Dundee Precious Metals Q1 2023 Earnings Call Transcript

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May 4, 2023

There are 9 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Dundee Precious Metals First Quarter 2023 Earnings Results Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jennifer Cameron.

Operator

Please go ahead.

Speaker 1

Thank you, and good morning. I'm Jennifer Cameron, Director, Investor Relations, and I'd like to welcome you to our Q1 conference call. Joining us today are members of our senior management team, including David Ray, President and CEO and Navendyal, Chief Financial Officer. Before we begin, I'd like to remind you that all forward looking information provided during this call is subject to the forward looking qualification, which is detailed in our news release and incorporated in full for the purposes of today's call. Certain financial measures that we will be referring to are not measures recognized under IFRS and are referred to as non GAAP measures or ratios.

Speaker 1

These measures have no standardized meaning under IFRS and may not be comparable to similar measures presented by other companies. The definitions established and calculations performed by DPM are based on management's reasonable judgment and are consistently applied. These measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS. Please refer to the non GAAP financial measures section of our most recent MD and A for reconciliations of these non GAAP measures. And please note, unless otherwise stated, operational and financial information communicated during this call are related to continuing operations and have generally been rounded.

Speaker 1

References to 2022 pertain to the comparable period in 2022 and references to averages are based on midpoints of our outlook or guidance. I'll now turn the call over to David Ray.

Speaker 2

Thanks, Jennifer. Good morning and thank you all for joining us. As you've seen from our news release circulated last night, our Q1 was an excellent start to the year as we delivered strong production and financial results. This morning, I'll briefly review the highlights from our Q1 results and discuss why we believe DPM continues to be well positioned to deliver value to all our stakeholders Now and over the long term. Highlights from our Q1 include solid production of approximately 69,000 ounces of gold and £7,200,000 of copper all in sustaining costs at $8.72 per ounce of gold sold, which continues to rank as amongst the lowest gold producers of our size, strong free cash flow generation of 65,000,000 and exceptional exploration results at Choca Rekita in Serbia as well as Tierra's Coloradas in Ecuador.

Speaker 2

With production at each of our operations expected to increase for the balance of the year, we're in a strong position to deliver our 2023 guidance. We exited the quarter in a very strong financial position with a cash balance of $473,000,000 which does not include proceeds of approximately $56,500,000 related to our divestment of B2Gold Shares following its acquisition of Sabina. And we continue to deploy our capital in a disciplined manner. In addition to investing in our future growth and exploration prospects, we returned approximately 24% of our free cash flow to shareholders to our sustainable quarterly dividend and enhanced share buyback program, which Navin will touch on shortly. Looking at our operations in more detail, Chelopech continued its track record of strong performance in the Q1, producing approximately 35,000 ounces of gold and 7,200,000 pounds of copper.

Speaker 2

Gold production was in line with our While copper production was slightly lower than planned due to lower copper recoveries, we expect grades and recoveries to be higher for the balance of the year in line with plan and Chelopech is on track to achieve its guidance for 2023. We continue to focus on extending Chelopech's mine life to our in mine and brownfields exploration programs. In March, we announced our year end mineral reserve and mineral resource update, along with the life of mine plan update that extended Chelopech's mine life to 2,031. In the Q1, we continued to advance our brownfield exploration program with 7 rigs focused on the drilling campaign at Svetapetka as well as testing conceptual targets on the Brevani exploration license and testing deeper extension at the Chelopech deposit. With increased in mine and brownfield exploration drilling, we believe there is strong potential to continue our track record of extending mine life at Chelopech.

Speaker 2

Turning now to Adatepe, the mine delivered a near record level of production in the first quarter, Adatepe has consistently outperformed our expectations since commissioning in 2019, and we are confident that Adatepe will continue to deliver strong results, supported by the updated life of mine plan we announced in January. We're also continuing our exploration efforts Around Adatepe and during the Q1, our activities were focused on target delineation for the Cernak and Copel prospect within the mine concession and the Karatepe prospect located within maturity exploration license. At Tsumeb, complex Concentrate smelted during the quarter was approximately 50,000 tons, which was below our expectations as a result of unplanned maintenance in the off gas system. Cash costs were $3.92 per ton, which reflects our efforts during the year to optimize and increase efficiencies, primarily around the reduction of costs. That initiative will continue.

