Start Time: 11:00
End Time: 11:35
Allied Nevada Gold Corp. (NYSEMKT:ANV)
Q3 2014 Earnings Conference Call
November 04, 2014, 11:00 AM ET
Executives
Randy Buffington - President and CEO
Steve Jones - EVP and CFO
Tracey Thom - VP, IR and Corporate Communication
Analysts
Vitali Mossounov - Nova Scotia Bank
Jeff Killeen - CIBC World Markets
Operator
Good day, ladies and gentlemen. Welcome to the Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Tracey Thom. Please go ahead, Ms. Thom.
Tracey Thom - VP, IR and Corporate Communication
Thank you. Good morning, everyone. Thank you for joining us today, as Randy Buffington and Steve Jones will be discussing the third quarter financial and operating results that were issued after market yesterday and are posted on our Web site. As a reminder, this call is being webcast and a replay of the webcast will be made available on our Web site shortly after the call.
I will remind listeners that some information provided during this call may include forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties have been materialized or the assumptions proven correct, the results may differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking. A discussion of some of these risks, uncertainties and assumptions are set forth in more detail in our press releases and SEC filings including the most recently filed Form 10-Q and 10-K. We assume no obligation and do not intend to update any such forward-looking statements.
I will now turn the call over to Randy Buffington.
Randy Buffington - President and CEO
Thank you, Tracey. Good morning, everyone, and thank you for joining us on the call. Third quarter, we produced 49,630 ounces of gold and 525,942 ounces of silver. Year-to-date, we produced 166,608 ounces of gold and 1.4 million ounces of silver well above the 2013 production levels.
With the delay of the crusher coming on line earlier this year and the lower metal prices, we did not crush as much ore as we had planned in the second quarter and third quarter. This resulted in more ore going as run-of-mine to the pad versus crusher.
Our focus for the third quarter in the mining operation was to move more waste to access more areas with ore and better position us for 2015 and 2016 production. During the fourth quarter, our strip ratio improves to 1.5 to 1 from a third quarter where our strip ratio was 3.2 to 1.
On the process side, the solution close to the pad have been as expected as well as the leach pad has been operating well. We averaged above 28,000 gallons per minute to the top of the pad on a barren site and we processed on an average of 23,000 gallons per minute.
Recoveries from the leach pad and the ore are as predicted with no surprises. We are focused on our liquidity and balance sheet. We’re facing the same issues as many are in an industry with diminishing margins as the metal prices continue to face pressure.
We are reviewing ways to relieve this pressure on our balance sheet including good margins to more efficient operating practices. Steve Jones will discuss some of these opportunities more from a strategic approach in more detail during this call.
At an operational level, we continue to look for ways to improve our operating costs. In the third quarter, we crushed 1.9 million tons of ore where the grades supported the crushing. With the continued decline in metal prices, we have reviewed the costs and benefits associated with crushing and have decided to shut down the pressure until metal prices support the cost of crushing ore.
Manufacturing the crushers continue to engineer and manufacture a solution for the second – a permanent solution for the secondary and tertiary pressures to ensure it meets availability demands for the mill. We continue to expect the permanent fix will be completed in 2015.
With the changes previously mentioned, we have decreased sales guidance to 220,000 to 230,000 ounces of gold but have not changed the silver guidance due to higher gold production we seen during this year.
Coming into the fourth quarter, we have returned – mining operations have returned to placing more ore to higher grade and we expect to see increased production ounces as a result of these tons that are being placed. During the quarter, we expect to place between 10 million and 11.5 million tons of ore.
I’ll now turn the call over to Steve to go over the financials.
Steve Jones - EVP and CFO
Thank you, Randy. Let me start with our cash balance. Our cash balance at the end of the quarter was 5.8 million. That’s a $7.8 million reduction from 6/30. We did have $5 million drawn on our revolver. I will remind everybody that we do have an additional restricted cash balance of 10 million that’s not shown as cash and not included in that 5.8. We are required to maintain that pursuant to our credit facility and obviously that makes the full $75 million revolver available to us.
We did generate cash flow from operations during the quarter of 5.2 million and I’ll talk about that a little bit more in detail toward the latter part of this presentation. We did have – as part of that cash flow from operations, we did not have an interest payment this quarter on our senior notes. We obviously got one coming on the 1st of December, so that benefit from a working capital standpoint was offset by an inventory build up this quarter due to the fact that we were in a high stripping phases, as Randy mentioned, although we did reduce the number of ounces on the pad during the quarter, the high cost resulted in an increase in the inventory balance on a pre-write-down basis.
