Equinox Gold Corp. Q4 FY2020 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to the Equinox Gold Fourth Quarter and Fiscal 2020 Financial Results and Corporate Update Conference Call and Webcast. As a reminder, all participants are in listen-only mode. And the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Rhylin Bailie, Vice President, Investor Relations for Equinox Gold. Please go ahead.

Thank you, everyone, for joining us today for the Q4 call. We will, of course, be making a number of forward-looking statements today. So, please do take the time to visit our website and to visit our continuous disclosure documents. I’m now going to turn the conference call over to our CEO, Christian Milau, for opening remarks.

Great. Thanks, Rhylin, and welcome, everyone, today. Just looking at slide number 3 and running through this past year, we had an incredibly busy year and many things on the go, with a strong finish to the year and good performance on the health and safety front with excellent mine integration and work on safety during a very challenging year when COVID had a major impact on our business. We tested over 15,000 people for COVID during the year, and our workforce is only just under 6,000 people. So, multiple tests per person on average, and I think we’ve done an excellent job. Kudos to the mines for managing through that difficult year. We had the highest production quarter to date and good cost performance. So, we’re pleased with the end to the year as we go into a significant investment year this year. We had strong cash generation, and Peter will discuss that in a few slides. So, a good end to the year. Turning over to slide number 4, we were extremely busy on the development and corporate highlights front. Development was very active during the year, with Castle Mountain Phase 1 going into production, hitting commercial production in the fourth quarter. The feasibility study for Castle Mountain is ongoing and we have been optimizing that, ready for release in the next few weeks, so keep an eye out for that. The Los Filos feasibility study update is also underway and is a little bit behind, expected to come out during mid-part of quarter two. We’re expecting good results from that in terms of reserves and resource expansion. Additionally, we've completed underground drilling at Aurizona, and there’s a PFS study underway, which we expect to release in the second half of this year. So, a lot happening, lots of new information, and exciting additions coming to those reserves and resources. We also saw a nice increase last year in the reserves and resources at Mesquite. Kudos to Scott and the team who did a great job of increasing those substantially. We’re really pleased with Mesquite's overall performance. We've owned it for just over two years now, and it’s generated free cash flow of almost $140 million, effectively repaying the purchase price within two years. So, excellent performance. The Santa Luz feasibility is released with strong results, making it a really good high-return project, $100 million in capital, and construction has started, and we’re now about 25% complete. We integrated the Leagold merger, with the teams now operating from one office in Vancouver. We also announced the Premier Gold acquisition, so we’re very active on the corporate development front. I’ll now pass over to Peter to walk you through the financials.

Thanks, Christian. On slide 5, you can see we had a strong year. We sold 135,000 ounces of gold at an average realized price of about $1,871 per ounce, generating revenues of $253 million. On the cost front, our cash costs for the quarter were $848 an ounce, and just under $1,100 an ounce for all-in sustaining costs. This led to earnings from mine operations for the quarter of $95 million. Income for the quarter was $89 million, with an EPS of $0.37, adjusting out a number of non-cash charges, our adjusted income is $34 million, leading to adjusted EPS of $0.14 per fully diluted share, or $0.12 a share. Most importantly, we generated substantial cash during the quarter; it was our strongest quarter, generating $87 million in operating cash flow before changes in non-cash working capital. This continued to strengthen our balance sheet, with cash of $345 million at the end of the year, up from $310 million at the end of Q3. We also have $200 million in net debt, which, assuming in-the-money conversion, means we have $55 million of net cash. Our net liquidity is approximately $600 million when factoring in the $75 million Canadian dollar financing. Moreover, our investment in Solaris has performed exceptionally well; we equity account for it, resulting in a book value of $22 million on our balance sheet, although the fair value of the shares we own is around $150 million. We have a good, strong balance sheet for the pathway ahead and the necessary development that we need to pursue. Moving to slide 6, our quarterly results by mine show that Mesquite had a strong quarter, with increased production from Q3, going from 125,000 ounces to 136,000 ounces produced and 135,000 ounces sold. Mesquite, Aurizona, and Fazenda all had particularly strong quarters. Mesquite benefited from an increase in recoverable ounces stacked in Q3, and Aurizona saw heightened throughput and grades, which is always encouraging, producing 37,000 ounces during the quarter. On slide 7, we highlight our earnings and operational results, and compared to the prior year, you can see the increase in scale from the Leagold merger. One item to point out is that we finalized our purchase accounting for the merger in Q4. Unfortunately, this generated some noise due to updating our assumptions on the gold price used for the fair value of the heap leach pad at Los Filos, which required retroactive adjustments to previous quarters, affecting cash flow. Looking ahead to 2021, although we had a strong Q4, it will be a year of investments with many sustaining expenditures. You would have heard from our guidance call and news release in February, setting expectations for the year; with 61% of sustaining expenditures in the first half of the year and only 40% of our gold sales, we anticipate higher all-in sustaining costs in the first half of the year compared to the second half. This will mainly affect Castle Mountain, Los Filos, and Mesquite. Final point before handing it back to Christian is that all financial results we’re reviewing today are unaudited. We’re finishing up the control side of the audit and expect to finalize our audited financials and MD&A in a few weeks. Now I’ll turn the time back over to Christian.

