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Welcome to the Gran Colombia Gold Q3 2020 results webcast and conference call. My name is Vanessa, and I will be your operator for today. [Operator Instructions] Please note that this conference is being recorded.I will now turn the call over to Mr. Mike Davies, Chief Financial Officer.
Great. Thank you, Vanessa. Good morning, and thank you for joining us today for the Gran Colombia Gold third quarter and first 9 months 2020 results webcast. With me on the webcast this morning is our CEO, Lombardo Paredes.As is customary, I'll first go through our prepared remarks regarding an update on 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, 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.Gran Colombia is committed to supporting the communities in which we live and we work. Community and health are 2 important pillars in our ESG strategy. We're continuing to take steps during the COVID-19 pandemic to protect our workforce in order to operate safely. We've increased security and protection protocols, and we have installed facial recognition technology with entry and exit biometric detection points in our operations.We've also installed antibacterial sanitization stations and handwash stations in our operations, and we have provided training to all of our personnel to ensure our workers follow the correct protocols. In addition, our office staff in Medellin and Toronto continue to work remotely.Supporting the community has similarly been an important focus area during the pandemic. We have donated sanitation kits and facemasks to the various communities surrounding our Segovia and Marmato operations. And another item that has been well-received in the community has been the continued donation of protein grocery kits to vulnerable families in our communities at both Segovia and Marmato.Earlier this week, I participated on an ESG finance panel at the Colombia Gold Symposium. It was a great event, and Paul Harris did a terrific job. One thing that really caught my attention, and Paul has since circulated it on Twitter, was this chart prepared by Skarn Associates benchmarking gold mine CO2 emissions in 2019.I was surprised and pleased to see how well our operations at both Segovia and Marmato placed in Skarn's ranking of 200 or so gold mines globally. This is an area we are diving into at the moment as we march towards the preparation of our first CSR report, which we expect to publish next year. ESG is something that Gran Colombia takes seriously, and I thought it was worthwhile sharing this information with you this morning.Last night, we released our third quarter and first 9 months 2020 results. Our production results, which we pre-released back in mid-October, show that we had, for all intents, returned to normal after some weakness in Q2 adapting to implications of the COVID-19 pandemic.With gold prices soaring in Q3 of 2020, we reported 5 new quarterly highs in Q3, including revenue, adjusted EBITDA, adjusted net income, operating cash flow, and free cash flow. When it comes to adjusted EBITDA, operating cash flow and free cash flow, it's worth noting that our 9-months results in 2020 equal or exceed our results for those metrics in all of 2019. Needless to say, we're very pleased with the results we reported last night.We also announced some exciting news for our shareholders last night. Following the second quarter results, we announced in August that we're initiating a dividend policy. The first dividend paid in mid-October was CAN0.015 per share. At the time, we announced we would pay a quarterly dividend, and that rate, it was about a 1% yield.Considering the strength in our balance sheet and the continued growth in our free cash flow, after studying our peers, we decided we would not only increase our dividend rate, but we would change the payment frequency from quarterly to monthly. As such, we are moving from paying CAN0.015 per quarter to CAN0.015 per share monthly. That's equivalent to CAN0.18 a year at our current share price. That's about a 3% yield.Based on our current outstanding shares, the annual total cost of this increased dividend is equal to about 10% of our trailing 12-months free cash flow. We've had good response to paying the coupon on our Gold Notes on a monthly basis, and we like the internal discipline. So it made sense to us to replicate that in our dividend. We think our shareholders are going to like the feeling of getting a monthly dividend check from the company.I mentioned at the outset that production returned to more normal levels in Q3 and were slightly better than the third quarter last year. While we're still slightly behind last year's performance, with 19,391 ounces reported now for October, we're on track to land in the middle of our revised production guidance for the full year, somewhere around 220,000 ounces.And Segovia had a strong third quarter, with 51,555 of gold production and an average head grade of 15.1 grams per ton, bringing its average head grade to 14.7 grams per ton through the first 9 months of 2020, which includes some impact from the lower-grade stockpile material processed early in the second quarter, when the COVID-19 quarantine interrupted operations. Segovia is on track to produce just under 200,000 ounces this year, which is terrific considering the COVID-19 situation in Q2.Marmato rebounded nicely in Q3, reporting 6,900 ounces and up 79% from Q2. Grades also improved about 3 grams per ton in August and September, and October's production, with about 2,500 ounces and grades at 2.84 grams per ton, keep it on track to produce about 24,000 ounces this year and getting into good position for 2021.Cash cost is probably the 1 area people will take note of on our Q3 results. At Segovia, Q3's cash cost rose above the $700 level to $722 an ounce. 