Speaking of the inventory write-down, we did write-down 70.7 million that’s pre-tax to reflect lower cost to market. We used $1,216.50 gold and $17.11 silver. Those were the quarter-end prices in the market. Ore on a leach pad balance is now at $11.48 an ounce. That’s roughly where we were at the beginning of the year. We were at $11.40. During the quarter, we only placed 34,600 recoverable ounces on the pads, as Randy indicated, as we were mining through waste to open up the work for Q4 2015 and 2016. We expect to more than double that in the fourth quarter.
You may recall, we did discuss both in our second quarter 10-Q and the MD&A as well as on this call last quarter that a write-down is likely if prices were to drop as a result of a high stripping phase in the third quarter. If we look at the assets held for sale during the quarter, 45.6 million, we had really no significant activities from an accounting perspective anyway, we were at 46.6 at the beginning of the quarter, so we had a small fair market value write-down of a drill (indiscernible).
We do have an agreement to sell four trucks. That agreement is in place and we’re working through the logistics and the finalization of that agreement and we would expect those trucks to be sold and the cash to be collected in the fourth quarter, and that would generate in excess of $2.7 million in cash after repayment of a debt. You recall, we have three brand new drills for sale. We do have an agreement to sell one of those drills, which will be 400,000 or so cash generative after debt repayment.
We continue to work with our Cat dealer. Cashman assist us in selling the shovel. First couple of months of the quarter and I’d say even probably through September not a lot of activity on that shovel. More recently Cat has actually sold four of those shovels and now there’s an 18-month wait time to get one of those shovels, so over the last three weeks or so we’ve been getting a lot of more calls on our shovel. It’s not usually cash generative, probably somewhere in the neighborhood of $2 million to $3 million in terms of the fair market value being in excess of the debt, but obviously it’d be nice to get close to $19 million of the debt off of our books.
Overall, we ended the quarter with total capital leases of 181.4 million. We started the year at 223 million. We’re paying roughly 13 million a quarter. We’ll pay slightly less in this next fourth quarter, it’s about 11.5. The principals over the next four quarters in total are about $50 million. You’ll note our current portion of debt is 71.2 but that includes 27.9 that relates to shovel, the drills and the four trucks, so all that debt is shown as current although if we don’t see the equipment, then obviously the vast majority of that is not current.
On our $400 million in senior notes, you’ll recall that we have to cash collateralize the [other] (ph) money swaps for 90 million of those. As of 9/30, we had 11.4 million of letters of credit drawn against the revolver to use as cash collateral and then we add an additional $0.5 million that we use to backed that collateral. The high point with the U.S. dollar strengthening was in mid-October and actually it’s probably this morning, but right at about $14.5 million of total collateral.
We are working with one of our revolver banks to try to novate this position to then basically transfer that liability from the two non-revolver banks to a revolver bank and if we were to expect that we’re able to do that, then what we would have to pay the bank to do that would be less than what the new [LCPs] (ph) were currently paying and the main thing it would do is it would eliminate the usage of a revolver for these letters of credit and get us more availability under a revolver.
Our borrowing based on the revolver at 9/30, we were 134 million. We need to have 100 million more of borrowing base to access a full revolver. If you ran the numbers at 9/30 using $1,100 gold and $15 silver, we still have in excess of $100 million on the borrowing base. We do have full availability to access our revolver.
Looking at the income statement, we generated 76.9 million in revenue this quarter. As Randy said on gold sales of 52,176 ounces of gold, we had an average price of $12.75. 10.26 silver to gold ratio. Total silver sales of 535,407 at an average price of $19.43.
If we look at our adjusted cost for the quarter, they were 856. We had forecast 825 to 850. We did not get quite as much far out on the pads as we were expecting, but obviously we were close with only $6 off of the high end of the range. Year-to-date, we’re at 822 and still less than our original aim of forecast of 825 to 850. And these numbers, the 856 is pre-write-down.
Even though the silver prices were somewhat lower in the quarter, we did have a very significant silver credit at $199 per ounce on the strength of the good silver production that we enjoyed during the quarter.
