Equinox Gold Corp. Q1 FY2022 Earnings Call

Thank you for waiting. Welcome to the Equinox Gold First Quarter 2022 Results and Corporate Update. I will now hand the conference over to Rhylin Bailie, Vice President of Investor Relations for Equinox Gold. Please proceed.

Thank you, Sheri, 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 website, SEDAR and EDGAR to read the rest of our continuous disclosure documents. I will now turn the conference call over to our CEO, Christian Milau.

Thanks, Rhylin, and welcome, everyone. Doug, Peter, and I will walk you through the first quarter results here and take questions. But just as a reminder on the first Slide 3, we're an Americas-focused group that's really building a sizable platform in the Americas. We've started out with six producing mines at the moment. We've got one in commissioning in Brazil, and it's ramping up towards commercial production at the moment, and we've got four large growth projects. So this year, we'll be producing 600,000 to 700,000 ounces with a clear path to 1 million ounces over the next couple of years as our growth projects come on stream. We've also got a strong balance sheet to fund that. And just leading into this quarter, as expected, we said the first half of the year would be a bit slower, particularly the first quarter. We expect costs will continue to reduce over the year, and as we move through the year, production will ramp up as we bring new mines online and we hit into the higher periods of production, starting in sort of Q2 and Q3 period this year. So pleased with the first quarter's costs. They are roughly in line with expectations. We set those with our guidance early in the year. Production was a little bit light, and we'll walk you through why that happened and how we see production moving up over the year. It's hard to compare to Q4 2021 as we were very back-ended last year. So we'll walk you through the quarterly production here. Looking at Slide #4 in terms of recent highlights, Santa Luz poured its first gold on time. Recoveries have been good. It was at the end of March. So we're really pleased with that. At the moment, we're ramping it up. Greenstone is tracking well. We had a chance to visit the site last week and are pleased with the progress there. We're coming out of the winter season. So there's a real high activity out there, and Doug will walk you through all the good stuff that's going on the ground. We're really pleased to see the team coming together, and they've managed these recent waves of COVID very well on site. Fazenda-Santa Luz had some drilling that we put out into the press not too long ago here, showing new significant gold mineralization in that nice big district and belt, and many more targets identified. So we're excited about that whole district. Corporately, we also had a few events happen just after the quarter end. We sold Mercedes, which actually closed in April. That was announced at the end of last year, but now we have $75 million of the $100 million of cash that has come in just after quarter end. We also received $40 million of proceeds from the Solaris warrant that we sold about a year ago to some purchasers of our Solaris shares, bringing in another $40 million. So after quarter end, we brought in approximately $110 million. And I'll pass it over to Peter to walk you through the actual operating and financial results here.

Thanks. With respect to responsible mining, we had five lost time incidents during the quarter for a total recordable injury frequency rate of 3.76 per million hours worked. The 12-month rolling average remained lower at 3.01. We're also very pleased, of course, that we had no significant environmental incidents to report during the quarter. As to operations, we produced 117,000 ounces of gold, which was a little lower than expectation. We did sell 119,000 ounces of gold. The production was primarily affected by RDM in Brazil, which experienced rain events late in Q4 that affected ore access heading into the quarter. In addition to that, we had a 10-day suspension of plant operations. At Aurizona, we had a little more reliance on our lower-grade stockpile than expected, so the grade was lower for the quarter at 0.94 grams per tonne. For reference, in Q1 of last year, we had 1.3 grams per tonne during the quarter. And Mesquite had lower production, but that was expected due to waste stripping during the quarter. Our all-in sustaining cost of $1,578 per ounce, as Christian mentioned, is close to expectations for the quarter, and we remain on track for our guidance range for the year. The increase in AISC for this quarter versus the same quarter in the prior year is primarily due to cost escalation and slightly lower volume than we were expecting for the quarter. With respect to our financial results, the 119,000 ounces that we sold drove revenue of $223 million. Our mine operating earnings were $28.5 million, and our adjusted EBITDA was $43 million. We had a loss of about $20 million on the quarter or about $0.07 a share, and on an adjusted basis, that was a loss of $24 million or about $0.08 a share. We had cash flow from operations before changes in noncash working capital of $33 million. At the end of the quarter, we finished with $150 million in cash. The reason for the cash decrease from our year-end position is primarily due to the $125 million we spent on CapEx. Our CapEx is a heavy year, with close to $700 million in sustaining and non-sustaining capital expected to spend. After the end of the quarter in April, we took in $150 million from the sale of Mercedes and also from the sale of 5 million more shares of Solaris. Our liquidity remains good, with net debt at $385 million, keeping our leverage reasonable, and we also have our investments to act as levers to help with our overall strong balance sheet as we head into the remainder of the year. With that, I will turn it over to Doug Reddy, our COO, to discuss operations.

