Lundin Gold Q1 2023 Earnings Call Transcript

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May 11, 2023

There are 5 speakers on the call.

Operator

Morning, ladies and gentlemen. My name is Kelsey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lundin Gold First Quarter 2023 Results Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question and answer session.

Operator

If you would like to withdraw your question, please press the pound key. Thank you. Mr. Ron Hochstein, you may begin your conference.

Speaker 1

Thank you, Kelsey, and good morning, everyone. Thank you all for joining us on this conference call today with Terry Smith, Chief Operating Officer Chester See, Interim Chief Financial Officer and I are going to take you through our results to the Q1 of 2023. Please note Lending Gold's disclaimer is on this slide. To the call. This discussion includes forward looking information.

Speaker 1

Actual future results may differ from expected results for a variety of reasons to the discussion regarding forward looking information and statements section of our press release. Lending Gold is a U. S. Dollar reporting entity and all amounts in this presentation refer to U. S.

Speaker 1

Dollars unless otherwise indicated. To. Lending Gold's momentum for 2022 continued in the Q1 of 2023 with an all time high in gold production of just over 140,000 ounces and gold sales of nearly 135,000 ounces at a cash operating cost of only $6.44 per ounce sold to an all in sustaining cost or AISC of $7.28 per ounce sold. To the call. This particularly strong result resulted in the generation of cash from operations of 144,400,000 to the call.

Speaker 1

As of March 31, 2023, the company maintained a strong cash balance of 210,000,000 to the company's conference

Speaker 2

call, which is a reminder of the company's call, which is the

Speaker 1

company's call. Thank you, Mr. Chairman. Thank you, Mr. Chairman.

Speaker 3

Thank you, Mr. Chairman. Thank

Speaker 1

you, for debt reduction initiatives and dividends to shareholders. During the 3 months ended March 31, 2023, to the company utilized cash to optimize its balance sheet through the full repayment of the gold prepay facility of $208,000,000 which provides the company with greater exposure to the positive outlook on gold price. This one time transaction resulted in additional interest and finance charges of $129,000,000 with the resulted 1st quarter free cash flow to the call of negative $11,700,000 Excluding the one time interest and finance charge associated with the full repayment of the gold prepay facility, to the company actually generated free cash flow of 117,000,000 to the Q1 of 2019. Key milestone achieved during the quarter that I would be remiss to not highlight was Lundy Gold's announcement of its updated estimate of mineral resources and mineral reserves. With this update, the company successfully replaced all mine reserves since the beginning of operations and added additional reserves, to a significant achievement.

Speaker 1

These results demonstrate the exceptional value we have added through our conversion drilling program. Importantly, to the operator. There remains 1,800,000 ounces of indicated resources and 1,700,000 ounces of inferred resources at FTN that are not included in the reserves, which we believe will play a significant role in continuing to place production in the future. We expect that this updated resource and reserve estimate is only the first step in continuing to expand the total mineable ounces of gold, Allowing FTN to continue producing for many years to come. Perhaps to the operator.

Speaker 1

Most importantly though, our strong operating and financial results were achieved while maintaining our outstanding safety record. On the heels of an excellent quarter. The operations team at FDM recently reached a milestone of 4,000,000 hours worked without neither a lost time incident or medical aid incident. This fantastic achievement is one that everyone to the Lending Gold family is very proud of. Although the robust performance for the quarter on many fronts provides a strong start for the year.

Speaker 1

The company's production guidance for 2023 to the operator. Remains unchanged as grade and gold production are expected to vary over the coming quarters. To the ramp up of sustaining capital activity starting in the Q2, the most significant being the construction of the 4th to tailings dam raise. The company also maintains its ASIC guidance. With that, I'd like to turn the call over to Terry now for a more detailed look at the operating results.

Speaker 2

Thanks, Ron, and hello all. I'm delighted to attend my first call with Lundin Gold as Chief Operating Officer. In my short time with the company, I've been very impressed with to the quality of the team, their commitment to safety and their ability to generate great results like our record Q1. I'm also really excited about the potential to continue optimizing the operation and extending its mine life considering the exploration results that were recently announced from our near mine exploration program. Ron will discuss exploration more in a minute.