Great. Thanks, Pete. Looking at slide eight, I want to provide a brief overview of operations and reflect on 2020 while looking forward into 2021. Starting with Mexico and California, Los Filos and Mesquite, as Pete mentioned, are in an investment phase during the first half of this year. Los Filos is reopening the Guadalupe open pit and preparing to start the Bermejal underground, contingent upon signing the social collaboration agreement with the community. We restarted the Los Filos mine in December, reporting approximately 13,000 ounces of gold last year, and it’s on track to ramp up to full production. We’ve been working on updating the social collaboration agreement with local community leaders, focusing on employment and contracts for this future growth and the operation, particularly around Bermejal. We’re pleased to have resolved those employment clauses and sharing among the various communities, ensuring a fair distribution of local contracts. We continue to work on finalizing the dispute resolution mechanism in the contract, and we hope to have that resolved in the coming weeks. Progress is being made and we plan to return to normal business at Los Filos and to expand the mine. At Mesquite, we face a significant stripping period in the first half of this year, as Pete hinted. The Brownie pit is being stripped, and there’ll be little new ore going on the pads during this period, so we are residual leaching and adding supplemental ore. We’re investing about $9 million this year in exploration at Mesquite. This mine has performed outstandingly over the past couple of years, and we’re focusing on extending its mine life. As I mentioned earlier, we’ve increased resources and reserves, and we are committed to maintaining that trend this year. Our confidence in the future of this mine is evidenced by leasing new equipment from Caterpillar. Turning to Castle, we hit commercial production in the fourth quarter last year, though we’re still addressing some minor issues with solution flow and leach pad management. A significant investment this year will focus on expanding the leach pad, and we’re confident that these steps will enhance production in the latter half of the year. Moving to slide nine, our Brazilian operating mines had an excellent year last year, with all mines performing well and consistent production anticipated this year, with less variability than in Mexico and California. I want to highlight Aurizona, which saw a fantastic end to 2020 with approximately $100 million of free cash flow in its second year of operation. This year will involve large stripping programs and a lift for the PFS. Sustaining capital is slightly elevated this year, and while operating costs are in line with last year, the all-in sustaining costs will be slightly higher due to capital expenditures at Los Filos, Mesquite, Castle, and RDM. We anticipate substantial improvements in costs in the second half of the year as Pete mentioned, with Q4 looking particularly promising due to new ore sources coming online at both Mesquite and Los Filos. Growth CapEx will primarily focus on our $100 million investment in restarting Santa Luz, along with $35 million designated for the RDM pit expansion and opening up the Guadalupe open pit and Bermejal underground at Los Filos, making up a total estimated CapEx of $400 million this year. Moving on to slide number 11, as we consider our development projects, the Los Filos expansion aims to achieve 350,000 ounces of annual production consistently starting in 2023. We’ve selected an 8,000-ton-per-day plant, and the new feasibility study is set for release in Q2. We won’t initiate investment until finalizing the social collaboration agreement for Bermejal underground. In Santa Luz, construction began in the second half of last year and is now approximately 25% complete. Concrete is poured for the mill foundation, steel work is well underway, and mining is expected to commence in May, with physical construction slated for completion by year-end. We anticipate pouring gold in early 2022, remaining on time and on budget. The Castle Mountain Phase 2 feasibility study will be released imminently, expected to showcase increased mine life, annual production, and reserve base. This will also allow us to start the permitting process in summer, as we project the permitting to take up to three years, which fits seamlessly into our current development pipeline. Key components of the $200 million expenditures this year include investments in Santa Luz, RDM, and Los Filos. Sliding into slide number 12, we announced the Premier acquisition on December 16th. The shareholder vote occurred last week and passed with 99.9% approval. We await Mexican antitrust approvals, anticipated in the coming weeks, much like our experience last year with Leagold. This acquisition positions us effectively as our investment in the i-80 spin-out has already demonstrated value creation, reaching an implied value of approximately $250 million. Looking more in-depth at the Hardrock asset, we’ll have a 60% stake following the Premier acquisition, enabling us to approach the project with greater confidence. Recently visiting the site, we observed significant local enthusiasm for the project and strong support from stakeholders. It’s essential to note that this is a permitted project with social agreements in place, making it construction-ready. The project team has extensive experience in the mining sector, which puts us in an excellent position to initiate construction later this year.