Thanks, Peter. Several of our mines were focused on stripping in Q1. We will benefit from that as we move into subsequent quarters. This is similar to how it worked in 2021, where we had stripping earlier in the year and had stronger subsequent quarters, especially in the second half of the year. Mesquite is particularly one of these cases. We had a low first quarter as we focused on waste stripping in the Brownie pit. Production has picked up in this quarter already, and we should have good production through both Q2 and Q3. I think Q3 will be our strongest quarter in Mesquite this year. We're now working on permitting for additional leach pad space at Mesquite and filing for permitting for drilling across the highway, which will provide longer-term opportunities. Exploration drilling has been focused on developing additional mineable reserves adjacent to the current active mining areas. This month, we are starting an injection leaching program, which involves drilling into our existing leach pad to enhance overall recoveries in areas that have not been fully leached in the past, so we should benefit from that additional opportunity. At Castle Mountain, we previously discussed the issue with slow percolation of ore, and we have established a crushing and agglomeration circuit for that ore, which will provide better percolation overall, leading to shorter leach times and improved overall recoveries. Pad 1B construction is nearing completion now and should be ready for use in Q2. We are drilling in areas of dump material, which will give us additional feed for Phase I. Our planned amendment was submitted in mid-March for Phase II and is currently under review with the Bureau of Land Management and San Bernardino County. Looking at Los Filos, the Guadalupe open pit has been a very good contributor this quarter, supplying additional ore than expected and resulting in a lower strip ratio overall, dropping from an anticipated 12:1 in the quarter down to 7:1. However, our underground mines were behind on grade, meaning overall, we had more lower-grade material going to the leach pads. Some of that gold will catch up in April, and production looks good for Q2. In Bermejal underground, we experienced a slow start in development in late 2021, but development rates are now improving. We're looking at various mine plan alternatives to enhance production and improve overall cash flow. We hope to implement some changes late this year. At Aurizona, we faced very high rainfall this quarter, about 1.2 meters. The site team is managing well, although we are restricted on some of the access to ore in the pit. We've built up a low-grade stockpile, which we are feeding in addition to the ore from the open pit. Our work continues on advancing underground activities to prepare for the eventual development of the underground below the Piaba open pit. The work includes drilling completed in 2021. We believe this will lead to additions to resources and reserves in the underground. At Fazenda, we had a solid quarter and good grades, mostly coming from two open pits, providing the underground mine a chance to catch up on development and open new stopes. We brought in a mobile crusher while the primary crusher was down unexpectedly, but it has now returned to full operation. We've reported good drilling results from the Canto 2 pit area, which is very close to the infrastructure at Fazenda and numerous other targets in the Bahia district that may ultimately benefit either the Fazenda mine or Santa Luz mine. At RDM, we had a weak quarter due to initial suspension related to freeboard on the TSF, which was a response to a new regulation. The permitting for the next TSF raise is delayed due to reversed previous decisions by the state environmental agency. We are discussing this with regulatory authorities, and if we can't achieve a satisfactory resolution prior to the need to start the next raise this quarter, the mine may need to be temporarily suspended in Q2 or Q3. I would note that the RDM TSF has been raised intermittently during the mine life to store additional tailings, and it's designed to industry best practices, regularly inspected and audited by independent parties. We encourage you to check the news release and MD&A for more details, and we can discuss more during the Q&A. At Santa Luz, we achieved our first gold pour on March 30, coming from the elution and gravity circuits. Recoveries are looking good and the resin is performing as anticipated. We are still ramping up and will be doing that through May and June, using a temporary crusher while finalizing work on the primary crusher, which should come online later this month. In summary, there are a few slides on Santa Luz showing the crushing area, the open pit, and the process plant. This is a refurbishment of a previously operated mine. The overall budget was $103 million, and we are wrapping up the ramping up and commissioning now. Looking at Greenstone on Page 11, we recently visited during our quarterly review. This project is being developed by Equinox and Orion and ultimately will contribute over 5 million ounces of gold over a 14-year life. During our visit, we were impressed with all the activity happening through the winter, and we see everything gearing up for a busy summer. Engineering is over 90% complete. This is crucial for ensuring the project is appropriately costed, with good diligence by the team involved.

