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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Gran Colombia Gold Q2 2020 Results Webcast. My name is Richard, and I'll 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. Mr. Davies, you may begin.
Great. Thank you, Richard. Good morning, and thank you for joining us today for the Gran Colombia Gold Second Quarter and First Half 2020 Results Webcast. With me on the webcast this morning is our CEO, Lombardo Paredes. And as is customary, I'll first go through our prepared remarks regarding our performance in 2020, and then Lombardo will be available as we open things up for the Q&A session. Before we proceed with the presentation this morning, 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. By now, we have all become much too accustomed to the challenges and the impact that COVID-19 has had in our lives. At Gran Colombia, to operate our mines, we've had to adapt almost everything we do. Protecting our workforce, both those in the operations and those who work in our offices, has been of the utmost importance. In the second quarter, we spent more than $600,000 to implement the necessary protocols in our operations, and our people have been very engaged, conducting training, educating our workers to look after both their physical and mental health and ensuring that our procedures at the mine sites are functioning appropriately so we can keep our operations going. Equally important has been our support for the communities in which our people live and we operate. Gran Colombia and Caldas Gold have worked together, contributing more than $1 million to COVID-19 relief efforts in the local communities with donations to local hospitals to create critical care units, to provide essential medical supplies and equipment and partnering with our local foundation, Angelitos de Luz, to provide meal kits to economically affected families and providing face masks to the communities. It's been an ongoing effort, and we are very proud of the manner in which our people have risen to the occasion and responded during COVID-19.Last night, we were pleased to report another solid quarter of operating and financial results, particularly in light of the COVID-19 impact in the second quarter. Several of our second quarter metrics reflect the disruption that COVID-19 has had on our production, particularly those metrics that are reported on a per-ounce basis. Notwithstanding these blips, we see positives in our second quarter results. Revenue and EBITDA remained strong as higher realized gold prices, which averaged almost $1,700 per ounce in the second quarter, mitigated the lower sales volumes. The 70% improvement in our share price in the second quarter, albeit a positive result, did contribute to the $35 million noncash loss on financial instruments primarily associated with our warrants, which was the biggest driver behind our second quarter net loss of $18.6 million.Our adjusted net income, which takes out these kinds of anomalies, increased to $17.5 million in the second quarter. That's up from $14.1 million in the same quarter last year and puts our first half adjusted net income to almost $39 million, up 43% over the prior year. Finally, our cash flow metrics in the second quarter were below the second quarter last year, but that was largely related to timing of income tax payments, and our trailing 12-month totals are still looking very good. Over the next few slides, we'll take a closer look at the results we reported last night. In July, we pre-reported our second quarter and first half production results. And if you've been following our monthly production updates, you would know that following the implementation of the COVID-19 national quarantine at Colombia on March 25, we had to make adjustments in our operations to be allowed to get access to our workers, especially those who live outside the local communities in which our mines are located.As a result, our second quarter 2020 gold production dropped to 48,000 ounces compared to 58,000 ounces in the second quarter a year ago. That brings our trailing 12-months total gold production at Segovia to 203,000 ounces and at Marmato to 23,000 ounces. That's a consolidated total of 226,000 ounces compared to 240,000 ounces last year. For the first half of 2020, we have produced a total of 104,000 ounces, and in July, added another 18,000 ounces. Taking into account our results to date and expectations based on current operating conditions, last night, we updated our annual guidance for 2020 to a range of 218,000 to 226,000 ounces of gold. As you will know from the last couple of years, we do tend to be a bit conservative with guidance. And as we get more comfortable with how things are progressing, we'll provide more updates on our expectations. At Segovia, the impact of COVID-19 national quarantine was largely felt in the first half of April, and we produced only 11,400 ounces that month. By mid-April, we have restored access to most of our workforce. And from May through July, we have been very steady with monthly production of about 16,500 ounces of gold and head grades averaging about 15 grams per tonne. Last night, we updated our 2020 annual guidance for Segovia to a range of 195,000 to 200,000 ounces.At Marmato, the COVID-19 situation has been far more challenging. A large contingent of our workers come from communities outside the municipality of Marmato, so access has been an issue. Production in the second quarter was down almost 40%, and that is largely driven by fewer tonnes as the grades have held at about 2.5 grams per tonne. By June, we started to see improvement, and we had another 