Equinox Gold Corp. Q2 FY2023 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to Equinox Gold's Second Quarter 2023 Results and Corporate Update. As a reminder, all participants are in listen-only mode, and the conference is being recorded. 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 this morning. We will, of course, be making a number of forward-looking statements today. So please do visit our continuous disclosure documents on our website, on SEDAR, and on EDGAR. I'd now like to turn the call over to our CEO and President, Greg Smith.

Thanks, Rhylin, and good morning, and thanks, everyone, for joining us today, especially at this very early hour on the West Coast. On the call with me is our COO, Doug Reddy; our CFO, Peter Hardie; our EVP of Exploration, Scott Heffernan; and our VP of Investor Relations, Rhylin Bailie, who you just heard from. As a quick introduction to those new to the company, Equinox is a diversified Americas-focused gold producer. We have seven producing mines across Brazil, Mexico, and the United States, and we also have several growth projects, including our large-scale Greenstone Gold mine in Ontario, which is currently under construction with our 40% joint venture partner, Orion Mine Finance. So today, we're discussing our 2023 second quarter financial and operating results. But before we jump into those results, I want to acknowledge the fatality at our Santa Luz mine in June. This was a tragic incident, and we extend our deepest sympathies to our employees, family, friends, and coworkers. We had a one-week site-wide suspension of operations at Santa Luz to facilitate the investigation and to refresh safety training. I'll now start with a broad overview for the quarter, and then I'll turn the call over to Pete and Doug for more details. We had a solid quarter with sales of just over 138,000 ounces at a cash cost per ounce sold of $13.61 and an all-in sustaining cost per ounce sold of $15.02. For the first six months of the year, we sold 261,000 ounces at cash costs of $13.54 per ounce and all-in sustaining cost of $15.76 per ounce. This reflects record sales for the company for the first six months of the year, and we remain on track to meet our 2023 production and cost guidance. On Tuesday this week, we issued a press release with a full Greenstone update. For those who didn’t see it, the team at Greenstone has done a great job of continuing to advance the mine on time and on budget for the first gold pour in the first half of 2024. As of July 21, we were 85% complete overall at Greenstone. There's a lot of pictures on the website, and you can really see how far the project has come and advanced over the course of this year. Doug will have more to say on Greenstone in a few minutes. During the quarter, we also continued to progress the feasibility study on the addition of an underground mine at Aurizona. We are going to continue to conduct some additional work, including trade-off studies on throughput from the underground mine. This means we'll complete the study next year. This timing also allows us to proceed with the construction of a portal and a decline, which we plan to include in our capital budget for 2024. Our work thus far shows excellent potential for a long-life underground mine in Aurizona. So we're keeping our foot on the gas in terms of development while we progress the feasibility study. Doug will also comment more on this. We finished the quarter with an unrestricted cash balance of $174 million, plus approximately $170 million available from our credit facility for a total of over $300 million in available cash liquidity at quarter end. With cash flow from operations, this leaves us well funded through the completion of construction at Greenstone. We also published our third comprehensive ESG report in May. And just recently in July, we published our first water stewardship report. These reports summarize our performance during 2022, our targets for 2023, and our long-term strategy across a range of ESG initiatives. They're both available on our website along with our climate action report, and I encourage everyone on this call to check them out. So with that, I'd like to hand the call over to Peter Hardie to run through our financial results.

