Earnings Call Transcript - EQX Q2 2020

Operator, Operator

Thank you for your patience. Welcome to the Equinox Gold Corporate Update and Second Quarter Results Conference Call and Webcast. Please note that all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for questions. I will now turn the conference over to Rhylin Bailie, Vice President of Investor Relations for Equinox Gold Corp. Please proceed.

Rhylin Bailie, Vice President, Investor Relations

Thank you very much, and thank you very much for joining us today at the Equinox Gold second quarter update. We will, of course, be making a number of forward-looking statements today so please do take the time to visit our website and our continuous disclosure documents on both SEDAR and EDGAR to be fully informed. I will now turn the conference over to our CEO, Christian Milau.

Christian Milau, CEO

Thanks Rhylin and welcome everyone to the second quarter call. Just to note here, Peter Hardie, CFO is with me today as well as Doug Reddy, Head of Technical Services, soon to be COO, and Attie Roux, our COO is here as well as Scott Heffernan, Head of Exploration. So the whole team is ready for questions at the end as well. So as a quick summary, we had a very good quarter despite the challenges of COVID that we know all the industry and other industries have been dealing with. Los Filos in Mexico was temporarily suspended for most of the quarter, but is up and running again, and we had two of our Brazilian mines suspended for a little less than two weeks. Overall, we had very strong cash flow performance and very strong cost performance for the quarter we are really pleased with, and that gave us the ability to repay a little bit of our debts. As we transitioned here after reasonably smooth integration during the COVID crisis, I’m very happy with how things have gone since March 10th when the two companies, Leagold and Equinox, came together, and the management team really has gotten on the same page here. I would say it has gone as well as could be expected, and I really want to say thanks to Attie Roux who has been the COO since the merger. I worked with Attie for about five years at Endeavor Mining as well, and he made the transition here very smooth, even during the challenging time of COVID which came on literally within days of us completing the merger. So thanks to Attie as he will be retiring at the end of August, hopefully enjoying a little more downtime in his semi-retirement, and I am pleased to welcome Doug Reddy to the team as COO. I worked with Doug again for five years at Endeavor, so it feels like a fairly seamless transition, and I think shareholders should be very happy with the results here of this transition from one experienced leader to another. Looking forward to the future, there is lots of exciting stuff to come, and we will run through that here today. Just starting on Slide 3, with health and safety, we did have three lost-time injuries over 2.6 million hours for the quarter, a respectable performance there. And with COVID, the impact was a little disruptive with Los Filos being down for most of the quarter, but all the mines are currently operational. Let's not forget the risk hasn’t gone away with COVID. We are finding a new way to operate a new normal for now until a vaccine is found or things change. We are certainly operating with a lot more testing at our sites, implementing quite regular testing in California, and we are doing the same in both other countries as well. We are even instituting some labs on our sites and using the local labs that are in the regions. So we are taking it very seriously and have integrated a lot of those costs. As you can see, we have had about 16 million of temporary costs for the quarter. Overall, a good performance. And I'm going to actually pass over to Peter Hardie to run you through the rest of the financial results here.