Speaker 2

We're planning to undertake additional maintenance in the off gas system concurrently with the furnace maintenance during the Q3, which is expected to result in improved quarterly performance and Tsumeb remains on track for its 2023 guidance. Turning to our development projects. I'll start with our activities in Serbia. In January, we announced the new high grade discovery at the Choka Rykita Prospect located 3 kilometers southeast of the Timok project, where drilling has defined a large high grade footprint with significant upside potential. In mid April, we shared additional assay results, which extended the deposit to the east and confirmed and extended the high grade zone.

Speaker 2

Copper Gold mineralization has also been identified at depth. We're following up on these results with a 40,000 meter infill and drilling program in this year to support the major mineral resource estimate of Choka Waquita, which we are targeting by the end of the year. We're also planning to drill approximately 10,000 meters of the Anka exploration license, which is located 5 kilometers south of Choca Riquita and potential drilling on new targets, which share a similar geological environment. Choka Riquita has several positive We look for in projects including a very high grade core, good initial metallurgical results, strong infrastructure and a great fit with our skill sets, resulting in significant potential within our organic growth portfolio. We're excited about this new development in a region where we have built strong relationships and where we've had local and regional presence for many years.

Speaker 2

Turning to Loma Largo in Ecuador, Drilling activities as well as the Citizens' participation process for the Environmental Impact Assessment remain paused, pending the outcome of the appeals process related to the decision on a constitutional protective action following a hearing held in mid October. The decision on the appeal is expected to provide clarity on the consultation process and whether an indigenous consultation could be completed in parallel as we originally planned or would need to be completed prior to resuming the Citizens' participation process. The expected timing for receipt of the environmental license is subject to the outcome of the appeal process. We are currently leveraging our significant operating expertise at Chelopech to explore additional optimized opportunities for the project and these are being included in an updated feasibility study, which is targeted for the second half of twenty twenty three. As we advance the project, our approach will benefit from our firm commitment to the highest standards for engagement with local communities and environmental stewardship in addition to our operating expertise to unlock the significant potential of the project.

Speaker 2

We continue to progress discussions with the governments of Ecuador regarding an investor protection agreement. This agreement is substantially complete and is progressing through the approvals of the various ministries. In February, we were pleased to share results from a 2,700 meter drilling program at our at Pierres Colorados Concession, which is located 200 kilometers south of Loma Largo in Ecuador's Loca province. The results confirm the presence of 2 high grain fitted grades vein systems that remain open in multiple directions. Given these positive results, we are planning an expanded 10,000 meter drilling program, which is expected to commence in the second half of the year.

Speaker 2

In closing, our first quarter results demonstrate the strength that caused DPM to stand out in the gold industry. These highlights include strong consistent production from our operations and an all in sustaining cost of ranks amongst the lowest in the gold industry, A robust free cash flow profile, supporting our financial strength and flexibility a record of disciplined capital allocation and returning capital to attractive development projects proven exploration success both in extending mine life at our operations and discovering new brownfields opportunities Strong ESG performance and a track record of securing social license to operate and Of course, a strong leadership and technical team with a history of adding real value through innovation. I'll now turn the call over to Navin for a review of our financial results and outlook following which we will open the call to questions.

Speaker 3

Thanks, David. This morning, I will discuss our financial highlights for the quarter to provide an overview of our balance sheet and capital allocation program, highlighting how the company continues to be very well positioned to reinvest in our business, while also returning a significant percentage of our free cash flow to shareholders. As Dave mentioned, the company delivered strong performance at Chelopech and near record level production at Adatepe. Looking at our key cost measures, 1st quarter all in sustaining cost of $8.72 per ounce of gold Seoul is 27% higher than the prior year due primarily to mark to market adjustments to share based compensation expenses As a result of our strong share price performance, which impacted all in sustaining costs by approximately $100 per ounce of gold sold and which was not reflected in our 2023 guidance, as well as higher treatment and freight charges, lower byproduct credits as a result of lower volumes and prices of copper sold, higher labor costs and higher prices for direct materials, all of which were partially offset by Higher volumes of gold sold and a stronger U. S.

Speaker 3

Dollar are all in sustaining costs for the year is expected to be in line with our guidance. At Tsumeb, cash cost per tonne of $3.92 was 18% lower than the corresponding period of 2022, due primarily to a stronger dollar and lower labor costs as a result of a cost optimization initiative we undertook last year. Looking at capital expenditures, sustaining capital expenditures of $7,700,000 were 12% lower than the corresponding period in 2022 and we're in line with expectations. Growth capital expenditures were $6,500,000 compared to $6,100,000 in the prior year due primarily to activities related to the Loma Largo gold project. Turning to our financial highlights.

