Post by
Weeble on May 11, 2017 11:45pm
Earnings call transcript.
May 11, 2017 3:22 PM ET|
About: Timmins Gold Corp (TGD)
Q1: 05-11-17 Earnings Summary
https://seekingalpha.com/article/4072238-timmins-gold-corp-2017-q1-results-earnings-call-slides
EPS of $0.02 beats by $0.01 | Revenue of $32.31M (+ 12.9% Y/Y) beats by $4.31M
Timmins Gold Corp (NYSEMKT:TGD)
Q1 2017 Earnings Conference Call
May 11, 2017 11:00 AM ET
Executives
Greg McCunn – Chief Executive Officer
Analysts
Jamie Spratt – Clarus Securities
Philip Ker – PI Financial
Operator
Good morning, ladies and gentlemen. Welcome to the Timmins Gold Reports 2017 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded.
I would now like to turn the meeting over to Greg McCunn, CEO. Please go ahead, Mr. McCunn.
Greg McCunn
Thank you, operator and thank you, ladies and gentlemen for taking the time to dial into our Q1 2017 results conference call. As the operator mentioned, I am Greg McCunn, the Chief Executive Officer. Here in Vancouver today is Ian Harcus, our Corporate Controller. I would like to remind you that I’ll be making some forward-looking statements as usual during the call and it all dollar figures discussed here today are going to be in U.S. dollars, unless we stated otherwise.
There is a presentation associated with our call today, which can be downloaded from our website for those of you that are not on the webcast. As well I just wanted to point out there were two news releases that went out this morning: one of them detailing our Q1 operating and financial results and a second highlighting the results of our revitalization study for our San Francisco mine. Obviously, these should be read in conjunction with our internal financial statements and MD&A, which are also available on our website and have been filed on SEDAR.
So just before we begin discussing the results, as you can see on the title slide for those of you dialed into the Timmins Gold call and you can now see the title of the slide saying Alio Gold. We are in the final stages of a rebranding process. So turning to Slide 1. We are expecting to change the name of the company to Alio Gold at our Annual General Meeting of shareholders, which is being held tomorrow. And we’ll start trading on both the TSX and the New York Stock Exchange market under a new ticker ALO and a new share structure with the consolidated shares on 10:1 basis. As well we are developing a new website aliogold.com, which we expect to be live when the rebranding is legally affected and that will be on Tuesday next week on May 16.
The management team from Alio will be in Toronto that day. We’ll be attending the opening ceremony at the TSX and we’ll be holding a technical presentation for our analysts following the ceremony. I hope that all the analysts, I can see here on the call here today, will be able to attend that in person. And for others, we will make copies of the presentations. We're giving to the analysts available on our website next week. So really the new name, ticker and the website, those are really the surface changes that are being made here at the company.
I think more importantly since I joined the company in February of this year, we really changed the direction in which the company is going and both with a new plan to revitalize San Francisco, which we'll discuss on this call as well and most importantly putting in place a new senior management team that's really made up of professionals, who built and operated mines for many years. So turning to Slide two, very pleased that over the last quarter, we’ve been able to attract a strong team of professionals to join me here at Alio. In finance, we have Colette Rustad, who’s been appointed as our CFO. In operations, Jose Hector has been appointed as our VP operations. And he is leading the revitalization of our San Francisco mine in Sonora.
For our Ana Paula project on the Guerrero Gold Belt, Paul Hosford will be leading the development and eventual construction of the mine as our VP Project Development. And finally Jason Gregg, will be responsible for building our organizational capability and implementing our high performance business systems. Those of you, who met – get to know me. You know that I'm a firm believer that shareholder value is created not just from good assets, but from having the people, the processes and the systems to make the most for those assets. So I'm really excited about the opportunity to lead such a high quality team.
