Equinox Gold Corp. Q4 FY2021 Earnings Call

Thank you for joining us. This is the conference operator. Welcome to the Equinox Gold Fourth Quarter 2021 Results and Corporate Update Conference Call and Webcast. I would now like to hand the conference over to Rhylin Bailie, Vice President of Investor Relations for Equinox Gold.

Thank you, Karl, and thank you everybody for joining us this morning. We will, of course, be making a number of forward-looking statements today. So please do take the time to visit our continuous disclosure documents on our website, on SEDAR and on EDGAR. I'm now going to turn the conference call over to our CEO, Christian Milau.

Thank you very much, and welcome everyone this morning. Just recapping our business plan here on Page number 3, we've put together a collection of companies and assets over the last four years, and we're excited to be at this point in our growth cycle where we've got a diversified Americas gold producer with seven producing mines soon to be eight. Santa Luz is ramping up in the second quarter of this year, along with five exciting growth projects. We have an extremely large reserve and resource base of 16 and 30 million ounces, which allows us a lot of leverage to the gold price. As we continue developing these assets, we're moving from roughly 700,000 ounces this year towards 1 million ounces or more over the next few years. Our balance sheet is strong, and the pathway towards 1 million ounces is clear and manageable within our control. As we look at the fourth quarter and full year highlights, Pete and Doug will provide more details, but I want to highlight that we had a strong Q4 as previously released. We're continuing on our two construction projects, and Doug will discuss the details, but I am pleased to say we're making good progress. We have also had good results over the last year and continue to focus on drilling and expanding our portfolio of valuable mineral assets that require our attention to extend mine life. We published two expansion studies on Aurizona and Castle Mountain, which continue to show mine life extensions and reserve growth. This year, we're focusing on optimizing Los Filos to accelerate cash flows, increase production, and streamline that project as we deliver on the Greenstone construction project. We're aiming to reduce costs and continue expanding our production base while planning to build that CIL once we reach stability and Greenstone is up and running. Regarding operations at Los Filos, I'm pleased to report another quarter of uninterrupted operations there, ending the year well. As you saw in the press release, RDM experienced heavy rains recently, and Doug will touch more on that, but we're planning to spend a few weeks managing the water levels in the TSF. We do not expect a material change to our guidance as a result of this situation; it is merely a temporary measure. I also want to discuss our focus on ESG, which is increasingly important this year as we build out our team. We released our first ESG report last year and will enhance it this year. We do plan to hold an ESG call focused on this topic for all investors to attend around the time of our AGM in the second quarter. We're implementing sustainable mining and responsible gold mining protocols at all our mine sites. We set targets for our Scope 1 and 2 emissions last year, successfully achieving a 5% reduction as a short-term goal. We need to finalize our long-term targets, which are being developed this year, with an announcement likely by the end of this year. In summary, we had a strong finish to the year overall. Now I'll turn it over to Pete and Doug for a detailed overview.

