Mandalay Resources Corp

TSX:MND

Earnings Call Transcript

[Operator]

Good morning. My name is Shamali, and I will be your conference associator today. At this time, I would like to welcome everyone to Mandalay Resources Corporation's Q2 2021 Financial Results Conference Call. Joining us on the call is Dominic Duffy, President, Chief Executive Officer and Director of Mandalay Resources. Also on the call today will be Chris Davis. [Operator Instructions] Please note that this conference is being recorded.This call contains forward-looking statements which reflect the current expectations or beliefs of the company based on information currently available to the company. Forward-looking statements are subject to a number of risks and uncertainties that may cause the actual results of the company to differ materially from those discussed in the forward-looking statements. Factors that could cause actual results or events to differ materially from the current expectations are disclosed under the heading Risk Factors and elsewhere in the company's Annual Information Form dated March 31, 2021, available on SEDAR and the company's website.I will now turn the conference over to your host, Dominic Duffy, you may begin.

[Dominic Duffy, President, CEO & Non]

Thank you, Shamali, and good morning to everybody. I'd like to welcome you all to our second quarter 2021 conference call. As the operator mentioned, Chris Davis, Vice President of Exploration and Operational Geology is joining me.Mandalay released its second quarter 2021 financial results at market close yesterday. You can find the consolidated financial statements and MD&A on the Mandalay Resources website and also on our profile on SEDAR.In the second quarter, we reported solid operational and financial performance that was mainly prompted from the Youle vein in Costerfield operations. The site produced [ 42,820 ] ounces of saleable gold, equivalent at a cash cost and all-in sustaining cost of $653 and $1,009 per ounce gold equivalent produced, respectively.On a consolidated basis, the 28,843 salable production ounces of gold equivalent during the second quarter was the company's highest results since Q4 2017 and marked the fourth consecutive quarter of production increase. Through to the first half of the year, Mandalay continued to build on the strong momentum generated since [indiscernible] and delivered 57,519 ounces gold. This places the company firmly on track to meet our 105,000 to 117,000 production guidance for 2021.For the remainder of the year, we're anticipating further increases in our production, driven mainly by [indiscernible]. This will be realized as we continue to advance development along the low levels, we're going to project it to be higher. And we're also anticipating stope production in deeper levels of the Aurora zone during the fourth quarter of 2021.From a financial point of view, Q2 revenues were consistent with previous quarters at $51 million, which are supported by an average realized gold price of $1,793 per gold ounce, and [indiscernible].During the 6 months of the year, we grew our consolidated revenue to $104 million, a 24% increase compared to the same period last year. During Q2, the company generated $23 million of adjusted EBITDA resulting in an EBITDA margin of 45%. And a year-to-date adjusted EBITDA of $49 million. Mandalay earned $11.5 million or $0.13 per share in adjusted net income during the second quarter, marking our sixth consecutive quarter of profitability.As compared to our Q2 2020 results, consolidated cash and all-in sustaining costs were approximately 13% and 9% higher, resulting in $960 and $1,342, respectively, per saleable gold equivalent ounce this quarter.One of the main reasons for this is a fact that local currencies strengthened against the U.S. dollar in Q2 2021 as compared to Q2 2020. And also the cost associated to the [indiscernible] and lower production levels at Björkdal. Specifically on the foreign exchange, during the second quarter of 2021, the Aussie dollar and Swedish krona appreciated against the U.S. dollar by 17% and 13%, respectively, as compared to Q2 2020. The net result from those FX movements accounted for approximately $3.4 million in additional costs during this quarter.During the second quarter of 2021, the company generated $12.7 million in free cash flow, which included our quarterly $3.8 million payment towards Syndicated Facility leaving $51.4 million owing as of the end of the quarter, With quarter ending cash balance of $39 million, increasing from the ending cash balance of $29.9 million as of the end of the first quarter.The company remains on par to have cash balance past our total debt and look to be net debt free by the end of the year. This is very pleasing first half of the year. As the company continues to generate stable free cash flows, the main strength of our balance sheet significantly improves access to capital in order to grow our business to the benefit of [indiscernible] near time.I would now like to turn to our operations. A large part of the strong quarter was due to continued high grade ore from Costerfield, which average grade of 9.9 grams per tonne of gold and [indiscernible] mining process. This resulting in Costerfield generating $23.4 million quarter revenue, $55.3 million through to June, a 28% increase as compared to the 6-month performance of 2020. As for adjusted EBITDA, Costerfield posted another strong quarter of $15.8 million and $37.3 million during the first 6 months of this year. Looking ahead, we're anticipating further production improvements over the third and fourth quarter of this year as [indiscernible] production begins to be the more predominant [indiscernible] plant.Shifting to Swedish operations. Second quarter production [indiscernible] Björkdal continues to deliver at a steady pace. However, the grade is lower than the previous quarter. This was only due to stoping lower and lower grade areas of the mine during the second quarter. We expect gold grade to be high grade levels in Aurora and brought into production towards the end of the year.We also have to overcome a few hurdles of different [indiscernible] over the -- over several weeks, which unfortunately resulted in lower [indiscernible] in the plant. The combination resulting in total pre-gold production of 10,941 ounces. Cash and all-in sustaining costs were higher at Björkdal at $1,338 and $1,766 per gold ounce, respectively, versus $1,078 and $1,352 per ounce during the same period last year. This was also related to the worse foreign exchange movements and lower gold production during the quarter.Quickly on the financial side. All of the above resulted in quarterly revenue of $22.5 million and $6.5 million adjusted EBITDA, which is in line with our previous quarters. Lastly, our Q2 results also included 3,049 gold equivalent ounces sold from the mineralized waste material at Cerro Bayo. This trial operation was able to generate a tiny sum of $5.4 million in revenue and $1.8 million in adjusted EBITDA.I'd now like to invite Chris to speak on our recent exploration developments. Chris?