Turning to our results on Slide 3. The San Francisco mine had another strong quarter. We produced over 26,000 ounces of gold, which readily exceeded our guidance of 20,000 ounces. Cost stayed consistent with the previous quarter at cash cost of $735 an ounce. The mine generated $9.7 million in cash flow from operations after changes in non-cash working capital. About $2.8 million of that cash flow was invested in our high grade high margin Ana Paula project and a further $1.8 million was invested into San Francisco. So the balance of the cash flow from operations was retained on the balance sheet, which led to an increase in cash to $39.2 million at the end of the first quarter.
Turning to Slide 4. You can see that the balance sheet is continued to strengthen quarter-over-quarter and working capital is now $41 million. We expect that the cash and the working capital levels will really sort of level off around this point as we're starting to increase our spending on the development Ana Paula as well as you'll see in the coming slides we are going to initiate a pre-stripping at San Francisco as part of our revitalization plan later this year. The mines really continued to produce consistent cash flow as you can see on the right hand graphic cash flow from operations consistently around $10 million per quarter.
Turning to Slide 5. I think the outlook for San Francisco is very encouraging. We've introduced a number of minor operational improvements this year to the crushing and leaching operations, which have given us an overall improvement in gold recovery. As well I think importantly in the mine plan in 2017, we've managed to fill the gap in what was our Q2 and Q3 production profile by finding some near surface additional sources of ore. So as a result, we are expecting to produce between 20,000 and 22,000 ounces of gold per quarter for the balance of the year. And as such we're going to be increasing our overall guidance for the year to between 86,000 and 92,000 ounces that's for fiscal 2017. I think this is a fantastic outcome. It's a significant increase over our previous guidance of 70,000 to 75,000 ounces for the year.
Whilst we've been able to find some short-term fixes to improve the mine plan for 2017 really in the longer-term these production levels are not going to be able to continue without reinvesting some of the cash flow from operations back into recapitalizing the San Francisco mine and that’s simply to catch up on development or waste stripping. It was not done sufficiently over the past several years.
So turning to Slide 6. We've developed a new longer-term plan for San Francisco, which was summarized in the second news release that you saw this morning. An updated technical report will be filed to back this up no later than June 26th, but ideally by the end of this month. And really at the heart of this project is reinvesting some of the cash flow from the operations back into capital stripping. That will open up both the San Francisco main pit and our satellite pit called La Chicharra. In addition, the plan does incorporates some modifications to improve the crusher operations, which will give us an improvement in goal recovery and as well we've got some power infrastructure upgrades that we've scheduled, which will help us reduce our overall costs.
So based on this new approach, an updated mineral resource estimate was compiled at a gold price of $1350 per ounce and incorporating mining depletion up until the end of the first quarter of March 31st of this year. And as you can see, there are adequate resources in San Francisco to support a longer mine life than our previous plan, but about 1.3 million ounces in the measured and indicated category.
Turning to Slide 7. By investing this capital in stripping and in improving the overall recovery of gold, we've been able to expand the life of mine from the previous plan, which was produced in 2016. And we're now forecasting the mine to produce between 100,000 and 120,000 ounces of gold per year for the next six years. So as a result, mineral reserves have increased substantially to 868,500 ounces with over half a million of those ounces in the proven category. These reserves were estimated at $1200 per ounce gold price.
Turning to Slide 8. I think, importantly, the plan is not only going to produce more gold, but generate a significant amount of cash flow from the operations with an average of 34 million per year of cash flow from operations being forecast over the next six years. That's at current gold prices. This is tripled the cash flow that was forecasted in the previous mine plan. And we really believe that this will provide us with a solid platform upon which to grow our business and in particular to develop our high grade high margin Ana Paula project. So, of course, in order to expand the operating profile, there is a capital investment required.
And Turning to Slide 9, you’ll see that our intention is to reinvest a portion of the cash flow from operations predominantly into the stripping of waste, which is expect to continue at higher rates than the life of mine over the next three years. It is a relatively smooth profile of cash spending over that three year period. And we're expecting to fund this anticipated spend certainly this year of $7.8 million, which we expect to spend in the later half of this year from cash flow from operations. In fact, the timing of this mine plan was developed such that we would provide enough ore to the crusher to keep the crushers running at full capacity, but not overly stretch ourselves in terms of the cash burn rate.
