AGI - Alamos Gold Inc. (AGI) Q3 2023 Earnings Conference Call Transcript
2023-10-26 16:15:23 ET
Alamos Gold, Inc. (AGI)
Q3 2023 Earnings Conference Call
October 26, 2023, 10:00 AM ET
Company Participants
Scott Parsons - SVP, IR
John McCluskey - President, CEO & Director
Greg Fisher - CFO
Luc Guimond - COO
Conference Call Participants
Cosmos Chiu - CIBC
Michael Parkin - National Bank
Ovais Habib - Scotiabank
Kerry Smith - Haywood Securities
Presentation
Operator
Good morning. I will now turn the call over to Scott Parsons, Alamos' Senior Vice President of Investor Relations. Please go ahead.
Scott Parsons
Thank you, operator, and thanks to everybody for attending Alamos’s third quarter 2023 conference call. In addition to myself we have on the line today John McCluskey, President and Chief Executive Officer, Greg Fisher, Chief Financial Officer, Luc Guimond, Chief Operating Officer and Scott R.G. Parsons Vice President of Exploration. We will be referring to a presentation during the conference call that is available through the webcast and on our website.
We'd also like to remind everyone that our presentation will be followed by a Q&A session. As we will be making forward-looking statements during the call. Please refer to our cautionary notes included in the presentation, news release and MD&A as well as the risk factors set out in our Annual Information Form.
Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Senior Vice President Technical Services, and a qualified person. Also please bear in mind that all of the dollar amounts mentioned in this conference call are in U.S dollars unless otherwise noted.
Now John will provide you with an overview.
John McCluskey
Thank you, Scott. Starting with Slide 3, we delivered another strong quarter with production of 135,400 ounces, exceeding quarterly guidance at costs near the low end of annual guidance. This reflected a solid quarter from Island Gold, and another excellent quarter from the La Yaqui Grande. With year-to-date to the production of 400,000 ounces, we are on pace to achieve a new annual record driven by an outstanding year from the Mulatos district. Given the strong performance we are increasing our production guidance by 5% to a new range of 515,000 to 530,000 ounces.
We are also on track to achieve our cost guidance for the year with total cash costs and all in sustaining costs both below the midpoint of guidance year-to-date. It was also a solid quarter financially, putting us on pace for a record year across a number of metrics including revenue and cash flow from operations. This is giving us the capacity to both grow as a company and generate solid free cash flow, including $37 million in the quarter and $109 million year-to-date.
Now looking at Slide 4. We continue to create value from within our growth projects. In August, we released an updated feasibility study on the Lynn Lake Project with a 44% increase in reserves supporting a larger, longer life low cost operation with attractive economics. As part of our balanced approach to growth, our current focus is on the Phase 3+ Expansion at Island gold. But Lynn Lake remains a key part of our longer term growth plans as another long life low cost project in Canada with significant exploration upside, which we expect will further enhance the economics of the project.
In September, we provided another exploration update from Mulatos, where we continue to extend high grade mineralization at PDA. We expect this exploration successful drive a further increase in higher grade reserves and resources as the deposits -- at the deposit beyond the million ounces defined at the end of last year.
This growth has been incorporated into a development plan to be completed later this year, which we expect will outline another attractive project and significant mine life extension of Mulatos. Construction of the Phase 3 Expansion at Island Gold is advancing well, with the headframe substantially complete and shaft sinking on track to start by year end.
The project remains on schedule and on budget, and we expect to be operating from the shaft and extended mill in the first quarter of 2026. These projects are key drivers of our strong outlook, supporting growing production, declining costs and increased profitability.
I'll now turn the call over to our CFO, Greg Fischer to review our financial performance. Greg.
Greg Fisher
Thank you, John. On Slide 5. During the third quarter we sold 133,000 ounces of gold at an average realized price of $1,932 per ounce $4 above the London PM fix for revenues of $256 million. Total cash costs of $835 per ounce and all in sustaining costs of $1,121 per ounce are both towards the low end of full year guidance. We are on track to once again achieve full year cost guidance.