[Chris Davis]

Thanks, Dom. Since the initial announcement of the newly discovered Shepherd zone in April, we followed in June with an announcement of some interesting gold grade intercepts, extending the Shepherd zone along the 400 meter strike zone.One of the most exciting points about Shepherd zone is that it is comprised of 2 parallel structures, the East and the Western veins. Both are located to the north of the central corridor of Costerfield and situated just below the currently planned depth to extend of the Youle development. The Eastern vein now has been traced over 300 meters of strike length and approximately 100 meters in vertical extent with mineralization remaining open to the north and south. Drilling highlights include 172 grams per tonne gold over a true width of 27 centimeters and 69 grams per tonne gold over a true width of 1.1 meters. This includes 406 grams per tonne gold over a true width of 14 centimeters. As for the Western vein, it has been traced over 400-meter strike and approximately 100 meters vertical extent. This also remains open to the south end of depth. Drilling highlights include 34 grams per tonne gold over a true width of 3.2 meters, 713 grams per tonne gold over a true width of 10 centimeters and 19 grams per tonne gold over a true width of 4.8 meters, including 657 grams per tonne gold over a true width of 13 centimeters.Since the Shepherd release in April, drilling within the area has slowed down due to a lack of appropriate drill platforms. Capital development has been initiated to establish an underground platform capable of adequately drilling below Shepherd and along the southern continuation of the zone. This is anticipated to -- that the platform -- sorry, it is anticipated that the platform will be established in the second half of September, after which drilling in the Shepherd zone will ramp up again.Looking forward to the second half of 2021 at Costerfield. Several drilling -- drill testing projects that have been put on place -- put on hold due to the Shepherd drilling are being restarted, along with new programs such as the Brunswick deeps drilling and Margaret drilling.At Björkdal, the first round of the Lake Zone and Main Zone extension drilling was completed in late June. The results were excellent as the program has extended veining approximately 300 meters further to the east and aimed towards the objective of elevating gold grades within the Björkdal [indiscernible].Some of the drilling highlights include for the Main Zone, 174 grams per tonne gold over a true width of 0.5 meter, 6 grams per tonne gold over a true width of 8.8 meters and 105 grams per tonne gold over a true width of 0.2 meters. For the Lake zone, 226 grams per tonne gold over a true width of 0.2 meter, 25 grams per tonne gold over a true width of just over a meter and 4 grams per tonne gold over a true width of 4.1 meters.Linking these targets is a Central Zone extension program, which began in Q2. Drilling is expected to be completed on this program in Q3. Further drilling of the Lake Zone and Main Zone is currently being planned, and will most likely follow the current Aurora extensional drilling, which will be ongoing during the third and fourth quarters of 2021.Thank you. That concludes the exploration update. And I'd like to hand back to Dominic. Dom?

[Dominic Duffy, President, CEO & Non]

Thanks, Chris. Based on our current financial trajectory coupled with the exciting exploration potential, I believe that the company's underlying value hasn't been truly reflected by the market. Before opening up to questions, I just wanted to thank the continued commitment of our employees and contractors. Thank you to everyone. And this concludes our call. I would now like to open the line for questions.

[Operator]

[Operator Instructions] Our first question is from Kevin Tracey with Oberon Asset Management.

[Kevin Tracey, Analyst]

I'm happy to hear that Björkdal will improve later this year. I'm hoping you could help me think about kind of the big picture of Björkdal. And if I looked in the past, I think when the asset was bought, the original target was to reach 60,000 ounces of production. That was ultimately achieved in 2017, I think cash costs in that year around $800. And at that time, the old management team had a target, I think it was 70,000 ounces of production there and cash costs below $800. So clearly, that's kind of -- our results have gone in the wrong direction since then.I'm hoping you could maybe just help me understand what didn't go according to plan. And given the recent exploration results, what should we expect for 2022? Is that 60,000 to 70,000 ounces, $800 type of cash cost, something that's achievable with these recent exploration results? Or just -- yes, how should we think about that asset?

