Equinox Gold Corp. Q3 FY2022 Earnings Call

Thank you for standing by, this is the conference operator. Welcome to the Equinox Gold Third Quarter 2022 Results and Corporate Update. The conference is being recorded. I would now like to turn the conference over to Rhylin Bailie, Vice President, Investor Relations for Equinox. Please go ahead.

Thank you, operator and thank you, everybody, for joining us this morning. We will, of course, be making a number of forward-looking statements today. So please visit our website and our other continuous disclosure documents to read all of those cautionary notes. I will now turn the call over to our CEO and President, Greg Smith.

Thanks, Rhylin and thanks, everyone, for joining us today. On the call with me is our COO, Doug Reddy; our CFO, Peter Hardie; and our EVP of Exploration, Scott Heffernan; and of course, our VP of Investor Relations, Rhylin Bailie. I know most of you on the call are familiar with the company. But for those that aren't, Equinox is a diversified Americas-focused gold producer and with our Santa Luz mine now in commercial production, we have 7 producing mines and 4 growth projects, including our large scale Greenstone joint venture projects in Ontario, which is under construction now. Just a reminder, we announced the CEO change in August and so this is my first quarterly call since taking on the role in early September. I'll start with a broad overview for the quarter and then turn the call over to Pete and Doug for more details. We expected an increase in gold production through the year. And during the third quarter, we did see a meaningful increase with production of over 143,000 ounces of gold, which is a 19% increase from Q2 and a 22% increase from Q1. That said, we also experienced some operating challenges at our Los Filos and Aurizona mines and a slow start at Santa Luz that impacted production. This, in addition to inflationary cost pressures and an inventory write-down of Los Filos, resulted in lower production and higher costs than we had planned. With consolidated cash costs in the third quarter of $1,400 per ounce and all-in sustaining costs of $1,749 per ounce. We are addressing the operating challenges at Aurizona and Los Filos, and we are making progress. However, production in Q4 will also be affected. And looking forward, we now expect gold production for the year to be approximately 540,000 ounces. We are seeing inflation start to ease, particularly in Brazil, but we also see inflationary cost pressures persisting through Q4 this year. As a result, we expect our all-in sustaining cost to exceed the upper end of our guidance of $1,530 per ounce by about 5%. Pete and Doug will provide more information on our Q3 operating results and financial results shortly. On to our projects. During the third quarter, we continued with commissioning of our new Santa Luz mine in Brazil, and we announced commercial production commencing on October 1. This makes Santa Luz our seventh producing mine. We also advanced an updated feasibility study for the Los Filos mine during the third quarter. And in October, we filed a technical report outlining the potential expansion of Los Filos through the construction of a 10,000 tonne per day CIL plant, which would complement the existing heap leach infrastructure. The study confirms that Los Filos could grow to be a large-scale, long-life mine with peak average annual production of over 360,000 ounces of gold per year. However, we have no immediate plans to proceed with the expansion, in part due to the capital needs at our other projects, primarily Greenstone, but also due to the continued risk of community blockades, the most recent of which occurred in September. On to Greenstone. The team has made significant progress during the quarter and construction continues to go very well. I was on site with our analysts and other stakeholders in September, and the site is very impressive. I encourage everyone on the call to go to our website, where you can check out the photo gallery. Overall, we're now over 57% complete, and Eric and his team have successfully executed on the critical path, with major components being shipped on time, including from China in October, and the building enclosures are progressing well for the year-end and for winter work. I'm very pleased to confirm the project continues to be on schedule and on budget. Finally, as was discussed on the Q2 call, we did amend our credit facility during the third quarter, which terms out our debt, increased our total available credit, and reduced our overall interest rates. With that, I would like to hand over the call to Pete to run through our financial results.

