Wesdome Gold Mines Ltd. (WDOFF)
Q3 2022 Earnings Conference Call
November 10, 2022 10:00 a.m. ET
Company Representatives
Duncan Middlemiss - Chief Executive Officer
Fred Langevin - Chief Operating Officer
Scott Gilbert - Chief Financial Officer
Mike Michaud - VP Exploration
Raj Gill - VP, Corporate Development
Lindsay Dunlop - Vice President, Investor Relations
Heather Laxton - Chief Governance Officer
Conference Call Participants
Ralph Profiti - Eight Capital
Don DeMarco - National Bank
Michael Fairbairn - Canaccord
Presentation
Operator
Good morning, and welcome to the Wesdome Gold Mines, Q3, 2022 Financial Results Earnings Call.
Heather Laxton, Chief Governance Officer will begin today.
Heather Laxton
Thank you, operator, and good morning everyone. Thanks for joining us today. Before we begin, we'd like to take this opportunity to remind everyone that during this call, we'll discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could cause outcomes to differ materially due to a number of risks and uncertainties, including those mentioned in the detailed cautionary note contained in yesterday's press release and in the company's management discussion and analysis dated November 9, 2022. Both documents are available on our website and on SEDAR.
Please note that all figures discussed on this call are in Canadian dollars unless otherwise stated. The slide views for this presentation and a recording of this call will be posted on the company's website.
And with that it's over to Lindsay Dunlop, Vice President, Investor Relations.
Lindsay Dunlop
Thanks Heather. Speaking on the call today will be CEO, Duncan Middlemiss; COO, Fred Langevin; CFO, Scott Gilbert; and Mike Michaud, VP Exploration. Also on the call today is Raj Gill, VP, Corporate Development.
Fred will begin today with the review of operations.
Fred Langevin
Hi everyone, and thank you for calling in this morning. At Eagle this quarter, the plant [inaudible] refurbishment shutdown was successfully completed and scheduled in July. Production grades were in line with the revised guidance, but production then fell slightly short of internal expectations due to delays in production in September as a result of a COVID spike in the workforce, which forced us to extract underground crews on two occasions. Also, production lapping issues delayed ore extraction to some extent.
We expect significantly higher gold production in Q4, with no shutdowns planned during the quarter and COVID numbers trending over. Finally, we have significantly increased our confidence level in the Falcon Zone as a result of additional drilling and experience with fill development and actual production results. With this additional information and improved reconciliation processes, we have a much better understanding of rates coming from this zone going forward.
At Kiena, which was also in shut down in July for refurbishment of the hoist, the team has made significant headway towards achieving commercial production. Most importantly, at the fiscal plant, all electrical components for the controls were delivered and installed. Pre-commissioning activities have started and we expect the plant to be fully operational first. This is very good news, as it will provide the mine with improved capabilities to deal with the challenging ground physicians encountered in Kiena Deep.
Additionally, it will free up equipment currently being used to backfill stocks to focus on developing the rent to access the wider part of the Kiena Deep A Zone. We continue to be challenged with mobile equipment delivery, especially our critical bolting equipment, but in Q3 we have been able to source rental equipment, and we expect those to be commissioned in Q4, derisking any further supply chain issues on that front.
Over to you, Scott.
Scott Gilbert
Thanks Fred. Both cash and AISC costs have increased in Q3, 2022 compared to Q3, 2021 due to an 8% decrease in assets sold, the inclusion of the height of our Kiena pre-commercial Office and inflationary pressures. At Eagle River, the cash [inaudible] by 49% to CAD $1,473 per ounce and the AISC by 57% to $2,259 per ounce, primarily due to a 30% decrease amount. We are still experiencing wage compression, but the price of diesel decrease by approximately 7% from the average price in Q2, 2022, and the other consumable prices were fairly consistent with Q2, 2022.
During the quarter the company generated $12.9 million of operating cash flow despite Eagle River being shut down for 15 days and Kiena for 24 days for scheduled payments. The capital expense totaled $33.8 million with $22.8 million being spent at Kiena. In Q4 we expect the capital spending to remain complacent with Q3, 2022 as we complete the remaining projects before we declare commercial [inaudible]. We expect costs to trend lower than in 2023 as production ramps up and major capital projects related to it, putting Kiena into commercial production higher in rates. As of today we have drawn $54 million of the secured $80 million revolving credit facility.