Speaker 2

Our operating results were particularly strong in Q1 highlighted by quarterly gold production totaling about 140,000 ounces comprised of approximately 88,000 ounces of concentrate and 52,000 ounces of dore. Gold sales totaled about 135,000 ounces. To the line of John. In the same period last year, gold production and sales totaled around 122,000 and 120,000 ounces respectively. The biggest driver of these results was grade.

Speaker 2

We benefited from high grade mined late last year and reduction in our low grade stockpile in December January. To this event that we lacked lower grades to blend with our mine feed and high grade stockpile in Q1. We don't expect this grade performance to continue through the year, but it's nice to have a strong start. Mine production in Q1 ramped up close to 428,000 tons of ore at an average grade of 11.7 grams per ton versus 380,000 tons in Q1 to 2022. Average throughput at the mill was 4,359 tonnes per day, below the guided average for the year of 4,400 tonnes per day due to the completion of the realigning of the SAG and Ball Mills late in the quarter.

Speaker 2

The average grade of ore milled was 12 grams per tonne with average recovery at 90.6 percent, also all time highs. To the call. Recoveries were positively impacted by processing high grade ore and an ore blending strategy that improved flotation recoveries. To the operator. Operational results in Q1 were achieved at a cash operating cost of $6.44 and AISC of $7.28 to our low unit costs were driven primarily by higher production.

Speaker 2

However, there were some to cost wins in the mining department in Q1 with several operational excellence initiatives starting to bear fruit. One example is our backfill costs have to come down with reduced cement addition. The team have come up with a better pace filled barricade design that reduces the strength criteria and as a result lower cement consumption. These types of efforts in all aspects of the operation will continue and we'll keep chipping away at improvement initiatives to get the most out of Fruta del Norte. Sustaining capital accounted for only $33 to the Q1, but will ramp up in the Q2, the most significant component in the construction of the 4th tailings dam raise.

Speaker 2

To the Q4. Preparations were underway for the 4th raise late in Q1 with work starting in Q2 and completion expected in Q4. To the construction of the new warehouse also progressed as planned during Q1 with completion expected in late Q2, while other sustaining capital projects such as a new sewage treatment plant, underground mine maintenance facility and other efficiency improvement projects are expected to ramp up during the remainder of the year. Using the 2023 ASIC guidance of $8.70 to $9.40 per ounce sold as a reference, the company sits comfortably in the lowest quartile of the global ASIC curve. As everyone is aware, the conversion drilling program is a component of sustaining capital.

Speaker 2

To Convergent Drilling in 2021 2022 enabled the successful replacement of all mineral reserves, to all mined mineral reserves since the beginning of operations at FDM. The new resource model has identified areas for additional conversion drilling in 20232024, to Q4 targeting 1,800,000 ounces of indicated and 1,700,000 ounces of inferred resource for conversion. To the 2023 conversion drilling program completed 8 drill holes of approximately 1600 meters to mid April in distinct sectors of the FDN deposit. The North Central sector, 4 drill holes were completed with positive assay results associated with hydrothermal breaches that confirmed mineralization continuity along the downdip extension. In the southern sector, 4 drill holes were completed and intercepted veins and veinlets hosted in volcanic rocks generally associated with gold mineralization at SDN.

Speaker 2

A complete table of results received to date can be found in Lending Gold's recently to the published press release dated May 4, 2023. I'll turn the call back to Ron now to discuss the exciting developments to the next question and answer

Speaker 1

session. Thanks, Terry. Lundin Gold's near mine to the next slide. Our exploration program commenced in the Q3 of last year and is focused on expanding the FDM mineral resource envelope and testing several unexplored targets near the mine. As of mid April, approximately 4,110 meters across 8 holes, both from surface and underground have been completed with assay results we received to date set out in last week's news release.

Speaker 1

To the results are still pending for a number of the reported drill holes. Initial near mine results published in January to identify potential areas of interest based on drilling conducted at the start of this year. These areas are now better understood and have enabled the delineation of a new mineralized zone, FDM South, and the discovery of 2 new targets, Lonza Sur and Castillo. At Effingham South, the current drill program aims to delineate new buried epithermal mineralization located to the west of the East Fault with 2 rigs currently turning. 3 drill holes to the company's website.