Peter Hardie, CFO

Thanks. So, we had another record quarter with production of 127,000 ounces and on the back of that, we sold just under 126,000 ounces of gold at a realized price of $1,712 per ounce. I will note that the sales for the quarter are more than 40,000 ounces more than over Q1, and that was with Los Filos down for most of the quarter due to government-mandated temporary standby due to COVID. Our mine cash costs for the quarter were also quite strong with mine cash costs of $776 an ounce and all-in sustaining of $900 an ounce. Those costs are driven by first of all, good cost controls by operating teams on the ground, favorable foreign exchange, and, of course, low fuel prices. Also influencing the costs for the quarter were adjustments for purchase price accounting. Our consolidated financial results showed revenues of 215 million and mine operating earnings of 85 million. Adjusted EBITDA was 83 million, and our adjusted net income was 27 million or $0.12 per share, including those adjustments. As Christian has mentioned, there were adjustments for gold hedges and warrants liabilities, as we have Canadian dollar-denominated warrants for that. Gold hedge adjustments were 38 million, and warrants were 49 million, along with an adjustment for foreign exchange. All of these non-cash charges are unrealized for a total of about 90 million. Our cash flow from operations, after changes in working capital for the quarter was 84 million, and I would note that before changes in working capital, it was 61 million. On to Slide 4, for our corporate highlights, we received 157 million in exercises on warrants and options during the quarter. Those warrants are predominantly legacy warrants that came in through the Leagold merger. We were added to the GX and S&P TSX composite indices. Additionally, our 30% investment in Solaris Resources, which was the copper spin-out from the company in the summer of 2018, listed on the TSXV, came out with a strong news release yesterday regarding good drill results. Our investment in that company is now worth at a market rate about 70 million. Of course, on our balance sheet, we carry that at cost, so that market rate is not reflected there. With respect to our liquidity and capital position, the warrant exercises and option exercises during the quarter really strengthened or continued to strengthen an already strong balance sheet. Our cash was 494 million at the end of the quarter after repaying 22 million in debt. Our net debt, which includes our in-the-money convertible notes, is 244.3 million. Excluding those, because they are well in the money at an average convert price of 650 a share, we actually have a net cash position of 8.3 million. With respect to our share price or share liquidity in volume, since the merger, we have experienced a significant increase in both with an average daily trading volume of over 48 million recently. Going to Slide 5, we had our second consecutive quarter with record results that was on the back of having a full quarter of results from post-Leagold merger and having the assets now in the portfolio. Mesquite had a very strong quarter, producing just shy of 40,000 ounces for the quarter and 76,000 ounces in the first half of the year at very good costs. The Brazil assets, despite all of the difficulties with COVID in that country, thanks to very strong management on the ground, are meeting expectations for where we thought they would be from the beginning of the year, so they had a strong quarter. Los Filos, even though it was down for the quarter, still produced 18,000 ounces at quite low costs. The rationale for those costs is first of all, with the mine being on temporary suspension, we postponed sustaining capital and expenditure activity to the second half of the year, and you will see that as we go through the minute when Christian walks us through it. We had favorable foreign exchange rates there, and the activity of residual leaching is fairly low cost. Lastly, purchase price accounting contributed somewhat to the low cost as well. Just going back to the operational results, Los Filos first in Mexico. Mining and development recommenced in June, and the ramp-up took place probably midway through June. We retested the whole workforce for COVID, taking a very cautious approach to restarting. One of the impacts from the delayed development has been the higher grade ounces that we expected from the Guadalupe open pit and the Bermejal underground being deferred to 2021. We have a delayed quarter essentially of production in Q2, but we also have a knock-on effect moving those ounces into next year. That is why we have reset that guidance. Our all-in sustaining costs benefited from the FX rates and fuel rates that were alluded to. We are still seeing those nice depreciated currency rates help us in Q3 as well. Aurizona in Brazil, with its first full rainy season, had good production. Overall, we met our expectations for production, and the only thing we are a little behind on is waste mining for the quarter, which we expect to catch up on in the dry season. We benefited from having a stockpile of lower-grade ore that we were able to draw upon as needed during the rains. We plan to have the same going into the rainy season at the end of the year. Again, FX rates, fuel, healthcare costs, and what we are focusing on now is how to extend the mine life. Drilling is ongoing, and we are looking at advancing to a prefeasibility study for underground potential, including drilling at depths and at satellite pits along strike. So, keep an eye on that space, and we plan to have some news as we get results from that program. Mesquite, as Peter noted, was really the star of the first half. It achieved production ahead of targets at lower costs. We are prioritizing the oxide ore from historical dumps, which we continue to find more of as Scott’s programs bear fruit. For the