15% increase in production in July. As such, last night, Caldas Gold updated its 2020 annual guidance for Marmato to a range of 23,000 to 26,000 ounces of gold.Our consolidated cash cost per ounce is one of those metrics in the second quarter that was somewhat punished to a degree by the COVID-19 impact on production as the lower volume of production increased fixed operating cost on a per-ounce basis. As I mentioned earlier, we incurred additional operating costs, implementing the protocols at our mines to continue to operate, and the increase in gold prices increased production taxes by about $19 per ounce in the second quarter. Our trailing 12-month total cash cost is about $684 an ounce and should improve in the second half of this year with Segovia returning to more normal levels. All-in sustaining costs and all-in costs on a per-ounce basis were also adversely impacted by the COVID-19 impact on gold sales volumes in the second quarter of 2020. In addition, consolidated G&A and social contribution spending increased with the emergence of Caldas Gold as a separate listed company, and Caldas Gold's nonsustaining capital expenditures on its Marmato Project for drilling and completion of the PFS increased the consolidated all-in cost per ounce. With gold prices rising in 2020, you can see the gap between revenue and all-in cost widened substantially in the second quarter compared to a year ago, helping to mitigate the impact of these factors on our cash flow metrics.And despite what I've been saying about COVID-19's impact on production and per-ounce cost, in the second quarter of 2020, our adjusted EBITDA was pretty solid, thanks to the improved spot gold prices we have seen this year. Our trailing 12-months adjusted EBITDA now stands at about $166 million, up 13% over 2019. That means we are still trading below 2x EBITDA in the current market. And with gold prices up more than $250 per ounce from the first half average, our second half 2020 adjusted EBITDA is poised for additional growth. Cash flow metrics in the first half of 2020 also benefited from the higher gold prices, which more than offset the lower gold sales volumes in the second quarter and the increased level of income tax payments that we made this year. On a trailing 12-months basis, our operating cash flow was just over $100 million and our free cash flow was $55 million, about $5 million below 2019's annual free cash flow due to higher CapEx spending in 2020. Overall, Gran Colombia continues to be a very strong cash flow generator.And you can see the effect that it's having on strengthening our balance sheet. At the end of June, our cash balance stood at $88 million, $14 million of which was in Caldas Gold. Using a portion of the February private placement proceeds to retire 30% of the Gold Notes early at the end of March, our Gold Notes are now down to about $40 million -- $41 million at the end of June, and after the July repayment, to $38 million. At the time we took the decision to reduce the Gold Notes in March, we were contemplating the decision to use a portion of our debt service savings to commence a dividend program. The onset of the global pandemic in March caused us to suspend making that decision while we gauge the impact of COVID-19 on our operations. As you can see from the results we reported last night, our confidence has been restored. And in light of our strong free cash flow, we have announced that we will commence a quarterly dividend program. We have declared a quarterly dividend of $0.015 per share that we pay on October 15 to shareholders of record on September 30. As you can see on the chart, our initial yield is about 1%, putting us in the middle 1/3 of the pack when we compare with other dividend-paying gold stock. We think this is a logical and prudent place to start, and we'll monitor our quarterly dividend rate going forward to evaluate if and when an increase makes sense. We currently have about 62 million shares outstanding, and our fully diluted share count remains at about 89 million. Our share price rebounded in the second quarter, and our market cap is just over $400 million at yesterday's close. We are hopeful that the dividend announcement will be another positive catalyst for share price appreciation. And on this slide, final slide before the Q&A session, I would like to highlight several reasons why investing in Gran Colombia Gold makes sense. Our flagship Segovia Operations continue to be 1 of the top 5 highest-grade global gold mines, and we have a significant amount of exploration potential in our Segovia title, not only at the existing mines but in the 24 known veins where previous mining has taken place in our title. Our planned regional exploration program was suspended in the first half of 2020 due to COVID-19 restrictions, but we are getting back to it in the second half of this year.We have a strong management and operating team with proven experience building and operating mines in Latin America, and we continue to see re-rating potential in our share price, not just because of the current gold price environment, but also in the increasing values in our equity investments in Caldas Gold, Gold X Mining and Western Atlas, all of which we feel have been -- not been fully reflected in our share price. In the second quarter results, you can see the strength of our ongoing free cash flow generation, and we have a nice healthy balance sheet. And the newest catalyst comes in last night's announcement that we will commence paying dividends. We remain very excited about what lies ahead for Gran Colombia Gold.And with that being said, Richard, we'd now like to open for the Q&A session.
