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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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Welcome to the Gran Colombia Gold Q3 2021 Results Webcast. My name is John. I'll be your operator for today's call. [Operator Instructions] Please note, the conference is being recorded.And I will now turn the call over to Mike Davies.
Thank you, John, and good morning and thank you for joining us today for the Grand Colombia Third Quarter 2021 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 an update on our performance in the third quarter and the first 9 months of 2021, and then Lombardo will be available as we open things up for the Q&A session.Before we proceed with this 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.Our strategy at Gran Colombia was focused on growth through diversification while returning value to our shareholders through our monthly dividend payments. In June, we took a major step forward with the acquisition of the 85% interest in the Toroparu Project in Guyana that we did not already own. Not only does this add geographic and project diversification in our assets and our future revenue profile, but it will give us exposure to copper down the road.In August, we closed our $300 million senior notes financing. And at the end of September, we had approximately $330 million of cash, and the gold notes have been fully retired. Together with the existing Wheaton stream facility that came with Gold X, the construction of the Toroparu Project is fully financed. Our technical advisers have been completing some of the mine optimization studies related to the design of future operations of Toroparu, and we expect we'll be releasing the results of an updated mineral resource estimate and PEA in December.Meanwhile, at our flagship Segovia Operations, everything is moving along as expected this year, and we have narrowed our production guidance for 2021 to between 203,000 and 210,000 ounces of gold. Our growth initiatives in Segovia focus on exploration and development, expansion of the Maria Dama plant to 2,000 tonnes per day, and the addition of the new polymetallic plant are all progressing well.We also remain committed to the health and safety of our employees. And in the third quarter, we were the first mining company in the Antioquia region, where Segovia is located, to secure COVID-19 vaccinations to immunize our employees and their families. We are very pleased with the progress that we have achieved so far this year.Last night, we released our results for the third quarter and the first 9 months of 2021. I'd like to remind you that the results for 2020 reflect our model operations now owned by Aris Gold on a consolidated basis, whereas in 2021, with the loss of control of Aris Gold in February, the results from our model are now equity-accounted, making some of the year-over-year comparisons a little like apples and oranges.In mid-October, we pre-released our production results. Segovia had another solid quarter with 50,000 ounces of gold produced. With gold prices still above the $1,800 level, our cash costs of $845 per ounce, our adjusted EBITDA for the third quarter was about $40 million. Net earnings in the third quarter was $25.3 million, and adjusted net earnings came in at $14.4 million. Operating cash flow amounted to $26.7 million in the third quarter. And our free cash flow turned positive, coming in at $12.1 million.As we noticed in our press release last night, the tax authority in Colombia has applied a modification in the local tax reform that will see our refunds for VAT claims related to 2021 delayed until the first half of 2022. While it does have a short-term impact on cash and cash flow metrics, it is expected that we'll receive these refunds in advance of the due dates to pay our 2022 corporate income tax installments. In the grand scheme, this is all part of our working capital management and will not impact the execution of our strategy.Over the next several slides, I'll take you through some further details behind our performance this year. We currently have 98.5 million common shares issued and outstanding. At yesterday's closing price of $5.66 per share, our market cap stood at $557 million, up 17% from where we were at the Q2 webcast in mid-August. We also have a fully diluted share count of about 132 million shares. And in October, we announced we have renewed our normal course issuer bid for another 12-month period, so we have it in our arsenal should circumstances arise that necessitate we use it to defend our stock. We have seen strengthening in gold prices of late, and we're pleased to see that is now being reflected in gold company valuations.We have continued to pay our monthly dividend at CAD 1.5 cents per share throughout this year, and our next payment takes place on Monday. Our dividend rate represents about a 3.2% annual yield at current share prices. Through the end of September, we have returned a total of USD 8 million to our shareholders through our monthly dividend program.In September, we were pleased to add Canaccord Genuity to the list of analysts covering the Gran Colombia story. Canaccord's initiating report has a buy rating with a target price of $9.50 per share. Red Cloud and Fundamental Research also continue to actively cover our stock, and target price is also well above the current share price. These reports all reaffirm our belief that a significant rerating potential exists in our stock, and we are confident that