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Good morning. I would like to turn the meeting over to Mr. Jamie Porter, Chief Financial Officer. Please go ahead.
Thank you, operator, and thanks, everyone, for attending Alamos' Fourth Quarter 2018 Conference Call. In addition to myself, we have on the line today, both John McCluskey, President and Chief Executive Officer; and Peter MacPhail, Vice President and Chief Operating Officer. In addition, to address any questions with respect to our reserve resource update, we have Chris Bostwick, our Vice President of Technical Services on the line.I'd like to remind everyone that our presentation will be followed by a Q&A session. On this call, we will be making forward-looking statements. Please refer to the disclaimer on forward-looking statements in our news release and MD&A as well as the Risk Factors set out in our annual information form. All forward-looking statements on this call are qualified by these cautionary statements. There can be no assurance that our forward-looking statements, even though considered reasonable by management based on information on hand, will prove to be accurate. Future results and events could differ materially. Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Vice President of Technical Services and a qualified person. Also, please bear in mind that all of the dollar amounts mentioned on this conference call today are in U.S. dollars unless otherwise noted.Now I'll pass over to John to provide you with an overview.
Thank you, Jamie, and good morning, everyone, and welcome to the call. We delivered on a number of our strategic objectives in 2018. We met our production guidance for the fourth consecutive year, with record production of 505,000 ounces. This was driven by strong performance at Island Gold and Mulatos where we increased production guidance twice in 2018. We also achieved our revised consolidated cost guidance with total cash cost of $802 per ounce and all-in sustaining cost of $989 per ounce.We closed this year on a high note with a strong performance from Young-Davidson and record production from Island Gold in the fourth quarter. Young-Davidson had a challenging start of the year but a much better finish with the operation delivering its highest production and lowest cost of the year in the fourth quarter, reflecting higher underground mining grades. We also made good progress on our various internal growth initiatives, including advancing the lower mine expansion at Young-Davidson while obtaining the Schedule 2 amendment for a new tailings facility, securing capacity for the current remaining mine life.We completed the Phase I expansion at Island Gold, achieved a new record for production and added nearly 1 million ounces of reserves and resources over the past year, which will support future expansions. Island Gold has exceeded expectations on all fronts, more than validating the quality of the asset and the potential we saw when we acquired it in November 2017. Island Gold was the driver of another successful global mineral reserve and resource update given the exploration success over the past year. Between the additions at Island Gold and Lynn Lake, we effectively replaced depletion, significantly increased inferred resources in both size and quality. All of this supports a very bright outlook.In 2019, we expect a similar level of production, with lower costs driving stronger margins and profitability. Looking to the second half of 2020, we expect strong company-wide free cash flow growth following completion of the lower mine expansion at Young-Davidson.We believe we have a deeply discounted share price. We initiated a share buyback in December and had been active buying back $10 million worth of stock thus far.We also announced the doubling of our dividend, which speaks to our confidence in the outlook and coming free cash flow growth, which we expect will support further dividend increases.I'll now turn the call over to our CFO, Jamie Porter, to review our fourth quarter 2018 financial performance
Thank you, John. We sold a record 131,161 ounces of gold in the fourth quarter at an average realized gold price of $1,244 per ounce, $17 above the London PM Fix, for revenues of $163 million. For the full year, revenues increased to a new record of $652 million. Total cash costs and all-in sustaining cost declined in the fourth quarter to $770 per ounce and $983 per ounce, respectively, reflecting improved performance at Young-Davidson. We expect a further decline in cost in 2019, driven by low cost production growth from Island Gold.Operating cash flow before changes to noncash working capital is $53 million dollars or $0.14 per share in the fourth quarter and $212 million or $0.54 per share for the year. All of our mines generate free