[Operator Instructions] Our first question on the line comes from [ Asheef Lalani ].
I've been a GCM shareholder one form or another -- or I should say, I've been on GCM one form or another since 2016, and I want to thank the team for their operational excellence. I do not consider production at these levels back then and so I'm very impressed. I also didn't think we would still be trading under 2x EV/EBITDA and be up fivefold in 5 years, but here we are. So sincerely thank you. With respect to this, at least you start paying a dividend, I hope you're planning to adjust the one-strike price for every dividend payment or make an offer to buy out the warrants. I'm sure insiders can sell and exercise a bunch of warrants earlier in the year, knowing that the Board of Directors was going to start accelerating the [ K event ] a few months later. Upon reading the press release last night, I consider these warrants have almost always traded with 0 vol, so they may have been anticipating dividends this whole time.Like I said, while I've been a debenture holder, a shareholder, a warrant holder in one form or another since 2016, I've never heard a serious dividend discussion. So I'm surprised when the dividends were announced. And I note that when the note buyers were negotiating the warrants, there was no dividend protection negotiated for indicating that they probably didn't think that, that was a possibility either.I remember being involved in that issue. And despite there being a terrific bargain and it has been, and I want to thank you for that, it was not an easy sell, much like the stock today, quite frankly. I do recall buybacks being discussed, and it's encouraging for me as a shareholder and warrant holder to see that the NCIB was announced. It's discouraging that so low has been done in that regard. That being said, this dividend might make the stock appealing to different types of shareholders. So I applaud the decision because they may improve valuation, but it doesn't mean warrant holders have to be sacrificed.I think the Board of Directors should consider making an offer for the warrants to compensate for the loss volatility. We have excess cash, and I'm sure the shareholders would also like to avoid the future dilution. Alternatively, the Board could also use a fixed -- use stock at a fixed ratio. And I shared with you, Mike, privately, that would improve the stock's liquidity and make it more attractive to even more institutional and passive shareholders in the dividend introduction. It would also still significantly reduce dilution.As a warrant holder myself, I was offered a fraction of a share for each warrant I own. I would like to buy more shares so I could keep my same exposure to the upside, given our low valuation, and that sort of buying would also help the share price. The total amount raised, if you wait until 2024, is less than 1 month EBITDA at recent gold prices. Why not reap the benefits now and lower the cost of our capital? The share price will benefit with the increased liquidity and ETF ownership.And also perhaps some potential note holders that Caldas Gold is supporting are still warrant holders from the GCM note issue like myself. They might appreciate this gesture as well and encourage them to participate in the Caldas Gold offer. We could price it off the actual vol in GCM stocks once the warrants are listed. This would be an objective alternative to adjustment in the warrant strike price of the dividend every quarter and would likely be easier to facilitate. I realize this is something that you might already be considering. I don't want to put you guys in the call on the spot. So maybe the Board of Directors can discuss it at their next meeting, and let us know the decision via a press release.
Well, thanks, [ Asheef ]. I'm not sure I heard a question there. But...
