Aris Gold Corp
TSX:ARIS
Earnings Call Analysis
Q3-2023 Analysis
Aris Gold Corp
Aris Mining Corporation demonstrated resilience with its Segovia operations, overcoming Q1 challenges like a mill fire and national explosive shortages to set a new production record in August. Not only did Segovia achieve 19,400 ounces of output that month, but it also continued to show robust performance into September and October. As investors look forward, they can gauge future performance with the full-year production guidance, set comfortably between 195,000 to 210,000 ounces. The attention to cost reduction, safety improvements, and the integration of artisanal and small mine resources is paying off, as evidenced by the financial results.
The recently announced 114% surge in measured indicated resources at Segovia, now standing at 3.6 million ounces, signals potential for long-term value creation. Aris Mining has also initiated construction on the Marmato Lower mine, which is poised to be the next substantial gold mine in Colombia. With low all-in sustaining costs of $1,000 per ounce and a projected 20-year mine life, Marmato could elevate Aris's consolidated production to approximately 400,000 ounces annually, translating to an annual EBITDA forecast exceeding $300 million over nearly two decades.
The third quarter showed a promising uptick in financial health, with a 6% rise in revenue to $113 million from Q2 and significant increases in free cash flow from operations, now tallying at $36.3 million. This substantial increase partly reflects an upswing in gold revenue and the amelioration of an earlier tax burden. Notably, after investing $24.6 million in growth projects like Marmato Lower mine, Aris still enjoyed a healthy $11.7 million in free cash flow. These figures underscore a healthy cash position of $211 million, illustrating the company's ability to self-fund its growth initiatives. Furthermore, the availability of additional stream financing from Wheaton Precious Metals enhances the financial robustness as Aris advances towards their first tranche expected in early 2024 upon reaching 25% completion of the Marmato project.
Significant developments such as the kickoff of the Marmato Lower mine's access road construction in September mark progress in building vital infrastructure. Aris Mining's collaboration with EPCM contractor Ausenco speaks to their commitment to advancing the mining project efficiently, targeting the initial gold pour from the bulk operation in late 2025, eyeing commercial production in 2026. Meanwhile, the company's strategy to engage small miners has already yielded results, with the first participation program delivering high-grade ore, contributing 6,367 ounces for the quarter. This initiative not only supports the local mining community but also strategically aims to reduce cost profiles as Aris further develops the mechanized lower mine.
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Thank you for standing by. This is the conference operator. Welcome to the Aris Mining Corporation Third Quarter 2023 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Neil Woodyer, Chief Executive Officer. Please go ahead.
Thank you, operator, and good morning to everyone. I'll start by providing a brief overview of our business this quarter. I draw your attention to the cautionary statement on Slide 2 as we will be making several forward-looking statements.
Starting with Slide 3 in the presentation. We are pleased to see a return to stability at our core Segovia operations, following the challenges in Q1, which related to a mill fire and a national explosive shortage. Notably, in August, Segovia produced 19,400 ounces which marks a new production record for the asset. We continue to see strong performance in September and October and remain on track for full year production guidance of 195,000 to 210,000 ounces.
Since taking control of Segovia in September '21, our optimization efforts have focused on cost reduction, safety improvements and effective integration of our artisanal and small mine resources. And we're now starting to see these efforts pay off in our financial results.
Additionally, we recently announced a 114% increase in Segovia's measured indicated resources with the resources now standing at 3.6 million ounces at 14.4 grams per tonne, and we expect to release our new reserve by the end of the month.
With Segovia generating stable cash flows for foreseeable future, we started to move our attention to building the Marmato Lower mine, which represents the next large-scale gold mine in Colombia. Following receipt of its PMA in July this year, we started construction in September of this fully funded asset. We view remarks there as a foundational asset due to its low all-in-sustaining costs of just $1,000 an ounce and a 20-year mine life. Once up and running, Marmato will take our consolidate production profile to 400,000 ounces a year. At today's gold price, that represents a forecasted annual EBITDA of over $300 million a year for almost 20 years of life.
As a broader country level, our commitment to partnering with local small miners positions us to unlock additional opportunities in Colombia. Notably in the Soto Norte joint venture, Aris is assisting the formalized [indiscernible] group to commence production in the next quarter. And we plan to process the high-grade ore at Segovia [indiscernible] plant. We're also advancing discussions with other parties to increase our support to small miners in the Soto Norte area.
We continue to believe that the market is short of growth-focused gold producers, and we look forward to operating and developing our portfolio of high-grade, low-cost assets as we pursue our goal of creating the next significant Latin American gold producer.