Thanks, Greg. We're now on Slide 6 in the presentation. From a gold sales and revenue perspective, we had our best first half of the year in the company's history. During the quarter, for the 138,000 ounces we sold, we received an average realized price of $19.62 per ounce. That's $19.31 year-to-date, generating $217 million in revenue, and $506 million year-to-date. We sold 15,000 more ounces in Q2 compared to Q1 of this year and about 18,000 more ounces than the 120,000 ounces that we sold in Q2 last year. Our cash cost per ounce of $13.61 for Q2 is similar to that of Q1 of this year and down from Q2 of last year, which was $14.82. Our all-in sustaining cost per ounce of Q2 this year was $15.02, which is down from Q1's $15.76 and also down from last year’s $16.57. Regarding forward views on input costs, we are now starting to see decreases in particular for diesel and cyanide in Brazil and the U.S. Those unit cost decreases in Brazil are somewhat offset by the strength of the Real against the U.S. dollar. Our EBITDA in Q2 2023 was $64 million, or $71 million on an adjusted basis, and we had net income of $5 million for basic and fully diluted earnings per share of $0.02. On an adjusted basis, we had a net loss of $6 million or $0.02 a share. Cash flow from operations before changes in working capital was $81 million or $0.26 a share. Included in that cash flow from operations is a receipt of an additional $10 million from the gold prepaid arrangement. If you back out those funds, we generated $71 million in cash flow from operations, or about $0.20 a share. In terms of liquidity and capital position, we ended the quarter with $174 million of unrestricted cash and $127 million available to draw on our credit facility, giving us total liquidity of a little over $300 million. We drew the remainder of the revolver on August 1. Further to the gold sale prepaid transactions entered in Q1, we did enter into an additional gold sale prepay on June 23, whereby with one of our syndicate members that provided the prepay, we received $10 million in exchange for delivering to the lender 263 ounces of gold per month from October 24 to July 26 for a total of just under 6,000 ounces. Those terms reflect the prepay we did earlier in the year. Concurrently with the execution of the gold prepay sale transaction in June, we entered into financial swap agreements that fixed the gold price relating to that $10 million at $21.09 per ounce. Net debt increased from $113 million at the end of Q1 to $661 million at the end of Q2. On Slide 7, what does that mean for Greenstone? Based on progress to date, we believe our share of the remaining construction budget is about $170 million, and we expect to fund that through our cash at the end of the quarter, our operating cash flow, and the final draw on the revolving credit facility. Additionally, we still have the $100 million accordion feature in place. With those sources of liquidity, as Greg mentioned, we believe we are well funded to complete Greenstone construction. With that, I will turn the time over to Doug to review the operations.