Well, I'm giving you many ideas, I guess. It isn't really a question.
Yes. No, and I appreciate the ideas and, certainly, the ideas you've shared in the past. And we do take them seriously and evaluate them. I would like to mention the one thing with respect to the Gold Notes. There is dividend protection in the Gold Notes for the Gold Note holders. What has allowed us to commence paying the dividend now is the capacity that we've built up under our restricted payments basket through the very strong earnings we've had over the last couple of years, which has enabled us to commence paying the dividend now.
Okay. I'm not concerned about the Gold Note holders. I'm just saying the warrants don't get adjusted is my issue.
Yes. And the warrants are deep in the money. We've started seeing warrants being exercised. You did make a comment that insiders had exercised warrants earlier this year, almost implying as if they knew this was coming. I can tell you that was not the case. We have very strict policies clearing people when it comes time for trading in the company's securities. So...
And I would say, Michael, with respect to that, I mean you indicated that you guys were thinking about dividend in March, and I believe the Chairman sold his warrants in May. And he sold them actually a week before you guys announced a hostile takeover bid for Guyana Gold. So I don't know what the big ends are, but [indiscernible] necessarily being used.
Yes. No, [ Asheef ], I don't want to be confrontational. I just really would like to say...
I don't either. I'm just looking at that...
Yes. No, we -- even -- those are, in hindsight when you look at things, coincidences. Certainly, the bid for Guyana Goldfields came up very quickly and came up as a decision after the exercise of the warrants by our Chairman. So -- but in any event, I'll reflect on what you've suggested this morning. We continue to look at the opportunities for us to improve the capital structure, and we'll take into consideration your comments this morning.
Can we agree to take it to the Board?
Absolutely. The Board considers everything. So absolutely.
Our next question on the line comes from Derek Macpherson.
Mike, congrats on a solid quarter in a tough situation. And on the dividend policy, just on the dividend policy. Obviously, the $0.015 a share quarterly is a very sustainable number for Gran Colombia relative to your overall free cash flow. I guess, what was the -- what was sort of the thought process behind this, sort of the $0.015? And then what factors is the Board using when they're setting the dividend or when they might set future dividends?
Well, I think the -- having looked at the comparison to peers and seeing the average quite simply around 1%, we started -- we took that as our entry point. $0.015 rounds out nicely on a quarterly basis and $0.06 a year. I think as we move forward, we'll continue to look at, obviously, the re-rating of our stock. We stay at 1%, should cause us to improve the dividend as we go forward. We wanted to set that $0.015 a quarter looking at, as you said, a starting point that is sustainable regardless of what happens in future gold prices. So if gold goes down for whatever reason in the future, we don't want to suddenly have to react and reduce the dividend.So we've entered into the dividend-paying program cautiously. We'll continue to monitor as we go forward. And we recognize that announcing an increase in dividend is always a nice thing to happen, announcing a decrease in the dividend isn't, and we prefer to be on the first case rather than the second case. So it's just -- it's getting our feet in the water and starting to move forward.
Yes. Okay. And that makes good sense. I mean it is a very small part of your overall free cash flow, so it's -- there is room to expand, I guess, in the future, which is, as you said, the favorable way to go.The -- you mentioned it briefly in your prepared comments on costs and capital spending. Obviously, you've updated your guidance for the balance of the year on production-wise. Can you give us a little bit of color on where you expect to see sort of capital spending and sort of cash costs come in half 2?
