TRX GOLD Corp Q4 FY2023 Earnings Call

Welcome to the year-end and fourth quarter results presentation. Please note that all participants are in listen-only mode and the meeting is being recorded. After the presentation, there will be a chance to ask questions. If you would like to ask a question, click the Q&A icon on the left side of the screen. You will have the option to raise your hand to ask your question verbally or submit it in writing. When you are introduced, your line will automatically be unmuted. Analysts who are joining us today can also press 1 on their telephone keypad to enter the question queue.

Yes. Thank you, Christina. Before we begin the call today, I'd like to recognize that our Founder and Chairman passed away during the quarter, and all of us here had a good relationship with Mr. Sinclair. He will be greatly missed. So with that, this is our 2023 year-end conference call. Obviously, we'll have an Annual General Meeting conference call in the new year as part of the Annual General Meeting, and I'm quite excited for what we have in 2023. We had a significant amount of growth. We're seeing the potential of the Buckreef Gold Project. We had another plant expansion and we have another one underway. We're getting a much better sense of the geological potential of the property and are quite excited about that and where it can go over time. We're hopeful to significantly increase the resources on our property, as well as continuing to increase the production profile. 2023 was a great year. We're quite excited for today's call and for where we're going as a company as well. As a cautionary note, we will be talking about forward-looking statements, so I'd ask everyone to go to our website and our corporate presentation to read the cautionary note. Today's speakers, obviously, are myself; we have Andrew, our COO here in Toronto; we have Mike, our CFO here with me as well; and Christina is joining us from Montreal. So TRX, a lot of you will hear this in our presentations, we're a very growing company. We have an experienced management team that continues to deliver rapid growth on both the production side, specifically on the production side, and we have exciting blue sky potential on our property and the growth of resources over time. The Buckreef Gold Project currently has under the 2020 resource statement, 2 million ounces in the measured and indicated category, around 1.8 grams per tonne. As many of you know, the deposit does come to the surface and it's relatively flat, featuring a vertical shear zone, so it's easily mineable. The widths are around 20 meters with easy metallurgy, and grind crush CIL in the oxide ore. As we will get into in this presentation, which is very exciting, our results around the sulphide ore, which are now being included in the mine plan for processing. We're fully permitted to grow as large as we can, with our permit extended to 2032, which is renewable for the life of the deposit. The processing plant and mine consistently meet production guidance, we have a minimal environmental footprint, and we recycle all water. We have good tailings management, are connected to the national power grid, and we adhere to all international standards around environmental standards with a solid ESG program as well. We have exceptional exploration potential which will hopefully mean that this mine life continues for a considerable period of time. The highlights for 2023 show significant growth. Our goal is to predominantly self-fund operations and manage your capital with minimal dilution, and I think we've achieved that in 2023. We generated record revenue, operating cash flow, and adjusted EBITDA with a great profit margin, which Mike will detail in a moment. We focused on reinvesting right back into the business to continue to grow it. This is the first year that we've managed to execute on that business plan. With the expansion expected in the next 3 to 6 months, that's going to provide us more cash flow to reinvest back into the business and its potential, both operationally and regarding resource expansion. In 2023, we executed on the 1,000 tonne per day plant, which came in on time and on budget for $6.4 million. We are now working on another mill expansion, increasing its throughput capacity by 75% to 100%. The production capacity will depend on the grade going through the mill, and we will provide more guidance on that in the future. We also unlocked the whole deposit, particularly in the Buckreef Main Zone. Everything being discussed here right now refers to Buckreef Main. The sulphide ore is currently going through the mill following a bulk sample that continues to process today. We're currently analyzing the right mix of oxides and sulphides to achieve an appropriate recovery rate over time. In 2023, we extended the known mineralization around our Main Zone by 500 meters, and discovered the Anfield zones. Andrew will detail how we're setting up a good exploration program as this new plant comes on board and how we can expand the life of the deposit. With that, I'll hand it over to Mike, who will go through the financial results for 2023.