Over to you, Michael.
Michael Michaud
Thanks, Scott. Well, at Eagle River, we are now about a year into mining on the Falcon Zone, and given some initial challenges of forecasting, we have since remedied this situation with the addition of 95 definition drill holes and several hundred meters of development on various levels.
Further to this infill drilling, in October we released the results of exploration drilling at Falcon that was completed from surface and from the new 355-meter level development that now extends 400 meters west of the mine into the volcanic rocks. This drilling has extended the zone up plunge to surface.
In addition, a number of drill holes have intersected mineralization in sub-parallel zones in the hanging wall of Falcon Zone, possibly the mine five and 311 west zones, including a recent hole that returned 40.3 grams per ton gold over 1.5 meters. The 355-meter level development is not only an important level for drill platforms to test these hanging wall targets, but also for future mining.
Based on the success along the western boundaries at our rig, we have now started to test the eastern boundary. Within the volcanic rocks to the east and directly beneath the previously mined 2 Zone, the initial drilling returned 233 grams per tonne gold of 0.4 meters. This area remains a focus given that this could represent a separate future mining front.
Elsewhere, drilling within the central portion of the mine diorite has discovered a new length of gold mineralization. Recent highlights include 27 grams per tonne over 4.6 meters and 40.4 grams per tonne over 3 meters core length. This new lens will now be drilled and accessed from underground adjacent infrastructure, along the previous mine 8 Zone located only 100 meters to the south. So overall, a good quarter of exploration at the Eagle River.
At Kiena, we also had good exploration success in Q3. In particular at the Presqu'ile zone, which is located only 2 kilometers west of the Kiena mine. Recent drill highlights include 24.3 grams per tonne over 3.3 meters and 30 grams per tonne over a 9.4 meter core line, and the mineralization remains open at depth. Given the significant upside that the Presqu'ile zones could represent for Kiena, the company has commenced the plan to develop an exploration ramp from surface.
Already, the initial soil investigation and geotechnical drilling has been completed to determine the optimal oral locations, and the permit application has been submitted. Also, the exploration ramp could be easily connected to Kiena's existing underground ramp network, providing access to surface for the existing operation that comes with many benefits, including improved ventilation, less reliance on the shaft for the transportation of men and materials, access to higher-level ore bodies, etc.
The underground exploration drilling continued to return exciting results with the Footwall Zone discovery last year and more recently the discovery of the sez link [ph], both having the potential to increase the number of ounces per vertical meter and to provide additional working phases during mining. Encouraged by these results, we continue to explore within the result in this area, which we expect to report these results later this month.
Over to you, Duncan.
Duncan Middlemiss
Thanks Mike. Staying at Kiena for a moment, the slide you're seeing depicts the current development in place that gives us access to the upper portion of the Eagle, which is narrower than the portion below the 1250-meter elevation.
The first two years of the PFS production scenario were built on the mining of the upper portion of the Eagle. The increase in the PFS mining rates were starting in 2024 as we develop the reserves down towards the wider area of the Eagle. Currently, the operation is behind in the planned advance of the ramp base, mostly attributable to challenges in the supply chain. As it stands, we will be developing into the wider part of this zone, in yellow, towards the end of 2023.
Ramp development will be able to advance much more quickly once the final pieces of our long-awaited mobile fleet provided in Q4, Q1, namely our mechanized bolters, and we have been able to source some short-term bolter rentals to augment this. Additionally, once the plant is operational, this will eliminate the use – the need to use cemented rock fill, which will free up additional resources such as scoops, trucks and workforce.
We are finalizing our 2023 budget now, and we'll release production and cost guidance in early January. 2023 production at Kiena will be lower than the PFS schedule reflecting the delays incurred to-date; however, 2024 is more in line with the PFS. On a positive note, Fred and his team were able to develop more meters in October than at any previous point, and we are continuing to build on this success.
2022 is often one of our better years. A downward reduce in guidance and currently chalking near the lower end and the part of the performance [inaudible]. As implied by our guidance, we are expecting a big fourth quarter.