Yes. And the second -- as I said, our trailing 12-months cash cost is around $684 an ounce. That's up from the $661 an ounce we had in 2019. I think we'll end up in the second half of the year somewhere between those 2 as the impact of April's production shortfall on, certainly, on Segovia gets watered down by steady performance in the second half of the year. And we do remain cautious on guidance as we always do. Certainly, this COVID situation is still an ongoing daily challenge at the operational level. So we don't want to get too far ahead of ourselves, but we certainly are seeing a nice steady progression right now at both operations and especially at Marmato, starting to see a bit more of a pickup in the second half of the year as the access to workers there grows.From a capital standpoint, we've recently updated our comments on exploration. We expect to do our full exploration at the mine site this year. On the regional program, we're probably only going to be doing about 50% of the meters that we had planned. We've been doing a lot of due diligence in the first half of the year to identify the targets we're going to go after in Segovia. So we're excited to get on to that in the second half.From a capital spending standpoint, I think the run rate is going to continue to be about the same as we've seen in the first half of the year. We still have a number of projects we're working on, including the work that we're doing to bring the Carla mine, our fourth mine, onto production for later this year. And that will give us now 4 different mines in the Segovia and Remedios area in operation, which, again, is exciting. We've been working on Carla for the last 10 years. It's been in our portfolio and very pleased to see that come on. So I think our second half sort of capital spending will be much like the front half. It's just that we'll be shifting a little bit more to some newer development projects.
And then with respect to Marmato, obviously, there was plans for some significant operating improvements of capital spending at Marmato this year. And based on your guidance, that seems to be a little bit -- your adjusted guidance, that seems to be perhaps delayed. Is the same capital going to be spent there and just be a little bit more back-end loaded?
It's going to be more back-end loaded. I think if you look at the PFS, you can -- we'll certainly be getting on to the initiatives that were outlined there. And the key things in the second half of this year, and they'll continue on into 2021, will center on the upper existing mine. The expansion of the plant from 1,200 to 1,500 tonnes a day, the development of Level 21 in the transition zone, also going over and starting to develop in Echandia and bringing in some new equipment to help us mine more effectively and reduce dilution, are all key pillars in the expansion plan in the second half of the year in the upper mine. In the Deeps Zone, a large part of the work in the second half of this year is going to focus around establishing the EPCM contractor and process and more detailed schedules. There are some additional upgrades to some of the work, almost the feasibility level that we'll be doing as part of the design and planning stage. So things will start to take shape quickly, and then we'll get into more of the capital spending on the Deeps Zone in 2021 once the design and planning phases are out of the way.
[Operator Instructions] Our next question on the line comes from Sid Rajeev.
Mike and Lombardo, pleased to see the results despite the drop in production. It definitely seems like you have been able to ramp up production. That said, the rising number of COVID cases in Colombia and also Peru, Venezuela, it's all a little bit concerning. How does this impact the development time lines of Marmato? I know you just talked about Marmato a little bit, but do you mind giving us some time lines on it on your expansion plans there?
Sure. Lombardo?
Yes. Well, Marmato, as you know, we have 2 mines there really. The upper mine, which may be -- we are doing a revamping of the upper mine. We have to optimize the mining method. We have to attack with Echandia and the transition zone. We are improving the capability of the labor force. And also the lab -- the quality of the lab, a lot of operational improvement that we have to do in the upper mine in order that the next year, we can fulfill what is in the PFS, which is a production around from 35,000 to 40,000 ounces of gold per year.In the lower mine, there is a lot of work, which is preparation. For example, the main contractor -- engineering, procurement, construction management contractor will be -- that contract will be awarded in late September. The idea is to start to mobilize the contractor in November and put in place all the labor force. Mobilizing a contractor for an EPCM job is a little bit complex, especially taking into consideration that we do not believe that the situation with the COVID will be normalized for that date.Another thing that we are doing in the lower mine is the tailing aspect of a lower mine. Tailing is always a complex aspect of any project. So at Marmato, it's a very mountainous area. So we have to be careful to comply with all the requirements of the environmental health authority plus international requirements. So we are going to hire an IP or a QA/QC for the tailing development.The other thing which we are developing in Marmato is just to start devising what kind of contractors are we going to use there because this -- there are some limitations in Colombia in the capability of some contractors. So first of all, we have to be careful in doing that. And the other thing, which is the people who are going to come form the project management team have to be a very well-trained group of people. Not all of them we are going to find in Colombia, so we have to have some expat working in that team. The integration with the project management team and the EPCM contractors and other tasks that we have to do very well with many, many projects fail or have overhead cost or break the schedule because that kind of interface does not work properly.I don't know if you would like to have more information about that.
