Earnings Call Transcript - EGO Q2 2022

Operator, Conference Operator

Thank you for joining us. Welcome to the Eldorado Gold Second Quarter 2022 Financial and Operational Results Conference Call. Please note that all participants are in listen-only mode and the call is being recorded. After the presentation, there will be time for questions. I will now hand the call over to Lisa Wilkinson, Vice President of Investor Relations. Please proceed, Ms. Wilkinson.

Lisa Wilkinson, Vice President, Investor Relations

Thank you, operator, and good morning, everyone. I'd like to welcome you to our second-quarter results conference call. Before we begin, I would like to remind you that we will be making forward-looking statements and referring to non-IFRS measures during the call. Please refer to the cautionary statements included in the presentation and the disclosures on non-IFRS measures in our Management's Discussion and Analysis as well as the risk factors set out in our Annual Information Form. Joining me on the call today, we have George Burns, President and Chief Executive Officer; Phil Yee, Executive Vice President and Chief Financial Officer; and Joe Dick, Executive Vice President and Chief Operating Officer. Other members of the senior leadership team will also be available for the Q&A session. Our release yesterday details our 2022 second quarter financial and operating results. This should be read in conjunction with our second-quarter financial statements and management's discussion and analysis, both of which are available on our website. They have also been filed on SEDAR and EDGAR. All dollar figures discussed today are U.S. dollars unless otherwise stated. We will be speaking to the slides that accompany this webcast. You can download a copy of these slides from our website. After the prepared remarks, we will open the call for Q&A. At this time, we will invite analysts to queue for questions. I will now turn the call over to George.

George Burns, President & CEO

Thanks, Lisa, and good morning, everyone. Here's the outline for today's call. I'll provide a brief overview of Q2 results and highlights before passing it to Phil to go through the financials, and then Joe to go through our operational performance. Then, we'll open it up to questions from our analysts. Our team has worked hard in the face of several challenges at the start of the year, and I'm pleased to report that our performance improved in the second quarter. We had strong operating results from Lamaque and Efemcukuru this quarter, with improvements seen at Olympias. In the second quarter, ounces placed to the leach pad at Kisladag increased significantly, which will positively impact gold production in the third quarter. We maintained our original 2022 production guidance range of 460,000 to 490,000 ounces and are tracking towards the lower end of that range. We continue to expect full-year production to be weighted to the second half. Joe will speak to the operations in more detail later in the call. As we have noted in previous quarters, we continue to face inflationary pressures similar to the wider market. During the first half of the year, we experienced cost increases for key commodities and consumables due to inflationary pressures in Türkiye, global supply chain issues, and impacts from sanctions imposed on Russia. Higher labor costs in Türkiye and Greece were partially offset by the weakening of the Turkish Lira and the Euro in the second quarter. We're revising our 2022 consolidated cost guidance ranges to reflect lower than expected gold production in the first half of the year. Continued inflationary pressures in consumables such as diesel, electricity, and reagents, and additional costs associated with the VAT import charge on Olympias gold concentrate shipments into China will be discussed in detail by Phil later in the call. In the second quarter, work progressed at Skouries, with activity focused on steel erection and enclosing the processing facilities, execution readiness, and critical path activities. The execution team is largely in place, and we are well positioned to advance access to already full of labor in the local area for the construction of the project. Recently, we completed a purchase order for the tailings filter press, one of our long lead equipment items, which is in line with the feasibility study cost estimate. This reiterates our confidence in the initial capital estimate of $845 million to bring the Skouries project to commercial production. Our Skouries financing discussions continue to advance. We are evaluating all available options including joint venture equity partners, project financing through EU and Greek lenders, as well as the EU Recovery and Resiliency Fund and metal streams. Our focus in selecting a financing package will continue to be driven by value optimization and de-risking for the future. We look forward to updating the market as we continue to work towards financing and board approval for the restart of construction at Skouries in the second half of 2022. As a risk to completion of a financing package, we will be allocating additional capital to the project in 2022. Total growth capital at Skouries will now be $60 million to $80 million for the year; we will adhere to the capital discipline thus far, and the scope will continue to focus on critical path and site mobilization for key activities to support a decision for construction restart. Finally, I would like to touch on our 10th annual sustainability report, which was published in the second quarter. I'm very proud of the team for the progress we've made on ESG goals and initiatives. Some highlights of the report are that we achieved gender parity on our board with 56% of members identifying as female as of January 2022. We launched our climate change strategy and set a target to mitigate greenhouse gas emissions by 30% by 2030 on a business-as-usual basis, enhancing our competitive, low-emission intensity relative to our peers. We demonstrated leadership in regard to local employment and procurement, with 81% of our employees from local communities surrounding our operations and 99% of our employees from countries in which we operate. As we look forward, we will continue to build on our solid foundation, challenge the status quo, and find ways of sustainable mining practices. I'll stop there and turn things over to Phil for a review of our financial results.