Our reported net earnings of $39 million in the third quarter are $0.10 per share, including unrealized foreign exchange losses of $12 million recorded within deferred taxes and other non-cash losses of $3 million. Excluding these items, our adjusted net earnings were $55 million or $0.14 per share. Operating cash flow before changes in non-cash working capital was $133 million or $0.34 per share.
Given our solid production growth and margin expansion this year, we're on pace for a record year in terms of revenue, earnings and cash flow from operations. This is driving strong free cash flow generation at a time that we were also investing in growth. This includes $37 million of free cash flow in the quarter and $109 million year-to-date. We expect the strong free cash flow generation to continue while funding the Phase 3+ Expansion.
Capital spending totaled $75 million in the quarter and included $27 million in sustaining capital, $42 million of growth capital and $6 million have capitalized exploration. Through the first nine months of the year, capital spending totalled $239 million consistent with our annual guidance. We paid cash taxes of $3 million in the quarter at Mulatos, with a similar payment anticipated in the fourth quarter. We expect significantly higher cash tax payments in Mexico in 2024, reflecting the strong profitability of Mulatos in 2023, and the $115 million of free cash flow generated from the operation year-to-date.
Our balance sheet continues to improve with our cash balance growing to $216 million, a 14% increase in the previous quarter and a 66% increase in the start of the year. We remain debt free and well positioned to fund our growth initiatives.
I will now turn the call over to our COO Luc Guimond to provide an overview of our operations.
Luc Guimond
Thank you, Greg. Moving to Slide 6, Young-Davidson produced 45,100 ounces in the quarter, consistent with the previous few quarters with record milling rates of 8,200 tonnes per day, offsetting slightly lower grades. Costs were in line with annual guidance, both in the quarter and year-to-date. Grades are expected to increase in the fourth quarter as my higher grade zones that have been deferred from the third quarter. This is expected to drive production higher in the fourth quarter, putting the operation on track to achieve full year production and cost guidance.
The operation continues to be a consistent performer with mine site free cash flow of $31 million in the quarter and $83 million year-to-date. For the third consecutive year, Young-Davidson is on track to deliver more than $100 million in free cash flow.
Over to Slide 7. Island gold produced 36,400 ounces in the quarter, a 19% increase over the second quarter, reflecting both higher grades and tonnes process. It was a strong quarter operationally with mining and milling rates both increasing to exceed annual guidance of 1200 tonnes per day. This helped drive cost down from the second quarter towards the low end of annual guidance. Given the strong year-to-date performance, including production of 100,000 ounces, the operation is well positioned to achieve full year production and cost guidance.
Over to Slide 8. Work on the Phase 3+ Expansion continues to progress with the focus on completion of the remaining shaft site surface infrastructure. Construction of the headframe is substantially complete as this construction of the shaft area substation. Pre commissioning tests on the E-house electrical systems have commenced and construction of the warehouse is well underway. I was sitting in the gallery to be used in the shaft sinking over 50% complete putting the shaft sink on track to start by year end.
Over to Slide 9, a total of $35 million of capital related to the Phase 3+ Expansion and capital development was spent in the quarter. The expansion remains on budget with 45% of the total initial capital of $756 million spent and committed to the end of September. With the shaft site surface infrastructure nearing completion, spending a shift towards the shaft sinking later this year, and the mill expansion plan into next year.
The overall expansion remains on track to be completed in 2026, transforming Island Gold into one of the largest lowest cost and most profitable mines in Canada.
Moving to Slide 10. At Mulatos, production of 53,900 ounces was down from the second quarter as guided. Reflecting the return to design mining rates for the La Yaqui Grande, and end up mining within the main Mulatos pit. La Yaqui Grande continued to outperform with rates exceeding guidance due to positive grade reconciliation. Mine-site free cash flow was $31 million in the quarter, and an impressive $115 million year-to-date.
As previously guided, production is expected to decrease in the fourth quarter reflecting the end of the Mulatos pit and a decrease in grades to guided levels at La Yaqui Grande. With year-to-date production of 164,700 ounces, Mulatos is on track to exceed its full year guidance driven by the strong outperformance from the La Yaqui Grande. Costs are expected to increase in the fourth quarter but remain within guidance for the full year.