Thanks, Pete. As mentioned earlier, we had a very good first half of the year, and we are looking at pushing hard to deliver strong production in the second half. We've noted before that about 55% of production this year is in the second half of the year. At Mesquite, the Brownie pit provided a majority of new ore, about 90% of the ore going to the leach pad and re-leaching on portions of the pad also contributed significantly to the Q2 gold production. Mining costs at Mesquite benefited from a drop in diesel prices. The current price is about 30% lower than it was in Q2 last year. Process costs were reduced through a reduction of cyanide and lime usage. We don't see that staying the same in the second half because we plan on stacking more in the second half, so the overall costs will go up on cyanide mine. At Castle Mountain, throughput has increased by 40% since the start of the year in the crusher, and the crusher run time is up by about 30%. We continue with modifications to the crusher setup, and we're planning for those additional modifications to be implemented in Q3. At Los Filos, productivity improvements were seen in both the open pit and underground operations. Open pit has about a 15% higher productivity, along with loading improvements and an increase in effective operating hours. For underground operations, we've seen about a 23% increase in the ore tonnes being mined. So although we have more tonnes going to the leach pad, we did have some challenges on the leach pad that we've been addressing. These include some higher copper ore coming from the Guadalupe open pit. I note that this is only a portion of the ore, and it represents about 12% of the tonnes being stacked for the remainder of the year. We also had issues with solution management related to some broken pipes in one area of the pad. Those have since been repaired, and the pregnant solution in that area where the breakage occurred needs to be drained. That impacts about 8,000 ounces that is slow in coming out of the pad. It will come out; it's just going to be slower to get coming out than originally anticipated. We also had one portion of the leach pad that had to be turned again and leached again after a carbonate precipitation occurred, which hindered recovery. That impacts about 4,000 ounces. Again, those ounces will come out in the second half of the year. At Aurizona, in addition to the current mining contractor, we also mobilized a second contractor with articulated dump trucks, which will be in for most of the rest of 2023. They came in during the rainy season. The rainy season is over now, and we're putting a big push on the mining to establish a larger stockpile in advance of the next rainy season. At Fazenda, we're currently mining mostly from open pits while the underground also catches up on development, and we'll work on bringing additional stopes into production. Drilling continues on the reserve replacement program at Fazenda. It's been successful every year, and we continue to achieve success in replacing reserves each year. At RDM, we had good performance from the owner-operated fleet. That fleet is a combination of our own trucks and 15 60-ton rental trucks. The increase in mining of higher-grade ore has brought the production up significantly in the quarter. And the mill feed is also being augmented with low-grade stockpiles if there is any availability in the mill. At Santa Luz, the team continues to gradually bring recovery up, and the plant had an average overall recovery of 67% in the quarter. We are targeting 70% or better for the remainder of the year, and the team continues to work on process and throughput improvements. Moving on to Greenstone, I’m excited to be able to speak about a really good story on construction progress, and the team has done a great job. We put out the Greenstone update news release on Tuesday and provided a complete summary of the project status. Essentially, the project is on budget and on schedule for H1 2024 production. Overall progress at Greenstone is 85% complete, with construction at 83% complete, engineering at 100% complete, and procurement at 87% complete. Capital spend at June 30 is $937 million, which is 76% complete of the budget on a 100% basis. We have approximately $170 million remaining as Equinox Gold's share to fund through to project completion. Facilities handed over to operations so far include the permanent effluent water treatment plant, truck shop, warehouse, sewage treatment plant, potable water treatment plant, the pit and plant site fuel stations, reagent storage building, and site mix emulsion or explosive plan. The Ministry of Transport Petrol Yard has been turned over to the ministry, and the dismantling of the old patrol yard is now complete. The Highway 11 realignment is also complete and has now been transferred to the ministry and was opened to the public a few days ago. The natural gas pipeline to the site has been commissioned and is operational. The plant site is 75% complete, and the TSF is 80% complete. Operations are now at 240 employees, with plans to get to around 360 employees by year-end. We look forward to hosting an analyst and investor visit in early September. For our other expansion projects, at Castle Mountain, we continue in permitting. We've responded to queries from BLM, and we anticipate permitting to be completed in 2025. In the meantime, we continue with engineering work and related activities to support Phase II of Castle Mountain. At Aurizona, as Greg mentioned, we've been advancing the engineering studies, and these incorporate additional drilling. The recent work looked at underground mining at a higher production rate given the large scale of the underground resource. We see benefits in continuing to advance our studies on operating with both open pit and underground operations concurrently to fill the plant. We are planning on developing an exploration decline in H1 2024, which would provide us an opportunity to develop down to one of the ore zones, mine in the ore zone, and enable collection of geotechnical and hydrogeological information on the ore and wall rock. The plan is to have a fully dimensioned decline that would serve as production access and also enable a rapid start to underground production when we've completed our additional studies. At Los Filos, we continue to assess the opportunity to invest in CIL, but we do remain focused on having the right climate in Mexico and within the region before committing to the major investment. While we also have competing opportunities for capital investment on other projects. With that, I'm going to hand it back to Greg.

Thanks, Doug. I think I'll just make a final comment here to thank the entire Equinox Gold team in Vancouver and at all of our sites, as well as our shareholders and other stakeholders for their continued support. I'll finish up and pass it back to Rhylin for Q&A.

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

Certainly. We will pause for a moment as callers during the queue.

Thank you. Well, there are no online questions yet, so you can go ahead and take questions from the phone, please.

Thanks, operator. Congratulations on a good quarter. I had a couple of questions. The first one was on Greenstone. There was $177 million of contingencies built into that $1.3 billion CapEx. How much of that have you actually spent so far on the project? Has it been roughly proportionate to the percentage spend that you've completed on the project?