second half and part of June, we are starting to stack more non-oxide ore, leading to a longer leach curve and slightly lower recoveries. We have sort of temporary expectations for the second half; we don't expect the same sort of results. We expect slightly lower production. But it is exciting that exploration is ongoing, and we have had good results to date. Remember, this mine was acquired for $158 million in 2018 when gold was $1200 an ounce, offering an initial three-year mine life. We have been mining for almost two years, and we still have nearly a three-year mine life. Very pleased to see that exploration providing results. It is very leveraged to gold operations and has a good margin right now. With these types of gold prices, we are seeing potential EBITDA generation on an annual basis exceeding the purchase price. Free cash flow from that operation is indeed very exciting. The other added benefit is we are ramping up Castle Mountain into production soon, allowing us to smelt the gold and share some of the back-office and services between the two mines. Let me turn back to Brazil and Fazenda on the next slide. Fazenda was slightly affected by COVID, with workforce reductions for a short period. The local mayor had put in place some restrictions to manage COVID in communities. We are now operating at full capacity. Grades were slightly lower for the quarter, and we expect to return to normal grades by late Q3 or Q4. Good costs were achieved, though there were slight deferred expenditures for the quarter into the later part of the year. RDM, the other Brazilian mine, delivered strong first-half performance with better-than-planned grades. Excitingly, capturing and storing water has been effective this year, and we expect to make it through the year with the available water sources. Costs were good, and there are some deferred stripping costs from the first half. We plan a significant pit extension once we receive the necessary permits to access higher-grade ore later this year. Overall, we are pleased with RDM's performance and Pilar had a respectable first half despite a temporary suspension in April but had overall good performance benefitting from FX and fuel rates. Looking at Slide 8, we have updated our cost and production guidance for the year. Despite risks due to COVID in all three countries we operate, Los Filos has had a significant adjustment, from an expectation of 170,000 to 190,000 ounces to about 100,000 ounces of anticipated production this year. This was driven by COVID impacts and the postponement of higher-grade ores into next year. The overall guidance for the year is approximately 470,000 to 530,000 ounces, reflecting a decline of about 12%, while costs are down slightly to $975 to $1,025 per ounce. On the capital side, we are about the same as initially expected, with about $9 million on sustaining capital spend and approximately $144 million on expansion capital. Interestingly, we have added a few million for early works at Santa Luz. Let me turn over to the growth and development projects on Slide 9. Castle Mountain's Phase 1 construction is substantially complete, at about 95% or 96%, and we commenced ore stacking in June, with commissioning underway. We expect to meet guidance for this year, though there were slight delays due to COVID, impacting contractors and final construction. We do not expect major issues for this year, but to be conservative, we have slightly delayed the goals for the last few weeks into early Q4. We anticipate producing about 50,000 ounces on average there per year. In the background, we are working on the Phase 2 feasibility study, expected before year-end, demonstrating the potential for a 200,000-ounce per year mine. Additionally, we are drilling for water onsite for Phase 2 and in nearby towns. With success so far, we will provide results when available in the next six months. Switching back to Los Filos in Mexico, exciting developments are happening despite the temporary suspension. This project typically produces around 200,000 ounces per year, with potential for 350,000+ ounces in the near future. Much of this relies on developing Guadalupe open pit and Bermejal underground. We are considering upsizing the carbon in-leach plant from a 4,000-ton per day capacity to approximately 8,000 tons per day, expandable to 10,000 tons per day. We hope to make this study public in the next three to five months. Excitingly, it has allowed us to reassess the mine plan and scheduling. With the new gold price environment, we see potential for increasing our reserves short term. Also, on a smaller scale, we are excited about restarting Santa Luz in Brazil. It is slightly ahead of Los Filos. We are finalizing CapEx and economics now and expect to announce that study in the second half of the year. Keep in mind Santa Luz is a 100,000-ounce producer with an initial mine life of 11 years, and we're excited about its upside potential. This pipeline involves four fully financed projects: Castle, Los Filos, and Santa Luz, with significant organic growth potential towards annual production of nearly a million ounces and roughly a 20% growth rate per annum. It's quite unique compared to mid-tier competitors to have a funded organic growth profile. Looking at Slide 10, we illustrate our projections over the next few years. If successful in executing this compound growth trajectory, we believe we will significantly enhance our market cap, which remains below CAD4 billion while peers producing 750,000 ounces+ per year range from CAD6 billion to CAD10 billion. This execution will present exceptional potential for reiteration, especially considering our exposure to gold being robust in our portfolio. With 20 million ounces in resources and over 12 million ounces in reserves, we possess a 20% per annum growth rate, and our key objective now is to execute on this growth profile effectively.