Moving to Slide 11, as John noted, the updated feasibility study on the Lynn Lake project has outlined a bigger, longer life and more attractive operation relative to the 2017 study. The updated study incorporates a 44% larger mineral reserve and a 14% larger mill at 8000 tonnes per day. Production over the first 10 years is expected to average 176,000 ounces per year, up 23% from 2017. At lower all-in sustaining costs of $699 per ounce.
Over the last several years, we have completed an extensive amount of additional engineering, geotechnical and other work, including obtaining approval of the Environmental Impact Statement back in March. This work has significantly de-risked the project, provides us with a high degree of confidence in the capital and operating cost estimates. These estimates support attractive base case economics for the project. And our current gold prices represent a 22% after tax internal rate of return.
We also see significant upside potential given several near mine and regional exploration opportunities that could be incorporated into the project. Under the current mine plan, the MacLellan and Gordon deposits will be mined over the first 11 years. For the remaining six years we will be processing lower grade stockpiles. With our fleet of mining equipment available from years 11 onward, we are evaluating several nearby targets such as Burnt Timber and Linkwood as additional sources of mill feed. These deposits represent upside to the feasibility study as they would help sustain higher rates of production well beyond the first 10 years.
To review that upside in more detail, I will turn the call over to our VP of exploration, Scott RG Parsons.
Scott Parsons
Thank you, Luc. Over to Slide 12. In August, we provided an exploration update at Lynn Lake, highlighting the significant upside potential across a number of near mines and regional targets. This includes Burnt Timber and Linkwood, two deposits in proximity to the plan mill and MacLellan that could potentially be incorporated into the mine plan. They're located approximately 28 kilometers away from the MacLellan site and are connected by an all basically offseason road. The two deposits contain 1.6 million ounces of Inferred Resources that were not factored into the feasibility study.
Updated geological models have been completed on both deposits, demonstrating the potential for a smaller higher quality mineral resource. We see excellent potential disruptors to MacLellan built infrastructure after the MacLellan deposits is in line. This would not only help sustain higher rates of production well beyond the first 10 years, but also extend mine life and enhance the project economics.
Maynard is a similar stage target with similar potential as another satellite deposit located 20 kilometers by road in the plant mill. All 15 holes drilled at Maynard to-date have intersected gold mineralization over 700-meter strike length and to a depth of 280 meters. This includes higher grade intercepts to just 5.9 grams per tonne over 12 meters. These are just a few examples of the potential that we see across the Lynn Lake Greenstone Belt, a large underexplored district.
We starting with a 17-year reserve life based on the updated study. However, given the opportunities we see across our 58,000-hectare land package, we fully expect the mining in the district well beyond that.
Over to Slide 13. In September, we announced the second exploration is updated here in Mulatos, where we continue to have success both regionally and near mine. At PDA step-out drilling is further extended high grade mineralization beyond reserves and resources, which will support additional growth beyond the currently defined 1 million ounces.
We are currently working on an updated reserve based on drilling to the end of July and we’ll be incorporating that in an updated development plan to be completed towards the end of the year. We expect it to outline another significant mine life extension in Mulatos. Based on the success of the program to-date, we've increased our exploration budget in Mulatos for the second time this year to $25 million. This includes drilling at PDA through the rest of this year with 50,000 meters planned up from the original budget of 16,000 meters.
We are still in the early stages of testing the potential within the broader PDA area. Based on success to-date, and with the deposit open in multiple directions, we see excellent potential for PDA to continue to grow in the years ahead. We also released additional results from the Capulin regional target, target located 4 kilometers east of the Mulatos pit. Step-out drilling continues to intersect wide intervals of significant oxide and sulphide mineralization within a breccia along the Capulin Fault. This included 2.7 grams per tonne over 121-meter core length, the best hole drilled to-date at Capulin. Highlighting a significant potential in that area and within the broader Mulatos district.
With that, I’ll turn the call back to John.
John McCluskey
Thank you, Scott. So that concludes the formal presentation. And I'll ask the operator to open the call -- open the lines for your questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from Cosmos Chiu. Please go ahead. Your line is open.