Thank you, Stephen. Good morning, everyone. Thanks for joining us. As Stephen mentioned, it was a record year operationally for us at TRX. We produced almost 21,000 ounces for the year, which was in line with our full year guidance of 20,000 to 25,000 ounces, following the launch of the 1,000 tonne a day plant in October of last year. We sold all of what we produced during the year at an average realized price of $1,845 per ounce. In Q4, gold prices exceeded $1,900 per ounce and are now trading over $2,000 per ounce. In fact, this morning, we were up over $2,050, marking record levels and suggesting record growth heading into next year. Record production drove record financial results as well, with revenues exceeding $38 million. Our cost of sales was just above $20 million, resulting in a gross profit exceeding $18 million or almost 50%, affirming a very cost-effective high-margin operation. We posted record net income of $7 million, with EBITDA near $14 million, and importantly, operating cash flow above $17 million, which has been reinvested back into the business. For investors tracking this story, this marks the third consecutive year of growth, and we anticipate further growth into next year as we expand to 2,000 tonnes a day. On the cash cost side, we recorded cash costs of $904 per ounce for the full year, which was higher than our previously guided range of $750 to $850 per ounce, primarily due to unplanned processing costs in Q4. Specific reasons included unexpectedly high maintenance costs from a mill motor failure on one of our ball mills and a subsequent overhaul of our crushing circuit, contributing to a $30 per ounce variance. Additionally, we experienced inconsistent and unstable power from the TANESCO Power Grid, leading to higher fuel consumption from gensets, which impacted cash costs by approximately $18 per ounce. We're now connected to a new substation, significantly closer and have experienced consistent grid power since November, leading us to expect lower costs heading into next year. Although we haven't provided detailed guidance on this, we suggest lower costs year-over-year. Our strategy revolves around using generated cash flow to reinvest back into operation and value-enhancing activities. Hence, the $17 million to $18 million of operating cash flow was reinvested into the business, having expanded the plant from 360 tonnes a day to 1,000 tonnes a day. We are on track towards the next milestone of 2,000 tonnes a day, while we’ve already procured a mill, and we’re enhancing our tailings storage to support higher production volumes. We're also conducting long-term studies for additional capital assets—all to facilitate long-term business growth as projected. Next slide, please.

Excellent, thank you, Michael. That's great. We're seeing significant improvement in our financial metrics and we expect these metrics to progress even further this year, which we'll revisit in our guidance. It's safe to say that projects, once initiated, can expand even more quickly over time; it's like pushing a snowball down a hill, it gets bigger as it rolls. Yes, we are quite excited about that. One of the significant factors is the sulphides. Last year, we had extremely heavy rainfall—what they call a once-in-a-hundred-years event in the spring. During such conditions, hard rock is easier to process than oxide rock because it has less stickiness and clay. Therefore, we pivoted to focus on the sulphides, and the results have been promising. The previous metallurgical study suggested recovery rates in the mid to high-80s, which we're seeing with our current mill feed. This is crucial, given that 90% of the resources in the Buckreef Main Zone exist in sulphides, and we are successfully processing them. Andrew, could you elaborate on the pit visuals for investors?

Thank you, Stephen, and good morning to everyone. In the photograph on the bottom, you can see the pit itself. The very top part is brown, which is topsoil. Below that, the ochre-orange colors represent our oxide zone, approximately 20 to 25 meters thick. At the deepest part of the pit, you can see the gray rock—that's the sulphides we've started to expose through the pit, as Stephen previously indicated with the examples.

Great, thank you, Andrew. Now onto the next slide regarding the 2,000 tonne per day mill expansion. As I've communicated to many investors, we operate on a pay-as-you-go framework. This means growth timelines can adjust based on hitting targets. As Mike mentioned, we experienced some power issues in Q4, but they have since been resolved. This has caused a slight delay with the mill expansion. We anticipate the project will come online in the first half of fiscal 2024. The mill is on-site, and long-lead items have been ordered. We will first expand the crushing circuit to over 2,000 tonnes a day, which will enable the establishment of a larger crush stockpile, facilitating consistent mill feed. My goal is to surpass 1,000 tonnes a day as our crushing system operates. We’ve budgeted for this expansion, and that remains our target.

Indeed, we've budgeted $6 million for the expansion, and it's going to be funded from our existing cash resources. Obviously, we have a big ore stockpile and future sales from ongoing banks, which creates conversations for ongoing financing options. Just like our previous mill expansions, this will also be built through 100% Tanzanian resources, ensuring seamless integration. We don't anticipate any issues with the ramp-up of this plant as we are already achieving 1,000 tonnes a day. Interestingly, the mining rates don't need to be increased in this year's budget to accommodate this.