Phil Yee, Executive Vice President & CFO

Thank you, George. Good morning, everyone. Slide 5 provides a summary of our second-quarter financial results. Eldorado reported Q2 2022 net loss attributable to shareholders of $23 million, or a loss of $0.12 per share. After adjusting for one-time non-recurring items, including deferred tax expense related to foreign exchange translation and a loss on the non-cash revaluation of the redemption option derivative related to our debt among other things, Q2 adjusted net earnings were $14 million or $0.08 per share. Our operational performance recovered in the second quarter, resulting in cash operating costs of $789 per ounce sold and all-in sustaining costs of $1,270 per ounce sold. However, free cash flow in the second quarter was negative $63 million, mainly due to the lower gold production and sales in the first half of the year, increased metal inventories, annual royalty payments, and mine standby costs. We expect free cash flow in the third quarter to be impacted by higher capital spending, including the additional Skouries growth capital. Cost performance in the first half of the year was mostly driven by lower than planned production and sales ounces. We expect costs on a per-ounce sold basis to be lower in the second half of the year in line with higher gold production. We are seeing higher costs at Olympias related to the 13% VAT import charge on concentrate shipments into China, which was the primary destination in the second quarter as planned shipments through Russia were halted in Q1 due to imposed sanctions. We continue to explore other markets in an effort to mitigate the Chinese VAT import charges. Electricity prices rose significantly in Greece following market changes in late 2021 and the Russia-Ukraine War. Rig subsidies introduced in 2022 reduced the effective average electricity price at Olympias by 26% in Q2 compared to Q1. A number of additional measures were introduced by the Greek government in May and July of this year to mitigate rising electricity prices, which remain volatile. As George mentioned earlier, we are revising our 2022 consolidated cost guidance ranges, with cash operating costs expected to be $700 to $750 per ounce sold, total operating costs in the range of $790 to $840 per ounce sold, and all-in sustaining costs between $1,180 to $1,280 per ounce sold. Capital expenditures on a cash basis were $83 million in Q2, including continued investment in growth projects at Kisladag and Skouries. We continue to actively review our growth and sustaining capital expenditures, and our focus on essential capital required to maintain production, asset integrity, and our license to operate. Income tax expense was $34 million in Q2, comprised of $28 million current tax expense and $6 million deferred tax expense. In addition to tax on our mining profits in Türkiye, the current tax expense includes dividend withholding tax, taxable unrealized foreign exchange gains, and Quebec mining duties. Deferred tax expense was driven by the weakening of local currencies, primarily the Lira and the Euro. At quarter-end, we had unrestricted cash, cash equivalents, and term deposits of $370 million. Our cash in the first half of the year was impacted by lower cash generated from operations as a result of lower production, continued capital spending, annual royalty payments, and increased levels of consumables and parts inventory. Our net leverage ratio was at 0.33 times as of June 30, 2022, compared to 0.89 times at the end of Q1 2020. This reflects a much improved credit profile for the company over the last two years. With that, I will now turn it over to Joe to go through the operational highlights.

