Earnings Call Transcript - ORLA Q2 2024

Operator, Operator

Good morning, ladies and gentlemen and welcome to Orla Mining's Conference Call for the Second Quarter 2024 Results. My name is Kayla and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Please be advised that this call is being recorded. I would like to turn the meeting over to Andrew Bradbury, Vice President of Investor Relations and Corporate Development. Please go ahead, Mr. Bradbury.

Andrew Bradbury, Vice President of Investor Relations and Corporate Development

Thank you, operator and welcome to Orla's Second Quarter 2024 Results Conference Call. We will be making forward-looking statements during today's call and I would direct you to the first and second slides of the presentation which contains important cautionary notes regarding these forward-looking statements. All dollar amounts discussed today will refer to US dollars unless otherwise indicated. The Orla executive team is on the call this morning and I'll pass the call to Jason Simpson, President and CEO.

Jason Simpson, President and CEO

Thanks, Andrew. During the second quarter, Camino Rojo continued to produce higher-than-planned ounces at low costs, all the while maintaining the health and safety of our workforce and consideration of our local environment. Our low-cost production combined with higher gold prices is driving increased margins and cash flow, which is being used to pay down debt and invest in our growth. Some of that growth includes the Camino Rojo sulfide extensions with recent drilling showing impressive high grades and strong initial metallurgical results. We have the executive team on the call to provide specific updates in various areas. The year-to-date outperformance at Camino Rojo enables us to increase our full year production guidance to 120,000 to 130,000 ounces and decreasing our all-in sustaining cost guidance to $800 to $900 per ounce of gold sold. I am very proud of our team's efforts in delivering consistent execution quarter-over-quarter. Now, over to Andrew Cormier, our Chief Operating Officer to discuss more on this operating performance.

Andrew Cormier, Chief Operating Officer

Thank you, Jason. As mentioned, our operating team in Mexico has delivered another strong quarter. It is imperative to Orla that we maintain a safety-first culture and always consider the impact of our actions on our stakeholders. During the quarter, we mined over 1.9 million tonnes of ore at a strip ratio of 1.08. In the second half of the year, we plan to continue to increase the rate of movement to a strip ratio of 1.5. As we previously indicated, we'll be mining at least 90% of the material planned for the year. The average gold grade of ore processed during the second quarter was 0.87 grams per tonne. We also achieved an average stocking rate of 19,717 tonnes of ore per day. I would like to provide an update on the recovery improvement program we started in August 2023. The objective of the program was to increase gold recovery by reducing the crusher product size while maintaining the daily throughput. The program has resulted in an increased gold recovery between 3% to 5% and we will continue with the testing in 2024. With the continued strong mining and operating performance in the second quarter, we produced over 33,000 ounces of gold. Year-to-date, we have outperformed on tons, grade, and recovery for both gold and silver. With the continued operational execution and performance, we are increasing our production guidance for the full year to 120,000 to 130,000 ounces of gold. The increased production guidance for 2024 is primarily due to the increased total stock material and improved recoveries. Overall grades for the year will remain in line with plan. It is worth noting that we are continuing our permitting efforts to expand the mine in Mexico and have the flexibility in the current mine plan. The permitting process also continues in Nevada. We are working through the federal permitting process with the Bureau of Land Management, the lead agency for the permitting. All 19 supplemental environmental reports have been submitted for review, of which 13 reviews have been completed. We anticipate permitting will continue through this year and next year in advance of the target construction start in 2026. And with that, I'll pass the call to Etienne Morin, our Chief Financial Officer; to discuss the financial results for the quarter.

Etienne Morin, Chief Financial Officer

Thank you, Andrew. During the quarter, we sold 35,000 ounces at a realized gold price of $2,332 per ounce, generating a record $85 million in revenue. The all-in sustaining costs for the second quarter were $782 per ounce, partly due to increased gold production and better silver recoveries. With strong gold production and effective cost management, we're lowering our 2024 all-in sustaining cost guidance to a range of $800 to $900 per ounce of gold sold, down from the initial guidance of $875 to $975 per ounce. This low-cost production, combined with higher gold prices, is leading to strong earnings and cash flow generation. Our earnings for the quarter amounted to $24.3 million or $0.08 per share. After accounting for unrealized foreign exchange gains and other minor items, adjusted net earnings were $23 million or $0.07 per share. These strong earnings reflect peer-leading operating margins of 64% and record free cash flow generation. During the quarter, exploration and project costs reached $9.7 million, with roughly two-thirds, or $6.6 million, expensed, and $3.1 million capitalized. Cash flow from operating activities, before changes in non-cash working capital, was $53.2 million or $0.17 per share this quarter. We also generated a record $44 million in free cash flow or $0.14 per share. As planned, sustaining capital costs will decrease in the second half of the year as the Phase 2 expansion of the heap leach pad was completed in early Q3. Total capital expenditures for the second quarter were $7.9 million, with $4.9 million for sustaining capital and $3 million related to non-sustaining capitalized exploration in Mexico. We've previously shown this chart, but it's important to reiterate our commitment to reduce our debt as we continue to generate strong cash flows. During the quarter, we repaid $10 million towards a credit facility and ended Q2 with $154 million in cash and $78 million in debt, resulting in a net cash position of $76 million. In July, after the quarter ended, we repaid an additional $20 million towards our revolving credit facility, reducing the current outstanding balance to $58.4 million. We will keep evaluating opportunities to reduce debt and lower interest charges while maintaining the financial flexibility to fund our internal project pipeline, including our exploration programs. Now, I'll pass the call over to Sylvain Guerard, our Senior Vice President Exploration.