Thanks, Christian. Regarding our operating results, I'll briefly touch on a few key points, as Doug will detail each of the mines shortly. For responsible mining in 2021, we improved on our already strong safety and environmental performance, as demonstrated by our safety and environmental metrics. We ended 2021 on a positive note for safety and environmental stewardship. COVID was well-managed throughout 2021, primarily due to vaccine rollouts in the countries where we operate, alongside rigorous screening and testing protocols. This led to almost no downtime at our sites in 2021, which we are very pleased about. In operation news, we previously announced that we produced 602,000 ounces of gold, achieving our guidance, along with our all-in sustaining cost guidance at $1,350 per ounce. We were slightly above our cash cost per ounce guidance, just above the higher end of our range. Looking at our Q4 financial results, we had our best quarter yet financially. We sold 212,000 ounces of gold at an average realized price of $1,972 per ounce. Our cash cost for Q4 was $1,040 per ounce, and our all-in sustaining cost was a respectable $1,266 per ounce. Our net income for the quarter was $111 million and adjusted net income was $76 million, translating to basic earnings per share of $0.37 or $0.25 on an adjusted basis. We had a busy year on the corporate front, with net income of $557 million for the year. We sold 10 million units of Solaris, generating $67 million, resulting in a gain of $50 million. Selling the shares lowered Equinox's holding in Solaris to just below 20%, prompting a change in accounting and a gain of $186 million during the year. Additionally, we sold the Pilar mine for a gain of $45 million, and other items include an $85 million gain from the change in fair value of Equinox issued warrants, which expired in October 2021 and a $58 million gain from the change in fair value of gold contracts, set to roll off in September this year. Our balance sheet remains unchanged and strong, with over $300 million in cash and $200 million in available credit at the end of the year, alongside approximately $450 million in fair value investments. We've received inquiries regarding why our current assets have increased. That's primarily due to three reasons: the sale of Mercedes in December 2021, where these assets are now held for sale; the Solaris warrants, allowing us to acquire more shares of Solaris at a low cost, many set to expire in Q4 2022, which are now considered current; and an increase in the fair value of Solaris shares, which has risen significantly from about CAD11 to CAD16 per share since September. As for our quarterly results by mine, we had a strong quarter with 210,000 ounces of production, led by Los Filos, Castle Mountain, and Aurizona. Cash costs for Q4 were particularly low at Aurizona, and our all-in sustaining costs for the quarter were led by Mesquite at $1,023. Regarding our guidance for the year, Christian, Ross, and Rhylin have been engaging with stakeholders since we released it earlier this year. Key aspects include much of the performance being weighted towards the second half of the year, with expected cash costs around $1,200 in the first half, dropping a little above $1,000 towards the latter half. Our all-in sustaining costs will be higher in the first half, mid $1,500 per ounce, and dropping to higher $1,200s in the latter half. With that, I'll hand it back to Doug for further operational detail.