No, it's roughly proportionate, Kerry. And when we talk about amounts left to spend, we're assuming that we go through that contingency. So it was included in the initial total budget amount, and we think we're going to come in at that total budget amount.

That's helpful. And then the second question I had, just on the convertible notes, the $140 million that are due next April, what is the plan or strategy to deal with those notes to try and roll them out?

Yes. It's something we've been kind of working on recently. I think there are a couple of options. Obviously, our first choice would be that they're well in the money, and we issue that equity. But you can't always plan for that. So we are talking to the holders, who are very constructive. Of course, we have other options available to us in terms of the market. So it is something that's on our radar, Kerry, and at some point, we'll report what we're doing on that specifically.

Okay. But do you think you'd have a strategy in place by Q3? Or is that something that's going to fall into early next year?

Whenever you've got debt maturing within a year, and especially when you're in a large capital program like this, it makes sense to be ahead of it rather than too tied up against it. So if we can have something done over the course of the next several months, I think that would be our preference.

Yes, I agree. Okay. And then the last question I had, how much CapEx do you think will be left to fund for Greenstone in 2024?

Kerry, it's Pete. We believe $170 million will get us through to the point where we don't need to fund CapEx anymore. So the budget that we prepared assumes that's all of the CapEx that the partners are going to have to provide to the project before it can support itself.

And how much of that $170 million will fall into the next fiscal year, roughly?

We're on track for the $277 million we were going to spend this year. Sorry, I just don’t have that split between this year and next year at my fingertips.

Okay. Maybe Rhylin can send me a text after and just let me know what that number is. That would be helpful.

I'll just follow up on that. I believe it's $180 million that you spent to date or into June 30, up to $277 million. So I assume that's about $70 million left for next year. Is that correct?

Yes, Anita. Thanks for clarifying.

Okay. So I have a couple of questions. Just firstly, on the leach inventory. There was some buildup in Q1 and then some additional buildup in Q2. Can you give me an idea of how much is allocated to each one of the assets? I believe the majority is to Los Filos, right?

Yes, that's fair. There is some Mesquite and a smaller amount at Castle, but it's predominantly Los Filos.

We do maintain a very large stockpile at Santa Luz. That's how we manage the blend of the ore going into the mill. The mining has exceeded throughput at Santa Luz, and we are working at building and maintaining a fairly large stockpile there. It's just more complicated than the other mines because you're trying to manage around the total organic carbon in the ore. So you'll see it's a stockpile inventory management before anything goes into the mill.

Okay. So that's broken or above-ground stocks rather than something.

Yes.

I guess the final comment, Anita, on Santa Luz, they also built up their spare parts and consumables inventory balances a little over the first half of this year as well. You might see that inventory figure at Santa Luz.

Okay. For the remaining assets, I think it was Los Filos, Mesquite, and Castle Mountain. Those should probably reverse over the course of the year? I think you said for sure, Los Filos, but I just want to confirm for Mesquite.

Yes, for Filos and Mesquite, yes.

Okay. And then just on Greenstone. I think as I mentioned, $180 million year-to-date on the spend. So how is it going to play out for Q3 and Q4? Like is it really bulky in Q3 year spend and then tapers down into Q4 for the $277 that you had said? I think as I mentioned, there was about $100 million left for this year in the back half of the year.

Yes, that's right, Anita. We do expect that kind of typical S-curve. There's a lot of activity happening now, and then you'll see tapering through Q4.

Okay. And then I think I had one more question, and I forgot, and I'll get back into the queue.

We've got a question from an investor in Kuala Lumpur. Can you give any more clarity on how things are going at Filos and when you might be able to start the expansion there?

As I said earlier, at the moment, we're monitoring the status in Mexico in general but also in the region. We continue with the current heap leach operations, mining from Los Filos Underground, and Guandupe open pit. We are advancing in our discussions with the communities as well, but we haven't picked the timing. It’s rushing into it with Filos when we have other development projects also on the go at Aurizona and Castle Mountain; we are judicious about how we deploy our capital.