3 things factored into this. First, considering the substantial increase in spot gold prices and the expectation they are here for a while, it became apparent that we had to adjust the rates we pay our contract miner and the artisanal miners in our title. These rates were last adjusted in mid-2017, and the new basis has an adjustment mechanism to adapt to rising or falling gold prices going forward.The other 2 factors impacting Segovia's cash cost in Q3 were the ongoing cost of the COVID-19 protocols and the higher production taxes, which are tied to spot prices for gold and silver.At Marmato, the higher cash cost grounds reflected an increase in operating development costs in Q3 in the transition zone to prepare areas for future extraction of material to feed the expanded upper zone plant in 2021. COVID-19 costs and higher production taxes also affected Marmato's cash costs in Q3.Our all-in sustaining cost results in the third quarter reflected the increase in cash costs as well as incremental G&A associated with the Caldas Gold public company and additional capital spending at Marmato related to its expansion plan.With the rise in 2020's gold prices at a faster rate than our costs per ounce have increased, our all-in sustaining cost margin in Q3 was $753 per ounce, compared to $500 per ounce in the third quarter last year. This is 1 of the factors fueling our growth in free cash flow. We've always had strong leverage to the gold price.And as I mentioned earlier, our third quarter adjusted EBITDA of $56.7 million was a new quarterly high. Our trailing 12-months adjusted EBITDA at the end of September now stands at $185 million and is up 26% over 2019.The gold price and the operating results and some finetuning of our working capital management at Colombia drove our third quarter operating cash flow and free cash flow results to new quarterly highs.Given some cyclicality in our cash flows associated with income tax, installments and capital programs in Colombia, I always like to look at how our free cash flow is performing on a trailing 12-months basis. At the end of September, our trailing 12-months free cash flow was up to about $89 million, 46% over 2019.And on this chart, you can see the quarterly progression of our cash and debt balances. These are only the balances of Gran Colombia and do not include Caldas Gold's $43 million of cash balance at the end of September, which we include in our consolidated balance sheet. Caldas Gold's cash will be used for the Marmato project, and its debt will be non-recoursed to Gran Colombia. This was one of the reasons we spun out Marmato.And what you can see is that Segovia's free cash flow is fueling the growth in our cash position, and our debt is coming down as we pay the Gold Note on a quarterly basis. With a strong balance sheet, we're comfortable we can pay the increased dividend while maintain cash to fund the growth in Segovia or paying down debt faster.And looking at our capital structure, the main thing to point out is that we've purchased just over 600,000 shares over the last 2 months under our renewed normal course issuer bid. We'll continue to use the required -- use it to require support for our stock, and we believe the increased dividend should also be a catalyst for our share price.We're continuing to repay our Gold Notes each quarter, but the most notable thing on this slide is the announcement by Fitch Ratings in October that for the second time in less than 3 years, Fitch has upgraded our rating, which is now a B+. Fitch commented that the upgrade reflects the improvement in Gran Colombia's capital structure due to the strong free cash flow and capital raising that has led to substantial debt repayment.They also mention positive strategic decisions over the past 12 months have given us a stronger balance sheet and a lowered risk, including the spinout of Marmato to Caldas and the planned spinout of Zancudo to ESV Resources. We're pleased with the upgrade decision, as it recognizes the substantial improvement we have achieved in our balance sheet the last few years and the solid footing that we stand on for going forward.The company currently has 6 diamond drill rigs in operation at the Segovia operations, with 4 rigs operating underground carrying out resource definition of the Providencia, Sandra K and El Silencio mines -- 1 rig operating from Level 3 of the Sandra K mine targeting the down plunge extension of the southern ore-shoot, and of the El Silencio mine, and 1 rig on surface testing the easternmost end of the Providencia mine.In October 2020, the company commenced its regional exploration campaign delayed from earlier this year due to COVID-19 restrictions. With 2 additional rigs operating from surface and a 3,500-meter drilling program expected to be completed by the end of the year at the brownfield Vera vein located east of the Sandra K-Cogote vein system.The regional exploration program, which will continue in 2021, represents a large diamond drilling campaign focused on the most prospective brownfield targets within the 24 veins at the Segovia operations which are not currently being mined.Over the last 10 years, we've added approximately 3 ounces of mineral resource for each ounce produced. Our exploration objective