Speaker 3

Revenue of $155,800,000 was comparable to the prior year as higher volumes of gold sold at Adatepe were mostly offset by lower revenue at Chelopech as a result of lower volumes of metals sold, higher treatment and freight charges and lower realized copper prices. Net earnings were $46,600,000 or $0.25 per share compared to $26,800,000 or $0.14 per share in the prior year due primarily to higher volumes of metals sold and a stronger U. S. Dollar, partially offset by higher share based compensation expenses as a result of our strong share price performance during the quarter, higher local currency, mine operating costs and royalties and higher exploration expenses as planned. Net earnings in the prior year also included restructuring costs related to the cost optimization initiatives at Tsumeb.

Speaker 3

1st quarter adjusted net earnings of $46,100,000 increased compared to $37,000,000 in the prior year due primarily to the same factors impacting net earnings except for the Tsumeb restructuring costs, which were excluded from adjusted net earnings in the prior year. In terms of our cash flow metrics, 1st quarter cash flow provided by from operations before changes in working capital was $75,000,000 and free cash flow, which also reflects outlays for sustaining capital was 65,000,000 These results were both higher than the prior year, largely due to the same factors impacting earnings before income tax. Looking forward, our 3 year outlook as shown on Slide 16 highlights our strong gold production profile and attractive all in sustaining costs and positions us well to generate significant free cash flow. It also highlights the benefits of additional low cost production from Atatepe as a result of the optimized life of mine plan we shared in January, which are reflected in our 3 year outlook for gold production and all in sustaining costs. The updated life of mine plan for Chelopech, which we announced at the end of March, was consistent with our 3 year outlook, and it therefore remains unchanged from what we issued in February.

Speaker 3

We remain on track to achieve our guidance for 2023 as outlined on Slide 17. Turning to Slide 18, we continue to deploy our capital in a disciplined manner that balances our desire to reinvest in growing and optimizing our business with our commitment to returning capital to our shareholders. In addition to investing in our future growth and exploration prospects, We have continued to pay a quarterly dividend since 2020, which offers an attractive 2.1% yield based on the current DPM share price. In 2022, we repurchased approximately 2,500,000 shares under our NCIB program. And in February of this year, we announced that our Board had approved a new share buyback program to repurchase up to 16,500,000 of the company's shares were up to $100,000,000 over a 12 month period.

Speaker 3

As a result, we returned approximately $15,900,000 24% of free cash flow in the Q1 consisting of the repurchase of approximately 1,300,000 shares under our NCIB for a total value of approximately $8,300,000 $7,600,000 in dividends paid. Combined, this translates to approximately $2.50 per ounce of gold sold for the quarter. In April, we returned another $8,300,000 for share repurchases, resulting in an aggregate 2,400,000 shares repurchased at a total cost of $16,600,000 year to date 2023. As a result of V2Gold's acquisition of Sabina, we exchanged all of our ownership interest in Sabina for V2Gold common shares on April 19 this year. Subsequently, we have disposed of these holdings for total cash proceeds of approximately US56.5 million dollars In closing, we delivered another solid quarter of operating performance and continued to generate strong free cash flow of 65,000,000 During the quarter, we increased our cash balance to $473,000,000 which excludes the proceeds of our Sabina B2Golden divestment.

Speaker 3

Our robust cash balance together with no debt, an undrawn $150,000,000 revolving credit facility and continued strong free cash flow generation positions us well to find future growth opportunities that generate additional value for stakeholders while continuing to return capital to our shareholders. With that, I will turn the call back to the operator for Q and A.

Operator

Thank you. At this time, we will conduct a question and answer session. Please standby while we compile the Q and A roster. Our first question comes from the line of Wayne Lam of RBC. Your line is now open.

Speaker 4

Hey, thanks guys and morning. Just wondering if Tsumeb, it looks like issues with the off gas system had led to a few Can you provide a bit more detail on why there seems to be some instability there and some of the optimization initiatives that you've undertaken?

Speaker 2

Yes. Thanks, Wayne. Maybe a quick bit of history. This installation was actually done in 2013, and what we have is an outlook for Replacement of some of the units in that time, what we've done is we've increased the material going through and we've also changed some of the nature of the materials being treated. As a consequence of that, we've ended up with certain components of this one short system on the Ausmelt, which takes the gases into the dust collection system.