Christian Milau, CEO

In summary, we had a good first half of the year. Despite the disruption, we are very happy with the performance of the mine, the integration of the team and assets. The second half of this year is very catalyst-rich. Our long-term plans are on track despite some disruptions, the teams are in place to deliver on it. Los Filos and the CIL plant construction looks set to start in the second half toward year-end, and we will also get that study out, which should provide a lot more detail on it. Santa Luz has already commenced early works, and we plan to publish that study in the second half of this year. Castle Mountain's Phase 1 gold pour should occur in the first half of Q4. The Phase 2 feasibility studies are in Q4, along with starting the Aurizona underground prefeasibility, expected for completion in 2021. On the exploration front, while there is a lot to discuss, our focus is also on extending the mine lives at core lines and setting the stage for the next few years. Corporately, as Pete mentioned, we have been included in the indices and completed the merger, we also just published sustainability reporting information on our website. The rerating potential is exceptional, so we will continue to focus on our fully funded growth platform. Our strong balance sheet shows about $500 million in cash; we expect to be nearly net debt-free when excluding in-the-money convertible notes. Our net debt remains below one-time EBITDA. We are in a strong position to deliver on this profile, so I want to thank the team and our shareholders for their support during the first half of the year.

Rhylin Bailie, Vice President, Investor Relations

Thank you very much, Christian. Operator, could you please remind people how to ask a question?

Operator, Operator

Certainly. We will now begin the question-and-answer session.

Rhylin Bailie, Vice President, Investor Relations

Thank you very much. While we wait for people to ask questions on the phones, I will ask a question from our online listeners. How will the development delay at Los Filos affect your production in 2021 at that project?

Christian Milau, CEO

In terms of Los Filos for 2021, we are just starting our budget process, so I don’t have detailed information on that yet. But we do expect to see here, as we move towards the higher grades at both Guadalupe and Bermejal, an incremental production increase into next year. We won’t have the benefits of the CIL plant probably until the end of 2021 or into the first half of 2022, when it becomes operational. So you’ll see a steady upward trend over the next 18 to 24 months.

Rhylin Bailie, Vice President, Investor Relations

Okay, thank you. Can you please take a question from the phones?

Operator, Operator

Certainly. Our first question comes from Ovais Habib with Scotiabank. Please go ahead.

Ovais Habib, Analyst

Hi Christian and team. Congrats on a good quarter despite COVID impacts that we saw in Q2. A question for Christian: starting off with Aurizona, obviously, production was low as a result of the rainfall, which limited access to some high-grade areas. You have increased guidance at the mine as well for the year. Now grades are the likely reason for that increased guidance. Can you give us a ballpark estimate of the grades you are expecting in the second half? And also, are you looking to do anything else to mitigate any risk in that project for the next rainy season going into 2021?

Christian Milau, CEO

I will take part of that and let Scott comment on grades. We were trying to be conservative going into the rainy season, factoring in potential limitations on accessing higher-grade ore. We had a stockpile, which is obviously lower grade, but I would say we slightly outperformed expectations. The plant operated well, and we see potential into the dry season to make up for that stockpile again. In terms of grades, Scott, could you comment?

Scott Heffernan, Head of Exploration

Yes. Grades are slightly lower in the first half due to sequencing in areas accessible during the rains. We predict grades in the 1.5 to 1.6 range for the second half.

Christian Milau, CEO

We plan to significantly ramp up the mining rate as we head into the dry period, similar to what we observed last year. We are fully prepared for that.

Ovais Habib, Analyst

That sounds great. Sticking with Aurizona, you are looking to modify the processing from CIP to CIL to improve recoveries. Was this conversion planned since starting production at Aurizona, or is this a new decision? Could you also comment on the cost of this conversion?

Christian Milau, CEO

As for the cost, I believe it is less than a million dollars, so it is relatively minor, and it won't disrupt operations much. It is a seamless transition.

Ovais Habib, Analyst

Perfect. Can you comment on the drilling for water at Castle Mountain? Is everything going according to plan?

Christian Milau, CEO

We are on hole number four or five, and we have found water in all of them. We are conducting pump tests to assess recharge rates. We are also exploring alternative water sources nearby, ensuring all options are covered. Good news on water availability.

Ovais Habib, Analyst

Sounds good. Thanks for addressing my questions, Christian.

Christian Milau, CEO

Thank you.

Operator, Operator

Our next question comes from Kip Keen with S&P Global. Please go ahead.

Kip Keen, Analyst

Hi, everyone. Thanks for taking my question. What's your strategy on shareholder returns? While still in growth mode, how might you approach it as you accumulate more cash, particularly if gold prices stay elevated?

Christian Milau, CEO

It’s a good question. We are often asked about this in the current gold environment. With operating cash flow funding our growth, we plan to repay $200 million on a revolving credit facility shortly. Additionally, we are beginning the budgeting process and have considered dividends. We are getting more inquiries about share buybacks, especially concerning dividends next year. If gold prices remain high, we expect the ability to begin returning capital in some form to shareholders. So watch this space for future updates.

Kip Keen, Analyst

Thank you, and as a follow-up, have you made any staffing changes post-COVID at Aurizona or Mesquite? What are you seeing in terms of savings?