Sylvain Guerard, Senior Vice President Exploration

Thanks, Etienne. In the second quarter, we continued to advance our 2024 Exploration program with ongoing drilling at Camino Rojo in Mexico and the commencement of our 2024 exploration program at South Railroad in Nevada. Throughout the quarter, we drilled over 10,000 meters, with approximately 7,800 meters on the Camino Rojo sulfide extension and 2,300 meters at South Railroad. We issued a press release in late June highlighting positive drilling intersections and metallurgical results from the Camino Rojo extension in the first half of 2024. Additional news releases providing results from our Camino Rojo and South Railroad drill programs are planned for late 2024. As part of the near-mine exploration at Camino Rojo, we are focusing our 2024 efforts on the promising Camino Rojo extension. We designed a 30,000-meter drill program aimed at testing and expanding the potential of the still-open mineralization at the expansive Camino Rojo deposit. The program targets polymetallic replacement style sulfide and skarn-type mineralization beyond the current resource boundaries. At the end of the quarter, we have drilled over 18,000 meters and 23 holes with assay and metallurgical testing in progress. The drilling results indicate potential expansion of the Camino Rojo sulfide resources at depth, extending beyond the current mineral resource down to at least 500 meters. The remainder of the current exploration program will focus on extending mineralization from half to one kilometer down the current limit of the mineral resources along the dike structure. This drilling is expected to test the open mineralized trends to assess the broader potential of the growing Camino Rojo deposit. The initial metallurgical results have been quite positive and are consistent with the results of last year, showing gold recoveries of 81% to 96% for bottle roll and 85% to 88% for rougher flotation, highlighting the potential for compatibility of this new mineralization style with both standard cyanide processing and flotation methods. As part of the Camino Rojo sulfide project planning, we are advancing an initial on-the-ground resource estimate, but it will not yet include any of the extension drilling which remains ongoing. Metallurgical studies on the recent phase are also ongoing. In Nevada, along the current trend, we have an exciting program underway. With the acquisition of Contact Gold, we increased our 2024 exploration budget by $3 million. We started our drilling 2024 in late May, and by the end of the second quarter, we had drilled more than 2,000 meters and completed nine RC holes, testing the extension of non-deposit with assay resource pending. The 2024 exploration program will continue to test potential extensions of mineral zones including targets on the edge of the Pinion and Dark Star deposits while also testing new exploration targets across the South Railroad project. Our 2024 Exploration program is progressing well with drilling operations underway in Mexico and in Nevada. We look forward to providing updates on our progress and results as we advance. I will now pass the call to Chafika Eddine.

Chafika Eddine, Sustainability

Thank you, Sylvain. On the sustainability front, we keep advancing towards our 2030 sustainability strategy to produce a net positive benefit for our stakeholders where we can add more than we extract from society, the environment, and the economy. Our second sustainability report will be released shortly, and I invite you to have a look to learn about the targets and key performance indicators that measure our progress. We have many reasons to be proud of our sustainability efforts. This includes how we are collaborating to protect and restore ecosystems and the low carbon intensity index from our Camino Rojo mine, which remains consistent with our 2022 level. This performance continues to position our Camino Rojo mine among the lowest global emitters in the gold sector. Embedding the sustainability strategy into the business targets means creating actions that are economically feasible and operationally achievable, which can create superior outcomes for the company and its stakeholders. We strive to foster a fair, safe, and healthy working environment, where everyone genuinely wants the company to succeed. We also keep engaging with all stakeholders to listen to their concerns and aspirations and to develop partnerships to maximize benefits. Openness is critical to building trust and achieving positive relationships. This is the way we are cementing Orla's reputation and culture for our company to remain recognized as a desired place to work and collaborate. I'll now pass the call back to Jason.