Cosmos Chiu
Thank you, John, Greg, Luc, Scott and Scott. Congrats on a very strong Q3. And good to see that you were able to increase your guidance for the year, on production cost and production. Maybe first off in in Mexico. As you mentioned, you know La Yaqui Grande has done really well year-to-date, positive grade reconciliation. But at the same time you say, you know that the grade will likely trend back to more normal levels. But I just want to know, you know, what happened? Why would you be able to have the positive grade reconciliation, is there a potential for it to continue?
Luc Guimond
Hi, Cosmos. Luc, here. Our expectation is that we will, will be more in line with our grades as we move forward, we won't necessarily see that over performance. What's really happening as we get deeper into the benches of La Yaqui Grande, the drill density gets tighter, so we expect to see more consistent performance, actual versus our model moving forward.
Cosmos Chiu
Understood. And then maybe sticking with Mexico, you know, quite a bit of noise these days in the country of Mexico, either the security issues for some of your peers, or, you know, the ongoing potential changes to mining law. Could you maybe talk about is there any potential impact to -- or has there been a potential impact on Alamos?
John McCluskey
Hi, Cosmos, its John I would say that you can never rule anything out just given you know, it could happen in Canada, I think everybody recalls, we had a big gold heist at our airport here at Pearson. So I don't think you could ever rule anything out from that point of view. But I would say that, we've been operating in Mulatos for a long, long time. We've significantly increased the security over the last five years. And on top of that the Mexican government has stepped up security in the region quite significantly. There's a lot of mining operations in this part of Mexico and I would say the Mexican government cares a great deal about that.
So I don't see I don't see anything particularly unusual about where we're operating. I think it's as secure as it's ever been. We've, been operating there for -- but we've been there 22 years now. We've been in production for 19 of those years and we've only ever had one real incident. So I would say looking forward we’re pretty confident that that our site continues to operate without any unusual impacts.
Cosmos Chiu
Okay, sounds good. Maybe you know switching gears a little bit to Island Gold. It sounds like the Phase 3+ Expansion is going well, sounds like surface infrastructure is almost complete, now, when it comes to shaft sinking. As we moved into shaft sinking, maybe could you talk about some of the key deliverables, even key risk in terms of what the next sort of stage of a project entails?
Clearly it's all your first road to go, John, you have done the shaft sinking at La Yaqui Grande in the past. Does that help? I guess that was raised for and this is a bit different. But you know, does that help? You know, can you talk about what we should expect with the next stage of shaft sinking with the expansion of some of the key factors you look at that?
Luc Guimond
Yes, Cosmo. Luc here. So, we're in the final stages of actually getting the requirements for gearing up the shaft, to be able to start the sinking. Our expectation is that we will start that to near the end of Q4 and get in the shaft on a consistent basis, obviously, and continue with the benching aspect.
I mean, we're using a reputable contractor at Redpath, mining, have done shafts all over the world, certainly in Canada, but all over the world. So you know, we're not obviously concerned with them being able to deliver on what their expectations are. Once they get the, you know, the setup completed and they get the cycle going, our expectation is that we would be thinking at about three meters per day, over the next couple of years, until the shaft is completed late 2025.
Cosmos Chiu
Thanks. And then maybe one last question, Greg, as you mentioned, very profitable in Mexico this year, which also means a larger tax bill next year. Could you remind me, when does that margin payment come out? When would it come out? How can we potentially estimate what that payments going to do?
Greg Fisher
Yes, Cosmos, its Greg here. So yeah, the yearend tax filing is due in March. So the payments to for the 2023 tax bill would be doing in the first quarter of 2024. And that would relate to both income taxes and mining taxes. We have paid about $3 million this year, we're going in the third quarter and about $3 million in the fourth quarter. But given our profitability, there will be a pretty significant catch up when we file that tax bill in March of 2024.
Cosmos Chiu
Great, thank you. So all the questions I have. Congrats again on a very strong Q3.
Operator
Our next question is from Mike Parkin, please go ahead.
Michael Parkin
Thanks, guys. And congrats on a great quarter. Could you just speak to the Island project? What is the critical path? And you know, what's kind of budgeted in there for -- and do you have any kind of flexibility to whether added a night shift gear it up, did prove to show any signs of falling behind schedule?