Great. I'll start with our operating results. We continued with strong safety and environmental practices in Q3, with no lost time injuries for the quarter, a total recordable injury frequency rate of 1.10, and a significant environmental frequency rate of 0.71. We're obviously proud of those figures and being able to continue to operate safely. During the quarter, we sold 143,000 ounces of gold at an average realized price of $1,711 per ounce for revenues of $245 million. Our mine operating costs were $189 million, which translates into cash costs, as Greg mentioned, of $1,400 an ounce and all-in sustaining costs of $1,750 per ounce. We continue investing in our operations. We spent $41 million on sustaining capital, primarily waste stripping at Aurizona and Los Filos, and $132 million in non-sustaining capital, primarily spending on Greenstone construction of $111 million, as well as Santa Luz, the mine we just brought into commercial production, on which we spent $10 million. Compared with Q3 2021, the decrease in average gold price, combined with higher costs, compressed our margins. On the revenue side, we're down $70 an ounce compared to Q3 last year. On the cost side, examples of the inflationary pressures driving up our consumables costs compared to Q3 last year included in the USA, fuel is up 60%, cyanide is up 40%, and lime is up 27%. In Mexico, cyanide is up 36%, power and lime were up between 15% and 20%. In Brazil, all of those items are up an average of 40%, with the exception of power, which decreased a little. All of that said, we are quite happily seeing early signs of inflation having peaked or even starting to reduce a little in Brazil. We obviously hope that continues and spreads to all of the other regions where we operate. That compression in margin is demonstrated by the decrease in income from mine operations that we had for the quarter of $7 million from the $54 million we had in Q3 last year. EBITDA was $30 million, that's $26 million on an adjusted basis, and the company had a net loss of $30 million or $0.10 a share for the quarter. On an adjusted basis, it was similar at $26 million and $0.09 a share. Cash flow from operations before changes in non-cash working capital was $15 million or $0.05 a share. Our liquidity and capital position at the end of the quarter showed cash of $142 million. Our net debt was $584 million. I'll note that we drew an additional $100 million from our revolving credit facility in October, leaving us with $127 million undrawn and the $100 million accordion feature still in place. As to our investments, they were worth about $220 million at the end of October. We have about $435 million left to fund at Greenstone, our share of the remaining construction. We expect to fund that using future cash flow along with the sources I just outlined. We always continue to try and optimize our capital structure. We demonstrated that earlier this year by refinancing our revolving credit facility. I'll note that in late October, we filed a preliminary base shelf prospectus with the exchange that when finalized will be effective for 25 months and allow for raising up to $500 million through various sources of capital. We see this as a very normal course for a company the size of Equinox. Years ago, when Equinox was a single asset developer, we did have a base shelf in place. Since then, the company embarked on a rapid growth strategy through acquisition and merger transactions. Now that we've had a period of relative calm from that activity, we've had time to put a base shelf prospectus back in place. We see that as being normal course and especially prudent given our current economic environment. As part of that prospectus, we're also assessing the implementation of an at-the-market share facility. We hope to finalize the prospectus in November. I will turn the presentation over to Doug for a discussion of our operations.