Thanks, Doug. It's a good review of the operations. And just to conclude, I've got a few slides here on ESG, which is a critical topic I want to address. We have published our second full ESG report for 2021, available online. We publish quarterly data as well on our website. We're pleased with the report, as it reflects our forward steps in disclosure and data collection. Kudos to the team for that. In terms of a few highlights from the report, we initiated a serious safety program recognizing our good record across sites, and we now give awards for our safest site, which was Mesquite last year, and for our most improved, which was Aurizona. We also recognize individuals for significant contributions to safety at our mines. We are working on our energy and GHG plan, aiming for midterm targets and long-term reduction of GHG gases. We continue to focus on community engagement. The Aurizona water treatment plant is fully operational. Gregg Bush and his team in Mexico are working on partnerships with the communities at Los Filos. From a health perspective, we are pleased with our COVID response at the sites, adopting strong protocols without production days lost from COVID. Also, we are issuing our regulatory tailings management report from last year, which supplements our ESG report, and we have conducted human rights assessments at several of our sites, managing our commitments to good practices. Looking at Slide #16 in terms of investing for growth, we have an unparalleled growth profile, approximately 600,000 ounces of incremental growth on the way. As this growth sequence comes in, with Santa Luz ramping up, Greenstone finishing construction and entering production over the next two years, and Los Filos advancing to higher production levels, we are quite pleased with our plans. We're focused on executing and delivering right now, rather than on M&A at the moment. Despite our ambitious plans, we are trading at a bit of a discount to peers, so we're eager to reach various milestones, continue derisking Greenstone, ramping up Santa Luz, and bring down costs with newer, longer-life mines, anticipating a re-rating closer to our intermediate producer peers. Finally, looking at our balance sheet, overall unrestricted cash is about $265 million, including those April receipts, with total liquidity at around $465 million. We still have a couple of hundred million on the revolving credit facility. This year, we will review our banking facility to see if we can extend it, as the company has doubled in size over the last couple of years. We will continue to have increasing cash flow quarter-on-quarter this year. So with about $850 million of liquidity when including our market value investments, primarily comprising Solaris and i-80 Gold shares. Overall, we have a diversified portfolio of assets, and we are focused on ensuring diversity with growth across our countries. This year, we aim to execute our construction plans, hit our guidance, and showcase the excellent work underway on the ground. We are planning visits to Greenstone and Santa Luz in September and October, excited to welcome analysts and investors to see the significant progress at these cornerstone sites. I'll conclude and open it up to Q&A.

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

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

I'll take a few questions from online. We all saw IAMGOLD's announcement this morning, and I wonder if that's affecting your share price today. How do you feel confident that you'll be able to stay on budget at Greenstone?

Yes. We do keep an eye on the market and all other projects in Ontario currently. It's always disappointing to see a cost overrun. We've seen some impact on the share price because people are watching those projects, and Greenstone is likely the third in the actual sequence of new projects coming online there in Ontario over the next year or two. We've had a site visit and maintain close attention to the issues that can affect project building, and we feel pleased with the team there and their progress. The preparation and readiness of the project are critical, and we spent a considerable amount of time with the designated team who has built a few northern mines previously. We're pleased with the readiness, engineering process, and an external review. Planning is key to anticipating challenges that may arise. Doug, do you have anything else to add?

As we looked at Greenstone, our due diligence included an extensive review of project CapEx. After taking over our 60%, we continued our engineering reviews of the CapEx, which has undergone independent reviews as well. We've accounted for expected escalations and have a constant monitoring process, tracking trends. The readiness of the project prior to construction being announced has been pivotal, and we’ve ensured as many of the contracts are fixed as possible at this stage.

Thank you. Regarding the cost trend, given the inflation seen in other companies, do you feel adequately budgeted, and do you think you'll achieve your all-in sustaining cost guidance for the year?