Speaker 1

Completed intercepted wide hydrothermal alteration zones of a similar composition to that found at FDM. To the Q1. Results indicate there is significant potential to continue exploring along strike both to the north and South as well as along the down dip continuity below the Suarez Basin cover. To drilling to test a geochemical and soil anomaly identified by Kinross along the south extension of the East Fault intercepted a new mineralized zone, to Banza Sur that is located 1 kilometer south of FDM. Here, we intercepted high grade gold mineralization hosted in a wide hydrothermal alteration zone.

Speaker 1

Additional drilling has confirmed that mineralization continues along strike to the south and at depth, and we currently have 1 rig focusing on that on this target. At Castillo, the first drill hole returned positive results. To this target of interest, which is located underneath the Suarez Basin to the west of the East Fall and south of FDM South is in a similar geological setting to FDM and FDM South. This target area is planned to be further explored during 2023 where additional drilling will target perceived wider mineralized zones at depth. The near mine exploration program is continuing to the next stage of the year.

Speaker 1

We are now ready to begin the Q1 of 2019. As a result of the recent advances and to accelerate delineation of these targets and continue to explore other sectors along FDM's major structures. To the nearest mine program will be increased to a minimum of 23,000 meters this year compared to 15,500 meters originally planned. With this increase in drilling, the exploration budget is forecast to increase by approximately $3,500,000 to the regional program, results in an estimated total exploration budget of $24,600,000 for 2023. To the call.

Speaker 1

It's important to mention that our regional program will remain unchanged at 12,500 meters. With that said, to the Q2. 2023 will be the 2nd largest drilling season ever at FDM and the surrounding land package. The regional drilling program restarted late in Q1 with 1 drill hole in progress at Quebrada La Negra located along the southwestern basin border. To the drill hole is investigating the northern continuity of a major fault where wide hydrothermal alteration zones with breccias to our veins and disseminated sulfides were intercepted during the 2022 drilling program.

Speaker 1

To Regional Exploration will continue to advance in identification of important indicators to point toward the presence of buried epithermal deposits in the Southern Basin. To the next slide. New targets of interest have been identified and will be tested targeting new potentially mineralized structures. To the call. Now, I'd like to turn the call over to Chester for a more detailed look at the financial results.

Speaker 3

Thanks, Ron, and hello, everyone. In the Q1 of 2023, Lundin Gold recognized revenues of $257,000,000 from the sale of 135,000 ounces of gold at an average realized gold price of $19.52 per ounce. To the call. Income from mining operations increased to $133,000,000 compared to $111,000,000 a year earlier, to the conference call, primarily a result of the increase in ounces sold and higher gold prices. From this, Lundin Gold generated net income of to $51,500,000 during the Q1 of 2023, including a derivative loss of $15,400,000 to finance costs of $21,100,000 income tax expense of $33,800,000 and other expenses totaling $11,400,000 to the line of David.

Speaker 3

The derivative loss is a non cash item resulting from the fair value accounting of our Stream facility and should not be factored in the assessment of our operating performance. To the MD and A provides a detailed explanation of the impact of fair value accounting of this credit facility and the determination of derivative gains or losses. In comparison, during the Q1 of last year, net income of $23,200,000 was generated from the recognition of revenues of 2 to $15,000,000 and income from mining operations of $111,000,000 offset by a derivative loss of $34,700,000 to finance expense of $27,300,000 income tax expense of $16,900,000 and other expenses totaling 9,100,000 to the call. Adjusted earnings, which exclude the derivative loss and deferred income tax expense, were $67,000,000 or $0.28 per share this quarter to the company's conference call. Compared to $57,600,000 or $0.25 per share a year earlier.

Speaker 3

The decreased debt service costs between the two quarters, to finance expense of $21,100,000 compared to $27,300,000 a year ago has resulted because of to savings of interest and finance charges that were realized after the full repayment of the gold prepay facility earlier this year.

Speaker 2

To the call.

Speaker 3

The long term debt notes in the financial statements describes in detail the way this cost arises. Debt servicing under the Stream facility is tied to variable gold volumes and spot gold prices. Gold prices are forecast to remain high. We currently expect this cost to remain high, just as we expect our revenues to continue to benefit by the same high gold prices.