Thanks, Pete. On operations for the quarter, Mesquite performed well in Q3 as we finished mining of Phase 2 of the Bernie pit and we benefited from a large amount of ore that was stacked in Q2 and came under leach in Q3. Mining at Mesquite has now transitioned to stripping and brownfield Phase III and the Vista East pit, which will provide ore as we go into 2023. The mine celebrated pouring its 5 millionth ounce in over 4.3 years with no lost time incidents in the quarter. At Castle Mountain, crushing agglomeration has been providing better percolation and better recovery, but we needed to increase the crushing capacity so that all of the ore can be crushed and agglomerated. In Q2, we had lower tonnes being stacked and there was mainly run-of-mine or no crushing. Therefore, we had lower ounces coming out in Q3. The transition, as we move from leaching of run-of-mine ore to putting all ore through crushing and agglomeration, will take several months as we gradually bring on new cells that are crushed and agglomerated and eventually turn off the run-of-mine cells, and we'll begin to see the overall results as that happens. At Los Filos, both Guadalupe and Los Filos open pits were reconciling on grades. In part, they had gains in more tonnes of low grade but overall lower average grade. So we're currently working on revisions to the mine plan to adjust for that. At Guadalupe, we also had some high sulfur and copper content ore, which has a lower recovery. We are drilling at the moment to look ahead to see how localized this has been and to anticipate how we have to adjust the mine plan to compensate for areas where we will need to mine through high-sulfur, copper content ores. In Bermejal underground, we had slower development and slower mining rates than anticipated in the quarter. We did have an improvement during Q2 but it slowed back down again in Q3, essentially providing fewer tonnes than expected, so we are conducting an operational review on Bermejal. Overall, we expect that Los Filos will be at the lower end of production guidance for the year. At Aurizona, we had an extended rainy season, which made it difficult to access higher grade areas at the bottom of the open pit. This meant that the operation relied on processing lower-grade stockpiles for longer than usual. Typically, 2/3 of our mining is done in the second half of the year as we come out of the rainy season; we're doing some catch-up now. The contractors brought in an additional excavator and 5 more 777 trucks. We're also looking at bolstering the fleet of articulated trucks that are on site with an additional set of trucks. We can continue mining into the rainy season and get caught up on what is a slower overall ore and waste movement in the second half of the year than originally intended. We do expect that Aurizona will be below production guidance for the year. At Fazenda, the open pit and underground mining has worked out well, so we've been able to do additional development and bring more stopes online. Plant throughput and recovery have increased over prior quarters. Fazenda is on track to achieve the upper end of production guidance for the year. I note that they've achieved 1 year with no lost time incidents, a good result at Fazenda. At RDM, we continue processing low-grade stockpiles but have started work in the open pit this quarter. Gradually, we will restart in situ mining as we go into 2023. The mine is on track to achieve the upper end of production guidance and the TSF raise is scheduled for completion this month. At Santa Luz, we declared commercial production effective October 1 and the resin has been working well, but we continue working on optimizing recoveries and increasing throughput. So for Q3, we had an overall recovery of 70%, and throughput was 85% of the design capacity of 7,400 tonnes a day. However, we still have challenges in maintaining the blend of total organic carbon at the same time we're working on increasing throughput and recoveries. Moving on to Greenstone, the project is tracking on time and on budget. As noted, the overall project is 57% complete and that compares to 35% complete at the end of Q2. We have completed over 1.8 million hours with no lost time incidents. During the quarter, we had four 793 trucks and a PC 5,500 excavator assembled, and mining commenced ahead of plan, with the team moving over 550,000 tonnes so far. All of the buildings are to be enclosed in Q4, with the exception of the East end of the plant, which is scheduled to be enclosed in Q1. The work on those will be suspended during the winter months and we will pick them up again in the spring. The site photos show great progress by the construction team. Back to Greg.

Thanks, Doug. I'll just make a few quick concluding remarks. Equinox is still a young company. We launched this company in 2018 with 2 development projects, no production, but we did have an ambitious goal, which was to build a gold company of scale with significant leverage to the gold price, which we believed was going to do well over the coming years. Our strategy at the time included both acquisitions and internal development. We executed on this first through our acquisition of Mesquite and then the development of Aurizona, and then the acquisition of Leagold and the development of the first phase of our Castle Mountain mine. And the strategy worked very well. In 2020, our shares significantly outperformed as the gold price rose to over $2,000 an ounce. At that time, we were able to buy Premier Gold, which delivered us the large-scale Greenstone gold project that we're building now. However, leverage works both ways. In these current inflationary conditions and with this sort of decreasing and stagnant gold price, it's challenging for all gold companies but particularly for higher cost, high-growth companies like Equinox that are spending capital to grow and build our mines. Thus, in this macro environment, our strategy underperforms. We must stay focused on the task at hand, which for us is delivering on construction at Greenstone on time and on budget, as well as improving performance at our existing operations. We planned to do better at our operations than we did in Q3 and we intend to do better. We have a dedicated team at Equinox, supportive shareholders, a world-class project at Greenstone with Orion Mine Finance as a great joint venture partner. We have a portfolio of assets that will support a much higher production profile as we continue to expand and develop them. I am very confident in our future, and we're going to continue working very hard to build a great company here at Equinox. I think with that, I'll conclude and pass it back over to Rhylin for Q&A.

Thanks, Greg. Operator, can you please remind people how to ask a question?

We consider Orion Mine Finance to be an excellent joint venture partner. We have a collection of assets that will enhance our production capacity as we further expand and develop them. I am very optimistic about our future, and we will keep striving to create a successful company here at Equinox. With that, I'll wrap up and hand it over to Rhylin for questions. Rhylin Bailie, Vice President of Investor Relations, thanks, Greg. Can you remind everyone how to ask a question?