And I'm just included there a section on Slide 9 to give you a feel for how the pre-stripping, which is the light green area at the top of that section, really opens up the San Francisco pit and it gives us access to the multiple future phases of the pit operations, which now include a phase eight. So, in summary, the future of San Francisco is looking very strong and we expect the mine to be the cash flow engine that really underpins our growth in the coming years.
Turning to Slide 10, I wanted to give a brief update on our Ana Paula project, which is located on the Guerrero Gold Belt as most of you know this is a high-grade open pit project located in a highly perspective jurisdiction. It's been a very busy quarter for us and some major milestones were achieved in de-risking the project. I think first and foremost in April the projects environmental impact assessment, or in Spanish it’s MIA, received approval from the regulator in Mexico, SEMARNAT. I think this may have been underappreciated by a lot of people. This is a major hurdle in obtaining our final permits, which will include a change of land use, which applications are now being processed. And really we want to make sure that we have these permits and our final permits required for construction of the mine in place and in hand by the end of this year, so that we can make an investment decision on whether to proceed with the project in the first and second quarters.
As well I think there's a number of major technical advances that were completed this quarter to continue to de-risking and as you can see them listed here on this slide. All of these are technical de-risking steps are now being currently summarized in a prefeasibility study, which is being done by M3 Engineering in Tucson. M3 builds two mines in this area recently, one of them was Torex, who is rated adjacent to the Ana Paula project and the other was for a company that I worked for previously Farallon Mining the G9 mine to the northwest of Ana Paula.
So the PFS is going to be released by – prepared by M3 will be released this quarter and really for me this will bring a much higher level of confidence and the estimated robust economics of the project, which were prepared in a preliminary economic assessment last year as all of you know will appreciate the work that's going on now of substantially de-risked the estimates in the preliminary economic assessment. So we're looking forward to seeing that PFS shortly.
Going forward on Slide 11 and really just to conclude, there are a number of key catalysts coming up for Ana Paula and the leases not – which is the release of the PFS as I said this quarter. We expect to continue on with the engineering work required to continue to move Ana Paula towards construction with the definitive feasibility study that we expect to begin early in the third quarter and really take us through into the first quarter of next year as well as I mentioned we will be going to our final permitting stages, particularly the change of land use, which will allow us to make a construction decision on this project in Q2 of 2018.
Importantly will also be the project financing, which will begin to evaluate with the pre-feasibility study in hand. We'll be starting to work on that in earnest in the third quarter of this year. I think also importantly it's not mentioned here on this slide, but it is worth highlighting is the company is going to start to work on a plan to evaluate exploration potential at Ana Paula and that exploration potential is really twofold. The first and I think the highest priority is looking at the potential to expand the operations by adding an underground component to them.
There are some drill results as some of you have seen below the proposed pit at Ana Paula and we expect to be able to try and explore that area further by putting an underground decline into the potential area and drilling it from underground, but we'd like that to happen in the last half of this year that's something we're working on exploring right now. And as well we have a 50,000 hectare land package, which we've barely scratched the surface of investigating and we think it has some real potential to contain potentially another discovery.
So to conclude, I think in summary the new management team here at Alio Gold are really excited by the pipeline of assets that we have in Mexico. It's a fantastic opportunity for us to create shareholder value from this platform by building a mid-tier gold mining company. So thank you again for your attendance on the call today and I'd be happy to take some questions from anyone.
I’ll pass it back to the operator now to just organize those questions into queue.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question comes from the line of Jamie Spratt from Clarus Securities. Your line is now open.
Jamie Spratt
Good morning. Congrats on the progress here.
Greg McCunn
Thank you, Jamie. Good morning.
