GCM Mining Corp

TSX:GCM

Earnings Call Transcript 2018-Q2

[Operator]

Welcome to Gran Colombia Gold Q2 2018 Results Webcast. My name is Christine, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mike Davies, Chief Financial Officer. You may begin.

[Michael Monier Davies, Chief Financial Officer]

Great. Thanks, Christine. Good morning, and thank you for joining us today for our 2018 second quarter and first half results webcast. Joining me on the webcast this morning is our CEO, Lombardo Paredes. I'll first go through our prepared remarks regarding our performance in the first half of this year and then Lombardo will be available as we open things up for the Q&A session.Before we proceed with the presentation, I would first like to draw your attention to our legal disclaimer regarding forward-looking statements that may be made by us during the webcast this morning. Each quarter, I've been providing you with an update on our progress against our stated priorities to execute our strategy in 2018. Our first objective this year focused on the final improvements to our capital structure. We're pleased to say that we have successfully closed this chapter with the elimination of all of the convertible debt that was put in place back in early 2016, reducing the potential dilution to shareholders from about 95 million shares under the former capital structure to about 63 million under the new structure. With the issuance of shares settled the 2018 debentures earlier this week, we now have 48.2 million common shares issued and outstanding. We have reduced our total debt from approximately $180 million at the time of the debt restructuring in early 2016 to $93 million at present represented by our 2024 Gold Notes. The Gold Notes are currently unlisted and we are working through the listing application of the TSX at this time. We also have 12 million new warrants outstanding that were issued as part of the Gold Notes financing in April. We're pleased to say that we have listing approval for these warrants and they should start trading on the TSX in early September under the symbol GCM.WT.B. The second objective we set for this year was to continue the implementation of the optimized mine plan at Segovia. Segovia is our primary cash-generating asset and was recently recognized in a mining intelligence study as one of the top five highest grade underground gold mining operations globally in 2017. We expect to invest about $30 million this year in the continuation of the exploration, development, expansion and modernization programs at Segovia, of which we spent close to $16 million in the first half. Of this total expenditure, about $8 million was spent on exploration and development. We spent almost $5 million on various programs, taking mines within our -- taking place within our mines, upgrading mining equipment, improving infrastructure such as the [ apikays ] and hoisting systems that move people and material in and out of the mines, ventilation improvements at Providencia and El Silencio this year, health and safety improvements and more. And we also spent just over $2 million through the first half of this year with some further equipment upgrades at our Maria Dama plant and its lab. Construction of the El Chocho tailings storage facility, which started receiving material ahead of schedule in July, and the commencement of construction of the new filter press, which will be commissioned in 2019. The water treatment plant implemented at Maria Dama in 2017 is continuing to do its job, eliminating our exposure to environmental discharge fees like we had incurred in the past. Overall, execution of our 2018 capital investment programs at Segovia is moving along nicely.Our third key focus area this year is the ongoing exploration program at Segovia. As we have said before, we feel we have only scratched the surface when it comes to exploring the high-grade veins that are known to exist within our RPP-140 title. Through the first half of 2018, we've completed 88 holes, representing approximately 55% of the 20,000 meters we initially planned to drill in 2018. Results to date, as we announced in mid-June, have been very encouraging. What really caught our attention was the results of the channel sampling that took place at the deep levels of the El Silencio mine, which you can see in this image. El Silencio is the oldest and deepest of our mines, going down to level 45, and historically a very high-grade gold producer. As we announced, we discovered a new structure at El Silencio in some very interesting high-grade results at depth, worthy of an immediate follow-up would be addition of another $2.3 million of drilling to take place, as illustrated in this image, starting in September, to test the extensions of the north, middle and south ore-shoots below level 45, another 200 meters below the currently delineated resource so that we can increase reserves and resources and incorporate these extensions into our future development and production plans.The fourth key objective we set for 2018 focuses on Marmato project and gaining an understanding of how we can move forward. As we announced late last year, we have shifted our attention from open pit to an underground expansion at Marmato. We have engaged JDS to work with us on technical studies, looking at mining methods, mine design, plant requirements and so on to take us toward a PEA in 2019. The first phase of this