Thanks, Pete. As noted, in 2021, several of our open pit mines produced more in the latter half of the year. We expect to see this trend continuing in 2022. Looking first at Mesquite, we produced 66,870 ounces in Q4 and a total of 137,500 ounces for the year, with most of the ounces coming at the year's close. We anticipate similar production for Mesquite in 2022. In 2021, we completed the stripping campaign for the Brownie pit, which will almost entirely feed our leach pad in 2022. Similarly, in 2022, we have a $44 million stripping campaign planned for the new phase of the Vista East pit. This will benefit us at the end of 2022 and into 2023. We're also conducting a $5 million exploration program at Mesquite to convert resources to reserves in the Brownie, Vista East, and Rainbow pits. I want to emphasize that this mine is a consistent producer, and we expect it to produce five million ounces in 2022. At Castle Mountain, our Q4 production was 8,357 ounces, totalling 25,000 ounces for the year; this will increase in 2022. We're implementing modifications to our stacking and irrigation practices and introducing crushing and agglomeration in Q1, which should raise recoveries and mitigate percolation issues. We are currently working on a $7 million leach pad expansion that is already underway. We're also conducting Phase 2 studies and permitting to support an expansion to 200,000 ounces a year. Moving on to Mexico, Los Filos produced 54,733 ounces in Q4 and 144,000 ounces total for 2021. We anticipate increased production in 2022, ranging from 160,000 to 180,000 ounces, benefiting from continuous operations. We've made ongoing developments at Los Filos and Guadalupe open pits, which now provide significant ore to the leach pads. Additionally, the Bermejal underground deposits are being developed for higher-grade contributions. In 2022, we're investing $20 million in sustaining and $47 million in non-sustaining capital, primarily for open pit stripping and underground development. About $30 million will be carried over from 2021 due to interruptions in development work. For the Mercedes mine, our total contribution for 2021 was 31,800 ounces, and we have an agreement to sell the mine to Bear Creek for $100 million, which includes a 2% NSR and just under 25 million Bear Creek shares. We expect the transaction to close by the end of this quarter while continuing with the development of two additional deposits at Mercedes. In Brazil, for Aurizona, our Q4 production was 41,258 ounces, with a total of 135,000 ounces for the year. We expect slightly lower production in 2022 due to a small decrease in feed grade. We set a new throughput record in Q4, processing 922,000 tonnes, alongside another record for mining. We are moving ahead with permitting for underground expansion, and we've received results from 21,000 meters of drilling focused on this area and others around the Piaba pit. We're investing $8 million in infrastructure improvements, including a new pebble crusher, and $8 million for exploration. At Fazenda, we produced 14,499 ounces in Q4 and 60,000 ounces total for 2021, with slightly higher production forecast for 2022 from higher grades in both underground and open pit outputs. The plant set a new production throughput record of 351,000 tonnes processed. For RDM, Q4 production was 13,362 ounces, with a total of 59,000 ounces for the year. We expect this to rise in 2022 to around 70,000 to 80,000 ounces, mostly from a new geotechnical model that allows access to higher grades. We processed more stockpile material in Q4 due to heavy rainfall limiting access to open pits. This year, we will expand the TSF capacity and install a thickener to conserve water and reduce the tailings volume in the TSF. We have sufficient water available for processing, but currently, we are managing excess in the TSF by suspending the plant for two to three weeks. During this period, we will continue mining and stockpiling ore. I will note there are no issues with the TSF, which has passed all regular inspections. For Santa Luz, commissioning is ongoing, with construction on schedule and within the budget of $103 million. We are 95% completed overall, with the crushing area nearing completion. Commissioning is underway on the leach circuit; first ore will be introduced this month, and first gold is targeted for late March. At Greenstone, construction is underway with Equinox holding 60% and Orion 40%. Total reserves are 5.5 million ounces, with significant additional exploration potential. This conventional open pit project is located by the TransCanada Highway and near Geraldton, with good community and First Nation support. Initial capital is set at $1.23 billion, including $177 million in contingency and $125 million for equipment leasing, which reduces upfront cash spend. Approximately 29% of the CapEx is now fixed through contracts, and about 45% is committed. The overall construction period is two years, with an additional six months for commissioning. The first gold pour is targeted for the first half of 2024. On Page 14, you can view some construction progress. Kudos to our team for their excellent project readiness and for advancing work quickly. Phase 1 road building and tree clearing is complete, with site access roads and power lines nearly finished. The TSF work is ahead of schedule, and civil works are about 70% complete. Additionally, the temporary water treatment plant is operational, and we have a 600-person lodging facility in use. All critical equipment has been ordered. So, good progress at Greenstone. I'm going to pass it back to Christian.

I'll conclude on a couple of slides here on page 15. To reiterate, we're in the execution phase right now, looking at approximately 600,000 ounces of incremental growth added to our existing roughly 700,000 ounce production base. As you can see, projects are nicely sequenced, with Santa Luz coming on stream in the coming weeks, followed by Greenstone in two years. Additionally, Los Filos, Castle Mountain, and the Aurizona underground projects will integrate within the timeline for Greenstone. We have one of the best growth profiles in the mid-tier to larger gold space right now, and all internal factors contribute to these projects. From a valuation perspective, we're trading at a slightly discounted multiple compared to some peers, so we'll continue executing and delivering these projects on time and within budget. This offers a compelling valuation for a 1 million ounce producer over the next couple of years. It's also worth noting we have strong leverage to gold, which is beneficial in the current gold environment as it ensures we have that reserve and resource base already owned within our portfolio. Moving to slide 16, our balance sheet remains solid, with a strong cash balance and available debt from a global banking group, while also having nearly $500 million in investments and robust cash flow from operating mines. We have nearly $1 billion of liquid investments currently and are well-positioned for internal growth. While we expect slightly lower cash production from our mines in the first half of the year, we're excited about our position as we ramp up production and lower CapEx in the latter half, given Santa Luz's impending ramp-up. The recent trend in the gold environment supports us as well. Our portfolio is diversified and growth-focused across all our jurisdictions. Thank you very much, and I invite any questions following this strong year-end performance.

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

Thank you, Christian. Can you please remind people how to ask a question?