Jamie Spratt
Yeah, just a couple of quick questions here, so good to see the production guidance for 2017 coming up. But I guess just on the cost side of things is there any change in the cost guidance for the year?
Greg McCunn
Thanks, Jamie. That’s a good question. And you could see that we haven’t adjusted the cost guidance for the year, which was previously at $1,000 an ounce all-in sustaining costs. And the focus really I think has been on the assets since we – the new management team has been in place has been really – back up the step has been threefold. The first and foremost has been on the safety in the operations of the mine and we've started to implement now I think a real strong safety program and proper safety systems at the operation. In my mind safety is a real indication of how well the operation is being run and I think we're starting to see some improvements there as we've been implementing these systems.
And then the second was focusing on production. And as you know Jamie, we had a fairly weak production profile for this asset going forward, which we now have replaced with this production profile that we put in front of you today and I think it's a very robust business plan for the San Francisco operations and shows us producing a lot more gold in which is using the assets that we already have on the ground keeping the crushers full. And then the focus of the company now absolutely the third and final leg of this is to focus on operating costs and you can rest assure that we will be really drilling down on our operating cost in the last half of this year. And as we start to capture some of those improvements will certainly adjust our guidance accordingly. For now we've conservative at them where they are.
Jamie Spratt
Great. Yeah, I guess, just turning to the reserve increase here. So I guess the question is, so what's the primary driver of this increase? I guess you've added an extra phase. Is there any change in gold price? I guess the question is kind of what's driving this increase?
Greg McCunn
Yeah, it's almost all being driven, Jamie, by the addition of the phase eight of the San Francisco pit although there are some additional resources that are coming into this plan from Phase two at La Chicharra. The bulk of the increase in production in the reserves is coming from Phase eight. That was not part of the previous mine planned predominantly because the plan was being run to try and optimize the cash flow off of – basis of having spent very little capital on stripping. And so in order to mine or extract portions of phase seven in the previous plan, they were essentially backfilling the pit as part of that plan which really sterilized phase eight on a go forward basis.
So that's the major change that we made to the plan as to not do pit backfilling and really which would be – they’d be the end of the mine life if we were to do that. So we’ve now incorporated extracting that waste from phase seven. The drilling that we've done since the last mine plan is approved of substantial amount of more resources in phase five, which is have also helped and it's certainly improve the margin of the ounces in phase five as well. So I think it doesn’t – to answer your question twofold is really the improvement in phase five since the last mine plan in the addition and that allowance of that to justify of doing phase eight.
Jamie Spratt
Great, final question here. So, it’s good to see the bump in the recoveries in the life of mine plan I get 73%. How are you guys achieving those higher recoveries? I mean obviously you're crushing more but can you give us some specifics on that?
Greg McCunn
Yeah, absolutely, so there's been some improvements that have already been captured and we basically have been running the recovery – currently the metallurgical recovery is running about 70%, so we've been able to achieve some recovery of the improvements with really two major operational changes. The first is that we have been able to crush a little bit finer with the existing equipment that we have, but a big part of this as you see about $7 million in capital is being directed at augmenting the tertiary crushing circuit that currently exists at the mine to be able to give us 100% passing 3/8s of crush particle size on to the heaps.
And based on our test work that we've done, we believe that will help us to get an extra 3% in recovery takes us to 73%. As well what’s helped us to get to 70 is we really have to change the operational philosophy on the heaps. We're now circulating and recirculating solution across that heaps and what I would call a more normal operating fashion. So that's allowed us to just really optimize the cyanide use and you will see that in the lower cyanide consumption as well as improved recoveries.
So those are the two main areas. I think that there's still a lot of opportunity as we start to understand this ore body better. There's a lot of actual first time metallurgical work being done right now that had never been done in the past. And we're starting to get an understanding of what's the nature of the 27% of the gold that's not leaching and how we might be able to improve that recovery in the long-term. So none of that upside is obviously baked into this yet, but rest assured we haven’t stopped working on improving that.