cash flow net of all capital and exploration expending for combined mine-site free cash flow of $56 million in 2018.We reported a net loss of $72 million or $0.18 per share in the fourth quarter, which included onetime adjustments for an after-tax $15 million noncash inventory impairment at El Chanate, unrealized foreign exchange losses recorded within both deferred taxes and foreign exchange of $16 million and other items totaling $10 million. Excluding these onetime items, adjusted net earnings were $4 million or $0.01 per share.The write-down at El Chanate followed a review of the heap leach pad inventory as the operation has transitioned to residual leeching in the fourth quarter. This review included an analysis of the number of ounces stacked on the pad and included in inventory that are expected to be recovered economically. This resulted in the write-down of approximately 52,000 ounces, leaving approximately 16,000 ounces in inventory, which are expected to be recovered in 2018. There may be opportunities to recover additional ounces beyond that, but we'll be carefully monitoring costs along the way to ensure that we are doing so profitably.Amortization expense was $42 million for the fourth quarter and $167 million for the year or $321 and $327 per ounce, respectively, both consistent with guidance. Corporate G&A expense of $3.5 million for the quarter and $17 million for the year was also consistent with guidance and remains among the lowest in our peer group.Capital spending totaled $62 million in the fourth quarter and $222 million for the full year in line with revised guidance. Total capital spending is expected to increase to a range of $290 million to $315 million in 2019, reflecting full-scale construction of 2 new mines, Kirazli and Cerro Pelon.As John mentioned, we initiated share buyback in December and have been active. To-date, we have purchased and canceled 2.4 million shares at a cost of $10 million or $0.04 per share -- or $4.07 per share. We also announced the doubling of our annual dividend to $0.04 per share paid quarterly. This increase is well supported by our balance sheet, higher gold prices and a bright outlook with much stronger free cash flow on the horizon. As John noted, we expect further increases in the dividend as we generate stronger levels of free cash flow.With our first quarterly dividend to be paid in March, Alamos has now paid dividends for 10 consecutive years, returning a total of $142 million to shareholders through dividends and share buybacks. We remain debt-free and possess one of the strongest balance sheets in our peer group. At the end of 2018, we had $206 million of cash and cash equivalents and more than $600 million of total liquidity when combined with our undrawn revolver. We are in excellent shape to fund our internal growth initiatives.At this point, I'll turn the call over to Alamos' Chief Operating Officer, Peter MacPhail, to provide an overview of operations.
Thank you, Jamie. Young-Davidson delivered its strongest performance in the fourth quarter producing 50,900 ounces, reflecting higher underground mining rates and grades. For the full year, the operation produced 180,000 ounces, in line with the revised guidance.Total cash cost for the quarter were $764 per ounce, a 7% decrease over the previous quarter. Mine-site all-in sustaining cost also decreased 5% to $974 per ounce. We faced some challenges at Young-Davidson during the first half of 2018, but have taken steps to ensure better performance going forward and have seen the benefit in the second half of the year. We remain focused on maximizing the efficiency of the upper mine while completing development and construction of the lower mine. We expect gold production at Young-Davidson to increase slightly in 2019 to between 180,000 ounces to 190,000 ounces, with total cash cost and mine site all-in sustaining costs expected to decrease approximately 6% for 2018, driven by higher underground mining rates and grades.Following the completion of the tie-in of the upper and lower mines, underground mining rates are expected to ramp up above 7,500 tonnes per day in the second half of 2020 towards our long-term target of 8,000 tonnes per day in 2021. We expect this to drive production higher, costs lower, and combined with the lower capital spending, we expect strong free cash flow growth.Island Gold continues to impress producing a record 29,000 ounces in the fourth quarter and a record 105,800 ounces for the year, meeting the midpoint of guidance, which was increased twice over 2018. Underground mining rates averaged 1,116 tonnes per day in the fourth quarter and were 30% -- 37% higher than the third quarter as mining rates increased to match the expanding milling capacity. Mill throughput increased to 1,146 tonnes per day in the