is to continue to grow the resources at Segovia while incrementally adding to our reserves to ensure we have sufficient near-term line of sight for mine planning. We have several high-grade priority targets in the regional exploration program, and we'll continue to provide updates on our progress as we proceed.Our equity portfolio includes 4 projects, each at different stages of exploration. We announced in late September that we intend to spin out Zancudo, currently under option to IAMGOLD, to a new silver-focused vehicle called ESV Resources. The spinout is still in process as ESV completes an RTO, and once concluded, we expect to have about a 36% equity interest in the new vehicle, to be renamed Denarius Silver Corp. ESV closed its $8.4 million private placement earlier this week, for which we subscribed for $3 million. The proceeds are being held in escrow until the RTO is completed.At Juby, Caldas recently released a mineral resource update and is readying an exploration program for next year. GOLDX announced in late October that they've commenced a 12,000-meter drilling campaign to add to their resources on the Toroparu Project. And Western Atlas is awaiting the results of its drilling campaign completed this summer at its Meadowbank Project. We continue to see opportunity to create value on our share price through the re-rating of these 4 investments as they progress in their individual growth strategies.And on this last slide, before we open things up for the Q&A, I'd like to summarize a few key takeaways. We have a superior free cash flow yield and a strong balance sheet. We've increased our dividend and sit in the top quarter of dividend gold paying stocks. And we are unique in that we pay our dividend on a monthly basis. We are undervalued and have the potential for re-rating. We're in a position now to explore the full potential of our high-grade Segovia title, recently kicking off the regional drilling campaign to explore the other 24 veins.I'd like to thank you for taking the time on this call this morning to listen to our update. And with that, Vanessa, we're now able to open up for the Q&A session.
[Operator Instructions] I do have a question in queue. I have a question from Sid Rajeev with Fundamental Research.
Strong balance sheet, buying back shares, increasing dividends. You also mentioned you're planning to prepay some of the debt. Any color on that, on how much you plan to pay down next year?
We haven't concluded a decision at this point yet as to any early redemption amounts yet for next year. We've got $35.5 million of the Gold Notes currently outstanding, and at current gold prices, we would be using about $52 million that we had raised through the sale of that gold in the market to repay the debt.So we are taking a look for next year as part of our budget before the end of the year to determine a course of action to potentially go through the process of doing some early redemption, but there's no urgency for it. But we do see it as an opportunity as our cash flow continues to build the balance sheet, that it would be a logical return that would favor our shareholders if we did so.
As you pointed out, the cash cost in Segovia did stand out in the quarter. Do you think the rate we see now is kind of a normalized rate for Q4 and 2021, or any chances it can go down?
I think it's sort of normalized again at this point. The history of working with the contract miner and the artisanal miners has always been one where we know that we are competing with illegal mills that buy materials. So with the very significant increase in the gold price, we felt that after keeping costs pretty steady since 2017, it was time to make a change to ensure that we reward them for the higher-grade material that they're bringing, and we are seeing an improvement in grades from the artisanal miners.And then Lombardo mentioned to me this morning, I mean, we've now got over 50 contracts in place for artisanal mines within the Segovia title, so we'll see some more supply coming from that down the road. And it's -- I think as I said, we've pretty much stabilized. There is a mechanism that above a certain price, we will see the price continue to go up, but we'll also see it come down, so it'll float as the gold moves up and down. So no additional surprise to come as we go forward. It's really just fine-tuning in light of this very significant rise in the gold price this half of the year.
And then resource drilling programs at Segovia and Marmato, are you planning to update the rates of the estimates in Q1 or wait for more drilling?
No, the plan was Segovia will be -- repeat what we've done each of the last few years. We'll update the reserve and the resource and announce that in March next year. At Marmato, we are expecting that we will update both the reserve and the resource with the drilling that we're doing. That'll come in the first half of next year, and we do expect to see increases in the reserves and resources based on the drilling that we're doing at Marmato, which is ongoing.Marmato released some updates earlier this week on the drill program, not only extending the main zone by 300 meters along strike, but infill drilling on the new zone and 2 wildcat holes, testing another zone of demonstrated mineralization. So it continues to grow the more we drill, and we're planning to put an update out, as I said, towards the -- between March and June of next year.
Just 1 more question, if I can squeeze it in. Can you expand on the exploration or the drill program at Juby next year?