our strategy to grow through diversification is the path to unlock this potential as we strive towards 400,000 ounces of gold production by 2024.Our current stone operating asset in Segovia Operations in Colombia continues to be ranked as one of the top 5 highest-grade underground global gold operations. In the latest study published in the Kitco commentaries in September, Segovia continued to rank #4 with a mine head grade of 12.8 grams per tonne in the first quarter of 2021. This level of grade at Segovia is not an anomaly. Since we acquired Segovia in 2010, we have produced a total of 1.45 million ounces of gold in this historic mining district at an average head grade of 13.65 grams per tonne. With over 100 years of mining history in Segovia, a solid mineral resource base and a well-funded ongoing exploration program, we are confident that Segovia will continue to be in production for more than the next 10 years.I mentioned earlier that Segovia had a solid third quarter, producing 50,000 ounces of gold, which brings its first 9 months total gold production to 151,000 ounces. October's production of approximately 19,500 ounces brings the trailing 12 months total gold production at Segovia at the end of October to about 203,700 ounces, up 4% over 2020's annual production. With gold production through the first 10 months of 2021 of 170,560 ounces, we remain on track to meet our annual guidance for Segovia, and we've narrowed the range between 203,000 and 210,000 ounces for the full year.In the third quarter, Segovia processed an average of 1,487 tonnes per day at an average head grade of 12.6 grams per tonne, yielding the 50,000 ounces of gold and just over 52,000 ounces of silver. This brings the plant's processing rate for the first 9 months of this year to an average of 1,513 tonnes per day with head grades averaging 12.7 grams per tonne.The expansion of the Maria Dama plant at 2,000 tonnes per day is proceeding as planned, and completion is now expected in the first quarter of 2022 after experiencing some pandemic-related delays in receiving steel deliveries. I mentioned earlier that October's production is about 19,500 ounces of gold, grades averaged 13.8 grams per tonne in October, and the daily processing rate increased to an average of 1,576 tonnes per day for the month, a great start to the fourth quarter and the reason we are confident that we will meet our production guidance for the sixth consecutive year.Turning to revenue. I'll first remind you that our consolidated revenue in 2020 and prior years included the Marmato operations. Revenue in the first 9 months of 2021 included only 1 month of Marmato's revenue, prior to loss of control, which was $5 million.Looking at just our third quarter revenues, 2020 included $13 million from our model, while 2021 did not include any revenue from our model. The other $9 million decrease in our third quarter 2021 revenue compared to Q3 last year was largely driven by lower spot gold prices, which reduced our realized gold prices by about 5% to an average of $1,784 per ounce. And for the first 9 months of 2020, consolidated revenue included $30 million from Marmato. Segovia's revenue increased by 9% from $261 million in the first 9 months of 2020 to $284 million in the first 9 months this year, reflecting a 5% increase in the average realized gold prices to $17.97 per ounce, a 3% increase in the volume of gold sold and a $1.7 million increase in silver revenues.In light of our production guidance for this year and the continuing strong gold prices, which have reached the mid-$1,800 level in the last couple of days, we expect solid performance in revenue for the fourth quarter of 2021.We mentioned in previous quarters that our cash cost at Segovia saw a step change from the third quarter of 2020. When we responded to the higher gold price environment and increased the rates we pay our contract miner and the small-scale miners in Segovia, we have not seen an increase in rates since 2017. If you look at our cash cost per ounce for Segovia over the last 4 quarters since the change was implemented, Segovia's cash cost has ranged from $767 to $845 per ounce sold and has averaged $816 per ounce over that period. In the third quarter of 2021, we saw Segovia's cash cost increased to $845 an ounce, impacted by a change in the mix of material processed to our plant with a slightly higher proportion sourced from the higher cost, contract miner and small-scale miner sources than typical. We continue to expect Segovia's cash cost to hover in the low $800 per ounce level based on our typical blended material that we process in Segovia.Our all-in sustaining cost in the third quarter of 2021 at Segovia increased to $1,218 per ounce from $1,031 per ounce in the third quarter last year. The increase was in part due to the higher cash cost in the third quarter this year that I mentioned on the previous slide. In addition, our spending on sustaining CapEx increased from $9.2 million in the third quarter last year to $11 million in the third quarter this year represent about a $44 per ounce increase in our all-in sustaining cost.And our social contributions at Segovia increased by $650,000 in the third quarter this year compared to the third quarter a year ago, representing an increase of about $15 per ounce in our AISC.For the first 9 months of 2021, our consolidated AISC increased compared to the same period a year ago for very similar reasons to those experienced in the third quarter. Our all-in sustaining costs in the first 9 