fourth quarter with the completion of the mill expansion.As part of the Phase II expansion, we're in the process of permitting the increase to 1,200 tonnes per day to match the existing capacity of the mine at the mill. Production at Island Gold is expected to increase 32% to between 135,000 ounces and 145,000 ounces in 2019, reflecting higher grades and throughput. Costs are also expected to decrease, driving strong free cash flow growth even with an aggressive ongoing exploration program.Exploration continues to be a key part of the Island Gold story, with the pace of mineral reserve and resource growth exceeding our expectations. Since the acquisition of Island Gold in 2017, we have seen combined mineral reserve and resources increase by nearly 1.2 million ounces. With the deposit open across all 3 main areas of focus, we think there is more to come.Mulatos produced 35,600 ounces in the fourth quarter and 175,500 ounces over the year, meeting the midpoint of guidance, which, like Island Gold, was increased twice in 2018. Mine-site all-in sustaining costs were $881 per ounce in the quarter and $855 per ounce for the year, the latter below the annual guidance of $900 per ounce.In 2019, production is expected to return to previously guided long-term rate of 150,000 to 160,000 ounces. Construction has commenced at the high-grade Cerro Pelon project, and we expect to complete permitting for La Yaqui Grande during 2019. Production from these higher-grade projects is expected in 2020 and 2021, respectively.We reached the end of mine life at the high-grade San Carlos underground deposit in 2018, but see good potential for additional sources of high-grade ore. This will be the focus of near-mine exploration in 2019.El Chanate produced 10,100 ounces in the fourth quarter and 43,700 ounces for the year, with mine-site all-in sustaining cost averaging $1,317 per ounce. Mining activity ceased at El Chanate in the fourth quarter, and we have since transitioned to residual leaching.At Lynn Lake, we've added to the reserve base and we'll be incorporating this and other value engineering initiatives into an optimized feasibility study to be released in the second quarter.At Kirazli, we're expecting to ramp up full-scale construction activities this year following receipt of the operating license, putting initial production on track for the latter part of 2020. This is expected to take our annual production to over 600,000 ounces per year starting 2021 while further reducing our costs given its low-cost profile.With that, I'll turn the call back to John.
Thank you, Peter. That concludes our formal presentation. I'll now return the call back to the operator, and we'll open the call for your questions. Operator?
[Operator Instructions] And the first question is from Michael Sroba from Macquarie.
A couple of questions from me. First, can you please let us know what the unit costs were at Island and Mulatos?
Mick, just searching for those numbers here. Unit cost, you mean mining cost?
Yes, mining and -- mining and processing?
Mining and processing. I haven't got those at my fingertips. I can -- we'll look them up and get back to you. Ask your second question.
Okay. And following the write-down at El Chanate, do we have any idea of the expected cash and all-in sustaining cost there for 2019?
Yes. So it's Jamie. Our guidance remains the same. Our anticipated all-in sustaining cost that we'll report for El Chanate production is $1,200 an ounce. But what's important to note is that, that is not all cash. About half of that is the actual cash processing cost associated with getting those ounces off the pad, the other half is the inventory cost, which represents cash that we've spent in the past. So despite the $1,200 all-in sustaining cost, we do anticipate generating $6 million to $7 million of free cash flow at El Chanate this year.
Okay. And it looks like there have been a few wins at Lynn Lake. Can you please let us know what the criteria will be for an investment decision there in terms of IRR or payback period?
Yes. So as you'll recall, we published the feasibility study back in December of 2017. It had an IRR, an after-tax IRR of 12.5% to the $12.50 gold price. So I think at a minimum, we'd want to get to 15%, but we're targeting closer to 20%.
Just getting back to you, Mick, on the unit cost. At Mulatos, we are $1,275 per tonne mining -- sorry, $275 per tonne mining, about $8 per tonne processing. At Island, mining was CAD 140 per tonne, CAD 30 processing per tonne.
The next question is from Kerry Smith from Haywood Securities.
Peter, in the commentary on YD for the new tailings facility, you made a comment there that it would lower your operating costs. Just curious what the magnitude of that cost reduction might be and exactly why it's lowering your costs?
