqui Grande from the rest of the operation?

Yes, Kerry, I think we will continue to do that for the next several quarters. While we are still getting significant production from the Mulatos leach pad, I think, this time next year we will reevaluate that. I mean, we do have the underground PDA deposit that will be coming online at some point, so we will likely look to report that separately as well. But yes, I think for the near term, we will keep the formatting presentation similar to what we had this quarter.

Okay, and then just one last question. I think I know the answer, but when you drop your ore from Island over to Young-Davidson, I’m assuming that those tonnes and those grades are captured in the Island reporting table, and then you capture the extra cost to track it over as well, is that correct John?

Yes. Everything gets attributed back to Island, absolutely. So those are stripped out of the Young-Davidson results and included in the Island results where they belong.

Thank you. The next question is from Trevor Turnbull with Scotiabank. Please go ahead.

Yes. Thank you, Luc. You mentioned that at Island those stockpiles have been sitting there for a long time and that you just took advantage of that capacity window at Young-Davidson. I was just wondering if you expected those stockpiles to grow again, or if you could maybe remind me what the mining rate is at Island and also when that permitted capacity increase at Island is expected.

Yes, so, I mean, the typical mining rates at Island currently are 1,200 tons per day. That stockpile has been sitting there really since we acquired the property back in 2017. Yes, so sorry, I missed the other part of that question, Trevor.

Well, it is kind of moot. I was wondering if you expected those stockpiles to kind of grow again. And my follow-up to that was when you expect that permitted increase in capacity for the Island plant, but it doesn’t sound like those stockpiles are really going to be an issue before phase three is ready.

No, correct. Correct. I mean, we will go through the permitting process; we are working on that obviously to ramp up for, you know, 2026 when the shaft comes online and then gets a full production at 2,400 tons per day in early 2027. But I mean, we typically will always have a bit of a stockpile sitting in the yard at Island Gold, similar to what we do at Young-Davidson. In the case of this quarter, we had just had Young-Davidson where we did have, you know, some downtime with regards to the head rope replacement. We were able to continue to run the mill at full capacity. So we would have that same benefit with Island Gold.

Yes, no, that makes sense. And obviously the metallurgy works out that you can use either facility. Then just my only other question was about Lynn Lake. The EIS approval is expected here fairly soon, in the next couple of months, and you said there would be a feasibility study coming out following that. I’m just wondering if the feasibility really comes out very quickly after the EIS or if there is a bit of work that you guys need to do so that we might have to wait a bit longer to see those numbers.

Trevor, yes, I think the feasibility study would follow pretty closely after the receipt of the provincial and federal permits, likely within a quarter certainly. And yes, that would likely be after, I mean, the feasibility study would be after the release of our updated reserves and resources, the end of 2022 numbers, so we can incorporate the exploration work that we have done this year.

Okay, great. Thanks Jamie. That is all I had.

Thank you. The next question is from Mike Perkin with National Bank. Please go ahead.

Hi guys. Congrats on the quarter and congrats to Peter on his retirement. And Luc welcome to the team. One quick question. Back down to La Yaqui Grande with the legacy stockpiles; is that something that is kind of temporarily on hold in terms of aggressively putting that back or putting that back into stacking in terms of like consumable prices being elevated? Would you look to be opportunistic and look to capture a greater margin assuming consumable prices soften in the near term or just keep going at the rate you are going?

Yes, Mike, it is Jamie. Yes, absolutely. I mean, our business plan for the rest of this year and into 2023 is focused on mining El Salto, the bottom part of the Mulatos set, and that is the basis for our production guidance. The stockpile, we will continue to evaluate that and look for opportunities when it makes sense based on the gold price and consumable prices to process it, but there is optionality associated with that which is not entirely factored into our existing near-term outlook.

And is it something that you can blend easily with the oxide, or do you tend to try to separate the stack that on a pad and be more as it consumes more consumables? So is it something that makes sense to try to isolate versus mix with the oxide at El Salto?

Yes, we tend to, I mean, when we are processing through the stockpile, we certainly can blend it. We tend to stack the stockpile of material separately. It is almost a batch process, but we can blend that as well.

Alright that is it for me, guys. Thanks so much.

Thank you. There are no further questions 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.