Jamie Spratt
Great, thanks very much. I'll leave it there.
Greg McCunn
Sure, Jamie. Thank you.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Philip Ker from PI Financial. Your line is now open.
Philip Ker
Yeah, thanks. Just a quick question. Was there an internal trade off study to go ahead and move forward with the capital stripping exercise here versus the previous mine plan to just kind of study quo 50,000 ounce to your program and help to save some of the capital for allocating to the development of Ana Paula?
Greg McCunn
Yeah, thanks, Philip. Good morning. No, I think that what you're seeing here is a plan which will actually generate more cash flow for the development of Ana Paula. So if you notice the timing of the – certainly not necessarily the development, but certainly to support us in the startup in operations at Ana Paula. You noticed here the timing of the capital spend on the San Francisco revitalization plan has really completed the main bulk of that by the middle of 2019. And we expect to be in the final stages of construction and really the startup and commissioning in the second half of 2019 at Ana Paula.
So what that means is that this will be a nice cash flow engine that can support us during that final stages of construction in startup and commissioning, which means from a financial perspective we don't need to raise as much of a buffer beyond the capital cost as we might if we were a pure development play. I hope that answers your question, but absolutely there is a trade off study. This is a far better economic outcome. The rate of return that’s being generated by this capital investment is actually on par with the investment in Ana Paula itself.
Philip Ker
Okay. Yeah and I guess it was just some clarity on the scheduling of the capital outlays I guess.
Greg McCunn
Absolutely and there is still a lot of flexibility in that plan. Obviously, we want to make sure that we execute on it as quickly as possible because not only does it – not only is getting through that capital stripping – obviously the cash flow for the startup of Ana Paula. But it also turned San Francisco into a viable operation across a very wide range of gold prices leading down to $1,000 an ounce gold.
Philip Ker
Right. Okay, and then just on the exploration initiative you’re sort of talking about here. In the past, San Francisco, it’s seen pretty exhaustive exploration campaigns upwards I think 400,000 meters annually. What are you looking at and what are sort of costs or capital outlays would you expect for that program I guess next year?
Greg McCunn
I think you're absolutely right reviewing the exploration work that's been done. There's been a lot of scenario that's been drilled here. And certainly the focus of the company going forward is not so much going to be looking to find another couple of million ounces in a greenfield discovery. I think that there's not the potential to do that that might be something we get to eventually. But really the exploration program for 20 – really there’s going to be a bid that happens in the back half of 2017 and then for 2018 is going to be focused on an ongoing replacement of reserves. And that is going to be very much near-mine exploration.
And in particular, we're going to be focused on drilling some of phase seven and phase eight that is really not fully proven up at this stage. I think that those phases of the mine life lost the resources that are in the plan and the reserves that are there are statistically well proven. The areas where were those ore body – those ore blocks occur. There's still potential to add some significant amounts of resources there. Certainly when I say significant I mean to add replace reserves on an ongoing basis for one or two years. So that's going to be the main focus of our near-term program and we expect to spend about $4 million in total, investigating that opportunity and it's about a 62,000 meter drill program that's proposed, some of that will start – and the board approved us to start some of that work in the last half of this year and will obviously carryover into early 2018.
Philip Ker
Okay, that’s it for me. I will leave it there. Thanks a lot. We will see you next week.
Greg McCunn
Absolutely, look forward to it.
Operator
Thank you. And I'm showing no further questions at this time. I’d like to turn the call back over to Greg McCunn for closing remarks.
Greg McCunn
Now, thank you very much operator and I just want to thank everyone for taking the time to join the call again today as said at the outset. For those of you who are – we’re going to be seeing next week in Toronto and the analysts and your associates look forward to it. And I again for those of you, who – others, who are on the call please refer to our website for the full presentations that will be given to the analyst that will be posted on Tuesday morning. Thanks again for your support and bye for now.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.