And with that, I'll hand over to Rich Thomas, our Chief Officer, for a review of our operating results.
Thanks, Neil. Looking at Slide 4, we have emerged from our operational challenges following the more repairs and exposure charges in the first part of the year. And you are seeing the Segovia plant operate at 1,900 tonnes a day or about 95% of nameplate capacity. Grades were in line with our mine plan and up from quarter 2 at 10.77 grams per tonne. In this quarter, Segovia produced 53,826 ounces compared to 47,882 ounces in quarter 2. We experienced a modest increase in site mine costs related to inflation of materials and the strengthening of the Colombian peso. Thus, we reported an all-in sustaining cost of $1,194 per ounce.
As of quarter 2, we're breaking out OpEx to report either partner or own operated cost structures. We continue to believe that it's important to understand that our ASM partners allowed some participation in the gold price. And as such, this component of our business has more of a fixed margin event. On a combined basis, we are still seeing a strong 35% margin on an all-in sustaining cost basis at Segovia.
Before going into more detail at our 2 producing assets, I'll hand over to Doug Bowlby, CFO, to discuss our financials.
Thanks, Richard. I would like to turn your attention to Slide 5.
As mentioned by Richard and Neil, we had a strong operating quarter, which resulted in a revenue increase to $113 million, up 6% compared to Q2. All-in sustaining costs were up in Q3, both as a result of the strengthening of the Colombian peso relative to the U.S. dollar and the purchase of some artisanal material bought at higher spot gold prices.
Free cash flow from operations totaled $36.3 million in Q3 and reflects an increase of $31 million from Q2. This was driven by increased gold revenue and the fact that Q2 has been impacted by the annual Colombian tax payment at the Segovia operation.
Also noteworthy, we generated $11.7 million in free cash flow from operations after investing $24.6 million in expansion and growth projects, including at the Marmato Lower mine, which is now in construction.
Our cash balance at the end of Q3 was $211 million, essentially flat from $214 million at the end of Q2. So this clearly demonstrates that our current operations are funding our growth investment and our corporate financing costs.
We remain in solid financial shape to bring the Marmato Lower mine project through construction as we also have access to $122 million of additional stream financing from Wheaton Precious Metals. We expect to receive the first tranche from them of about $40 million when we hit the 25% completion milestone on the project in early 2024.
Then moving to our financial results on Slide 6. In this table, we are showing positive trends across a broad set of financial metrics. Adjusted EBITDA was $41.6 million for Q3 and now totals $120 million for the 9-month period. This speaks to the significant cash flow generation from Segovia. We were also profitable with net earnings of $12.4 million in Q3 or $0.09 per share. On an adjusted earnings basis, this increases to $0.11 per share and $0.30 per share on a 9-month basis. We're very pleased to be reporting both significant cash flow generation and positive earnings.
I'll now hand the call back to Richard to discuss our operations and projects in more detail.
Starting with Segovia on Slide 7. We've incurred sustaining CapEx of $16.5 million year-to-date at Segovia. Encouragingly, our strong production results in Q3 at Segovia appear to be carrying out into October with both tonnes and grade with what looks like similar milling rates as well.
Moving to Slide 8. We'd like to continue to highlight our strong results of our infill and expansion drill program, where we have completed $10.5 million out of a budget of $17 million exploration spend, and that has helped us drive the big resource increase we released last week. As the program advanced and we've become more efficient, the cost per meter has reduced. And thus, we'll be able to expand our exploration program this year, allowing us to drill 105 kilometers versus the 85 kilometers budgeted. The increase in resource stems from a detailed review of the resource model at Segovia. We have improved the understanding and the interpretation of the dispute fan shapes and as a result, we have been able to create wire frame that more closely capture the natural shape of the fan. By doing this, we eliminate waste that was previously included into the frame -- wire frames and thus reducing the grade below our cut off.
The next step will be converting the measured and indicated resource into a reserve estimate to be filed in November.
Moving on to Marmato on Slide 9. Our focus is clearly shifting to the low mine expansion project. We have started the construction of access roads in September, which is a critical step in establishing infrastructure to support the construction of the new process plant and mining infrastructure. We have begun to receive tenders for long-lead key items and are progressing through the adjudication stage before orders are placed in the last quarter of this year.
Aris is working closely with Ausenco, the EPCM contractor for the processing plant. The design and engineering work of the process plant is well advanced across all disciplines and the bulk of noncritical component bids have been issued into the market. We are still targeting our first gold pour from the bulk tonnage operation in late Q4 '25 with commercial production sometime in 2026.
