Alamos Gold Inc
TSX:AGI
Earnings Call Analysis
Q3-2023 Analysis
Alamos Gold Inc
With a production of 135,400 ounces surpassing quarterly guidance and costs near the low end of the annual forecast, the company is on track for a record year, particularly due to exceptional results from the Mulatos district. This momentum prompted a 5% increase in production guidance to 515,000 to 530,000 ounces.
Financially, the quarter was strong, with potential record revenue and cash flow from operations, echoing the productive operations. Adjusted net earnings hit $55 million or $0.14 per share. Operating cash flow amounted to $133 million, contributing to $37 million in free cash flow for the quarter and $109 million year-to-date, while the company continues to fund significant expansions.
Progress continues on the Phase 3 expansion at Island Gold, with the head frame near completion and the shaft sinking expected to start by year's end. Despite anticipated cost increases in the fourth quarter, the company is set to meet full-year guidance.
Mulatos has outperformed with year-to-date production of 164,700 ounces, on course to exceed annual targets. Young-Davidson has also been solid, gearing up to deliver over $100 million in free cash flow for the third consecutive year.
Island Gold's expansion is on schedule and budget, set to transform into one of Canada's largest and lowest-cost mines by 2026. Total capital commitments at the end of September reached 45% of the initial $756 million capital outlay.
Increased exploration investment at Mulatos, now totaling $25 million, indicates the company's focus on extending mine life through ongoing success in the area.
The updated study for Lynn Lake shows a 44% reserve increase and a mill expansion with production projected at 176,000 ounces per year over the first decade. This project, with all-in sustaining costs around $699 per ounce, has the potential to enhance overall company economics significantly.
There is potential for increased production beyond the first 10 years at certain projects, which would not only boost the production rate but also extend the overall mine life, improving the project economics.
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Good morning. I will now turn the call over to Scott Parsons, Alamos' Senior Vice President of Investor Relations. Please go ahead.
Thank you, operator, and thanks to everybody for attending Alamos' Third Quarter 2023 Conference Call. In addition to myself, we have on the line today John McCluskey, President and Chief Executive Officer; Greg Fisher, Chief Financial Officer; Luc Guimond, Chief Operating Officer; and Scott RG Parsons, Vice President of Exploration. We will be referring to a presentation during the conference call that is available through the webcast and on our website. I would also like to remind everyone that our presentation will be followed by a Q&A session. As we will be making forward-looking statements during the call, please refer to our cautionary notes included in the presentation, news release and MD&A as well as the risk factors set out in our annual information form. Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Senior Vice President, Technical Services and a qualified person. Also, please bear in mind that all of the dollar amounts mentioned in this conference call are in U.S. dollars unless otherwise noted. Now John will provide you with an overview.
Thank you, Scott. Starting with Slide 3. We delivered another strong quarter with production of 135,400 ounces, exceeding quarterly guidance at costs near the low end of annual guidance. This reflected a solid quarter from Island Gold and another excellent quarter from La Yaqui Grande. With year-to-date production of 400,000 ounces, we are on pace to achieve a new annual record driven by an outstanding year from the Mulatos district. Given the strong performance, we are increasing our production guidance by 5% to a new range of 515,000 to 530,000 ounces. We are also on track to achieve our cost guidance for the year with total cash costs and all-in sustaining costs, both below the midpoint of guidance year-to-date. -- was also a solid quarter financially, putting us on pace for a record year across a number of metrics, including revenue and cash flow from operations. This is giving us the capacity to both grow as a company and generate solid free cash flow, including $37 million in the quarter and $109 million year-to-date. Now looking at Slide 4. We continue to create value from within our growth projects. In August, we released an updated feasibility study on the Lynn Lake project with a 44% increase in reserves, supporting a larger, longer life, low-cost operation with attractive economics. As part of our balanced approach to growth, our current focus is on the Phase 3 plus expansion at Island Gold, but Lynn Lake remains a key part of our longer-term growth plans as another long-life, low-cost project in Canada with significant exploration upside, which we expect will further enhance the economics of the project. In September, we provided another exploration update for Mulatos, where we continue to extend high-grade mineralization at PDA. We expect this exploration success will drive a further increase in higher-grade reserves and resources as the deposits -- at the deposit beyond the 1 million ounces defined at the end of last year. This growth is being incorporated into a development plan to be completed later this year, which we expect will outline another attractive project and significant mine life extension at Mulatos. Construction of the Phase 3 expansion at Island Gold is advancing well with the head frame substantially complete and shaft thinking on track to start by year-end. The project remains on schedule and on budget, and we expect to be operating from the shaft and extended mill in the first quarter of 2026. These projects are key drivers of our strong outlook, supporting growing production, declining costs and increased profitability. I'll now turn the call over to our CFO, Greg Fisher, to review our financial performance. Greg?