Speaker 2

And we've ended up with certain elements of that, having problems with the water cooling system integrity at times, which were unexpected. Unfortunately, When that happens, when you're in operation, there are significant things that you need to manage in terms of safety and risk to make sure that you can do a repair promptly and effectively. So we've made a decision that the ongoing activity and the way we do this It's something that has much to be improved. And what we're going to do is actually replace the units and then do the repair work offline. So we actually in the process of changing to that new approach and we believe that's going to give us greater continuity of That system and at the same time meet with our goals of making sure that we have safety appropriately managed for our organization.

Speaker 2

So in terms of what you can expect, I would expect that to translate into greater availability and greater availability has a knock on consequence in terms of costs. So therefore, current cost performance can be expected to improve and production performance can be expected to improve.

Speaker 4

Okay, great. Thank you. And then maybe just at Loma Larga, maybe two questions. I guess the first is, it's been about 6 months since the hearing and over a year from when drilling was first paused. Just wondering what was what's kind of driving the delays or the drawn out process there?

Speaker 4

And then number 2, For the investor protection agreement, can you help us understand the negotiations around that? It just seems like there's a number of mines in So now being advanced and so would have thought that it would be pretty cookie cutter.

Speaker 2

Okay. Yes. Thanks for that question. In terms of the delay on the response on the constitutional protective action, we know that there is a backlog of Court cases which need to be reported on and the decisions taken and communicated. So that's what we're understanding is the issue.

Speaker 2

We remain confident There's nothing fundamental that's affecting that decision and anticipate a positive response Sue, perhaps what I can do is I can ask my colleague, Kelly Starke Anderson, to talk about the IPC.

Speaker 5

Yes. The IPA is, As we've indicated, the terms have were substantially agreed with the government a number of months ago. In the current political situation in Ecuador, There has been quite a bit of turnover in various ministries that we work with. We've got strong support at the ministerial level, But some of the bureaucratic processes we've needed to engage with various individuals at various levels to ensure they're Well familiar with the terms and conditions of the IPA and to continue to move it forward. We're having weekly, if not more Frequent meetings with individuals through the Bureau of Pratik levels as well as at the ministerial levels to continue to move it forward.

Speaker 5

In the political situation as it stands now, that's where our focus is and we need to ensure we keep pushing that through. But it is of course part of the political environment there that's creating issues.

Speaker 4

Okay, great. Thank you. And maybe last one for me, just on the Sabina stake sale, obviously nice to monetize that. How are you thinking about the return from that sale and would you consider a special dividend? And then more broadly speaking, how should we think about the growing cash balance in terms of potential to upsize the capital returns program?

Speaker 4

Okay.

Speaker 3

Hi, Wayne, it's Navin. So I'll just answer a couple of things here. So as we outlined back in February, when we issued our year end results, The transaction between Sabina and V2Gold had already been announced, and that was just prior to us announcing our enhanced NCIB program, so we'd already taken into consideration. While it wasn't a factor in terms of us upsizing the NCIB, it was We were aware of the transaction taking place and we were also aware that going forward, we were probably not a holder of B2Gold shares just given our focus. So with respect to a special dividend, that's something that we have constant conversations with our Board about our capital allocation program.

Speaker 3

But as you know, we take a very, very disciplined approach to that and we try to balance that with the needs of the business, our potential Growth prospects going forward, exploration opportunities as well as a number of other factors. So with respect to a special dividend, at this time, there's not been a consideration for that. And in terms of upsizing the NCIB, we've as you've seen, we've only done about $16,000,000 worth of the current NCIB. We have the ability to go up to 100,000,000 We expect to perhaps continue with that over the next for the foreseeable future. But again, It's not a discussion we're having at this moment to consider upsizing the NCIB program.

Operator

Our next question comes from the line of Eric Windmill of Scotiabank, your line is now open.

Speaker 6

Nice to see the free cash flow generation in Q1. Maybe just on Chokeraquita, obviously getting some really good results there, Initial resource later this year, can you help me understand what would be sort of the threshold you want to see there in terms of development Or how quickly do you think you could get that into the mine plan there?

Speaker 4

Yes. So I think

Speaker 7

What we're seeing right now based on the initial growth results is, we're starting to increase our confidence that this has the potential to be A standalone deposit. I think it's tough to say what the threshold is in terms of actual But we're seeing some very good grades, which give us increasing confidence in accelerating the process. In terms of timing, As mentioned, we're targeting the initial resource by the end of the year. However, what we're doing between now and then is we're actually Completing a number of other steps, which are scoping level steps to be able to accelerate the project after we put out the resource. So that we'll be able to come out with a PA fairly quickly thereafter.