Now, let's focus on how we plan to scale this physical asset and expand our processing capacity while ensuring we possess sufficient resources for sustaining a long mine life. Andrew, I'll turn it back to you.

Thank you, Stephen, and Mike. As you can see from our drilling program, which had just under 7,000 meters of drilling including infill, sterilization, and pure exploration, we've been able to extend mineralization to the North and a bit deeper to the South, right underneath the South pit—about 500 meters to the Northeast and Southwest at depth. Additionally, we’re seeing strong mineralization results through our drills on both the Anfield and Eastern Porphyry zones, closely aligned with the Buckreef Main Zone. This presents a very important opportunity for our future mineral resources. The best way to secure continuous throughput increases is to have several available pits—main pit, South pit, and we will also be looking to go underground. Thanks to our archaeological work, we've delineated and defined 2 to 3 high-grade shoots. I am confident that this deposit will go underground, which will contribute to a much longer mine life.

Just before you continue, Andrew, can you explain to the investors how we determine the switch from open pit to underground and the significance of strip ratios in that consideration?

Certainly, Stephen. Once the strip ratio reaches around 6 or 7 to 1, it becomes more economical to transition to underground mining. The high-grade shoots' narrow widths make underground mining a viable option, allowing us to optimize costs in terms of strip ratio. The economic decision involves analyzing costs versus the necessary infrastructure for mining stopes underground.

Given we have a vertical deposit, as we penetrate deeper, we need to manage stripping properly to maintain our values. Given the width of 20 meters, this deposit is well-suited for underground mining, likely proving cheaper over time compared to surface mining.

Certainly, Stephen. We're seeing preliminary reports indicating high-quality rock, which facilitates underground mining.

To emphasize, we won't face the same kind of challenges relating to underground steel supports due to the rock's quality. We have sections of the pit that are quite stable.

Correct. We've already commenced interactions with some very small amounts of old stopes from historical operations. Interestingly, those have remained intact for the past 40 years.

That's an important point. Our historical underground operations have maintained their structure well, even after being flooded. We've kept those well under control.

Absolutely. Transitioning to one of my favorite topics—the Eastern Porphyry—our best drilling results there yielded a 14 meters width at 3.5 grams per tonne, including 3 meters at just under 11 grams. This result was from a mere 27 meters below the surface—very encouraging news. Likewise, at the Anfield Zone, we registered a result of 2.9 meters at a remarkable 13.7 grams per tonne, again, shallow at approximately 43 meters. For those who have been with us for a couple of years, you may recall a photo of someone holding a rock from the Anfield Zone. Here we are with nearly 3 meters at 14 grams per tonne from early on in our drilling program. I remain exceptionally bullish on this overall trend; additionally, beneath the South pit, we have encountered wide zones of mineralization ranging from 1 to 2 grams per tonne, comparable to our main deposit. Presently, we are performing water management work in the South pit to ensure it is re-included into our mining plan later this year.

Fantastic. Now, regarding guidance for the year, as many know, we can build mills and capacity relative to the market at an extremely cost-effective rate. If we examine all associated costs, our 2,000 tonne per day plant's total cost is less than $20 million, hovering around the $16 million to $17 million range, challenging anyone to show me a project with similar specifications built for under $50 million to $70 million elsewhere.

Indeed, there have been studies corroborating that our approach has been notably capital efficient.

That's right. With this being our third mill expansion, we anticipate production guidance for this year to be between 25,000 to 30,000 ounces. This isn't the run rate of the 2,000 tonne per day plant that's anticipated; rather, it reflects the output of the 1,000 tonne per day plant operating for most of the year and the 2,000 tonne per day plants beginning operations. As such, the 2,000 tonne per day plant will exceed this guidance. Cash costs are predicted to fall between $800 to $900 per ounce as of next year, likely decreasing even further once the full plant capacity is achieved.

I would add a couple of comments, Stephen. When discussing power connectivity to a substation close to the site, we anticipate benefits from this transition. Moreover, we expect significant economies of scale from a larger plant, having noted how we won't need a substantial increase in workforce as we transition from 1,000 to 2,000 tonnes a day. Therefore, we can see our processing cost per tonne and cash cost per ounce decline since we'll be leveraging our existing workforce to double our output.

Indeed. The figures we present are blended numbers considering both the 1,000 tonne and 2,000 tonne operations.