If we look at our mining costs, we were at $1.57 per ton. Last call, we indicated that we thought we’d be in $1.50 to $1.60, so we were right in that range. We mined 23.6 million tons on the quarter and we’re on target to mine close to 100 million tons this year. Our original budget was 92 million tons, so we are mining a little bit more than what we had originally budgeted at the beginning of the year and that’s to make sure we have plenty of open ore areas for 2015 and 2016.
As Randy indicated, our strip ratio during the quarter was quite high. It was 3.7 to 1 and that compares to 1.3 to 1 in Q2 and we would look to have a much, as Randy indicated, a much more stripping ratio in Q4.
On the processing side, we spent 29.2 million in processing costs for the quarter. That does include 5.4 million of crushing costs. That’s about $1.10 per ton of the ore or about $3 per ton of crushed ore. Overall, including the crushing costs, our cost for processing cost per ton was 596. That’s very high due to the fixed nature of the costs and the fact that we did not put out a lot of ore tons during the quarter. We did crush, as Randy indicated, 1.9 million tons during the quarter.
Year-to-date, our processing costs are 296 a ton and that includes crushing costs of $0.23 per ton of ore. Our ore total of 273 for ton of ore crushed. Merrill-Crowe plant fared well during the quarter. As Randy indicated, we actually had about 2,000 gallons per minute flowing through the plant, greater than what we had in the second quarter.
We talked about the fact we had the write-down to lower our cost to market 70.7 million pre-tax. We had interest expense during the quarter of 11.4 million. We had 660 capitalized. Both of those were as projected and consistent with the prior quarter. Although our effective tax rate for the quarter was 30.3%, plus we had $3.2 million of discrete items, those are items that you record during the quarter in addition to your effective tax rate, they relate to stock-based compensation and our return to position adjustment for a prior year depletion adjustment.
We’re not forecasting benefit of depletion in 2014 as we’re not forecasting [interest] (ph) at the high gross level and therefore we’re not able to take advantage of depletion. Just to remind everybody, we’re not a current tax payer. Overall, the net loss for the quarter was 62.4 million or $0.60 a share. Year-to-date, our net loss is 57.7 million or $0.55 a share.
Let’s move on to the cash flow statement. I’ll start with EBITDA of 17.6 million. We had cash interest of 3.4. I mentioned obviously we didn’t have senior note payment this quarter. So that left us 14.2 million of cash flow. We’ll use net-net 9 million in working capital primarily related to an inventory build pre-write-off. So our cash flow from operations is $5.2 million.
We did not spend a lot of capital, only 6.3 million during the quarter. We’re able to restructure our surety arrangements and free up 1.8 million in restricted cash, so our net cash used in investing was only 4.5 million during the quarter. We did have capital lease payments of 13.5 million. We drew on the revolver of 5, so net used in financing activities was 8.5. For the 7.8 million cash reduction that I mentioned at the outset in my comments, that leaves us with a cash balance of 5.8 million.
If you look forward to the fourth quarter and assume we had a similar amount of EBITDA, we would expect to pay total cash this quarter of about 20.1 million and that would leave us about $2.5 million negative amount after interest. If we have a same store to working capital used that would leave us $11.5 million of cash used from operations. We’re forecasting capital spend of about $10 million this quarter. We’ve got three large payments that relate to prior expenditures on the mill and crusher that are due this quarter. And then we’ve got capital lease payments of about 11.5. All total, that would be a cash reduction of about $33 million and that would drive our cash balance down to minus 27 or said another way, we would expect to draw during this quarter about $30 million.
Looking beyond that, we have minimal PP&E moving into 2015 and after the interest payment this quarter on the notes, our next interest payment is June 1, so we would expect to be generating much more cash flow than that in first and second quarters. We do have some additional sources that aren’t mentioned in those numbers. Obviously the trucks and drills that we sell, we are working on another surety restructure that might generate $1 million or so. Obviously, we’re into the revolver and we’re relying on the revolver currently and we’re also looking at some additional financing to add to the liquidity, so that we can no longer be relying on the revolver.
We do continue to work with Credit Suisse and Scotiabank. They’re helping us to find investors for our mill expansion. We did finalize the feasibility study and released the results on the 15th of October, and we had a call for that effect to talk about that. That reiterated the strength of the mill project ahead of us. We do expect to file our 43-101 document sometime this week on SEDAR and our current focus as we talked when we released the feasibility study is on reducing that Phase 1 capital to enable us to run the initial line of 60,000 or we believe we can actually get it up to 70,000 tons per day, which is one SAG, two ball mills and build that for minimal capital and that work is ongoing.