Thank you, Christian. Operator, can you please remind people how to ask questions?

Certainly. Thank you, Christian. Can you please remind people how to ask questions?

Thank you. We do have one question from an investor in the United Kingdom. You’ve just outlined, Christian, some very impressive growth plans for the coming years. What do you think the market is missing? What does the market need to do to believe in Equinox Gold and have that reflected in the share price?

I think one of the key things, certainly from the feedback we've received, is that we have a lot on our plate. The focus should be on our core projects and the opportunity to create value through those core expansion projects where we can enhance reserves and successfully execute. I think the execution aspect is critical. We've gathered the various pieces necessary, and now we need to put them together effectively on time and within budget. I believe we have done a commendable job of constructing a mine each year over the past several years, implementing M&A, integrating cultures, and creating value already. It’s all about executing well from this point forward, and our balance sheet is solid, allowing us to pursue these efforts. The shareholder base also shares a long-term vision with us, emphasizing substantial growth.

Thank you. We’ll take a question from the phone now, please.

Maybe Doug can answer this question. Just for these big pre-strips you have at Mesquite, Filos, and Aurizona, and I guess, RDM. Would that pre-strip be happening sort of equally over the year, or is it sort of front-half weighted, running for three quarters? Just a bit more clarity on how it’s going to be scaled out or scheduled over the year?

RDM will be consistent throughout the year. Los Filos is more front-end weighted as we strip down Guadalupe to make way for ore. Mesquite is again, front-end weighted as we open up the Brownie pit to access the ore in the southern part of that pit. Aurizona stripping is a carryover from last year and will continue throughout the year.

Okay.

Yes. The rainy season typically impacts our ability to move tons effectively until after April, so it will likely be fairly evenly distributed.

Aurizona built up a significant stockpile coming into the rainy season, over 1 million tons, so we will take advantage of that as we progress through the rainy season while resuming stripping for the remainder of the year.

Right. Okay. And Doug, while I have you, just on RDM for the production. That mine has been doing around 18,000 to 19,000 ounces a quarter over the last few quarters, at least? Your guidance this year is 55,000 to 60,000. Can you explain why that production is anticipated to be lower than what you kind of expect on a quarterly annualized basis?

We were waiting for permits to begin pit stripping, which came in the middle of last year. We’re now focused on that. However, we anticipate more modest grades during 2021 based on the initial stripping. That said, we have been performing well against our expected grades this year, leading to potential increases in production.

Okay. And does that all that stripping finish by the end of the year then? Are these some of the rollover into...

It rolls over.

Okay. And Christian or Peter, could you let me know what the book value will be for your i-80 position once the deal closes, the financing closes, and the company starts trading? Just what your dollar amount will be?

I think that falls to you, Peter. Do you have that information?

Yes, we will have to fair-value the shares. The short answer is it will be at whatever the shares trade at at inception. I’d estimate it will be in the range of about $80 to $100 million.

Okay.

That’s something we’ll look into during Q1.

Let’s take another question from the phone, please.

Good morning, gentlemen. Thank you for your hard work. As a CPA, I’m a bit concerned about the all-in sustaining cost numbers. With the acquisitions and streamlining, are you going to be able to cut costs? Will these numbers decrease in the coming quarters?

I think the bigger trend is that as we expand and develop these longer-life, larger assets, we will naturally see costs decrease. However, we also contend with the short-term impacts of these stripping programs and reduced ore going on pads at Mesquite and Filos in the first half of this year, leading to elevated expenses. We anticipate this will trend downward as we move forward into next year, where we could reach near 900,000 ounces. With the expansions at Hardrock and Castle to full capacity, we expect progressive reductions in costs over time.

Will that increase the potential for dividends? After those developments, might we see dividends around 2022 or 2023?

Yes, although we cannot predict the exact timing yet, we are heading in that direction. The goal is to enable our portfolio to thrive, invest in high-return growth capital, and then allocate capital back to shareholders as dividends. Timing-wise, 2022 may be possible, but 2023 is more likely.

That should help with valuation. Thank you.

Another question from the phones, please?

Could you speak to how Santa Luz’s development budget is tracking? Have you seen wins on certain cost items? Any further details?

I’ll start, but Pete and Doug, please jump in. So far, we’ve been tracking closely; around 1-2% behind, I believe, with the stage currently at around 25%. I think it’s tracking pretty much as planned for the budget. We’re benefiting from favorable FX rates as well, and the contractors are more qualified than we anticipated, leading to a good start. This is a short build with established infrastructure. The critical path concerns mainly concrete pours, early mining, and erecting steelwork; there are fewer opportunities for complications. Of course, construction projects have inherent risks, but thus far, it’s going very well. Doug or Pete, anything to add?