Thank you, John. On Slide 5, during the third quarter, we sold 133,000 ounces of gold at an average realized price of $1,932 per ounce, $4 above the London PM fix for revenues of $256 million. Total cash costs of $835 per ounce and all-in sustaining costs of $1,121 per ounce were both towards the low end of full year guidance. We are on track to once again achieve full year cost guidance. Our reported net earnings of $39 million in the third quarter or $0.10 per share included unrealized foreign exchange losses of $12 million recorded within deferred taxes and other noncash losses of $3 million. Excluding these items, our adjusted net earnings were $55 million or $0.14 per share. Operating cash flow before changes in noncash working capital was $133 million or $0.34 per share. Given our solid production growth and margin expansion this year, we are on pace for a record year in terms of revenue, earnings and cash flow from operations. This is driving strong free cash flow generation at a time that we are also investing in growth. This includes $37 million of free cash flow in the quarter and $109 million year-to-date. We expect the strong free cash flow generation to continue while funding the Phase 3 plus expansion. Capital spending totaled $75 million in the quarter and included $27 million of sustaining capital, $42 million of growth capital and $6 million of capitalized exploration. Through the first 9 months of the year, capital spending totaled $239 million, consistent with our annual guidance. We paid cash taxes of $3 million in the quarter at Mulatos with a similar payment anticipated in the fourth quarter. We expect significantly higher cash tax payments in Mexico in 2024, reflecting the strong profitability of Mulatos in 2023 with $115 million of free cash flow generated from the operation year-to-date. Our balance sheet continues to improve with our cash balance growing to $216 million, a 14% increase from the previous quarter and a 66% increase from the start of the year. We remain debt-free and well positioned to fund our growth initiatives. I will now turn the call over to our COO, Luc Guimond, to provide an overview of our operations.
Thank you, Greg. Moving to Slide 6. Young-Davidson produced 45,100 ounces in the quarter, consistent with the previous few quarters with record milling rates of 8,200 tonnes per day, offsetting slightly lower grades. Costs were in line with annual guidance both in the quarter and year-to-date. Grades are expected to increase in the fourth quarter as we mine higher grade stopes that have been deferred from the third quarter. This is expected to drive production higher in the fourth quarter, putting the operation on track to achieve full year production and cost guidance. The operation continues to be a consistent performer with mine-site free cash flow of $31 million in the quarter and $83 million year-to-date. For the third consecutive year, Young-Davidson is on track to deliver more than $100 million in free cash flow. Over to Slide 7. Island Gold produced 36,400 ounces in the quarter, a 19% increase over the second quarter, reflecting both higher grades and tonnes processed. It was a strong quarter operationally with mining and milling rates, both increasing to exceed annual guidance of 1,200 tonnes per day. This helped drive costs down from the second quarter towards the low end of annual guidance. Given the strong year-to-date performance, including production of 100,000 ounces, the operation is well positioned to achieve full year production and cost guidance. Over to Slide 8. Work on the Phase 3 plus expansion continues to progress with a focus on completion of the remaining shaft site surface infrastructure. Construction of the head frame is substantially complete as is construction of the shaft area substation. Pre-commissioning tests on the E-house Electrical Systems have commenced, and construction of the warehouse is well underway. Outfitting of the galloway to be used in the shaft sinking is over 50% complete, putting the shaft sink on track to start by year-end. Over to Slide 9. A total of $35 million of capital related to the Phase 3 plus expansion and capital development was spent in the quarter. The expansion remains on budget with 45% of the total initial capital of $756 million spent and committed to the end of September. With the shaft site surface infrastructure nearing completion, spending will shift towards the shaft sinking later this year and the mill expansion appeared to be planned into next year. The overall expansion remains on track to be completed in 2026, transforming Island Gold into one of the largest, lowest cost and most profitable mines in Canada. Moving to Slide 10. At Mulatos, production of 53,900 ounces was down from the second quarter as guided, reflecting the return to design mining rates for La Yaqui Grande and end of mining within the main Mulatos pit. La Yaqui Grande continued to outperform with grades exceeding guidance due to positive grade reconciliation. Mine site free cash flow was $31 million in the quarter and an impressive $115 million year-to-date. As previously guided, production is expected to decrease in the fourth quarter, reflecting the end of the Mulatos pit and a decrease in grades to guided levels at La