Christian Milau, CEO

Staffing levels have remained fairly stable. We've added some personnel for modified shifts and increased testing, but overall impact on costs has probably offset by FX rates and fuel prices.

Scott Heffernan, Head of Exploration

We have also implemented cross-training to create multi-skilled employees for operational flexibility due to COVID-related shortages.

Kip Keen, Analyst

Great, thank you.

Rhylin Bailie, Vice President, Investor Relations

Thanks, operator. We have a question now from a shareholder online in Saudi Arabia. When do you expect the company to be profitable on GAAP measures?

Christian Milau, CEO

Currently, we would be profitable if gold and share prices are stable. Non-cash losses from increased share prices adjusting our warrant liability on the balance sheet have influenced this. If both stabilize or drop slightly, we expect to see profitability this quarter. We are at that cusp.

Rhylin Bailie, Vice President, Investor Relations

Thank you. Another question from online: you mentioned in your catalysts slide that you expect creative M&A in 2020. Is that still on the table despite rising gold prices?

Christian Milau, CEO

Accretive M&A is not the highest priority currently, though we remain opportunistic. We have numerous growth opportunities internally and will continue seeking ways to expand, ideally with lower-cost, longer-life mines in good jurisdictions, but it isn't essential right now.

Operator, Operator

Our next question comes from Dalton Baretto with Canaccord Genuity. Please go ahead.

Dalton Baretto, Analyst

Thanks, guys. A question about your current portfolio: considering the high gold prices, how are you approaching your assets? What specific criteria are you looking for as you consider M&A opportunities?

Christian Milau, CEO

It’s indeed tougher to find deals at high gold prices. We are focused on producing assets in the Americas, ideally with annual production of 150,000 ounces or more, although those are trading at a higher value now. We remain open to development assets if that relative discount changes.

Dalton Baretto, Analyst

Understood. Regarding Solaris, what is your current view on that holding?

Christian Milau, CEO

Solaris has been a strong performer for us, valued around $70 million to $75 million now. We plan to hold onto it for the long-term, expecting significant future returns from our investment.

Dalton Baretto, Analyst

Thank you. That's all from me.

Christian Milau, CEO

Thanks, Dalton.

Operator, Operator

Our next question comes from Kerry Smith with Haywood Securities. Please go ahead.

Kerry Smith, Analyst

Thanks, operator. Christian, could you update us on the permit status for Castle Mountain Phase 2, Los Filos expansion, and Santa Luz restart? Which permits are needed, and when do you anticipate finalizing them?

Christian Milau, CEO

Regarding Castle, we have permits for Phase 1. The feasibility study for Phase 2 is expected in Q4. We will submit an amendment as required. Los Filos, the optimization study is underway. We will revise the permit for the plant location, likely taking around six months. The additional permits are landscapes confirming the existing footprint. For Santa Luz, we have all permits in place, aside from one for a geotechnical drilling program to design for the next phase of tailings impoundment, targeting completion for that.

Doug Reddy, Head of Technical Services

Los Filos will have its revised permit for the new plant location submitted, along with permissions for placing filter tailings on the heap leach pads.

Kerry Smith, Analyst

So we could expect permits to be in hand by mid-next year for Los Filos and Santa Luz?

Doug Reddy, Head of Technical Services

That is a reasonable timeframe. For Santa Luz, we have all permits aside from the ongoing geotechnical studies for the tailing impoundment lift, which we will finalize soon.

Kerry Smith, Analyst

Good to know, thank you.

Rhylin Bailie, Vice President, Investor Relations

We have another question from an online listener. Could you provide more clarity on sharing resources between Mesquite and Castle Mountain to reduce costs and improve efficiencies?

Christian Milau, CEO

Now that we are nearing operational status, we are trucking loaded carbon from Castle to Mesquite, which saves about 10% in capital costs as we utilize existing smelting capacity in Mesquite. Additionally, we can optimize back-office resources, fleet management, and joint procurement to gain efficiencies across both sites.

Rhylin Bailie, Vice President, Investor Relations

Thank you. At the moment, there are no further questions online or on the phone. We will wrap up the call.

Christian Milau, CEO

Thanks again for attending and for your support during these challenging times. The business is in a great position, growth is intact, and there are exciting plans ahead. Stay tuned for a rich second half of the year with plenty of positive news as we manage this new operational environment.

Operator, Operator

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