No, that's good. That's very good. Just maybe one more question. Obviously, on the Juby Project, it's an advanced-stage asset. It's a new asset for you. How do you plan to -- how do you foresee development of this project?
Well, initially -- yes, Lombardo, do you want...
Well -- go ahead, Mike. No, no, go ahead.
Yes, I was going to say, initially, we are working right now with the consultants to upgrade the mineral resource statement to align with the current 43-101 rules. We should have that soon to be able to publish. With COVID and various other things we've been working on, we haven't had a lot of time yet to get up to the community. That's in our near-term plans to start to engage. Again, we want to -- we basically are assembling our Canadian team, if you will, to be able to start working on the review of all the technical data that comes with Juby. There is an enormous amount of data. We're looking at various means of how we're going to analyze that data.And really, this year, used the money that came with Juby was about $300,000 to carry out those studies. And then that will put us in a position where next year, we'll be much more informed about the size, the scale and the scope of a drilling program that we'll want to take. There are a couple of known pits that already have significant amount of resources. During our due diligence, we started doing some initial work, trying to get more understanding of what those pits could look like down the road. It's given us some objectives for our drilling programs that we want to try and achieve. And there's a couple of additional areas along the trend that haven't really been explored that have some really nice potential for some higher-grade material as well. So we're really going to use this next 6 months to fully digest before we start drilling and then get into the drilling part of the project next year.
Okay. So I guess it's fair to say that the spending is going to be minimal in Juby. How about 2021, do you have some budget for Juby there? Is this just for -- to get an idea of the free cash flows of Caldas, just to see how that [ fares with ] Juby.
Well, we -- I think it's premature for us to sort of come up with how much we'll spend on drilling. It will depend, obviously, on what we see. I think we like to think of something in around the $5 million level. But we've also been looking at a couple of opportunities for us in terms of how we'll fund that. For the first time ever, we've got even an opportunity for flow-through financing with a Canadian project. That might be something that we'll consider as well when the time comes. But we'll make that decision after we get through the data and see what we want to accomplish next year.
I'm showing no further questions.
Yes. Lombardo, I have one question from [ Nick Pickard ] coming in through the web portal that maybe you can help with. Looking at Carla, what's the expectation of production that we think we'll get out of Carla? And will it help fill the capacity at Maria Dama? And maybe I'd add to that is just maybe more generally, we are processing right now around 1,200 tonnes a day. What will we do to be able to get up to the 1,500 tonnes a day capacity at Maria Dama?
All the element to start to put Maria Dama on a stable processing capacity of 1,500 is in place. So you will see starting in this month, Maria Dama, we are going to process in a stable way 1,500 tonnes per day. Carla is going to start in November, second part of November. At the beginning, it's going to be 5,000 tonnes per day with a grade from 5 to 7 grams per tonne. And we are doing -- we still are doing some drilling in Carla. And also, we are doing some development. So Carla is going to help. There's no question about that.And Maria Dama is not going to be a problem. To expand Maria Dama for 1,500 to 2,000 is not a big deal. There's not a lot of capital expenses related with that. The mill is in place. Probably you can add some thickener. Probably you can add some -- we don't have to add anything about crushing. So it's not a big deal, in other words.
All right. So Richard, any other questions on the phone?
I'm showing no questions at this time.
All right. Well, we'd like to thank all of you for joining us this morning. Appreciate your interest in the Gran Colombia story. We'll keep you posted. We have more news coming out about drilling over the next several weeks to a month. And obviously, developments in the Caldas Gold story is it's rounding out its financing and turning the corner into the expansion project. So exciting times ahead and a great gold market to do this, and so thank you very much for joining us this morning.
And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.