No, I echo that sentiment.

Excellent. Once the Hardrock deal closes, could you outline expectations for activity on that project this year? What percentage of engineering completion can you provide?

I’ll address the first part. We have been visiting the sites to familiarize ourselves with the team. We have some questions and points to explore, but we’re satisfied with the progress made to date. Premier has initiated some early works like tree clearing that must be done during summer months, with limited initial capital spending over the next three to six months. We aim to commence full construction later this year. Doug, do you have an idea of the engineering percentage completed?

Yes. For engineering work completion estimates, while some elements are around 50% completed, others such as TSF and highway rerouting are closer to 90%. We anticipate a sizeable effort in updating costs, as most equipment pricing is based on firm quotes. Our push in the second half of the year includes establishing necessary camp and water treatment facilities ahead of initiating the main construction.

Let’s take a couple of questions online now. One question I often receive is whether there are any plans to employ synergies at Mesquite with Core Mining’s Imperial gold project.

Not at this stage, certainly. We are satisfied with our current operations at Mesquite and see that our best investment is focusing on exploring and adding ounces through drilling. We believe there’s significant upside potential at Castle, and we think of the two mines as a linked set, not merely as a complex. We have a long mine life and ample opportunities in both projects. Our recent focus has been on executing our current projects, with acquisition mode less emphasized.

Thank you. Another question from a shareholder in Estonia asks if you foresee any political or union-related risks in your mining locations.

Political risks are prevalent globally. COVID has driven some shifts in government and public spending, with possibilities of tax increases. Jurisdictions we operate in are mining-friendly; Ontario is highly favorable, California has successful long-term mines despite its reputation, and Mexico’s long-standing tradition in mining remains robust. In Brazil, since our reinvolvement in 2016, there have been significant improvements in labor relations and government policies, fostering a supportive environment. We feel equipped with a diverse portfolio that can withstand changes. Union relationships have required ongoing management, but we maintain good dialogues.

We now have a question from an institutional investor in the UK. Given the current equity levels, which are extremely discounted, is management open to considering a small buyback that doesn't substantially impact cash levels?

It’s a question we often receive. The dividend and share buyback discussion frequently arises in today’s market. However, with our growth profile and the necessity to allocate resources prudently, a buyback could send the wrong signal while we continue expanding our project pipeline. Our focus remains on pursuing sustainable dividends once we reach that point. Buybacks tend to focus on short-term gains, while we aim for a long-term commitment to our growth.

Thank you. Operator, can we take a question from the phone line?

I want to extend appreciation for the work done in this pipeline. It feels like the market is largely focused on in-year rates and short-term gold prices. Christian, could you provide insight into highlights of forthcoming community agreements at Los Filos? What measures might ensure longer-term alignment?

I’ll be cautious as I address this. Our objective is to create a robust social collaboration agreement with the community by addressing major concerns and contributions like improving water distribution systems, scholarships, and health resources to the community. Essential elements of the agreement will ensure a fair distribution of jobs and contracts among the three primary communities. Realizing that we plan to be a long-standing participant in the region, it's vital to establish durable, clear relationships. Our team's experience facilitates ongoing interaction with community leaders, although COVID impacted our ability to foster personal connections. We look forward to strengthening our partnerships as overall conditions improve.

Thank you, Christian. I appreciate your attention to community needs and ESG considerations in today’s market.

Thank you for your understanding. We gain fulfillment from positively impacting the communities we work in. Managing COVID has been a significant challenge over the past year, both operationally and mentally for our team. Cases have been declining across our mines, and the rollout of vaccines in the U.S. should facilitate better conditions. In Brazil, we’ve even discussed the possibility of ordering vaccines for our teams.

One last question online from a new shareholder this week: Are there any plans for expansion in Canada following your first project there?

We are interested in expanding our footprint in Canada. With my history at New Gold, we see the immense opportunity; Canada offers a great mining environment, skilled labor, and supportive regulations. We believe this new venture rounds out our portfolio effectively. However, we’re not urgently searching for new project acquisitions, especially in development since our pipeline is currently full with Santa Luz, Hardrock, and ongoing work at Filos. We aim to maintain focus on executing our current projects while prioritizing accretive deals should they arise. Our immediate concern is to enhance value and avoid unnecessary acquisitions.

That brings us to the end of our questions for today. Thank you all for your participation. Should you have further inquiries after the call, please feel free to reach out. I will now hand it back to Christian for closing remarks.

Thank you very much for your insightful questions and ongoing support. 2020 was a busy year, and as we progress into 2021, we expect to see our production growth and execution efforts bear fruit. We are excited about our journey towards increased valuation and the chance to build upon our portfolio, and we’re glad to have you with us on this ride. Thank you for being here, and we look forward to connecting again soon.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.