months of 2021 includes 3 full quarters of the increased cash cost level at Segovia compared to only a partial quarter in the first 9 months of last year.In 2020, our capital programs at Segovia were disrupted by the onset of the COVID pandemic and the national quarantine in Colombia, and many didn't get started until late in the year given the appearance that our AISC was increasing as 2021 progressed -- sorry, 2020 progressed. When in reality, it was more of a timing issue. Our capital programs this year are running at a more normal frequency, and we have increased our investment in exploration and development compared to last year as part of our growth strategy.Our social contributions this year are about $1 million higher at Segovia due to financial support that we have provided to a new [ pharma ] operation in Segovia acquired in 2020 as part of our ESG initiatives in the district.Our adjusted EBITDA in the third quarter of 2021 was $40 million, down from $56.7 million in the third quarter a year ago, which included $2.4 million from the Marmato operations. The lower gold prices and the higher cash cost at Segovia that I've mentioned earlier were the key factors contributing to the decrease in Q3's adjusted EBITDA. When you consider the first 9 months of 2021, Segovia's adjusted EBITDA was $134 million, down from about $140 million in the first 9 months of 2020 due mainly to the increase in cash cost.At the end of the third quarter of 2021, our trailing 12 months adjusted EBITDA totaled $177 million compared with $188 million last year, although $4 million of that decrease was related to Marmato's adjusted EBITDA included in the 2020 results and the balance primarily relates to the changes in Segovia's cost structure and cash costs starting in Q3 of 2020. That being said, we do expect that our full year 2021 adjusted EBITDA will continue to be more or less in the same range as our 12 months trailing number of $177 million.Looking at our cash flow metrics. Our consolidated operating cash flow in the first 9 months of 2021 amounted to $53 million, included $10 million used by Aris Gold prior to the loss of control in February. In the first 9 months of 2020, our consolidated operating cash flow was $107 million, including about $5 million provided by Aris.If you exclude the impact of Aris Gold activities in the current prior years, our operating cash flow in the first 9 months of this year increased by $39 million compared to the first 9 months last year, and this can largely be attributed to an increase in income taxes paid in the first 9 months this year to $67 million and $46 million paid in the first 9 months last year. There has also been changes in our noncash working capital items, including the delay in receiving 2021's VAT refunds that's had about a $12 million impact on our free cash flow this year. And the reduction in adjusted EBITDA from the Segovia Operations also had an impact in our operating cash flow this year.Despite these factors, the reality is that we continue to be a solid operating cash flow generator, and this has been more than sufficient to fund our capital programs, pay our dividends and meet our debt service.Our free cash flow through the first 9 months of 2021 is lower than the same period a year ago in part due to the decrease in operating cash flow but also due to an increase in capital spending: both the sustaining CapEx I mentioned in the discussion on our AISC as well as nonsustaining CapEx of $6.8 million related to growth initiatives at Segovia and another $2.4 million of nonsustaining CapEx related to our Toroparu Project.Since 2018, we have focused on our strategy of deleveraging our balance sheet. In the third quarter of 2021, we used a portion of the net proceeds from the senior notes financing to fully retire our gold notes, more than 2 years ahead of schedule. At the end of September, we had about $330 million of cash in our balance sheet, of which $268 million represents the remaining net proceeds from the senior notes financing and is earmarked for the Toroparu Project and general corporate purposes. We also have another $138 million of financing available for Toroparu's development and construction to a stream facility with Wheaton that had been arranged several years ago by Gold X. We're happy to say that we are fully funded to build the Toroparu Project based on our expected capital cost for the project.We're also pleased to report that both S&P Global Ratings and Fitch Ratings issued B+ ratings for the new senior notes that were issued in August.Over the next couple of slides, I'd like to comment on a few of our initiatives to grow through diversification. As I noted earlier in this webcast, we're very fortunate to own 100% of one of the top 5 highest-grade underground global gold mines in the world. One with a rich history of production, it's still not fully explored or exploited to its full potential. We announced earlier this year that we are executing a 60,000 meters drill program at Segovia in 2021, our biggest annual program to date, to continue to expand reserves and resources near mine and in mine at our producing mines and to explore our highest priority targets in the brownfield former-producing mines within our title to identify future mines. The program has already yielded high-grade intercepts, which we have reported earlier this year, including the discovery of some new veins. We're currently assembling another drilling update, and we expect to release further results from this program before