Luc Guimond
Hi, Mike. Luc here. As I mentioned earlier with the previous question, right now, our main focus has been around the shaft setup and the shaft sinking in preparation for that. And certainly the headframe and everything as well advance. And we're in the final stages of preparing to commission for the shaft sinking. So our expectation is at least Q4, we'll start that process. As I mentioned, we've got a reputable contractor that's got a lot of a lot of expertise and skill set to complete that on time and on budget. And we fully expect them to be able to do that.
The other components that we've been certainly working on with regards to the Phase 3+ Expansion is the detail engineering for the mill expansion, as well as the Paste plant. So those have been ongoing over the course of this year. And, you know, we'll start to get into more serious aspects of the construction into next year and into 2025 with regards to both of those components.
And the other component that's required for us is obviously an upgrade to our existing power distribution to the site. And we will be basically doubling our load from where we are today. And we are certainly currently working on that as well to have a construction timeline to have that all in place as well. Once all the other components of the Phase 3+ Expansion are completed to start up in Q1 -- end of Q1 2026.
Michael Parkin
Right. Follow up for Greg, can you just remind me what was the budgeted Canadian dollar? I know you guys looking to take advantage of the current weaker -- I would assume weaker Canadian dollar versus budget to just help give you a bit of additional tailwind on that project?
Greg Fisher
Yes, we had budgeted at $0.75. So the weaker Canadian dollar will help from a CapEx perspective but also on our operating costs through our existing operations.
Michael Parkin
And can you just remind me roughly like what percentage of the CapEx would be Canadian? I guess probably all your labor and contractor would mostly be CAD. I imagine it's pretty high.
John McCluskey
Mike, I'll have to get back to you on that. I don't have the details right now. But I'll take that off line.
Michael Parkin
All right. Thanks. And then obviously, some pretty exciting news coming out later this quarter with PDA. Can you just give me -- is there any ability to talk about like, you're already added million ounces of total resource in bumped up the budget on the drilling a couple times already this year, recognizing that you've got the July cut off?
But seems like things are going really well there. Do we have an idea of what we should be kind of thinking of in terms of scale, like it seems like it's getting bigger and bigger and bigger? Is it going to be possibly a project that you would phase like, do a Phase 1, and then as it opens up, adding a second processing line in the mill? What is there anything you can kind of talk to?
Luc Guimond
Mike, Luc here again. Yes, so let me still kind of early stages. I mean, we've just recently completed some of the geotech drilling required for the mine design aspect of the operation. And in that mine design, we'll put a mine plan together. We've also in conjunction in parallel been working to some technical studies with regards to the metallurgy and the mill design. So our expectation is we will have a development study completed by the end of the year with some preliminary numbers with regards to mining rates, and supporting milling rates.
I mean, high level at this point, I mean, we've been kind of targeting 2000 times per day, based on what we've seen so far, with regards to the success we've had with the exploration and some early review of what we've been seeing with regards to the mine design and mill design.
But I mean, there's always opportunity for expansion, I mean, we can certainly start on that basis with the mining week, the mining weeks can certainly increase over time, if it's supported based on the geometry of the ore body and the strengthening to the ore body. And obviously, with regards to expanding the mill to support a higher mining rate, that opportunity also still exists, I mean, you can always add components to that mill circuit to be able to expand to a higher milling rate if required.
Michael Parkin
And do you guys have power to site now or you would have by the time you would build PDA?
Luc Guimond
We're currently still on diesel generation. But we're in the process of doing a conversion from diesel generation power to the site to grid power and the expectation on that would be by the end of this year. So that will provide obviously further upside for the longer term of La Yaqui, but also with PDA. Any other opportunities to develop within our Mulatos district.
Michael Parkin
Okay, so the PDA study would assume grid power connection.
Luc Guimond
Correct.
Michael Parkin
That's it for me, guys. Thanks so much.
Operator
[Operator Instructions] Our next question is from Ovais Habib. Please, go ahead.
Ovais Habib
Hi, John, and Alamos team congrats on the Q3 beat and increase production guidance, just couple of questions for me. Number one, in regards to the parallel structures that was covered at Island Gold, at the site trip in mid-summer, you mentioned that you had already started to mine some of these structures. Now, are we expected to see some of these ounces from the structures in Q4 and going into 2024? Potentially what I'm trying to ask is, are these ounces expected to come into the Island Gold mine plan in the future?