Moving forward, the two major issues we have faced this year has been the Falcon grade reconciliation and at Kiena the supply chain issues. The variability of the Falcon Zone has negatively impacted our ability to accurately forecast production. Our block model in the Falcon which informed our budget for 2022 was largely drill indicated. Now that we have drilled an additional 95 holds and completed substantial ore development within the zone, we feel our predictability is increasing.
The Falcon Zone can best be described as a high-grade mining zone, and so far we have experienced both positive and negative reconciliations. As our additional information gets incorporated, we are confident our forecast will improve. We will take into account the high grade variable nature of this zone when issuing 2023 guidance at Eagle River.
At Kiena, we finally have the majority of our components critical to mining, with the exception of our mechanized bolters, which we expect in the next few months. Even with new equipment, breakdowns occur and sourcing parts is still an issue. However, this is improving. We're in the pre-commissioning phase at the [inaudible] plant and look towards the full commissioning of this critical piece of infrastructure as the final preproduction item which needs to be in place. We are still on track to finalize these plant commissionings for December. Global conditions have certainly made the development of Kiena a process much more difficult than I have ever experienced.
I'm confident we're better equipped now to continue the path to become an all-Canadian mid-tier gold producer with the assets, the team, the jurisdiction and the exploration potential we all see.
I will now open up the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions] One moment for our first question. And our first question comes from Ralph Profiti of Eight Capital, please proceed.
Ralph Profiti
Good morning, thanks very much. Two questions for me. Duncan, firstly I'm seeing improved reconciliation and predictability at Eagle and the Falcon Zone. I’m just wondering, when I think about these 95 definition drill holes, what's that in terms of like tonnes or meters, right? What I'm trying to get a sense of is how much – I’m trying to quantify how much development is needed ahead of the plan in order to reduce great variability going forward?
Duncan Middlemiss
Yes. So Ralph, really the issue with Falcon I would say is, because it's kind of located about 300 meters to the west of the diorite, we did have a little bit of development in the upper part. That was the 622 to 635 stock that we took out in Q4, which over reconciled to be quite frank, is really performed well. However, at sort of the heart of the zone in which we sort of saw from 700 to 772 was largely not developed within the ore. We had the access to it, and it wasn't coming online until Q2.
Frankly at Eagle Q1 performed as it was supposed to. It was only upon reaching the sort of the heart of the Falcon Zone that we ended up with the grade reconciliation problems that we then recognized. So I would think that we'd like to be up to six months ahead in terms of development, which will give us a – you know a much better, I would say forecasting accuracy.
In terms of actual meters, I think the zone is typically about 75 meters wide. So in terms of well development, I would definitely want to have at least 4 levels in there, so 300 meters of predevelopment just on the ore itself. So we're actually getting at that point now. There was a bit of a lag of developing the Falcon Zone just because it was periphery to the – where we had all the infrastructure within the diorite.
Ralph Profiti
Yes, got you. Yeah, good answer, I appreciate that. And then if I can switch over to Kiena, just thinking about whether or not ground conditions are still only challenged within the footwall zones, and whether or not this ground support is really – can only – it's only required to be remedied through sort of bolting equipment and bolting strategies as opposed to other ground support remedies that may be needed.
Duncan Middlemiss
Yes. Yes, a good question Ralph, and so as identified in the PFS, I mean we always recognize the shift in the Canadian rock type, which are in the Footwall of the A Zone. So just to put it in perspective, we've got great confidence in ourselves in the hanging wall of the Eagle, and if you go to the footwall, it becomes into the shift and the [inaudible].
So quite frankly, we didn't really have the tools in order to address this directly. I mean – we all see that stand up time of stokes is a critical event. So when you substitute the CRF per paid bill, that extends the whole billing cycle substantially. So I see that the paid bill coming online is going to significantly reduce the exposure time at the openings out. Additionally, to not really have a mechanized bolter, it's you know, it’s been really problematic I would say.
We were expecting our bolters to arrive in February and March. The way we're going, we might get in the February, March of 2023, okay. It's just been really aggravating. So Fred's done a good job of sourcing rental bolters. We're going to get those online, but we can foresee that certainly that's going to be helpful.