Yes. We anticipated some inflation during our budgeting, particularly for the first half of the year, projecting costs around $15.40. We are tracking closely to that in Q1, and overall, I think we are pleased with our performance considering the fluctuations we’ve noticed in Brazil and California.

Yes, we are tracking closely to expectations of cost escalation, factored into our guidance.

Absolutely. The first question comes from Mike Parkin with National Bank Financial.

Can you just remind us what your budget for diesel or oil is for Greenstone on your base case versus if you have any hedges in place?

Is that in reference to construction versus operations?

Yes. Just in terms of are you exposed to that with a contractor doing your earthworks? Is there a locked-in price there per tonne moved, or is there an inflationary component to the contract?

Yes. The contracts allow for escalation for the earthworks. We've been working on the long-term pricing for consumables. I’ll come back to you with specific numbers if required. None of it is hedged.

Okay, Mike, I can e-mail you that information afterwards if needed.

That would be great, thank you.

Staying on costs for Castle Mountain Phase 2, you provided color around potential surface disturbance and implications for your closure plan. Is that new or could that defer the potential for starting that Phase 2 expansion?

No, we think we've already taken that into account. We remain within the overall footprint. However, we will complete an environmental impact assessment, which is anticipated in our timing but being mindful of it.

We have factored in that an environmental impact statement is required rather than just an amendment to the plan of operations. That process will take a few years.

Regarding your large steel equipment and the mill's steel printing, has everything been ordered? Are those prices protected or are you exposed to elevated steel prices?

Most major pieces have already been contracted. We accounted for escalations when we did that. The site team actively monitored trends and options to mitigate any expected cost escalations. We do use some of our contingency to address those increases but feel confident overall.

I can add that most of the contracted items are already lined up. Our timelines are set, and we are tracking well with deliveries, while a few smaller contracts need finalizing. Major items are well ahead, and we feel good about this.

Okay. Is that tied to completing more engineering before project kick-off?

Yes. Prior to us taking over, the engineering had already advanced significantly. Our focus has been ensuring that vendor drawings and engineering processes are accurate.

The procurement function was a key focus for us after closing the transaction, and Greenstone’s team proactively secured large equipment orders and fixed prices to mitigate costs amidst rising prices.

Thank you. We have about six questions on growing production and long-term all-in sustaining cost. I’ll combine them. You talk about 600,000 ounces of incremental production growth. When can we expect to see that, and how will that affect your long-term all-in sustaining costs as you approach that 1 mm oz/year target?

In terms of sequencing, Santa Luz is already contributing. Greenstone will begin output in the first half of '24. Expect around 50,000 ounces from Los Filos over the next 12 months, and that will advance further after the new CIL plant. Castle Mountain will add 180,000 ounces once built. That will begin construction phase as Greenstone comes online, so look for that in 2026. Aurizona will enhance output gradually as underground development progresses. As for long-term all-in sustaining costs, we anticipate cost reductions. The second half of this year should see costs below $1,300, and longer-term expectations might align closer to $1,100 to $1,200, but we're cautious about inflation's impact.

Specifically for Castle Mountain and Los Filos, how will costs be reduced?

For Castle Mountain, we've changed the treatment of ore. Shifting from run-of-mine to crushing and agglomeration will improve leach time and overall recovery. Phase II will enhance the overall cost per ounce due to increased scale. For Los Filos, recovery has lagged due to developmental delays in Bermejal and Guadalupe, but we expect increased ore loading and recovery over the next quarters.

As Doug noted, we're focused on ramp-up operations and have seen stable production recently, directing efforts to cost improvement and mine planning.

We are confident in our funding to achieve expansion projects without the need for equity financing.

I want to address our website issues. Our main website experienced downtime due to a technical issue with our vendor. This situation affected all their clients, not just Equinox Gold. A short-term interim website has been set up, containing essential information but less comprehensive than our typical offerings. The vendor is working on stabilization, and we hope to revert to normalcy shortly. For immediate needs, please reach out via phone or email. Thank you for your understanding.

Thanks for joining, everyone! We're seeing exciting progress. We will keep you updated on Greenstone and our other projects, especially during site visits and continue to share our achievements. Thanks for being with us.

Thank you. Operator, you may now close 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.