Yaqui Grande. With year-to-date production of 164,700 ounces, Mulatos is on track to exceed its full year guidance, driven by the strong outperformance from La Yaqui Grande. Costs are expected to increase in the fourth quarter but remain within guidance for the full year. Moving to Slide 11. As John noted, the updated feasibility study on the Lynn Lake project has outlined a bigger, longer life and more attractive operation relative to the 2017 study. The updated study incorporates a 44% larger mineral reserve and a 14% larger mill at 8,000 tonnes per day. Production over the first 10 years is expected to average 176,000 ounces per year, up 23% from 2017 at lower all-in sustaining costs of $699 per ounce. Over the last several years, we have completed an extensive amount of additional engineering, geotechnical and other work, including obtaining approval of the environmental impact statement back in March. This work has significantly derisked the project and provides us with a high degree of confidence in the capital and operating cost estimates. These estimates support attractive base case economics for the project. And at current gold prices represent a 22% after-tax internal rate of return. We also see significant upside potential given several near-mine and regional exploration opportunities that could be incorporated into the project. Under the current mine plan, the Maclellan and Gordon deposits will be mined over the first 11 years. For the remaining 6 years, we will be processing lower-grade stockpiles. With our fleet of mining equipment available from years 11 onward, we are evaluating several nearby targets such as Burnt Timber and Linkwood as additional sources of mill feed. These deposits represent upside to the feasibility study as they would help sustain higher rates of production well beyond the first 10 years. To review that upside in more detail, I will turn the call over to our VP of Exploration, Scott RG Parsons.
Thank you, Luc. Over to Slide 12. In August, we provided an exploration update on Lynn Lake, highlighting the significant upside potential across a number of near mine and regional targets. This includes Burnt Timber and Linkwood, 2 deposits in proximity to the planned mill in Maclellan that could potentially be incorporated into the mine plan. They are located approximately 28 kilometers away from the Maclellan site and are connected by an all -- by existing All-Season Road. The 2 deposits contain 1.6 million ounces of inferred resources that were not factored into the feasibility study. Updated geological models have been completed on both deposits, demonstrating the potential for a smaller, higher quality mineral resource. We see excellent potential to truck this in the Maclellan mill infrastructure after the Maclellan deposit has been mined. This would not only help sustain higher rates of production well beyond the first 10 years, but also extend mine life and enhance the project economics. Maynard is a similar stage target with similar potential as another satellite deposit located 20 kilometers by road from the planned mill. All 15 holed mill at Maynard to date have intersected gold mineralization over 700 meters strike length and to adapt to 280 meters. This includes higher grade incepts which is 5.9 grams per tonne over 12 meters. These are just a few examples of the potential that we see across the Limelight Greenstone Belt, a large underexplored district. We'll be starting with a 17-year reserve life based on the updated study. However, given the opportunities we see across our 58,000 hectare land package, we fully expect to be mining in the district well beyond that. Over to Slide 13. In September, we announced the second exploration update this year in Mulatos, where we continue to have success, both regionally and near mine. At PDA, step up drilling has further extended high-grade mineralization beyond reserves and resources, which will support additional growth beyond the currently defined 1 million ounces. We are currently working on an updated reserve based on drilling to end of July, and we'll be incorporating that in an updated development plan to be completed towards the end of the year. We expect this to outline another significant mine life extension at Mulatos. Based on the success of the program to date, we've increased our exploration budget of Mulatos for the second time this year to $25 million. This includes drilling at PDA through the rest of this year with 50,000 meters planned, up from the original budget of 16,000 meters. We are still in the early stages of testing the potential of in a broader PDA area. Based on success to date and with the deposit open in multiple directions, we see excellent potential for PDA to continue to grow in the years ahead. We also released additional results from the Capulin regional target located 4 kilometers east of the Mulatos pit. [Sepo] Drilling continues to intersect wide intervals of significant oxide and sulfide mineralization within [indiscernible] along the Capulin fall. This included 2.7 grams per tonne over 121-meter core length, the best hole drilled to date at Capulin, highlighting the significant potential in this area and within the broader Mulatos district. With that, I'll turn the call back to John.