No decision will come on Filos during 2023. Maybe in 2024, we can provide more clarity.

Operator, do you want to take any follow-up calls?

The next question is from Anita Soni with CIBC.

So it was a question with regards to the sustaining capital. I think you spent about 35% year-to-date. I wanted to get an idea of, you did mention that you'll be spending it over the back half of the year, the remaining 65%. But will it be all 65%? Or do you expect to come in a little bit under what you had previously guided to?

Yes. We are planning on catching up on that sustaining spend, Anita. We deferred some equipment expenditure at Filos. At RDM, we deferred some of the tailings work into the second half of the year that we had planned to do in Q2. So yes, we do plan on doing that in the second half of the year. We believe we're on track for our full spend for the year.

Okay. Is it an even split between Q3 and Q4?

It's always heavily weighted into Q4.

It's a somewhat typical operations pattern where you head into budgeting, and mine managers and general managers recognize that they got behind on the sustaining spend and want to get it done before the end of the year. So you can assume that we'll have more in Q4.

Can you move up their budget deadlines to get them going?

Correct.

Okay. Great. Just wondering at Santa Luz. Obviously, a very unfortunate situation this past quarter. Can you just provide a bit more detail into what happened in terms of breach and safety protocols?

The answer is no. We haven't really, out of respect for the employee's family and colleagues, we're not going into any details publicly on what happened.

Okay. Got it. And then maybe at Greenstone, it’s nice to see things on track. Just wondering with the project, 85% complete, $170 million left to spend, and $300 million in cash with the revolver fully drawn. Are you guys seeing any additional large spend or bottleneck items ahead as you enter the home stretch here?

The short answer, Wayne, is no. The focus is on—we're in that phase towards the tail end of construction. It's a fairly linear relationship between the amount of piping and electrical installation you have and the manpower that you have doing it and their productivity rate. They've made great progress through the summer, which was planned, and very fortunately, they're staying on schedule on that front. It's really just keeping working that schedule, maintaining the productivity rates. We're happy with our commissioning readiness. An external review of our operational readiness by another group also went well. Based on all the feedback we have from our work internally and from assessments done by independent groups, we don't believe right now that we have bottlenecks that have significant remaining risk.

And Doug referenced how many employees we have today and where we need to get to by the end of the year. We're in a pretty heavy recruitment drive to ramp up the workforce, which is going very well. It was a little challenging a few months ago, and we had our own questions whether we'd get there, but as the mines advance, we've been able to rapidly increase the operational workforce. It looks like we're on track for year-end, but that was an area where we definitely knew we had to focus. Things are going very well at Greenstone, and hopefully, you're planning to come in September, and you can see it for yourself.

Yes. That's definitely the plan. It sounds like you guys are in a pretty comfortable spot. Just wanted to confirm the original CapEx number had about $125 million in fleet purchases. Can you remind me if you guys have moved to fleet financing? Do you have an estimate of what kind of operating cost impact that might have as we look out to next year?

We did move to fleet financing, Wayne, and we haven't provided any guidance on what 2024 operations look like. We will provide an update as part of our 2024 guidance, but it's not something that we have in place right now.

And then maybe just last one for me. On the inflationary impacts, do you have any percentage estimate on how much consumables have eased versus your budget? Some of your peers have noted significant offset on the input cost easing due to stronger local currencies in Mexico and Brazil. I wonder if you guys are feeling those pressures as well and have been managing that.

Yes, prior to considering the FX strength that you see in Brazil and Mexico, we are starting to see some tapering in unit input costs, which we're happy about. In Mexico, even before considering FX, we've seen some positive trends. Regarding diesel, PEMEX tends to buffer fuel price increases. However, there’s also an effect when fuel prices taper, where that is buffered too. While we have seen fuel come down reasonably in the U.S. and Brazil, we haven't seen that in Mexico. As for FX, yes, the FX in Brazil and Mexico is effectively offsetting the unit price decreases we are seeing. In terms of cost management, we hedged about 50% of the near-term FX exposures we have in Mexico and Brazil, which has helped some, leading to the realized gains you see on our financials.