Thank you. As we wait for people to queue up, I'll take a question from online. When you announced the Los Filos update, it made it quite clear that you weren't going to build the expansion right now and that you were prioritizing Castle Mountain. How are the expansions going at Castle Mountain and Aurizona?

I'll take the Castle Mountain question first. Castle Mountain, we developed the Phase 1 operation, which is a fairly small-scale operation, primarily in place to advance the Phase 2 expansion to produce over 220,000 ounces per year. Earlier this year, I believe in March, we filed a plan amendment or permit application to the regulators. Since then, we have received notice of completion of that plan amendment from both the state and county regulators. We're just waiting on the BLM and expect to have their conclusion by the end of this year. That will set the stage for the determination of whether we proceed with an environmental assessment or a full environmental impact statement. We should know that early next year, and the timeframe to complete that would ideally have us permitted by mid-2024, with an outside date of mid-2025, at which point we would hopefully look to start that expansion at Castle Mountain and increase production there.

And Doug, Aurizona?

On Aurizona, after we finished the PFS, we had been drilling during 2021. We are working towards a feasibility study while simultaneously putting in permit applications for 3 portal locations. We are working towards a mineral resource, mineral reserve update for Aurizona underground. We have received permits for the 3 areas where we want to do the portals. We have confirmed the selection of the West end portal location. Essentially, our mining will have that area available at the end of Q3 this year. So we will have the ability to start with development of a portal in Q4 of next year.

Q4 of next year.

Sorry. Q4 of next year. So it's progressing really well. We're seeing overall good results, and at the same time, we continue exploration in the area around Aurizona.

Perfect. Thank you. Operator, please go ahead with the questions on the phone.

The first question is from Dalton Baretto with Canaccord Genuity.

Greg or maybe Peter, I want to start kind of with the elephant in the room here. On my numbers, it looks like at spot prices, there's still a reasonable funding gap even after considering your stakes in Nati and Solaris. You guys mentioned the shelf, you mentioned the ATM. I was just wondering what other options are available to you, and how would you rank all these options in terms of deploying them?

I'll start. Greg can feel free to jump in any time. Option number one is cash flow. When we did our guidance for the year, cash flow, and it's partly driven by seasonality, is weighted into the second half of the year. We underperformed for the quarter. As Greg mentioned, we expect to come in below our guidance for the year. Our expectation is that cash flow will push into next year. We're going through our budgeting now, and obviously, we'll confirm all that when we do our guidance for next year. So option number one is cash flow. We generated lots of it last year. We expect to return to profitable production going forward, and we have our existing treasury of $142 million at the end of the year that is immediately available, along with our undrawn revolver portion of $127 million. Following that, our next most liquid source of capital is our investments. We're strong and supportive shareholders of those companies and have been for some time. That said, it's a lever we can pull. Our accordion feature on our revolving credit facility is an additional $100 million. That requires approval from our lenders, but it’s set and ready to go.

I'm looking at the notes from the September slide presentation regarding Greenstone. At the end of Q2, you were at 35% compared to a target of 40%. By September 30, the target was 60%, but on October 21, you reported 57%. If you are still behind, yet maintain that you are on schedule, when do you expect to close that gap?

I can jump in here. Dalton, I don't think our numbers agree with your numbers. I think we're tracking very closely to our re-baseline.

Yes. Dalton, I was at site with the SVP Projects a week before last. What we saw was that we are at most 0.5% behind the current schedule.

If you want, we can follow up to see where the misunderstanding may be, but we don't believe that those numbers jive with what you've mentioned.

Okay, fair enough. I mean we're only halfway through, so there's probably some give and take there. Just in that same vein but on the CapEx side of things, also on the site visit, at that point in time, you had 55% of the CapEx contracted, but only had 1/3 of your contingency left. Now you have 67% committed. How much of the contingency is still left?

Dalton, again, I think we talked about this on the site visit. The consumption of contingency was taking our forecast, allocating it, assuming the full construction completed cash out the door. To be clear, we have not consumed that much of our contingency at that time. The forecast was also based on trends that the team at Greenstone and our advisors determine where prices are going. Those trends can change over time, and I think in some cases, we have seen some easing, which is obviously a good thing.