It's still sort of an early stage. I think we're focused on resource growth at Juby. Within pit resource that we reported in early October, it fell in line with our expectations from the due diligence work. It came down from the original 4 million ounces of global resource only because the new 43-101 rules require to constrain yourself within pit resources. So we haven't lost any ounces from the old resource. It's just a more constrained reporting of the ounces.But we're going to continue to follow up on drilling on Golden Lake, where Tahoe had some good conversion of drilling into additional resources from their 2018 work. We're also going to go over and test the Hydro Creek-LaCarte and Big Dome area. There's some interesting information over in that area that it's not really been fully drilled, and we plan to get out in the title and do some other reconnaissance work as well.So we've got a fair bit planned for next year, but we're still finalizing timing details, and we've got to get some exploration permits, which is a couple month exercise. So we'll really get orientated to it right now. So we'll have more detailed news once we've got more concrete plans ready to roll out.
I show no further questions in queue. Mr. Davies, do you have any closing remarks?
No. I do have a few questions come in through the Web portal. Let me see. Matt Ritzel from Red Cloud wants a little bit more elaboration on the sustainability of the dividend, et cetera. Certainly, we feel that the dividend is sustainable at this level. As I said, it's about 10% of our trailing free cash flow over the last 12 months.We can expect that that free cash flow on a rolling 12-month basis should improve in the fourth quarter with a continuation of gold prices at the current levels and the fact that we essentially are transitioning from paying interest and gold premiums on the Gold Notes. As those are coming down, that cash flow is being now directed into funding the return that we're giving our shareholders. So we're very confident that we'll be able to continue at this level and very excited to move it to a monthly basis to allow people to get a paycheck every month.Steve Lorimer has a question about the drilling campaign objectives. Last year, the drilling increased the reserve slightly more than was removed. Is the objective to build this up to a 10-year gold mine reserve? I think if -- I would say a 10-year gold reserve would be something that we'd love to have, but with this high-grade, narrow-vein underground style of mineralization, it would be very expensive.And what we do believe is that the Segovia title in general is very underexplored. There are 27 known veins, but we've never tapped into the other 24, where we've got data going back 100 years that demonstrates the historical results from mining in the grades. So we feel this is the time to really fan out and start exploring those other 24 veins in a much more detailed regional drilling program, identify the areas of future mining, and we'll continue to devote a significant portion of our annual drilling to infill drilling those resources and upgrading.We would certainly like to get the reserves up to at least 1 million ounces. I think it's going to take us more than 1 year to do that. But the real drive I think moving forward is to really fan out and add resources in this title in a significant way, and then go back and infill to keep a near-term line of sight on mine planning.Another question that's come in deals with do we continue with the share repurchase under the NCID in Q4? And if so, how many have been repurchased since September 30? Well, under the normal course issuer bid, we've bought 270,000 shares in October. Given that we've been in blackout during the early part of November, we haven't bought any. I think at the moment, we'll continue to use the normal course issuer bid to support the share price.If we do see down-dip days, we're definitely in the market buying, as we have been in September and October. But we really are devoting an allocation of free cash flow more so now to this increased dividend. We feel that's the way to reward shareholders and support our stock moving forward.And then 1 last question, and maybe I'll put this 1 to you, Lombardo. How do we see things moving forward at Segovia for any potential expansion of operations at Segovia?
Well, with the resources that we are getting out of our exploration program, we have to -- in the near future, which means the next year, we are going to concentrate our efforts, our money in the relevant infrastructure. We need more infrastructure [Indiscernible] where we have very good results in exploration. We have to concentrate our efforts in development of that mine too. Also, the same thing will apply for [Technical Difficulty]
Pardon me, sir. I'm so sorry, but you appear to be breaking up, sir. Is there any way to adjust your microphone?
No, no way. I have only 1 microphone. I have no noise around here. Okay, going ahead with it. We have a new mine, which is [Indiscernible]. We are developing that mine. We are in the planning stage. We're seeing that we have to increase our processing capacity. We are [Indiscernible], and probably we're going to do something next year on that. We will announce that when we are ready for that.Yes, in Segovia, we have the potential to increase our processing capacity, and probably the next stage is going to be [Indiscernible] to 2,000 tons per day, something like that, but it's too early to say that. We will announce that once we have ready all the preparations.
Thanks, Lombardo. I think 1 of the things to add to that, Lombardo was just commenting to me this morning that 2020 has been our biggest year of development spending in the mines in Segovia in our history, and that certainly is going to set us up well for being able to feed our plants and continue with the current level of production as we go forward.So with that, I don't have any other questions on the Web portal. Is there anything else, Vanessa, on the lines?
No, sir, I have no audio questions.
All right. Well, again, I'd like to thank all of you for taking the time to join us this morning and be part of the update on Gran Colombia. And if you do have any additional questions or follow up, please feel free to reach out to us. And stay tuned for continued announcements on exploration, and certainly keep an eye on our website for new information and developments as we go forward. Thank you.
And thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.