Thank you, Scott. So that concludes the formal presentation. I'll now ask the operator to open the call -- open the lines for your questions.
We will now take questions from the phone lines. [Operator Instructions] There will be a brief call when the participants to register for questions. Thank you for your patience. Our first question is from Cosmos Chiu, please go ahead.
Congrats on a very strong Q3 and good to see that you are able to increase your guidance for the year on production, not cost, in production. Maybe first off, in Mexico. As you mentioned, La Yaqui Grande has done really well year-to-date, positive grade reconciliation. But at the same time, you say that grade will likely trend back to more normal levels. So I just want to know what happened there? Why were you able to have the positive grade reconciliation? Is there a potential for it to continue?
All right. Cosmos, it's Luc here. Yes, our expectation is that we will be more in line with our grades as we move forward. We won't necessarily see that over performance. What's really happening as we get deeper into the benches of La Yaqui Grande, the drill density gets tighter. So we expect to see more consistent performance actual versus our model moving forward.
Understood. And then maybe sticking with Mexico. Quite a bit of noise these days in the country of Mexico, either the security issues for some of your peers or the ongoing potential changes to mining law. Could you maybe talk about is there any potential impact to -- or has there been any potential impact to Alamos?
Hi Cosmos, it's John. I would say that you can never rule anything out, just given it could happen in Canada. I think everybody recalls we had a big gold heist at our airport here at Pearson. So I don't think you could ever rule anything out from that point of view. But I would say that we've been operating in Mulatos for a long, long time. We significantly increased the security over the last 5 years. And on top of that, the Mexican government has stepped up security in the region quite significantly. There's a lot of mining operations in this part of Mexico. And I would say the Mexican government cares a great deal about that. So I don't see anything particularly unusual about where we're operating. I think it's as secure as it's ever been. We've been operating there for -- been there 22 years now. We've been in production for 19 of those years. And we've only ever had one real incident. So I would say, looking forward, we're pretty confident that our site continue to operate without any unusual impacts.
Okay. Sounds good. Maybe switching gears a little bit to Island Gold. It sounds like the Phase III plus expansion is going well. It sounds like all the surface infrastructure is almost complete. Now comes the shaft sinking. As we moved into shaft sinking, maybe could you talk about some of the key deliverables, even key risk in terms of what the next sort of stage of the project entails. Clearly, it's not your first rodeo, John. You send the shaft sinking thing [Indiscernible] in the past. Does that help? I guess that was raised for [Indus] a bit different. But does that help? Can you talk about what we should expect with the next stage of shaft sinking with the expansion and some of the key factors you look at?
Yes, Cosmos, Luc here. So we're in the final stages of actually getting the requirements for gearing up of the shaft to be able to start the sinking. Our expectation is that we will start that through the end of Q4 and getting the shaft on a consistent basis, obviously, and continue with the benching aspect. I mean we're using a reputable contractor. RedPath Mining have done shafts all over the world, certainly in Canada, but all over the world. So we're not obviously concerned with them being able to deliver on what their expectations are. Once they get the setup completed and they get the cycle going, our expectation is that we would be sinking at about 3 meters per day over the next couple of years until the shaft is completed late 2025.
Great. And then maybe one last question. Greg, as you mentioned, very profitable in Mexico this year, which also means a larger tax bill next year. Could you remind me when does that large payment come out? When would it come out? And how can we potentially estimate what that payment is going to be?