I'll add one final point to that. When we report our expected spend and budget at Greenstone, that's a gross cost. It doesn't include what you might call typical offsets such as gold produced during the preproduction and pre-commercial production periods. So we track against gross budget, and if we have pickups along the way, those are obviously pluses to help reduce the budget.

The next question is from Wayne Lam with RBC.

Just wondering at Los Filos for the update fees. Can you comment on what was driving the lower reserve grade there? And regarding potential optimization on costs, can you outline some of the things you're looking at? Is there a potential scenario where you might evaluate the potential to put the mine on care and maintenance during the Greenstone construction period?

In regards to the lower average grade at Los Filos, you'll note that the reserve gold price is lower than it was before, hence it brings in more material. At the Los Filos open pit, you rapidly add additional lower-grade material which ultimately becomes the raw or uncrushed ore that goes to the leach. We also did resource model reviews, taking a more conservative approach to account for some reconciliation issues we've had in the past, which we believe are prudent measures. So that brings down the average grade overall. Regarding cost optimization, the site has been working hard to reduce consumables wherever possible. They've been looking to lower consumption on various materials, as we've seen costs rise significantly, particularly cyanide. The impact we've had is like going from Q3, having fewer ounces means an overall cost per ounce basis hit us hard. Some of those ounces that were expected in Q3 will still come—now in Q4 and Q1 of next year.

We are still a young company, and we've implemented a global procurement strategy. We have a new executive at Equinox who has started over the summer and is in charge of the supply chain, looking at opportunities to use our economies of scale and larger purchasing profile to help bring down costs.

On your third question regarding care and maintenance, we have no current plans to put any of our operations on care and maintenance. Obviously, Los Filos has been a challenge for us in terms of production and operations over the last couple of years. We've continued to invest in Los Filos, both in the Guadalupe open pit and in the Bermejal underground. We're currently in our 2023 budgeting process and looking at mine plans at Los Filos that could see us deferring some capital into the future, particularly since we're not building that CIL plant anytime soon. But as of now, there’s no intention to go into care and maintenance.

Perfect. Regarding the updated revolver, can you help us understand any covenants in terms of net debt or interest coverage, and what are the conditions to drawing on the accordion feature?

With respect to covenants, they are typical for a company of our size that is growing and maturing. We're well on target with our covenants for Q3 and expect to be well on target for Q4 onward. With respect to the accordion, nothing else is required for the company other than to make a request. Assuming that we're still in compliance with the agreements, it can be done quite quickly.

Great. Lastly, at Santa Luz, can you comment on the performance and the recoveries as you ramp up and scale there? How much more improvement should we expect to see over the coming quarters?

We had hoped that transitioning from a pilot plant to industrial scale would be smoother, but resin is a challenge. We found that maintaining a consistent blend is critical, but variable ore leads to variability. So we achieved a recovery of 70% in Q3 and we're planning similarly for Q4, targeting 74% to 75%. An overall target of getting to 80% would be good, but 84% is quite difficult to achieve due to the carbon levels in the ore body.

The next question is from Mike Parkin with National Bank.

One question on Greenstone. You mentioned on the site tour that the milling closure was a little delayed. It looks like the pictures continue to show progress there. What's the latest in terms of expectations of having the full mill enclosed?

The West end of the mill building is done. We are completing the structural steel for the grinding area. The mill building will be enclosed in Q1 of next year. The East end remains open into Q1 and then it becomes enclosed. All other major items will be enclosed in Q4 of this year.

And Mike, we had always intended that the grinding end of the mill building would be enclosed in Q1 next year, which would be the last piece.

And the crushing you're adding at Castle Mountain, is that equipment you're purchasing, or are you using a contractor for that?

We have a contractor. We are currently reassessing our arrangement, as we need more capacity than we currently have. We've increased capacity but need to do a bit more. We're on review at the moment.

Is that something you're looking to add to a contractor, or actually purchase the crushing equipment yourself?

We're looking at both options at the moment. We're working on trade-offs currently with the contractor but may just switch.

Do you have a sense of if you went 100% crush, where your expected recoveries would shift to?