While we're waiting, I'll take a question from one of our very supportive shareholders in the state who frequently discusses this on his Rons Basement YouTube channel. It's a great quarter. Can you provide any color on how operations are performing during the first two months of 2022? Do you think your previously released guidance is on track, conservative, or aggressive?

Maybe I'll take that. Doug, please jump in if you have any comments. As we mentioned, the first half of this year is seeing slightly lower production and higher costs, and we're tracking along those lines. It seems to be an annual trend for us, where the second half of the year tends to perform better. This year does not seem different. We've provided clearer guidance this year by bifurcating the two halves, and we are on track for the first couple of months as we move forward.

Another question from online. I saw that IAMGOLD recently increased costs again at their Cote project. How do we know that Greenstone will stay on budget?

From my perspective, the best way to view Greenstone is that the team has been working on advancing the project for many years. At the end of 2019, the Greenstone team was updating all project aspects and CapEx. Since then, we have been consistently reviewing and tracking all costs. Project readiness is essential; we've conducted both internal and external assessments. We believe Greenstone is in a solid project readiness position, with a lot of CapEx completed based on well-advanced work. We've made rapid progress with early works like tree clearing, camp construction, water treatment plant, and site infrastructure, allowing us to minimize risk, especially regarding the plant and TSF.

We have also been observant of market conditions, particularly supply chain and inflation issues. We've factored these into our CapEx estimates, maintaining a 14% contingency, which is a healthy figure compared to many projects starting out. We've taken currency fluctuations and inflation into account, alongside finalized quotes. We're vigilant, especially since any shifts in other projects prompt our team to double-check everything as part of our proactive approach.

Moreover, our ability to observe the market trends on other projects informs our strategies. Any external variables motivate our team to ensure every detail aligns perfectly as we advance with the construction decision. We're committed to being proactive in our approach.

Operator, we'll now take a few questions from the phone lines, please.

The next question comes from Ryan Thompson of BMO.

Just a couple of questions for me. First on the corporate side, it appears you will be relying on cash from operations during this capital-intensive phase of Greenstone construction. Are there plans to hedge some gold in the near future? My second question is a little more operational. At Mesquite, you're undergoing significant stripping and exploration to potentially convert resources into reserves. Is there any permitting required for this process?

It's Peter here. Regarding your first question on hedging gold, we do not currently plan to hedge any gold even during this capital-intensive phase. As we've mentioned, our balance sheet provides enough liquidity moving forward. Therefore, we have no plans for gold hedging.

Ryan, we might look at hedging for other aspects like different currencies or fuel expenses. However, we prefer keeping gold as open to the spot market as possible. We believe our strong balance sheet can support this and keep us flexible.

Regarding Mesquite, permitting depends on the specific activities, whether it's leach pad expansion or conducting drill programs. Therefore, some aspect of permitting is always present.

You have a significant resource there. Would converting some of it to reserves involve a lengthy permitting process?

Yes. If we're looking at large changes, the permitting will be longer. Smaller changes, like exploration programs or minor expansions, would require a shorter, more manageable permitting period. However, if significant alterations are on the table, a longer timeline is expected. This is all being managed effectively.

Many of the reserves and resources lie within our existing pits, which facilitates routine permitting. We've updated permits several times a year based on various activities. Longer-term permitting would apply across the highway, requiring a multi-year strategy, but most activities near the current resources are more routine.

The next question comes from Kerry Smith of Haywood Securities.

If you submit the EIA amendment for Castle Mountain Phase 2 in March, is the three-year permitting cycle still applicable?

We still indicate three years for permitting. However, if everything goes smoothly, it could be as short as two years. Given our project sequencing, with Greenstone set to complete in approximately two years, a three-year timeline seems prudent. We've had positive feedback and communication regarding the permits, focusing on water management issues, which we've successfully addressed.

With regards to RDM, it's a dry area, and now you're discharging excess water due to heavy rain. Is there any thought toward building a supplemental water containment area to manage this in the future?