Moreover, let's not forget about our pay-as-you-go approach. If the team exceeds targets on guidance figures we've shared, we can adjust capital expenditure timelines earlier, expediting the plant's online capabilities.

Exactly. With our business model, we aim to produce gold, fund exploration drilling, finance additional capital programs, and promote our social license over time. This model worked well in 2023, and I’m optimistic for 2024 and beyond. Understanding that social responsibility is crucial, we acknowledge that our mine inputs—including mining, construction, and capital expenditures—constitute over 50% of our revenue. Consequently, the communities should receive the biggest share of these benefits. Therefore, we are committed to being good corporate citizens and maximizing local procurement in our operations.

Stephen, it significantly reduces our supply chain and inflation risk as well.

Indeed, we've been witnessing an increasing flow of news around us. The mill expansion is in progress, and we will release updated modeling for the Buckreef Gold Main Zone soon. Metallurgical and geotechnical studies are underway, which will provide a clearer picture of resource opportunities and a longer life project at Buckreef. Speaking of our current market position, our share price has remained relatively stable, with a cash position of $7.6 million as of August 31, 2023. We’re slightly above that figure currently. Consequently, we're maintaining a strong liquidity profile in this environment, supported by three brokerages in the United States. All considered, I'd like to see our share price rise, as everyone does. Despite challenging market conditions, we've navigated through, and we aim for a higher share price over time. We believe this can be achieved by executing our business plan, although it may take time given our pay-as-you-go system, which allows for some delays or accelerations. With that, I'll turn the presentation over to Christina and the operator for questions. As outlined, there's always a lot going on at Buckreef.

Thank you, Stephen.

In your press release, you state and quote, lower cash costs are expected in the second half of the year once the ramp-up is complete and the processing plant achieves a steady state. Can you quantify the lower cash costs that you think we might see? I assume there is some modeling you've done. Additionally, conceptually, would it be fair to take the first half of the year at the higher end of the $900 mark of your range, and then assume the second half will be closer to the lower end of the range, or is the delta even larger?

We've not guided to that level of detail, but yes, Heiko. As I mentioned, we expect economies of scale as we transition toward 2,000 tonnes a day. You can reasonably expect Q4 to be among the lowest cost quarters once the plant achieves its maximum capacity. Your thinking aligns with how we view it; the front end of the year would be around the higher end of the range while the backend could trend lower, averaging out over the year.

In your internal model, when do you project the 2,000 tonne-a-day processing plant to become cash flow positive on a monthly basis? Has any sort of modeling been completed?

Q4.

Can you specify which month we might see more money coming out than going in?

Anticipate cash flow positivity by the start of Q4, which means around June.

For clarification, operating cash flow remains positive as always; it predominantly funds CapEx for construction. So, the new plant will utilize all operating cash flow, expediently bringing it online.

Building upon Heiko's inquiry regarding ramping to 2,000 tonnes daily, can you elaborate on the anticipated grade profile once maintaining these elevated throughput levels? Will it resemble what we've observed over the past year?

Are you able to comment on the grade profile during this strip?

Sure. As we progress to 2,000 tonnes a day, there may be a slight decline in grades. This adjustment is due to fast-tracking high grades for plant development. Consequently, we will likely have medium to lower-grade stockpiles available for processing, and we might incur mining costs since the ore is already mined. We expect to see this slight grade decrease in Q4.

Looking towards the medium term, are you anticipating gradual expansions beyond the 2,000-tonne-a-day plant, or do you think you might escalate to a 100,000-ounce-a-year range with a single expansion?

We are flexible in our approach and can pursue either option, provided it makes valuation sense for shareholders. As previously mentioned, we've achieved excellent cost efficiencies while aware of opportunities to expedite the process if needed. It ultimately depends on financing for required capital compared to our pay-as-you-go program. We are currently analyzing potential expansions and will prioritize the approach that maximizes shareholder value.

Regarding the timing for potential expansions, might we see updates around the first quarter or possibly mid-next year?

I suspect updates will be more likely by mid-next year as we finalize various scenarios. We are gaining a clearer understanding of asset potential, allowing quicker pivots if required.

Congratulations on your discipline over the past year, especially your commitment to operating cash flow paralleling capital investment. It's evident that you're prioritizing the project effectively. Most of my inquiries were already addressed; however, I'd like to revisit your perspective on the gold price and cost analysis in Tanzania from a North American viewpoint. How do you see the advantages of operating within Tanzania in terms of cost?