We intend to shift to 100% crush and agglomeration. Overall, we anticipate total recovery to run in the low 70s. The operational recovery will be around 67%, with an additional 7% coming as residual leaching over the mine's life.

And you'd be looking to have 100% crush capacity sometime in 2023?

Yes.

I noticed the accounts payable is up about $24 million quarter-over-quarter. Is that primarily tied to Greenstone's construction or other factors?

Yes, primarily.

Just following up on the RCF. Why is the accordion option kind of a last resort in that order of priority given your interest in maintaining equity holdings?

I was speaking more in terms of immediately available capital with respect to liquidity. That's the order I mentioned.

The next question is from Anita Soni from CIBC World Markets.

A couple of questions. Firstly, on Greenstone and the CapEx. When you were on the tour in early September, you said you would spend about $210 million. Just looking at the mine tour disclosures, you ended only spending $182 million. Is there a reason for the differential?

I think this relates mainly to the lag time in spend.

As you look at the projections for Q4 spending, should we assume a differential adjustment over the $150 million drop for Q4?

Yes, that is the case.

I wanted to ask for next year, as we think about your budget, what costs are you using? It seems at current spot prices and the $1,600 ASIC, unless there's a reduction in the cash cost, it's pretty tight from a liquidity perspective. What levers can you pull to improve overall cost structure?

Yes, Anita. When you see increases in costs and stagnation in gold prices, it results in margin compression. We're in the budgeting process for 2023 and looking at scenarios to maximize cash flow from our assets, including deferring some capital and seeking cost optimizations across our sites. This is a crucial focus for us and part of our funding plan.

Regarding Los Filos, when do you think you'll get into better grades and see positive cash flow? If you can't improve performance, would you consider an outright sale of that asset?

In Guadalupe and Los Filos, Los Filos was going through a big stripping campaign in the first part of the year. As we came out of Q2 and into Q3, we started to see ore coming out of Los Filos, averaging a lower-grade open pit but very reliable recoveries. The Guadalupe open pit had a hiccup with high sulfur and copper content, which caused a drop in recoverable ounces. We expect to see improvements in Q4 and Q1 as we drill ahead for high sulfur areas. Regarding the potential sale of Los Filos, it's a large gold system with growth potential and a production profile, and parting with it would be painful. It's not something we're considering at the moment.

Yes, to add to that, we see Los Filos as a valuable part of our portfolio right now, and my preference would be to support the asset. We've had challenges, but we're focused on surfacing its value.

When you started the company, you had the 1 million-ounce target. Is that still a target? Are you better focused on the expansions versus optimizing your assets?

The 1 million-ounce target is still an indicator of scale. We have a plan to grow the company, targeting that amount. With Greenstone, Castle Mountain expansion, and Los Filos fully producing, that's over 700,000 ounces a year. We are still working toward that scale, but the current environment requires careful capital allocation, focusing on critical areas like Greenstone. The extensive value is sitting in our assets, and we aim to service that value over time.

Do you have any intention to hedge against rising diesel prices or falling gold prices?

On gold hedging, we're off the program we inherited. We believe in keeping the company fully exposed to gold prices. We will not hedge gold. Regarding diesel price hedging, we have no hedges in place against diesel currently and don’t find success in hedging due to varying effectiveness. We focus on hedging against currencies where we operate.

The gold price has recently been weak, squeezing margins. What is your view on the long-term gold price?

The gold price is holding well given the strength of the U.S. dollar. With rates going up, gold faces pressure until rates get high enough to warrant easing again, which will then support gold. We're currently in challenging times but historically, this will reverse and should favor gold again. So, long term, we remain bullish on gold.

Brazil elections, do you see any impact on mining in Brazil?

The short answer is no. Nothing indicates that we would expect substantial changes. The previous administration wasn't unfriendly to mining, and I don't expect issues this time either.

Thank you. At the moment, there are no further questions online or on the phone. Greg, I'll turn it over to you for closing remarks.

Thank you again to everyone for attending the call today. You can always reach out to myself, Pete, Doug, or Rhylin if you have any other questions, and we'll talk to you next quarter.

Thank you, everybody, for joining us today. Operator, you can now conclude the call.

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