Currently, we have a 3.4 million cubic meter water storage dam on site. We evaluated our water balance at the end of the year and confirmed we are secure for two years without additional rainfall. This high water level is exceptional; many regions, especially in Brazil, have seen abnormal rainfall. We are pumping and evaporating water from the TSF while planning to manage excess, adhering to the new guidance by reducing contributions from our processing plant during this period. We will manage this situation adequately and ensure our plant operations resume with minimal disruption.

Looking at the big picture regarding water and emissions has garnered focus, particularly given areas of dry conditions and extreme rainfall fluctuations. We proactively invested in evaporators last year, and we will keep evaluating our approach to water treatment. We've implemented a temporary horizontal treatment plant to manage any excess, and we will continue enhancing our monitoring and management strategies.

Specifically, our work on the water balance and tailings is an ongoing initiative led by Kelly Boychuk, who has over 30 years of experience with TSF. We've pursued numerous strategies to improve water conservation and reduce our TSF footprint, and introducing the thickener is a significant first step in that direction. Continued testing is in progress to enhance our overall water management practices, driven not only by ESG considerations but also practical business sense.

You've mentioned that construction at Los Filos won't start until Greenstone construction is completed. Is there a possibility that it could begin earlier?

I want everyone to understand that our primary plan is indeed to wait until the completion of Greenstone construction. While there might be potential to advance the schedule, it’s prudent to prioritize stability and financial considerations first. We will explore the potential to maintain flexibility but won’t project any shifts in the timeline at this point; it's best to focus on a couple of years out for the start of construction.

Have there been any notable shifts in community attitudes now that operations have resumed?

Everyone seems happy to be working again. The recent issues led to increased engagement, and now that operations are back on, the general atmosphere is positive. Our management team is committed to ongoing, daily communication with the communities, ensuring that we build relationships outside the mining sector.

We’ve been addressing various routine grievances effectively and building constructive partnerships in the community. It’s been great to see increased alignment as our workforce returns, emphasizing the collective desire to engage and operate steadily again.

Additionally, interaction has improved as COVID restrictions have eased, allowing for face-to-face engagements rather than digital communication, which has been a positive change.

We're also noticing a significant decline in COVID cases. In the present moment, there are virtually no cases affecting our workforce in California. Mexico has also seen a rapid decline in cases, although Brazil is still reporting some flu outbreaks. In Canada, we’re managing relatively well too with minimal disruptions. As restrictions lift, we're looking forward to increased travel and face-to-face meetings, which is promising for our business. We also hope to arrange visits for analysts and some investors to both Santa Luz and Greenstone to showcase the current advancements.

On the topic of Los Filos, I've received a question online about the delay in the CIL plant—this brings costs down, but do you see costs reducing as you operate Bermejal and Guadalupe? What would it take to enhance the economics at Los Filos?

Guadalupe has primarily involved stripping and has contributed only a small amount of ore, but it helped provide some higher-grade ore for the pad in late 2021. The Bermejal underground has faced a delay in its development, resulting in a smaller contribution thus far, but as we ramp up in this area, we expect to encounter higher grades which will benefit production. Our current plan is to segregate these and reprocess them at a later date through CIL, which is a separate advantageous strategy for managing costs.

Now that we've clarified our plans around the CIL construction, it presents an opportunity to optimize our mine plans further. With the understanding that we won't be developing the CIL for at least another two years, we can prioritize making this process cash-generative; therefore, we anticipate gradual improvements in costs over time, rather than immediate changes. The major positive shift awaits the CIL's operational establishment.

Operator, we’ll move to the phone lines, please.

The next question comes from Mike Parkin of National Bank.

You mentioned introducing agglomeration at Castle Mountain. When could we expect to see results from that?

We'll start the crushing and agglomeration processes towards the end of Q1, so you should see results kick in by Q2.

Is that factored into your guidance?

Yes, it's included in our guidance.

Last one for me—by when do you need to make a go/no-go decision on the fleet leasing for Greenstone?