This remains a debated topic around what constitutes a Tier 1 jurisdiction. In Tanzania, a significant benefit is the established social infrastructure. This attributes to a qualified workforce with substantial experience in global mining operations, forming an effective framework for building and running operations. The labor cost differentials also play to our favor, especially considering electricity and fuel costs. We've found our operational experience in Tanzania remarkably positive in comparison to anticipated risks associated with so-called Tier 1 jurisdictions.

A pertinent example is the recent power line issue we've faced. Upon notifying the regional authorities, we were swiftly reassigned to a more reliable power line, illustrating the responsive nature of local governance.

Exactly. Establishing a productive enterprise contributes to local economies through jobs, taxes, and economic activity. Our goal mirrors the government’s intentions regarding economic growth and support.

Considering rising gold values above $2,000, is there competition toward advancing other projects in Tanzania and any significant impact from graphite mining activities?

Thus far, we've encountered favorable input costs. There is indeed a global shortage of highly skilled mining engineers; however, this is an industry-wide challenge rather than specific to Tanzania. Other disciplines—metallurgists, geologists—remain abundantly available. We're attracting key talent with modest turnover, especially as we demonstrate stable growth compounding desirable conditions.

Importantly, our strategy for growth has allowed us to attract talent within the industry effectively.

Right. The strategic focus must first remain on the processing plant, concentrating on our property before looking at the surrounding region. We continue to receive interest from various players regarding opportunities.

Your press release is succinct. Can you confirm if the 1,000 tonne-a-day ball mill is all that's required for expansion, given there appears to be excess capacity in other parts of the plant?

There are additional components in the expansion plan. As I mentioned, we're expanding the crushing circuit first, with equipment arriving at this month. Additionally, the ball mill's plinths need to be constructed this month, along with necessary electrical components expected in the new year. We have a long-term plan addressing tailings, with an ongoing assessment for dry stack solutions and expansion of our wet tailings facility. Your concern is completely valid.

Can you outline potential drilling programs for 2025 and 2026, considering cash flow from production?

Of course! Referring to this slide, the Buckreef main zone is vividly depicted in the center. East of that, we’ve managed to identify three zones extending over three kilometers, anchored by the Eastern Porphyry deposit, which remains open to the Northeast. There are also opportunities in the extreme East and West regions. The potential for drilling and exploration in these areas will only increase, leading us with plenty of targets for 2025-2026.

Agreed, as we refine resource understanding and enhance operational capabilities, we will open avenues for growing our asset base systematically.

Are there shortages in labor or inputs affecting production because of the elevation of gold prices or the growing graphite sector in East Africa?

We've experienced stable input costs. The shortage of skilled mining engineers is a global issue rather than a localized one; however, there remains an excess of skilled labor in metallurgists and geologists locally. We're confident in our HR strategies, especially with a growing project that can facilitate recruitment and retention. Christina, shall we explore any text questions?

Yes.

I see we have a question from a private investor regarding the likelihood of dividends in physical gold? At this time, we are not considering this option. The Tanzanian government imposes a gold royalty, monitoring its gold output closely, and we have a joint venture with the government controlling production. We also received an inquiry about our exploration potential. Although personal opinions may differ, extensive work must validate the speculated 5 million to 10 million ounces of gold present. I remain hopeful, yet it's essential to support this assertion with concrete drilling data.

We have ample exploration potential on our special mining license.

The next question asks when we expect an updated indicated and inferred resources report. We're currently evaluating the economic potential surrounding the Buckreef Main Zone and plan to release an updated resources report by the first half of calendar 2024. There’s a query regarding our current relationship with the Tanzanian government amidst prior concerns about foreign investment. Presently, we maintain a productive relationship with local officials, and our reputation as a good employer and taxpayer is beneficial for our continued growth.

The new regime actively promotes foreign direct investment in mining sectors, aiming to increase mining's GDP contribution.

Overall, our strategy focuses on cultivating more investor interest. While our institutional shareholder base remains stable, we’re keen on onboarding new long-term investors while we enhance our operational capabilities. Thank you all for attending today's call. We've solidified our growth trajectory in 2023, and we look forward to continued progress into 2024 and beyond. Please stay tuned for updates coming your way soon!

This concludes the meeting. You may disconnect. Thank you for participating, and have a pleasant day.