Speaker 7

We're also doing geotech drilling and additional met test work as well as an initial design of an exploration decline, which could start as early as next year as well. So we're working very hard to accelerate the project. I mean, I think right now it's a little bit early to come up with an exact timeline. However, 2028 would be something that is A date that we're working for in terms of working towards in terms of production, but as I said early days to sort of formalize that at the moment.

Speaker 6

Okay, great. Super helpful. Thank you. Maybe just another quick one for me. Obviously, you talk Disciplined M and A valuation, which makes a lot of sense.

Speaker 6

How should we think about that in terms of criteria or jurisdictions that might guide your search suitable candidates.

Speaker 3

Sure. I mean, I think we're at

Speaker 7

the moment, we're very comfortable with our organic portfolio, As we've just talked about with respect to Tropekariketa and Loma Largo. Having said that, we do evaluate other projects with respect to M and A. We do have a good expertise in our existing region, but we'll be opportunistic given as other opportunities present themselves in other jurisdictions as well depending on the asset quality.

Speaker 6

Okay, great. Much appreciated. Yes, thank you. I'll hop back in the queue.

Operator

All right. Our next question comes from Don DeMarco of National Bank Financial. Your line is open.

Speaker 8

Thank you, operator, and good morning team. My question just has to do with how to kind of The schedule the development schedule has been subject to some delays and you've got this promising new exploration target, but then Cocoa Bachete is emerging. How do you view each of those? Does one sort of take precedent over the other in terms of funding dollars going forward or precedence going forward? Thank you.

Speaker 2

Yes. Thanks, Don. So it's a question we get asked a lot of course. As excited as we are about Choca Ratita, we also recognize We're progressing something that's at a lot earlier stage than Loma Lager. So Loma Lager at the moment continues to get the necessary Support for us to be ready to deliver that project in the timelines that we previously communicated.

Speaker 2

So we continue with working on the updated Drilling and Geotech and other drilling that we want to do in this type of thing. So that's pretty much at a stage where we're looking to complete the EIA, move to So clearly, that remains the in the subposition 1 within our portfolio to deliver. Terrus, Colorado is very early days. We're very happy to have found something that's exciting in proximity, but still 200 kilometers south of of Loma Lago and in a separate province, which does change the dynamics a little bit in terms of the potential to move that project should we have any ongoing things that we're dealing With Loma Lager. With Choco Raquita, there's no constraint on resourcing to either Loma Lager or Choco We have teams looking at how we can advance choker Waikita as fast as possible.

Speaker 2

And maybe an additional comment to what Michael said to Eric's question About timeline, when we talk about the decline, it's necessary to put in a decline in order to complete the work to be accepted at a Serbian feasibility level. So We're not doing that as much to advance the project. It's just a necessary part of the process. And given our interest and the way that project is developing, we're obviously So Loma Lago remains a priority for us. It's the one that's at the front of the queue.

Speaker 2

Choka Riquita at this point is firmly establishing itself at the second point, but keep in mind TMOC is associated with that. And then Pieris Coloradis is a new entity And really comes together with the other work that we're doing in and around Chelopech and other Tepe.

Speaker 8

Okay. Well, thanks for that. And just as a second question then, looking at your cash balance higher quarter over quarter and then we've got the proceeds from the sale of the B2 shares. Can you just talk about some of your capital allocation priorities? It's another good position to be in.

Speaker 8

But with Loma Largo spend potentially Sometime into the future, this cash balance could go above $600,000,000 $700,000,000 before you start deploying cash in a significant way. Is that what you see too?

Speaker 3

Yes, Don, that's definitely the same possibility of that happening. But as David said, we're definitely focused on Advancing Lavalarga. And as we progress through the course of the year and we have more clarity around the timing of those processes, Perhaps we come back and take another look at our cash balance, especially considering where gold prices have moved to. But certainly, the plan for now is to stick to the current plan, continue to look at our intense NTIB program, While making sure that we have enough cash in the business to effectively run our operation.

Speaker 2

Maybe, Don, additional what Navin was saying, the burn rate in Q1 for Loma Lago It's also a function of the amount of work that we're doing on the development of the updated feasibility study. Obviously, as we come out of that, our burn rate will decrease. Just to comment that while we remain committed to Lama Lock, we don't anticipate that Q1 is going to be the ongoing burn rate.

Speaker 8

Okay, fair enough.

Operator

Closing remarks.

Speaker 1

Thank you everyone for joining us today. We look forward to keeping you updated. If you have any other additional follow-up questions, please feel free to reach out. And if not, we'll talk to you next time.

Operator

All right. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Dundee Precious Metals Q1 2023
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