Yes. The numbers are in our -- I think, in the deck there. From memory -- and it's -- when you say operating costs, it's more the capital costs of constructing dams than operating costs, so it lowered our kind of sustaining capital costs considerably. Currently with the facility, it costs us in the range of $5 per tonne, and the guys are pulling up the numbers here, in the range of $5 a tonne in capital costs to construct our current facility and it's less than half of that or around half of that -- what do we got here, here we are. So in our presentation, it shows the capital cost for the current facility to store a tonne is CAD 4.24, that's capital cost, and the new facility -- Oh, it's U.S., sorry, I apologize, it's U.S. dollars, $4.24. And new facility is $1.43. So, a 1/3. And the reason for that was the second part of your question, reason for that is just the taking advantage of the natural topography, what the existing facility is kind of in an area raised up, the new facility, obviously, we needed a Schedule 2 amendment. Schedule 2 amendment is because the area used to be a lake. It was used by the old-timers in the '50s and -- well, '40s and '50s as a tailings facility already. So it's full of tailings, but it's still had been classified as a lake. We're now going to repurpose that as a tailings facility as it was in the past and actually reclaim what the old-timers had done.
Okay. I interpreted the commentary to mean it was lowering your operating costs and that's what was confusing me and I appreciate the clarity. And Jamie, just on Chanate, the charge, the $64 million, that's on that 52,000 ounces, that's over $1,200 an ounce. Why is it that high? I wouldn't have expected it to be that high.
Kerry, if you look at our guidance for 2019, we forecast production from El Chanate between 15,000 and 25,000 ounces. We've written down the inventory balance to above 16,000 remaining ounces, and that's based on conservative assessment comparing the revenue from those incremental ounces to the cost of cyanide. That inventory balance has been whittled down over time. I think on the time of the merger with AuRico was 140,000 ounces, cut down to 70,000 ounces currently. And we've decided to take conservative view as to what we'll be able to residual leach there. So 16,000 ounces is what we anticipate for 2019. If we're able to get more this year or in the future, those will be free ounces.
Okay. And just while I've got you there, is there any plans for any more hedging? I know you've got about, I guess, 20% of your production hedged now with these collars. Is there a plan that you might do more of that or has, the more you kind of said, 20% is as much as we'd like to have?
No. In fact, 20% is about as high as we're going to go and -- for a year. And that's what -- yes, that's what I'm about to say. And it's annualized and we have it -- it's a rolling hedging program. So we have hedges coming off quarter-by-quarter, and we can actually decide quarterly whether we want to continue or -- continue to add hedges to keep us out on orders or whether we don't.
Yes, so we are -- we're up to 100,000 ounces currently, Kerry, and the range I think is pretty attractive with a flooring around $1,289 and a ceiling close to 14 -- north of $1,430. So we're comfortable with that range and we'll continue to monitor it. But we've had tremendous success with our hedging over the course of the past 2 years. We've generated $15 million in incremental cash flow between our gold and FX hedging. So it's a testament to our treasury group. We've done a good job and we'll look to continue to do that.
And just the last question on Kirazli, the $75 million that you've got budgeted for CapEx this year, when would you need to get the operating permit by in order to effectively deploy that amount of capital this year?
By the end of the first quarter, Kerry.
The next question is from Mike Parkin from National Bank.
Just circling back to one of the answers there on mining costs at Island being CAD 140. And I recall back from the Richmont days, there's always a bit of a fairly significant price difference between whether you're mining or stoping or development, do you have the breakdown of roughly what the mix up was?
Yes, Mike, I don't have it on my fingertips, but it would have been -- it's a pretty steady mix any given quarter, so I wouldn't expect that to drive anything dramatically.
Okay. It's similar rates kind of going forward?
Yes. Like our budget for this year is $135. So not too far off where we ended up -- where we were in the fourth quarter.
[Operator Instructions] And the next question is from [ Thurman Willis ], a private investor.
There's a lot of huge leads about the consolidation in the gold industry. And with you trading at such a discount to your peer group, doesn't that make us highly attractive on a take-out basis? And the second part of that question is, will the consolidation continue to read that there could be a gold shortage upcoming? Could you comment on both those items, please?