technical work with JDS has already started. We're also going to do about 10,000 meters of drilling this year in our program, which consists of 32 holes to be drilled from level 20 got underway in mid-June. The drilling focus will -- program will focus on the transitional zone and the deep zone. The main purpose of the drilling plan in transitional zone, on nominal 50-meter by 50-meter center spacing, is to convert as much as we can of the inferred resources to indicated and to extend the higher grades core, which we have outlined so far along strike, which is open in both directions and at depth. It's our intention to outline a high-grade block with an extension of at least 500 meters along strike. Also, drilling within the transitional zone is aimed to aid the mine design for expansion of the existing mine at Marmato. The drill holes in the first hundred meters of the deep zone have the same purpose as the transitional zone, while drilling planned in 100-meter by 100-meter center spacing is focused on increasing our confidence in the deeps mineralization up to a depth of 700 meters ASL. If we are successful in extending the higher-grade block up to a depth of 700 meters ASL, we could then extend our drilling and nominal 50 meter by 50 meter center spacing up to a depth of 600 meters ASL, which would mean having indicated resources for a further 400 meters down below the current lowest level of the existing mine. The results of this drilling program will aid JDS and our project team as they get into Phase 2 of the technical studies later this year. In July, we announced completion of a 15% equity interest in Sandspring Resources. There are 2 facets to this transaction: first, we diversified our project's exposure outside of Columbia by taking a position in Sandspring. Sandspring owns the Toroparu project in the emerging Western Guyana gold district, an area that senior management is very familiar with through previous experience in the Venezuelan Guyana Shield greenstone belt. Toroparu is one of the largest undeveloped gold deposits in South America, and we believe we can assist Sandspring's management bring this project to development through our involvement through the company's board.Second, Sandspring needed a source of cash flow and through this transaction acquire 100% interest in the Chicharron Project located in our Segovia title by acquiring 30% from us and the other 70% from the local Colombian company who had contracted to explore, develop and operate the project. The Chicharron Project is located in the eastern side of our Segovia title, as you can see on this slide, in an area that is predominantly silver-rich mineralization with some gold and includes the workings of the Guia Antigua mine, which is a former producer. With this acquisition, Sandspring will now take over the operating of the project, which we believe can be up and running in the near future. As part of the transaction, Sandspring completed an approximately $10 million financing, from which a significant portion of the net proceeds will be used to fund exploration of the Chicharron Project and to get it up and running and to complete the feasibility study on the Toraparu project.Last night, we have released our operating and financial results for the second quarter and first half of 2018. We're pleased to be able to report positive quarterly results that we -- as we continue to execute our strategy. In our second quarter and first half 2018 results, we saw improvement in gold production, adjusted EBITDA, adjusted net income and excess cash flow compared to the second quarter and first half last year. In addition, our cash cost and all-in sustaining cost for the second quarter and first half of 2018 met our expectations. Over the next few slides, we'll take a closer look at the results reported last night. This was our third consecutive quarter reporting more than 50,000 ounces of gold production. Segovia accounted for almost 47,000 ounces of our total second quarter production, up 17% over the second quarter last year. And of this, the company's mines contributed 95% of the total gold production, with the growth in 2018 coming from our Providencia mine. This has been the trend since the middle of the second quarter last year when our development activities opened up access to the higher grade areas, which form the basis of the Providencia mines' reserve and resource base. The success at Providencia, coupled with stability of production from the other company mines at Segovia and Marmato, led to a total first half gold production in 2018 of 105,578 ounces, up from 20% over the first half last year. And from this chart you can see that Segovia continues to drive our production growth. Our trailing 12 months' gold production reached 194,000 ounces at the end of June, up 14% over 2017's annual production. We announced last night that July's total production was 19,296 ounces, of which Segovia was 17,164 ounces, both of these being new monthly records. This brings our trailing 12 months gold production at the end of July to 198,632 ounces, and we have raised our production guidance for 2018 as we now expect we will most certainly pass through 200,000 ounces of gold this year. The company's total cash cost per ounce are heavily influenced by the optimized production cost of our Segovia operations, which represent about 89% of total gold sales. As you can see on this chart, Segovia's cash