Joe Dick, Executive Vice President & COO

Thanks, Phil, and good morning. I'll start with a health and safety highlight from our operations. In the second quarter, we continued to improve our total recordable injury frequency rate year-over-year from 6.46 to 4.13. We are focused on building a sustainable safety culture as part of our commitment to a zero harm workplace. I would also like to congratulate our Efemcukuru team for achieving over four and a half years without a lost time injury. Now moving to operating results, we produced 113,462 ounces of gold in the second quarter, with cash operating costs of $789 per ounce sold. Our operational performance increased in the second quarter, driven by strong performance from Lamaque, Efemcukuru, and meaningful improvements at Olympias. Slide 8 looks at our operations in more detail. Starting in Türkiye, Kisladag production in the second quarter was 27,973 ounces, and cash operating costs were $798 per ounce sold. Gold production during the quarter was lower than planned as fewer tons were placed on the leach pad in the first quarter. During the second quarter, there was a significant increase in ounces placed on the leach pad with higher average gold grades, which is expected to positively impact gold production in the third quarter. Accordingly, we anticipate production in Kisladag to be weighted to the second half of the year. Cash operating costs in the quarter were impacted mainly by lower ounces sold. Optimization of the high pressure grinding roll and de-bottlenecking of the belt agglomeration circuit continued in the second quarter. The HPGR is performing according to the expected particle breakage model, with recovery rates improving as expected, and better gold liberation. As part of the Kisladag North heap leach pad project, we are investing in a higher capacity materials handling system. These conveyors are expected to enhance materials handling in the belt agglomeration circuit and allow us to increase throughput over the balance of the year. We are also installing an agglomeration drum, which will treat a fine ore split of the HPGR product to improve quality, consistency, and permeability of the product. The agglomeration drum is expected to be commissioned in the first half of 2023. At Efemcukuru, second quarter gold production was 22,793 ounces at cash operating costs of $706 per ounce sold. Gold production, throughput, and average gold grade at Efemcukuru are in line with expectations, with cost increases and labor, electricity, and consumables partially offset by the weakening Lira. It is worth re-emphasizing the outstanding performance at Efemcukuru. Not only has the site demonstrated excellence in safety for four and a half years as I noted earlier, but also the site team has delivered production to plan since 2014. I'm very proud of the Efemcukuru team. Now moving to Lamaque, where we are also seeing the same level of robust operational performance. The second quarter gold production at Lamaque was 46,917 ounces, and cash operating costs were $657 per ounce sold. The Lamaque team’s strong performance in the second quarter was driven by mine and mill continuous improvement efforts. Underground development of high-grade stokes progressed well, and gold production was higher than planned due to higher throughput and higher grades. Cost increases for consumables were partially offset by a slightly weaker Canadian dollar. In the second quarter, resource conversion drilling started on the Ormaque deposit from the new exploration drill, which was completed as planned in early Q3. It is still in the very early stages, but the drilling is validating our models, and we are very excited about the future potential at the Ormaque deposit. Finally, let's move to Greece. At Olympias, second quarter gold production was 15,779 ounces, and cash operating costs were $1,446 per ounce sold. Olympias transformation initiatives are showing positive results as the mine continues to improve productivity, with better gold grade resulting from blasting initiatives with a dilution control focus. Cost increases resulting from blasting initiatives, VAT, import charges, electricity, fuel, and other consumables are partially offset by a weaker Euro in the quarter. I'll stop there and turn it back to George for closing remarks.

George Burns, President & CEO

Thanks, team. I'm pleased with the strong performance in the second quarter across our global operations. As we look forward to the remainder of 2022, we continue to focus on delivering safe operating results, and de-risking the Skouries project as we execute on our growth strategy. We believe Skouries will have a transformative impact on Eldorado's operating profile and maximize value for our shareholders. Thank you for your time. I will now turn it over to the operator for questions from our analysts.

Operator, Conference Operator

Thank you, we will now begin the question-and-answer session. The first question comes from Fahad Tariq with Credit Suisse. Please go ahead.

Fahad Tariq, Analyst

Hi, good morning, just one for me. On the Skouries financing package, can you give some more detail on whether there are any hurdles or just why the process seems to be taking a bit longer? And in terms of expectations, are you hoping to announce one complete financing package or will it be in stages, for example, beginning with the Greek banks and then maybe followed by other forms of financing? Thanks.

Phil Yee, Executive Vice President & CFO

Hi, Fahad, it is Phil here. Good to hear from you. In terms of the Skouries financing package, we've been actively in discussions with two Greek banks that we're looking to have lead the financing package. The Greek banks are at the point of actively working towards obtaining credit committee approval, and we hope to obtain that fairly soon. Once we've had the Greek bank credit committee approval, we can start the RF process. In terms of process, we expect it most likely in Q3. I would say that we're pretty advanced and discussions are going well. So it's progressing; it's a process, but I think it's a well-advanced process.

George Burns, President & CEO

Yes, it is George. I just want to supplement that obviously the low-cost financing is very attractive from the Greek banks and the EU, our RF funding, and there's a primary effort on that. But we are continuing to focus on the other alternatives. In terms of timing, our public guidance is to get financing in place and restart Skouries construction by the end of the year, pending board approval for both. We remain confident we'll be able to deliver that, but we'll update the market as this unfolds.

Fahad Tariq, Analyst

Okay, that's helpful. And then maybe just a follow-up; can you give a percentage of the total financing you expect from the Greek banks? And is there any appetite to maybe fund the remaining amount yourselves?

Phil Yee, Executive Vice President & CFO

So the Greek bank financing package is focused on funding 80% of the project capital now, and then the remaining 20% would come from Eldorado equity or a potential JV partner; the 80% that the Greek banks are funding would then be potentially brought to the next step to incorporate the European Union relief funding, which can then be allocated a portion of that 80%.

George Burns, President & CEO

Again, I would just supplement that we believe we've got the balance sheet to support the capital, and any decision to bring in a joint venture partner would depend on valuation and the strength that would bring to the security of the investment over the multi-decade mine life. So we continue to focus on those alternatives but believe we have the balance sheet with the project financing to put it into construction.

Fahad Tariq, Analyst

Okay, thank you.

Operator, Conference Operator

As there are no more questions from the phone lines, this concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.