Jason Simpson, President and CEO

Thank you, Chafika. Our execution and delivery at Camino Rojo continue to underpin Orla's success. We are holding our costs and seeing margins expand in this very healthy gold price environment, which is strengthening the business. Thank you to our team in every country where we operate, who remain committed to their areas in this business. It is their collective efforts that drive us forward towards our vision of becoming the gold producer of choice. At this point, I'd like to open the call to questions and hand the call back to the operator.

Operator, Operator

And our first question comes from John Sclodnick with Desjardins. Your line is open.

John Sclodnick, Analyst

Yes. Thanks for taking my question, guys. Congrats on a great quarter and another year of increasing guidance. Just on the recovery improvements. Just wondering when you'd expect to start increasing that crush size and to the finer grind? And just on the impact of processing costs if you have a sense of that at this point?

Jason Simpson, President and CEO

Yes, certainly. Thanks, John, and good to hear from you and appreciate the acknowledgment. In terms of the reduced crush size, we began that in August of last year. So that's been underway for over a year now. As time has progressed, and we understand the kinetic effect in the leach pad, we are now able to communicate to the market the percentage increase and recovery that we're seeing. As you would expect, that increased recovery is part of the reason we've been able to increase our production guidance in addition to throughput and grades in the first half. But also we're lowering our all-in sustaining cost guidance this year, which also considers the effects of improved recovery. So as we conducted that process, beginning in August of last year, we're watching two things. One is could we achieve the reduced particle size and maintain our stacking throughput? The answer is yes. Secondly, could we do so and still keep our costs within budget and guidance? The answer to that is also yes.

John Sclodnick, Analyst

I appreciate the information you provided. For the second half of the year, I'm trying to understand the gold grades. We've seen higher levels in the first half, and I would expect a slight decline. Can you give some insight into how much of a decline to anticipate in the second half? Additionally, regarding the first strip ratio, I would expect that to increase. Is the 1.5 range appropriate, or do you see it going higher or lower?

Jason Simpson, President and CEO

Yes. Let's start with the grade. One of the contributors to our overachievement in the first half has been grade, in addition to throughput and recovery that we just discussed. For the second half of the year, recoveries and throughput will continue to be contributors, but the grades will in fact begin to level out. We expect, based on our latest forecast, to be in line with our planned grades. If we can continue our first half performance, we'll expect to continue to overproduce and stacking. We are now carrying through the recovery benefits that we described. So you're quite right. As we communicated to the market today, we're expecting the overall year-end grades to be in line with plan. The benefits of the increased production guidance will be a function of recovery and stacking rate. Now in terms of the waste, you also correctly picked up that we have increased our stripping ratio beginning in quarter two. As we previously communicated, we needed to make adjustments to the mine plan to enable us to strip the amount of waste planned for this year. That will, as you've noticed, be second half weighted. I think 1.5 that you cited is a reasonable number to expect in the second half of this year, such that by the end of the year, given the understripping in quarter one, we will result in about 90% of our waste stripping plan for the year. The benefits of that are that we are not going to upset the cost profiles for the years to come, having been able to adjust the mine plan and achieve the stripping ratio that we initially intended for 2024.

John Sclodnick, Analyst

Okay. That's great. I appreciate those details. Thanks. And again, congrats on a great quarter and year so far.

Jason Simpson, President and CEO

Thanks, John. Love your headline.

Operator, Operator

Our next question comes from Bryce Adams with CIBC Capital Markets. Your line is open.

Bryce Adams, Analyst

Good morning, all. Thanks for the presentation. Just one question and it's probably for Etienne, but maybe Jason started to touch on it there. For the accelerated stripping in the second half, how will those costs be classified? I assume capitalized, but will they be inside or outside of the all-in sustaining cost?

Jason Simpson, President and CEO

Go ahead, Etienne.

Etienne Morin, Chief Financial Officer

Yes. Thanks for the question, Bryce. No, it will be expensed. So it will be part of flow through inventory and be part of the cost of sales. We don't do capitalized stripping at this point.

Bryce Adams, Analyst

That’s very clear. Thank you.

Operator, Operator

And at this time, there are no further questions. I will now turn the call back over to CEO, Jason Simpson.

Jason Simpson, President and CEO

Thank you, operator. Since there are no further questions, I'd like to take the opportunity to thank you for your time and remind you that you can always reach out to Orla should you have any follow-up questions. Our management team is fully available. Thank you for tuning in.

Operator, Operator

And this concludes today's conference call. You may now disconnect.