Luc Guimond
Hi. Yes, its Luc here again. Yes, I mean, we have started mining some of those, certainly some parallel zones in the north south zone that we've talked about previously. So we started some of that late in Q3, there's opportunity, certainly to bring some more of that in into Q4. But as we further understand it and develop it we’ll actually start to yes incorporate that into the mine plan over the longer term.
Ovais Habib
Okay, sounds good. So, eventually, in terms of what you see in terms of the firewall structure, they're closer to existing. So it's not like you'd have to do a lot more development to access these zones?
Luc Guimond
No. Because, these are kind of running off of the east west, striking zones that we're currently mining. And from a sequence perspective, actually, it makes more sense to incorporate these into the mine plan as we're in those areas, just as from a point of view of just following a proper sequence and being able to basically extract the zones and retreat in those areas based on our launch tool or retreat mining method.
Ovais Habib
Yes, thanks, thanks for the color on that Luc. Just switching gears to PDA, just follow up call on to Mike's question. I believe the expectation is to release a new mine plan in Q1 next year. You know, so in regards to the advancement of PDA, what kind of permits will be required and you see any risk to those permits?
Luc Guimond
Sorry, that was in relation to PDA.
Ovais Habib
That's correct.
Luc Guimond
So as I mentioned there, we're looking to have a development study by the end of the year. End of Q4 in Q1 at the latest. With regards to permits, we've basically within our, all of this, the mining and the milling operations will be all within our existing concessions.
So it would be just a question of getting an amended [indiscernible] basically, which is what it's referred to in Mexico, because of the fact that it's not new processes. We've done underground mining there in the past. So it's not new to the district. We had a milling process as well a conventional milling process in the past as well. So that's not new to the district. And as a result of that, we would just be looking to get amendments to our existing [indiscernible] to be able to construct the new requirements for the mining milling operations for PDA.
Ovais Habib
Perfect, thanks. Thanks, Luc for that. And that's it for me. And thanks for taking my questions.
Operator
Thank you. Our next question is from Kerry Smith. Please go ahead.
Kerry Smith
Thanks, operator. Luc for the Phase 3 at Island, you have $162 million for development underground, and you've completed $64 million, can you just remind me how many meters of development is included in that $162 million number?
Luc Guimond
I say it's at least a couple of kilometers plus, on that one Kerry. I have to get back to you to get a more firm number. But that's in relation to all of the shop access development, all the other development that's required to establish that infrastructure as far as crushing rock rakers, loading pocket, everything associated with all of that infrastructure for the underground. But I'd have to get back to you with a firm number on that.
Kerry Smith
Okay. And that you're doing that development with your own crews? Correct?
Luc Guimond
Correct. For the most part, I mean, we do still have Redpath doing some of the development shaft, the shaft ramp access development, but starting next year, it'll be 100% Alamos development crews.
Kerry Smith
Yes, okay. And so those costs should be pretty much in line because you're doing -- you're using your own guys. Okay, thank you. And then maybe for Scott, the 444 meters of underground drifting that you had planned for the exploration underground at Island is that pristine all complete in hours, there's still some more of that to complete this year?
Greg Fisher
I mean Kerry it's ongoing throughout the year and sequenced into the development testimony, we were advancing laterally at the west and east side of the deposits of multiple levels, and then also on our hanging wall exploration, drift and 945. So we'll do it kind of systematically, as we get going to establish a drill off the targets from that drill bay will advance the development as required. So it's kind of ongoing throughout the year.
Kerry Smith
Okay, I got you. And then Greg, just try and clear the $2.7 million of cash taxes you paid at Mulatos in Q3, and then you're forecasting a similar amount in Q4, those will be pre payments against the taxes due in March of next year. Correct?
Greg Fisher
Correct. Those are installment payments with respect to our 2023 tax bill.
Kerry Smith
Right. Okay, perfect. Thanks very much.
Operator
Thank you. There are no further questions at this time. This concludes this morning's call. If you have any further questions that have not been answered, please feel free to contact Mr. Scott Parsons at 416-368-9932. You may now disconnect.
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Alamos Gold, Inc. (AGI) Q3 2023 Earnings Conference Call Transcript