the end of the year.I've also highlighted with a red star on this map the location of the Guia Antigua project owned by Denarius in which we own 27%. Denarius started to drill campaign on this target in mid-2021 and should be announcing results in the near future as well.Another initiative focusing on growth through diversification is our new polymetallic plant at our Segovia Operations. We purchased this plant earlier this year from a third party for $7 million and spent another $1.2 million to complete construction by the end of the third quarter. The plant is in the commissioning phase and is expected to produce its first concentrate in the fourth quarter of this year.Our Maria Dama plant produces about 120 tonnes per day of solid concentrates called leach tailings, which have been stored in our Bolivia tailings storage facility for years. The polymetallic plant has a daily solids processing capacity of 200 tonnes, and we'll receive fresh production of leach tailings from Maria Dama plus a portion of leach tailings stored in Bolivia. We've also installed a washing plant to treat the Bolivia tailings, which are then fed to the polymetallic plant through a transportation system.Ultimately, the payback from those investments will be achieved in 2 ways. First, we will gain additional revenue and profit from the recovery of commercial quantities of zinc, lead, gold and silver contained in the tailings. And second, according to our Environmental Manager, Erwin Wolff, this initiative is a clear example of the evolution in the processing of mining waste, which will dispose of the waste in a harmless way, thereby, reducing eventual environmental impacts and eliminating potential health for us.There's no better way to explain our ability to grow through diversification but in the acquisition of the Toroparu Project in June of this year and a share-for-share exchange for Gold X Mining valued at approximately USD 187 million. Based on Gold X's 2019 PEA, Toroparu is one of the largest undeveloped gold deposits in the Americas with over 7 million ounces of measured and indicated resources and another 3 million ounces of inferred resources.In 2020 and early 2021, Gold X completed a drilling program, which identified a 4-kilometer strike length that structurally controlled high-grade gold mineralized structures. Since closing the acquisition, we've been working with SRK American to complete an updated mineral resource estimate and PEA for Toroparu that incorporates this new information. After completing various studies, including mine optimization for the design of the eventual mining operations, we expect that we'll be in a position to announce the results of this work in December.In the meantime, Lombardo is already leading our effort to carry out a number of preconstruction activities, including hiring a project team and key contractors, preparation of the camp facilities, revamping of the local airstrip to enhance logistics and access to the site, design and civil works related to the camp, road and water management, electrical network design, permitting, design of our initial ESG initiatives and various other studies associated with the environmental matters of this very important project for Gran Colombia.We also wanted to draw your attention this morning to our newest equity investment this year, Denarius, a new company listed on the Venture Exchange earlier this year created through an RTO. Gran Colombia is the largest shareholder with a 27% equity stake in the company and is providing managerial and technical assistance as Denarius gets off the ground with its exploration programs. In addition to its 2 Colombian projects, Denarius has joined the rank of companies targeting the Iberian Pyrite Belt in Southern Spain, one with the largest concentration of massive sulfides in the world with its acquisition in April of the Lomero Project, a former producer with a historic resource of over 20 million tonnes containing 3 grams per tonne gold, 62 grams per tonne silver, 0.9% copper, 0.9% lead and 3% zinc.Fully funded, Denarius has just started at 23,500 meters drilling campaign to drill the Lomero Project, initially validated some historic holes within the existing mine and later carrying net extension drilling. We see Denarius as another exciting opportunity to enhance value for our shareholders as it carries out its program to this exploration projects to bring them forward as key mining projects down the road.In previous webcast, we've highlighted the integral nature of ESG to our operating style at Gran Colombia. It has been a critical element to maintaining our social license to operate. And our inaugural sustainability report, a copy of which can be found on our website, demonstrates our commitment to have a positive impact on the communities in which we live and operate. This is clearly being demonstrated for one of our latest initiatives in Colombia where we have administered over 12,000 vaccines to immunize almost 100% of our workers and their families. We're the first mining company in the Antioquia region of Colombia to undertake such an initiative, and it's been great to see that the response from our employees has been terrific.With that, John, I think we can open things up for the Q&A session.
[Operator Instructions] And our first question is from Carey MacRury from Canaccord Genuity.
Just on the Toroparu PEA, I know you're still working on it, but is there any comments you can make about what you're looking at versus what Gold X had previously looked that?