cost in the current and prior years has been steadily below $700 per ounce, and we continue to expect it will remain below $700 per ounce for the balance of this year.At Marmato, told cash costs have historically been higher than Segovia due to the lower mine grades and the fact that we have not yet put in the effort to optimize the production cost as we have at Segovia. This will come with the underground expansion project we are currently working on with the help of JDS. Marmato's cash cost in the first half of 2018 were adversely impacted by low-grade material early in the second quarter. However, mine management made the necessary corrections and for the month of June cash cost came back down below $1,100 per ounce, where we expect them to be for the balance of this year. For the first half of 2018, our company average cash cost was $683 an ounce, down from $709 per ounce in the first half last year, reflecting the increased proportion of our total production coming from the lower cost Segovia operations this year. When you look at this chart depicting our all-in sustaining cost results for the last 3 years, the first thing that comes to mind is stability. Our cash cost has been trending at about $700 per ounce and our all-in sustaining cost in the low $900 range, a little more than in 2016 as we're investing more in exploration now because we can afford to. For the balance of 2018, we don't see much change in this trend.I had mentioned earlier that we have now had 3 successive quarters with over 50,000 ounces of gold production. With stable cash cost and gold prices over $1,275 per ounce that translated into 3 successful quarters of adjusted EBITDA in excess of $26 million. For the first half of 2018, our adjusted EBITDA reached $54 million, bringing our trailing 12 months to $95 million. We certainly appear to be trending towards $100 million of annual EBITDA this year. Over the last couple of years, we've been using excess cash flow as a measure of our ability to generate free cash flow to repay our debt. Excess cash flow essentially reflects our cash from operations plus CapEx, interest and taxes paid during the period. In the first half of 2018, we turned $54 million of adjusted EBITDA into almost $14 million of excess cash flow, up about 2.5x the excess cash flow we generated in the first half last year. Although gold prices have fallen off in the first 6 weeks of the third quarter, we believe we have sufficient cash generation capability in the second half of this year to meet our obligation to deposit 1,300 ounces each month, being less than 10% of Segovia's monthly production, into the Gold Trust Account for the quarterly Gold Notes' repayments.Turning our attention to our June 2018 balance sheet, this is probably the main beneficiary of the work we have completed this year to improve our capital structure. Our cash balance increased almost $22 million in the second quarter of 2018, $11 million through our excess cash flow and the other $11 million through our financing activities, which included getting back the cash that was in the sinking fund for the 2020 and 2024 debentures. As you can see on this chart, excluding the current portion of the Gold Notes that will be serviced by the delivery of gold from our production at Segovia, our working capital at the end of June had turned positive, a $20 million improvement since December largely due to our increased cash position.Now since the end of June, $3.5 million in cash in trust has been returned to us, as it was not required to pay the 2018 maturities -- the debentures at maturity in August. This helped to offset the $3 million we used to pay for the shares subscription in Sandspring in July. In July, we made the first quarterly principal repayment on the Gold Notes, and in August of 2018 debentures were repaid with shares. That brings our total debt down to $93 million as of today, and we still have $25 million of cash in the bank. Our focus on cash, costs and execution over the last 3 years has certainly paid off when you look at our financial position now. And lastly, before we get to the Q&A portion of this morning's webcast, I would like to reiterate our outlook for 2018. Our objectives remain unchanged, although we can now count the capital structure improvement as complete. Our focus will center on execution of our mine plan at Segovia and the exploration programs at both Segovia and Marmato. We have raised our production guidance, and we're maintaining guidance for our 2018 cash cost and all and all-in sustaining cost per ounce averages. The first half has been a very positive period for us, and despite the recent volatility in gold, we're excited about what the second half of the year has in store for us. So with that, Christine, we'd now like to open it up for the Q&A session.

[Operator]

[Operator Instructions] And we have a question from Nicolas Zalles from LW Investment.It looks like they have their line on hold. [Operator Instructions]

[Michael Monier Davies, Chief Financial Officer]

All right. Well, if there's no questions at this time, we thank you for taking the time to join us this morning. Our contact information is on the website if you do want to follow up with us. And stay tuned, we'll continue to update market information as it comes forward on our exploration programs in the next few months. Thank you.

[Operator]

Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.