Yes, Cosmos, it's Greg here. So yes, the year-end tax filing is due in March. So the payments to -- for the 2023 tax bill would be due in the first quarter of 2024, and that would relate to both income taxes and mining taxes. We have paid about $3 million this year. We're going to in the third quarter and about $3 million in the fourth quarter. But given our profitability, there will be a pretty significant catch-up when we file that final tax bill in March of 2024.
Great. Those are all the questions I have. Congrats again on a very strong Q3.
Our next question is from Mike Parkin.
Congrats on a great quarter. Could you just speak to the Island project? What is the critical path? And what's kind of budgeted in there for it? And do you have any kind of flexibility to add a night shift gear it up if it did prove to show any signs of falling behind schedule?
Hi Mike, Luc here. As I mentioned earlier with the previous question, right now, all of our main focus has been around the shaft setup and the shaft sinking in preparation for that. And certainly, the head frame and everything is well advanced, and we're in the final stages of preparing to commission for the shaft thinking. So our expectation is late Q4, we'll start that process. As I mentioned, we've got a reputable contractor that's got a lot of expertise and skill set to complete that on time and on budget, and we fully expect them to be able to do that. The other components that we've been certainly working on with regards to the Phase III plus expansion is the detailed engineering for the mill expansion as well as the base plant. So those have been ongoing over the course of this year, and we'll start to get into more serious aspects of the construction into next year and into 2025 with regards to both of those components. And the other component that's required for us is obviously an upgrade to our existing power distribution to the site, and we'll be basically doubling our load from where we are today. And we are certainly currently working on that as well to have a construction time line to have that all in place as well. Once all the other components of the Phase III plus expansion are completed to start up in Q1 -- end of Q1 2026.
Great. A follow-up for Greg. Can you just remind me what was the budgeted Canadian dollar? And are you guys looking to take advantage of the current weaker, I would assume, weaker Canadian dollar versus budget to just help give you a bit of additional tailwind on that project?
Yes, we had budgeted at $0.75. So the weaker Canadian dollar will help from a CapEx perspective but also on our operating costs through our existing operations.
And can you just remind me roughly like what percentage of the CapEx would be Canadian, I guess, probably all your labor and contractor would mostly be CAD, I imagine it's pretty high.
Mike, I'll have to get back to you on that. I don't have the details right now, but I'll take that offline.
All right. And then obviously, some pretty exciting news coming out later this quarter with PDA. Can you just give me -- is there any ability to talk about like you're already at 1 million ounces of total resource, bumped up the budget on the drilling a couple of times already this year, recognizing that you've got the July cutoff, but it seems like things are going really well there. Do we have an idea of what we should be kind of thinking of in terms of scale? Like it seems like it's getting bigger and bigger and bigger? Or is it going to be costly a project that you would face like do a Phase 1 and then as it opens up adding a second processing line in the mill? Or is there anything you can kind of talk to?
Yes. Mike, it's Luc here again. Yes. So I mean, still kind of early stages. I mean we've just recently completed some of the geotech drilling required for the mine design aspect of the operation. And in that mine design, we'll put a mine plan together. We've also, in conjunction in parallel, been working through some technical studies with regards to the metallurgy and the mill design. So our expectation is we'll have a development study completed by the end of the year with some preliminary numbers with regards to mining rates and supporting milling rates. I mean, high level at this point, I mean, we've been kind of targeting 2,000 tonnes per day based on what we've seen so far with regards to the success we've had with the expiration and some early review of what we've been seeing with regards to the mine design and mill design. But I mean, there's always opportunity for expansion. I mean we can certainly start on that basis with the mining rates, but mining rates can certainly increase over time if it's supported based on the geometry of the ore body and the strike length of the ore body. And obviously, with regards to expanding the mill to support a higher mining rate, that opportunity also still exists. I mean you can always add components to that mill circuit to be able to expand to a higher milling rate if acquired.
And you -- have you guys have power to site now or you would have by the time you would build PDA?
We're currently still on diesel generation, but we're in the process of doing a conversion from diesel generation power to the site to grid power. And the expectation on that would be by the end of this year. So that will provide obviously further upside for the longer term with La Yaqui, but also with PDA and any other opportunities that develop within our Mulatos district.