We've mainly made that decision during the initial construction period for the first couple of years of operations. The equipment leasing is the preferred option now, and we can switch to purchasing as Greenstone generates cash.

When do you believe the mill building could be enclosed?

I would need to refer back to our timing schedule for that. Can I get back to you on that?

Sure, that would be appreciated.

I will note that one of the significant milestones is completing all concrete work and engineering during spring this year. This summer will see considerable activity, with earthworks nearing completion and concrete pads in place. We've fixed prices for major components, a critical aspect as we progress. Come fall, we hope to have substantial constructions that will allow indoor work throughout the winter months. If necessary, we'll consider double shifts based on production needs.

We don’t often highlight it, but our team managing Greenstone is highly experienced, and they’ve successfully factored all elements into their overall planning.

The next question comes from Lawrence Danny, a private investor.

Thanks for your hard work. During this capital-intensive phase of building and developing mines, when do you think we might realistically see dividends? Are we looking at a couple of years?

That’s a great question. We certainly keep that on the radar moving forward. Right now, the focus is on expanding our assets, as you've noted. The plan is to scale Greenstone up and running, and after a quarter or two with solid cash flows, we can explore flexibility regarding a dividend policy or possible capital returns to shareholders. By the end of '24, we might have clearer estimates as we progress through the 2025 budget phase.

I've received several inquiries regarding production growth and reducing all-in sustaining costs. Will we see improvements in all-in sustaining costs as projects come online? When do you expect to reach the magic million-ounce target and what will your all-in sustaining costs look like then?

Let me break that down for you. As indicated in our guidance, we expect all-in sustaining costs to decline this year. An example is Santa Luz, which is coming online—being one of our lower-cost assets, it will displace higher-cost production. Greenstone will bring further reductions as well. Our run rate of 1 million ounces may be reached by late 2024 or early 2025 as Greenstone ramps up. I can't provide a precise number for costs at this point, but approaching the $1,100 mark might be reasonable as we escalate towards that 1 million ounces and diversify our portfolio into long-lived, high-quality, low-cost assets.

We’ll return to the phone lines.

The next question comes from Robert Zeitzer, a private investor.

I have a quick question about your asset portfolio—Solaris, i-80, and Bear Creek Mining. Do you have any thoughts on whether to start selling these, or do you plan to hold them longer? Solaris has been successful, and i-80 looks promising. Any insights on Bear Creek would be appreciated.

On Solaris, it's a core holding we created a few years back. We still have approximately $300 million stake, and we're supportive of Richard Warke and his team. We believe it could be acquired by a larger global copper company within the next 12 to 24 months. For i-80, it appears slightly different; constructs are in place, and with Ewan leading, it seems promising as a gold producer in Nevada. Our goal is to monitor that actively. Regarding Bear Creek, we do not own it directly, so it's premature for decisions there, but it's a significant project with high leverage to silver, aligning with our investment philosophy. It's likely the project will build more value and become stronger as it progresses. Our outlook for that remains very positive, looking for a producing asset to boost potential leverage.

Your growth thus far has primarily stemmed from M&A, but now with the foundational assets needed, are you considering additional M&A, especially in relation to Greenstone, given the fantastic junior mines in the area?

For the time being, M&A has taken a backseat. We are fully engaged in executing and building our current construction projects. We remain opportunistic and will evaluate any suitable opportunities that arise. However, it's essential to weigh these against the significant upside for exploration and development on our existing sites, especially around Greenstone. We see more value in investing in our own assets rather than paying for new developments outside of our skilled bases.

At this time, there are no further questions. Christian, would you like to share any closing remarks?

Thank you again for your support. We've witnessed significant growth from 2018 to 2020, though 2021 was challenging for various reasons. I believe that period has passed, and we're positioned for exciting developments in the upcoming years, leveraging our strong growth profile linked to precious metals. Our robust balance sheet will enable us to successfully execute our plans, making the next couple of years quite promising as we progress our growth portfolio.

Thank you very much for joining us today. Operator, you can now close out the conference call.

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