I have a question online from Ovais Habib, our analyst at Scotiabank. Ovais says cash costs in the first half have been below the guidance range. How should we look at the second half? Are you on track to beat the cash cost guidance, or is there a catch-up in cost and all-in sustaining that we should expect?

I'll address the all-in sustaining first. I think it's in the same line of questioning that Anita mentioned; some of the sustaining capital was deferred into the second half of the year. We do intend to spend that, so you'll see an increase there on a per unit basis. With respect to cash costs, we do think they'll go up somewhat as the inventory releases from the buildup, especially when related to our leaching operations. We see those going up a little. If we hit around the top end of our guidance, then we will come in, we believe, right around the low end of both our cash cost and all-in sustaining cost guidance.

Operator, you can take the next question from the phone, please?

The next question is from Dalton Baretto with Canaccord Genuity.

You sound good considering the hour there. A few questions from me. Just first off on liquidity. Outside of your I-80 stake, are you happy with the existing liquidity you have right now relative to the remaining spend? Or are you going to look to bolster it a little bit?

Yes, outside of our stake, we're relatively happy. So we don’t see ourselves bolstering it.

And then, so you have a 40% stake in Greenstone. I know you can't speak to their intentions, but on the chance that they look to offload their stake post-commercial production, do you guys have a right of first refusal on that stake? Have you given any thought to how you would fund that?

Yes, we have a right of first refusal. I think it's fair to say that we'd love to own more of Greenstone. We haven’t discussed anything advanced on how we would fund it, but it's definitely on our radar because we expect we will need to act at some point if we don't take some preemptive measures. We'd absolutely like to own more Greenstone, but how that ends up playing out, I couldn't speak to right now.

Okay. And then once Greenstone is in commercial production, how are you thinking about the broader portfolio? Are you content with it right now? Are you planning to make some changes?

I think I've said in the past that over the course of building the company, we've acquired mines, developed mines, and sold some mines. We're always looking to upgrade the portfolio. If we can get to a place where we've got larger, longer-life mines that fill out our production profile, that's a goal we aspire to. I believe there's a lot of upsides we want to surface in our portfolio. That said, we wouldn’t hesitate to make changes in the future. Right now, though, we're very focused on getting Greenstone built up and running in commercial production, and we can be more flexible with the longer-term strategy after that.

And maybe just one last question. On Castle Mountain Phase 2, it sounds like you've got an initial response from the BLM, and they seem to be accepting the application. Have they flagged any high-risk areas that they'll be looking at? Or is this expected to be reasonably straightforward?

Both the County and BLM had a period where they can assess the completeness of our application, and they made additional inquiries. So we responded, and it's just in the overall permitting process. There's no indication of anything other than we've moved to the point of answering the questions to be complete so that we can enter fully into the rest of the process.

So at this point in time, there are no indications as to what they'll focus on to mitigate certain things, such as water, that sort of thing?

It looks really straightforward at this stage. It's already an operating mine. We're not expanding beyond the currently permitted footprint, and we're not making meaningful changes to the processing that was there previously. The most painful part for us is the time. I wish this permit was coming in at 2024. It looks like it’s going to be 2025. We haven't received any comments that I would characterize as controversial or concerning to us.

All right. We've got no further questions. If anybody thinks of anything after having a cup of coffee, please reach out by email. Greg, do you have any closing remarks?

No. Just thanks, everyone, for joining the call so early today. I promise it’s not something we’re going to make a habit of. We had to accommodate some schedules, but I appreciate those who got up early and attended the call. Thanks again for joining. As Rhylin said, you can always reach out to us directly, and we’re happy to answer questions.

Thank you. You can close the call.

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