Speaker 2

To the operator. As a result of increased taxable income generated

Speaker 3

during the period, income taxes of $33,800,000 were accrued during the Q1, to the operator, which is comprised of current and deferred income tax expenses of $26,200,000 $7,700,000 respectively, to the $16,900,000 during the same period in 2022. In addition to corporate income taxes in Ecuador, to be paid in the form of dividends and an accrual for the portion of profit sharing payable to the government of Ecuador, which is calculated at a rate of 12% of to the Q1. The employee portion of profit sharing payable calculated at a rate of 3% of net income for tax purposes is considered an employee benefit and is included in operating expenses. Earnings before interest, taxes, depreciation and amortization to our operator. For EBITDA and adjusted EBITDA were $144,000,000 $159,000,000 respectively in the Q1.

Speaker 3

To the conference call. The difference between the two is a derivative loss of $15,400,000 this quarter. In the Q1 of 2022, to the call. These same non IFRS measures amounted to $99,000,000 $134,000,000 respectively. With all time high production and costs low, Lundin Gold generated net cash from operating activities in the Q1 of 144,000,000 It's important to remember that the full repayment of the gold prepay facility occurred in early January, which resulted in additional interest and finance charge paid of to the call of $129,000,000 As a result, a negative free cash flow of $11,700,000 or negative $0.05 per share was achieved during the Q1.

Speaker 3

When backing out the one time interest and finance charge paid relating to the gold prepay, to the line of Janine Gold achieved free cash flow of $117,000,000 or $0.49 per share. We expect to continue generating significant free cash flow in the to the future based on our production and AISC guidance and continued high gold prices, especially given increased exposure with a full repayment of the gold prepay. The company generated free cash flow of $91,800,000 or $0.39 per share in the Q1 of 2022. To the call. After optimizing our balance sheet through the payment of $208,000,000 to extinguish the gold prepay facility, Lundin Gold ended the quarter with a strong cash balance.

Speaker 3

To the call. As of March 31, 2023, the company had cash of $210,000,000 and a working capital balance of $257,000,000 compared to cash of $363,000,000 and a working capital balance of $195,000,000 at December 31, 2022. The change in cash this quarter was primarily due to the full repayment of the gold prepay, interest and principal repayments under the senior debt of 42,800,000 to the line of our conference call. Principal repayments, interest and finance charges, including associated taxes under the Stream credit facility totaling 21,000,000 to dividends of $23,600,000 and cash outflows of $7,200,000 for sustaining capital expenditures. To the call.

Speaker 3

This is offset by cash generated from operating activities of $144,000,000 and proceeds from the exercise of stock options and anti dilution rights to $4,000,000 Free cash flow is fundamental to Lundin Gold's growth story. The company's capital strategy ensures that we utilize our treasury as and when needed, while maintaining optionality. By fully repaying the gold prepay in the Q1, We will now benefit from the cash flow generated from an additional approximate 100,000 ounces of production over the coming years. Further, to the operator. And as per the terms of the agreement, the company continues to evaluate the option of buying back half of the Stream credit facility in June 2024 for $150,000,000 Unless gold prices fall materially between now and then, doing this makes both financial and strategic sense.

Speaker 3

To the operator. The remaining component of our outstanding debt is the senior debt facility, which had a remaining principal balance outstanding of $143,000,000 at the end of the first to the next quarter and is repayable in quarterly variable installments and through a cash sweep mechanism. Based on our current free cash flow generation, Unless prepaid, this debt facility will be fully repaid almost 2 years ahead of its scheduled maturity in 2026. I can't talk about cash flow without touching upon Lundin Gold's dividend policy of $0.10 per share declared on a quarterly basis. The 1st quarterly dividend of to the Q1, while the second is payable on June 27 for shares trading on the TSX and OTCQX and June 30 for shares trading on NASDAQ Stockholm based on a record date of June 13, 2023.

Speaker 3

To the call. Even after the payment of dividends and the repayment of the gold prepay, we still retain a healthy treasury and continue to generate significant operating cash flow for other value generating activities such as the recently expanded NEAR mine and regional exploration programs, future throughput expansions, to further debt reduction and M and A. A great start to the year for Lundin Gold. The company is in a strong financial position and at these gold prices, the cash being generated from operations is substantial. For a more detailed discussion of our financial results, to the MD and A.

Speaker 3

Now I'd like to turn the call back over to Ron for his concluding remarks.