At the upper mine, we launched our first small miner participation program in April this year. Since commencing operations on 16 level, our terminal and small-scale miners delivered 1,423 tonnes of material at an average grade of 6.21, which is double what we do in our own operations at the end of September 2023. Marmato contributed 6,367 ounces for the quarter, and our focus on upper mine will be expanding to the high-grade partner source feed to lower the cost profile at the small producer whilst we build out a mechanized lower mine as owners.
We look forward to providing the market with further updates as construction accelerates to the end of the year. And with that, I will hand back to the operator for questions.
[Operator Instructions] Our first question is from Kerry Smith.
Neil or Richard. Just at Segovia in August with this record production. Was that driven by grade? Or was it higher throughput? Like what was the components to get to that record?
That's for you, Richard.
Right. So in August to get to the higher production, so it was really grade driven as well as tonnes driven. So our mill is starting to stabilize around about the 2,000 tonnes per day instantaneous mill rates. And we've been taking real care to reduce our [indiscernible], reducing the dilution, and that's how grade has gone up. So that was the -- as a result of those 2 elements, which gave us our production in August.
Okay. So the improvement in grade was really less dilution, not that you were in a higher-grade stoping block is what you're saying then?
Correct.
Okay. Okay. Got you. And -- on the -- maybe just for Doug on the financing with the stream from Whaeton for Marmato you were saying, you're expecting $40 million in Q1 when you hit 25% completion. Can you just remind me what the remaining milestones are to draw the rest of roughly $80 million, I guess?
Yes, sure, Happy to. So there's 3 milestones, 25%, 50% and 75% and the payments are $40 million, $40 million, $42 million.
Okay. Okay. Got you. And would you hit the 50% milestone in late 2024? Or would that be a 2025?
I think that should also be at 2024.
So Q1, for the first one, Q4 for the next one and then the last $40 million sometime in [ '25 ].
That sounds right.
Right. And is there any plan to update or revisit the CapEx estimate, the $280 million for the lower mine at Marmato between -- while you're doing the engineering? Or are you still pretty confident that, that $280 million is a reasonable number?
We're still pretty confident, that's a reasonable number. It's a relatively reasonable one because as we were waiting for the PMA to come through, we were able to make considerable progress on getting some firm numbers to market. So at this stage, we're comfortable with the number.
The next question is from Carey MacRury with Canaccord Genuity.
Maybe just a follow-up on Marmato. In terms of the capital profile, how much should we -- how much would we expect for the balance of this year versus maybe 2024?
Tyron and Rich, you've got the answer?
I don't have a strong answer to that, but perhaps you do, Richard. We've looked at the totals, but I don't think we've spent much time with the specific number yet, unless you've got something, Richard?
I do not have something, but we will definitely get that number and get back to you on that question.
Okay. Great. And then maybe now that the permit is in place, construction is undergoing. Just wondering if you can just review kind of how relationship is with local communities and sort of what the plans are for kind of mobilizing the artisanal miners?
Well, I think Richard has made it clear that the upper mine is much more suitable for the small miners to mine than ourselves and we concentrate on the lower mine. We've started that program. It started a little bit slower than we anticipated, but we're working with them and that should be accelerating. We'll be looking to give some of the other levels out to other small miners progressively throughout the rest of this year, next year. And the sooner we get to the situation where we're using their expertise and skills more fine-tuned than ours in the upper mine. I think that will benefit not only Aris, but it also benefit the community. So that's our focus most definitely to do that as quickly but efficiently and safely as possible.
And everything is going well with the local communities around our model?
Has been going well. With the social people have been very much in contact, anticipating the different moves that we're making as we start constructing. But a great deal of support and good local elections still came through from our point of view when they had the regional elections last week. So strong relationship.
Okay. That's good to hear. And maybe just one last one for me. Obviously, a big increase in resources at Segovia. Directionally, should we be expecting a similar kind of magnitude change in the reserves? Or is there something more specific about reserves that we should be thinking about?
Okay. So with the big increase in resources, of course, you're be going to inspect a increase in reserves. That work is ongoing at the moment. So I don't have very solid numbers, and we will have that by the end of this month. However, indications are that the reserve will increase to approximate anywhere between 1.3 million and 1.5 million ounces. But that is still under progress. And when it comes out, we will publish those numbers.
[Operator Instructions] This concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Thank you, operator.