It's John McCluskey speaking. We didn't quite hear the second part of your question very clearly because of the line. But in terms of the first part of your question, there is certainly a lot of talk of M&A in the industry right now. Alamos has been very active in M&A for 5 years. 5 years ago, this was a single mine company with a 140,000 ounces of production. By 2018, we're producing from 4 mines and generating 500,000 ounces of production and we're continuing to drive that growth. And while we went through some very low share price periods over the course of 2018, especially late 2018, the shares have been recovering quite significantly over the last number of months. And our -- and I would -- I would submit that our valuation is ultimately on the way to normalizing with its peer group. Nobody is going to force us into M&A if that's what you're implying. I don't see that happening. I really see another thing happening in the industry right now, which is CEOs getting together and talking about strategic mergers that improve both companies. And frankly, if the terms were right and somebody approached us with something that made a lot of sense, we'd be open to discussion. But given that we've done so much over the last number of years to drive our value, and we have so much in the way of improvement coming over the next 12 to 18 months, I highly doubt that we're going to hear a story attractive enough to match what we're about to achieve on our own.
Good. And the second part of my question that you did not -- or was not able to understand was I commend you on the repurchase program of 10% and especially the good acquisition -- the good pricing at $4.07. Do you think we will still be active at these levels considering we're getting closer to our peers, be as aggressive in buying back our shares at these levels?
Jamie, why don't you take that question? I'll let Jamie Porter answer that question for you.
Sure. Yes. I mean, the challenge with any normal course issuer bid is that you're subject to regular blackout periods. So we're blacked out. Now given our earnings, and we're at -- frankly, we're blacked out more often than we're not, we do still think that our share price is deeply discounted relative to the potential that we have and the growth that we're going to see in cash flow over the next 12 to 18 months. So without outlining exactly what our price parameters are, we do still think we're trading at an attractive price where we'd want to buy back stock.
And the window opens 2 days there for earnings, is that correct?
It does. It does, absolutely.
All right. And then, again, I apologize for this, but some of the reading I've done said that with the M&A activity, that we could wind up seeing some gold shortages forthcoming, which may be pressuring the price of gold up. How does management feel about any shortages in the commodity as you look into your crystal ball?
Well, it was our thesis some time ago that the industry was going to be very short of gold projects. And it's not just the question of finding them, which frankly we're having some difficulty in doing. If you could compare the rate at which the industry was finding new gold reserves and resources over the '80s and '90s and how it's been since 2000, there's a different -- there's a definite trail-off in that curve. So it's an issue. It really is an issue for the industry, and we effectively addressed it through fairly aggressive M&A merging with companies where we saw opportunities to grow reserves and even acquiring nonproducing assets that we felt made excellent future additions to our production pipeline. So that's how we've addressed it. How the industry addresses it, in general, I don't know. I think the logical answer is to boost exploration, and I think that will come with rising gold prices. The problem over the last 5 years has been that gold prices have been very weak. The majors that generally drive exploration expansion through their exploration teams, they just haven't been funding those teams as aggressively as they have in the past. So I think that's what we're going to have to do as an industry, we're going to have to explore more and employ better techniques. There is -- technology is improving all the time and we can see that across many industries, and I think we're going to see that ultimately in the gold space as well. And frankly, companies like ours are investing in that very kind of thing right now. Other than saying that, I think what ultimately is -- we're going to see is higher gold prices. There is a shortage of gold reserves, and if there is peak gold production, which you're hearing discussed in the media quite a lot right now, I think the ultimate outcome of that on market pressure will be higher gold prices.
I'm sort of new to the company in the last 90 days to 6 months, but I've been an active acquirer of stock and I researched management well and I applaud all of you for doing such an excellent job and I'm not trying to cheerlead you, I'm just trying to tell you my 40 years’ experience tells me that this is first class operation.
[Operator Instructions] There are no further questions at this time. This will conclude today's call. If you have any further questions that have not been answered, please feel free to contact Mr. Scott Parsons at (416) 368-9922, extension 5439. Thank you for your participation. The call has now ended.