Okay. So the PDA study would assume grid power connection?
Correct.
[Operator Instructions] Our next question is from Ovais Habib.
Hi John and Alamos team, congrats on the Q3 [Indiscernible] and increased production guidance. Just a couple of questions from me. Number one, in regards to the parallel structures that was discovered at Island Gold. At the site tip in midsummer, you mentioned that you had already started to mine some of these structures. Now are we expecting to see some of these ounces from the structures in Q4 and going into 2024? Essentially, what I'm trying to ask is, are these ounces expected to come into the Island Gold mine plan in the future?
Yes, it's Luc here again. Yes, I mean we have started mining some of those -- certainly some parallel zones and the [indiscernible] zones that we've talked about previously. So we started some of that late in Q3. There's an opportunity certainly to bring some more of that into Q4. But as we further understand it and develop it, we'll actually start to get to incorporate that into the mine plan over the longer term.
Okay. Sounds good. So there's eventually in terms of what you see in the parallel structure, they're closer to existing structures. So it's not like you have to do a lot more development actives zones.
No. Because I mean, these are kind of running off of the East West striking zones that we're currently mining. And from a sequence perspective, actually, it makes more sense to incorporate these into the mine plan as we're in those areas. Just from a point of view of just following a proper sequence and being able to basically extract the zones and retreat in those areas based on our launch tool and retreat mining method.
Thanks for the color on that Luc. Just switching gears to PDA, -- just a follow-up call to Mike's question. I believe the expectation is to release a new mine plan in Q1 next year. So in regards to the advancement of PDA, what kind of permits would be required and do you see any risk to gross formats?
Sorry, that was in relation to PDA?
That's correct.
Yes. So as I mentioned there, we're looking to have a development study out by the end of the year, end of Q4 or Q1 at the latest. With regards to permits, we've -- basically, within our -- all of this, the mining and the milling operations will be all within our existing concessions. So it would be just a question of getting an amended MEA basically, which is what it's referred to in Mexico because of the fact that it's not new processes, we've done underground mining there in the past, so it's not new to the district. We had a milling process as well, a conventional milling process in the past as well. So that's not new to the district. And as a result of that, we would just be looking to get amendments to our existing MEAs to be able to construct the new requirements for the mine and milling operations for PDA.
Our next question is from Kerry Smith.
Thanks, operator. Luc, for the Phase III at Island, you have $162 million for development underground, and you've completed $64 million. Can you just remind me how many years of development is included in that $162 million number?
I'd say it's at least a couple of kilometers plus on that one Kerry. I have to get back to you to get a more firm number. But that's in relation to all of the shaft access development, all the other development that's required to establish that infrastructure as far as crushing rock breakers, loading pocket, everything associated with all of that infrastructure for the underground. But I'd have to get back to you with a firm number on that.
Okay, okay. And that's -- and you're doing that development with your own crews, correct?
Correct. For the most part. I mean, we do still have RedPath doing some of the development, the shaft ramp access development. But starting next year, it will be 100% Alamos development crews.
Yes. Okay. And so those costs should be pretty much in line because you're using your own guys. Okay. And then maybe for either you or Scott, the 444 meters of underground drifting that you had planned for the exploration underground at Island. Is that drifting all complete now? Or is there still some more of that to complete this year?
Yes. Kerry, it's Scott. It's ongoing, obviously, throughout the year and sequence into the development schedule. I mean we were advancing laterally at the Westside of the deposits at multiple levels and then also on our hanging wall exploration drift on the 945. So we'll do it kind of systematically as we get out to establish a drill bay, drill off the targets from that drill bay, we'll advance the development as required. So it's kind of ongoing throughout the year.
Okay, I got you. And then, Greg, just so I'm clear, the $2.7 million of cash taxes you paid at Mulatos in Q3, and then you're forecasting a similar amount in Q4, those will be prepayments against the taxes due in March of next year, correct?
Correct. Those are installment payments with respect to our 2023 tax bill.
There are no further questions at this time. This concludes this morning's call. If you have any further questions that have not been answered, please feel free to contact Mr. Scott Parsons at 416-368-9932, you may now disconnect.