Yes. I think at this stage -- and we're a couple of weeks, hopefully, or 2.5 weeks away from having the results available. And then in early January, we'll get the full document published on SEDAR. I think it's safe to say at this point that we're still looking at CapEx that would be within the number that was in the 2019 PEA that Gold X had published, which we're going to have a long life asset with more than 20 years of production. We're looking at the mine optimization right now with the combination of open pit mining to start and then later on, getting into underground mining study to access the higher-grade mineralization at depth that was identified through the Gold X drilling. I think these results in the PEA will ultimately be an improvement from what we saw in the July 2019 PEA from Gold X, so.
Sounds good. In terms of once you had the PEA done, what's the next steps then before a construction decision is made?
Lombardo, do you want to speak to that?
Yes, yes. Could you repeat, please, the question?
What -- after we get the PEA done, what will be the next steps that we'll go through to get construction started?
Yes, yes. But let me answer [ part questions ]. The project -- the idea of this project is to build it on a fast-track basis. That's the reason because we are initiating preconstruction activity, building the camp, the airstrip, the water management works. And also, we are selecting the contractors to build the project. We are going to use 2 GCM contracts. One will be for all the civil work related with the mine, and the other contract will be related with processing plant and the facility related with the processing plant.We are going to be ready to award those contracts in the first quarter of next year. The idea is to have the first commercial operation in the first quarter 2024. We are expecting to have only execution phase for the project of around 26, 28 months. Just the same scheme that we've done and we'll follow it with the Aurora mine. We are sending the project management team for -- in January 2022, the team will be fully assembled, and also, the contractors will be selected. So we are confident that we can build this plant on a fast-track basis on a 28 months maximum.
Okay. Great. And in the...
[indiscernible]
Sorry. Go ahead.
Excuse me?
Yes. Carey, was that clear or? I know Marmato's line is obviously having a little trouble from Colombia.
Yes. I guess the other question is just, obviously, there's a lot of cost inflation in the industry. I know your costs are up this quarter. You talked a little bit about the cost going forward. But I guess, what should we be expecting in terms of 2022 on the cost side?
Yes. I think we're working on our 2022 projects and plans at the moment, and we'll have our guidance early in the new year, but I wouldn't expect significant changes from what we've seen in the last few quarters in terms of average cost. We'll still be in the low $800s for cash cost. And ideally, depending on the amount of exploration we do around the mines, which I think will be consistent next year as what we've done this year, we'll still be in sort of about $1,100 to $1,150 AISC number for Segovia as we go forward.
Yes. We are not expecting any surprises in Segovia. The production will continue to be about 200,000. The cash cost is going to be around $800,000 -- $800. And of course, the capital expenses related with the exploration will continue. We will expect next year to have another 60,000 meters of drilling with the exploration process. 20,000, we allocate it to take it to the brownfield, and 40,000, we allocate it to the mines, the existing mines.The -- our expectation, in fact, is to have a good result. We are expecting good result with our brownfield program in the sense that we have said that we build -- can build a new mine in 2024. And we are expecting that, that new mine will be located around a base that we call Cristales. So we don't have -- we don't expect any surprises in Segovia. Segovia will continue to be a stable operation.
[Operator Instructions] And Mike, I'm seeing no further questions at this time.
Yes. Okay. I've got one question that's come in through the web. Congrats on the good quarter. Wondering what our view is on grades at Segovia going forward and if the increased tonnage of Maria Dama will lead to higher production in 2022. That's the first part.I think, as we said, we're still finalizing our plans for next year, including throughput, based on the timing of the expansion of the plant. It's just a little early to give too much guidance. But as we said, we've processed at Segovia historically over the last 11 years now an average of 13.7 grams per tonne this year, so averaging about 12.7. We are still, as I said, looking at our plans for this year, but we don't see significant reductions in grade because we're expanding production tonnages. So we'll follow up and give more guidance on that early in the new year once we finalized the mine plan for next year.And then the other part of that question was what kind of cash credit we expect to come given the current market prices once the polymetallic plant is up and running.And again, we'll provide more information on that early in the new year once we've seen the first concentrates coming through and we've got our plant set for expected volumes next year.All right. Well, John, if there's no other questions on the line, we'd like to thank everybody for joining this morning. Stay tuned. We've got further press releases coming up over the next several weeks related to both the results of Toroparu as well as the results of our drilling program. Next dividend's paid on Monday and the next dividend declaration announcement of growth funding. So thank you very much.And if you need to reach out to us, please do so, and we'll follow up with any questions that you have. Thank you.
Thank you, ladies and gentlemen. That concludes today's conference. Thank you for participating, and you may now disconnect.