We do continue to dialogue with interested parties, but given the competence in nature of the process, we’re really limited on what we could communicate at this time. We’re still focused on an end of year conclusion to the process and we would hope to be able to announce something at that stage whether we got an interested party and have an investment going forward that we believe is beneficial or whether given this commodity price environment, we have decided just to wait for better times in the gold business and continue to dialogue but put the process on hold.
With that, I’m going to turn it back to Naomi and ask her to open it up for questions.
Question-and-Answer Session
Operator
(Operator Instructions). Our first question comes from [Peter Crescendo] (ph) from Imperial Capital. Please go ahead.
Unidentified Analyst
Hi. How are you, guys, and thanks for taking my question. Could you please walk me through again your liquidity and your sort of expected revolver drill down of 30 million this quarter to fourth quarter?
Steve Jones - EVP and CFO
I can Peter. So $10 million in PP&E, 11.5 in capital lease payments and then I was using cash used from operations of 11.5 million.
Unidentified Analyst
Perfect.
Steve Jones - EVP and CFO
That contemplated interest payments of 20.1 million.
Unidentified Analyst
All right. And in terms of your asset sale to shovel, you mentioned you received several calls this quarter of curiosity. What was the highest bid you were seeing?
Steve Jones - EVP and CFO
I’m not going to answer that. They could be on the phone, so I’m not going to --
Unidentified Analyst
That’s right. Okay.
Steve Jones - EVP and CFO
I’ll say this. We have had goods in excess of the cash balance.
Unidentified Analyst
And why didn’t you sell them?
Steve Jones - EVP and CFO
Because the shovel is worth more than what the bids we’ve been given to-date.
Unidentified Analyst
I understand. Got it. All right, thanks. Good luck, guys.
Operator
Thank you. Our next question comes from Vitali Mossounov from Nova Scotia Bank. Please go ahead.
Vitali Mossounov - Nova Scotia Bank
Hi, everyone. Thanks for taking my call. The (indiscernible) crushers that you shut it down because it just doesn’t make sense in this pricing environment. Is there a number that you’re looking out where you could see this coming back on line, maybe say 1,200, 1,250 just to get a better idea?
Randy Buffington - President and CEO
Yes, it’s probably around 1,250 is where it comes back on line – it’s 1,250 and $19.20 silver is where it makes the most sense.
Vitali Mossounov - Nova Scotia Bank
Right, okay. And then on the strip ratio, I think looking back to the Q2 transcript, we were looking at something more like 2 to 1 in the second half of the year. Was there something that we missed or something unusual that precipitated the high ratio of 3.7 in Q3?
Randy Buffington - President and CEO
Yes, the first half of the year was 1.18, Q3 was 3.2 and then we dropped back to the 1.5. And Q3 was really just a product – we’ve always had this stripping phase in the mine plan and we push it out and push it out, we just had to get into two phases of Brimstone to get into higher grade ore and we took that during the third quarter. That positions the Hycroft mine for fairly flat, more of a oxide reserve strip ratio and gold production for the next two years without having to take a big stripping phase again.
Vitali Mossounov - Nova Scotia Bank
Is the strip ratio that you’re looking for in '15 and '16 still about what’s in the mine plan of kind of 1.8 (indiscernible) can’t recall the number?
Randy Buffington - President and CEO
It should be flat in there with the reserves, yes.
Vitali Mossounov - Nova Scotia Bank
Okay. Actually that’s all. Thanks very much.
Operator
Thank you. Our next question comes from Jeff Killeen from CIBC. Please go ahead.
Jeff Killeen - CIBC World Markets
Hi. Good morning. Thanks for the time. Just on the topic of grade, so you had mentioned that grades did decrease in the first nine months of 2014, but then you’ve opened up some higher grade areas now. So just thinking about the grade in the current quarter and then to next year with the idea that you have been mining grades sort of above the current reserve base. So should we expect the grades to kind of normalize here or start to normalize back towards a reserve number or what would you anticipate?
Randy Buffington - President and CEO
Yes, the fourth quarter will be a little bit higher in grade as we’re into an area in Brimstone that’s good grade both on the gold and the silver. But when you start to look throughout '15 and '16, you’ll see reserve type grades for the remainder of those periods of time.