Additionally, I would have to say, just our experience with the shift in the [inaudible] has been beneficial for our understanding with how best to deal with it. I mean, Fred certainly, quite experienced with this site and sort of converging the shifts. I would call it – it's very prevalent in the adversity. [Inaudible] Lapa mine where Fred worked before and Kiena has it. We're not the only ones for sure, and so I think this experience has really aided us in really controlling this much better.
Ralph Profiti
Got you, yeah, very helpful. Thanks for that Duncan.
Operator
Thank you. One moment for our next question. And our next question comes from Don DeMarco of National Bank, please proceed.
Don DeMarco
Well, thank you and good morning gentlemen. My first question is, so it sounds like you're going to declare commercial production at Kiena after the pace backfill plant is commissioned sometime probably in December. Does this imply that there isn't much growth CapEx remaining at Kiena in 2023?
Duncan Middlemiss
Yes, it does Don. We – I mean we're – I think our forecast for this year is one where we’re over $100 million. We're not going to be doing anything close to that. Just to add again, I'll caution people on the supply chain hangover. Sometimes you think you're going to have expenditures in December that might go in into January, yes.
Don DeMarco
Okay, sounds good. And Duncan, looking at Eagle, I mean – at Kiena obviously we've seen the cost increase quarter-over-quarter and we're looking forward to the pace backfill plan to largely remedying that. I mean there may be some ground conditions and other things to also address, but that pace backfill plan should be an inflection point.
But at Eagle, you know it sounds encouraging that there's a turnaround that might actually happen at the same time as Kiena in terms of cost reduction. But how much of the cost escalation that we've seen at Eagle due to grade volatility or so on versus say inflation? And maybe if we look at three to six or nine months, what kind of – can you give us a sense of the magnitude of cost improvement that we might expect at Eagle?
Duncan Middlemiss
Thanks, Don. Really, I mean we're still doing the budgeting exercise, so it's not finalized, so I don't really want to get too deep into that. What we see at Eagle is it's really – I'd say it's an H2 thing honestly is what I'm seeing right now.
The cost inflation, we're really most exposed to wage inflation I think and so really when we look at the cost breakdown of Eagle, because really it's a small development incentive mine and really I think 65% of our costs are likely you know our own wages and contractors, right. So we've already seen an escalation of that at 5% to 7% I'm going to say and so that's what we're most exposed to.
In terms of consumable, we're really not that exposed. You know these are you know smaller mines. We don't get it with huge cost increases because diesel went up or things like that. A lot of our cost performance is not that. We did, I would say in terms of building out Kiena, especially in that period, just for example like steel all of a sudden shot up 35%, that certainly affected our base fill plant build and everything else. However, I think that we're starting to see hopefully a little bit of retrenchment of inflation. So in terms of volume, you know ounces sold on, I think the really – that's really the main driver here for us.
Don DeMarco
Okay, I see. Okay, well thanks for that. I appreciate it and just good luck with the restart and the ramp up thereafter. Thank you, that’s all for me.
Duncan Middlemiss
Yeah.
Operator
Thank you. One moment for our next question. And our next question comes from Michael Fairbairn of Canaccord, please proceed.
Michael Fairbairn
Hi Duncan and team! Good morning and thank you very much for taking my question. I just wanted to ask about the balance sheet. I just wanted to confirm that I heard correctly that you've drawn down $54 million on your credit facility now of the $80 million total?
Duncan Middlemiss
That's correct, that is correct, we’re drawing down.
Michael Fairbairn
And kind of following-up on that, just wondering how you see your cash flow progressing over the next few months here? Do you see yourselves drawing down further on the credit facility and then on the other side after you achieved commercial production at Kiena, how quickly do you think you'll be able to start paying that down?
Duncan Middlemiss
For the remainder of this year we're going to be pretty consistent I think around the $54 million drawn, spending on production for the remainder of Q4, but we have positive expectations for the remainder of Q4 and therefore we should be able to drive the revolver down somewhat. And then I think you know it all depends on how we're ramping up with Kiena for next year, but probably – I would probably be using this revolver in and out during the first half of the year of next year.
Michael Fairbairn
Okay, perfect! That’s really helpful all. Thank you very much and good luck with the ramp up.
Duncan Middlemiss
Thanks Michael.
Operator
Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect.
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Wesdome Gold Mines Ltd. (WDOFF) Q3 2022 Earnings Call Transcript