Speaker 1

Thank you, Chester. To another strong operating and financial quarter for Lending Gold. We are generating substantial cash from operation, which in turn gives us the financial flexibility to explore so many different growth initiatives. Our exploration programs, which include conversion, near mine and regional are now generating promising results and our debt consolidation strategy is advancing. To

Speaker 2

the Q1

Speaker 1

of 2019. By June 2024, Lending Gold will be quite a different company to what it is today. To the operator. Before I open for questions, I would like to quickly acknowledge that several Board and management changes were made in Q1. With that being said, I'd like to thank Bob Teal, a Newcrest representative for his role on the Board over the past few years and welcome Jill Terry in his place.

Speaker 1

In addition, Chantal Gosselin will not be standing for reelection at our AGM in a few days. Chantel joined the Board in 2017 and has been a great resource for me and the Board of Lundin Gold. We look forward to welcoming Angelina Mehta to the Board following her election by our shareholders on Monday. I would also like to welcome Terry Smith, who you heard speak today and wish Alessandro Petelli, former Executive Vice President and Chief Financial Officer, to a happy retirement. Chester has stepped into the role of Interim CFO for the time being until Chris Pololian, who is expected to begin his role as CFO on July 1, 2023.

Speaker 1

Chester to continue in the role of Senior Vice President, Finance. Thank you all once again for your continued support. With that, I will now open the call to questions. Over to you, Kelsey.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. To the operator. You will hear a 3 tone prompt acknowledging your request and your questions will be pulled in the order that they are received. One moment please for your first question.

Operator

And your first question comes from Don DeMarco to the call from National Bank.

Speaker 4

Thank you, operator, and good morning, Ron and team. Congratulations on a strong quarter. I mean, Seeing elevated grades and recoveries, I mean, it's very impressive performance. Maybe on grade, Can you give us a little bit of indication in terms of what you might expect for Q2 and Q3?

Speaker 1

Terry, do you want to handle that?

Speaker 2

Yes. Hi, Don, it's Terry here. Our grade, it looks like it'll hang around just under 10 grams for the rest of the year. That's what we see in our forecast.

Speaker 1

Can you maybe explain a little bit more detail, Terry, why we saw that? It was particularly mine sequencing.

Speaker 2

Yes. Don, just to give you a little bit more color on what really propelled a great Q1. We had some mine sequencing changes late last year, which brought some high grade out from the mine that wasn't in our original plan. And we also consumed our low grade stockpile in December January last year. So we had really nothing to blend from a low grade perspective with what was coming out of to the mine in Q1 and our high grade stockpile.

Speaker 2

So we fed basically high grade, which wasn't in the plan and that's Why you saw the grade spike the way you did. Does that make sense?

Speaker 4

Okay. Yes, that makes sense. And yes, just made for strong free cash flow and that was timely to the deleveraging progress that was made. My next question though has to do with your near mine exploration program. It was a press release Came out earlier this month.

Speaker 4

And in particular, looking at FDNs or even Castillo and Bonanza, sir, Could you tell us what the timeline might be to continue to explore these? And in the event that they prove out, Where would they fit within a I presume they could be accessible from FDN. How would they fit within a mine plan?

Speaker 1

FDNS would certainly be added to the current mine plan as part of our conversion, as you know, Don, was to push out further to the south, that southern extension and FDNS, FDNS South Definitely could be added. Just remember when you were on-site, Don, the old Kinross decline that Kinross had started and then abandoned. That's essentially right very near FDNS. So That one in particular, Castillo, it's a bit too early to say how that may work. It's encouraging, but It's a bit too soon.

Speaker 4

Okay. But FDNS, we're looking at good proximity to FDN And potentially attack on to later in the mine life if it proves out, extend the mine life.

Speaker 1

Yes. We were talking we've talked about that with Andre, our VP of to the operation. It's very early days, but he feels that this actually could show to be continuous with FDM.

Speaker 4

Okay. Thank you very much. Good luck with the rest of the Q2 and that's all for me.

Speaker 1

Great. Thanks, Don.

Speaker 2

To

Operator

Mr. Hochstein, there is no further questions at this time. You may please proceed.

Speaker 1

Well, that's great. Again, thank you everyone for attending the call and welcome, Terry, and great job, Chester, on this quarter. And thank you, everybody. And if There are any questions that come up after, please feel free to contact either Findlay Heppensal, our Director of IR and Corp Dev or myself. Thank you very much.

Operator

Ladies and gentlemen, this does conclude your conference call for today. We Thank you very much for participating and ask that you please disconnect your lines. Have a great day.

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Lundin Gold Q1 2023
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