Jeff Killeen - CIBC World Markets
Okay, great. And obviously looking at current metal prices and what you’ve had to do in terms of writing down some ounces, I would think that that must have sort of impact on your mine plan let’s say from today forward? Are there any ounces in the mine plan as you would have seen it six months ago that have now been deemed not minable or effectively what I’m asking is, is the current metal price kind of also the way you’re looking at your mine plan for going into 2015?
Randy Buffington - President and CEO
Not really. Remember our reserves are run at a fairly low gold price compared to today, so we’ve got a little bit of margin in the reserves as well as a lot of these ounces are stripped already. So you continue to push those down. You will see some of the lower grade, I would say the [third] (ph) mineral that we’ve benefited from in the stripping before that will now go to waste because you just don’t pay the $2 processing fee even though it’s already loaded in the truck. But I wouldn’t see a difference in ounces going from the leach pad.
Jeff Killeen - CIBC World Markets
Okay, great. I think that’s all from me. Thanks for your time.
Operator
Thank you. Our next question comes from [Ross Carden] (ph) from PSG Asset Management. Please go ahead.
Unidentified Analyst
Hi, guys. I just got a follow-up on the liquidity. First of all, thanks for providing more detail. I think that’s helpful but I do have a question as we move into 2015 how liquidity might look? So if we say you’ve got annual interest payments of let’s say high 30s and then you got the number that you talked about for leases in the 50s or around 50, and then if you have some CapEx, you get into or close to $100 million of burn on that front. So what I’m trying to understand is when you say you got liquidity for 12 months, what am I missing on the operational side because the implied – if you’re saying earlier the cash used from ops this quarter is going to be 11 that includes interest expense of 20, so you’re saying maybe there’s a 10 cash generation this quarter when you annualize all that, it looks like it’s going to be a hefty burn in 2015 and I certainly can’t get to 12 months out. So can you walk me through the next 12 months and how should we be thinking about it, especially given historically grade is a lot higher and gold is also a lot higher and I’m trying to piece together the lack of cash generation from operations in the past with – I guess you’re implying there’s a turnaround. So can you help me with that. Thank you.
Steve Jones - EVP and CFO
I’m not sure what you’re using for capital but we have very minimal capital next year, so that’s one component.
Unidentified Analyst
How much is CapEx next year?
Steve Jones - EVP and CFO
I would say 10 million or less. That’s one component. The numbers I was using for Q4 was basically trying to mimic Q3 in terms of working capital use. I would not expect us to continue to have working capital uses long term. So I think if you pull that out of your equation, you should be able to get to roughly 12 months from today assuming that we can draw fully on the revolver.
Unidentified Analyst
Okay. But if you step through those, if you say cash interest is around the high 30s and then you’ve got the principal repayments around 50. So you’re someway close to 90 and then let’s add on 10 as CapEx. So you’re pretty much at $100 million as fixed expenditure that (indiscernible) as five operations. Now if you look at the operations – I mean during this quarter, you had a working capital – you had an inflow from receivables and payables that would benefit. So I guess I’m struggling to see what’s going to change moving into 2015 versus what we’ve seen historically? And also I mean the gold price is going to be significantly lower.
Steve Jones - EVP and CFO
Well, that’s your opinion. If I take your number of 100 and I’ve got 58.6 million on my revolver and I can generate $50 million, then I’ve got 12 months of run rate.
Unidentified Analyst
Well, I’m actually working that from the end of '14, so I’m thinking – you’re saying in Q4 --
Steve Jones - EVP and CFO
No, no, no. The 12 months is not from the end of '14, because the end of '14 would include three interest payments. So I’m saying we have 12 months over the financials to talk about having 12 months. It’s actually as of today.
Unidentified Analyst
Okay. If you say 2015, you’re going to stock 2015 with another 30 million draw on the revolver and then you’re going to spend 100 million. That looks – if you use those numbers as a starting point, it does imply a huge turnaround in underlying operations.
Steve Jones - EVP and CFO
Well, you wouldn’t spend the 400 million but – I think I’ve answered your question.
Unidentified Analyst
Yes, okay, fine. Okay, well, I’ll let somebody else jump on. Thank you for taking my question.
Operator
Thank you. At this time, there are no further questions. So that concludes the call for today. Thank you for joining us.