[Dominic Duffy, President, CEO & Non]

Yes. So the -- we did, as you mentioned, a few years ago achieve the 60,000-ounce production [indiscernible]. However, plans did change, and we realized that there wasn't much longevity, did open pit. So all of the focus was given on the underground production. And so we -- in 2020, we -- sorry, 2019, we stopped production in open pit. So that did have an impact on the overall production, but concurrently with that, we were ramping out the underground production rate.So this year, we do anticipate producing 1 million tonnes of production from underground. The problem with Björkdal vein is that it's a quite variable mine within the areas here, mining at any 1 point. So in Q2, we were mainly starting from lower grade stopes. And that will carry through most likely [indiscernible] Q3 as well. However, we are moving to high-grade areas in Q4.It is a massive mine. And so there's definitely not a lack of production in terms of longevity through the mine. We have a 10-year mine plan in front of us. So the issue is not the mine life. The key is getting the production higher and the grade higher as well. So with the exploration results, as Chris mentioned, this will have an impact on the future of the mine, because we are having high-grade results as you look at the Northeast down deep. So to the north or east of the mine, continuation down deeper, Main Zone is reporting high grade.In the Lake Zone, hopefully, we will be within this high-grade area next year. We are currently working on our budgeting process. So it's a little uncertain at the moment. Unfortunately, with the Main zone and Central Zone, the results -- good results we're getting there. That's actually outside of our mining permit. So we would not be mining in those areas next year. So we have to expand the mining permit out past that area.So we're currently -- the reason we are doing -- part of the reason we're doing this drilling now is obtaining the information to apply for the extension of the mining permit, which we don't envisage [indiscernible]. But it probably takes at least a 12-month period, would anticipate [indiscernible] extension we got, which was early this year. We got the approval for that.So we are expecting further increases in production tonnage next year. We are expecting increases in grades next year because we will be falling into production in the lower levels of ore which gives us a high grade from down there and possibly into the deeper levels of the Lake Zone as well. So I can't commit on this call to actually the production levels we would be producing, but I would hope that we would -- we could reach over 60,000 ounces next year, and definitely along with that, our cash and all-in sustaining costs will be dropping.I think the best way to think of Björkdal, I can't state what our budgeted cost would be for next year, but just assuming close to fixed cost operations, so the cost being similar to what they are now, but with a higher production rate, we should be able to figure out where we anticipate our cash and all-in sustaining cost could be next year.

[Kevin Tracey, Analyst]

Okay. All right. And then on your website, there's a link to a mining journal article written last month, noting that at Costerfield, if you're able to get to a 7-year mine life, then you might be interested in expanding your plant capacity pretty significantly. Just given the recent exploration results, I'm just wondering if you could talk a little bit about your expectations for adding significant reserves by the end of this year and just talk through more about the timing of that potential project?

[Dominic Duffy, President, CEO & Non]

Yes. So we definitely -- we won't reach a milestone this year because of the issues we're having with drill platforms being able to get the adequate [indiscernible]. So we will have that remedied with major platform established in September this year. So what we have realized previously on Shepherd Zone, we really haven't grown Shepherd much more. And that this year because we just can't get the angles to drill deeper or further inside.So for our reserves and resources, we will be drilling, going deeper and further to the south towards the end of September [indiscernible] Shepherd continues to grow. If you look at the long sections on Shepherd, you can see that it's significant grade with the highest grade deposit we have found in Costerfield over the last 12 years. So I anticipate it will definitely be placed in depletion, adding a bit more. And then next year, we'll be able to take the Shepherd Zone a lot heavier, too.We will be out to see what the expenses look like this year with the gold platform we have, probably might be out of this reserves [indiscernible] that we will be going. I would hope that it does continue next year and correct if we could reach our estimated 7-year [indiscernible] in front of us, then that would be a time that we could probably really justify an extension of the process and plan to upgrade our production.So we are able to upgrade it from the underground production. We just [indiscernible] time. So we currently have quite a large stockpile on surface but it's hard to justify [indiscernible] when you only have 4 years of reserve currently.

[Kevin Tracey, Analyst]

Okay. And the last question, if the exploration works continue to go well at Shepherd and you see these very high grade, is that something you might mind -- you would accelerate the mining there? Or would it be after the 3 or 4 years that you had left at Youle?

[Dominic Duffy, President, CEO & Non]

No, we will actually be seeing the Shepherd down by the end of this year. Because on the press release, you can see the long section of the Shepherd and the further to the south, the higher up Shepherd is because of [indiscernible] Shepherd is much lower to the north and then higher up to the south.Unfortunately, we haven't even been enough to drill the Shepherd Zone march towards the south. So some of that southern section [indiscernible] development along the Youle vein. So by year-end, we'll definitely shut it [indiscernible] definitely the best vein that we have mined, which does mean less ground support and much easier mining and higher production rates and we anticipate similar from Shepherd.The main difference being that Shepherd [indiscernible] to 1 year-or-so, you would anticipate so that we could get even higher [indiscernible] as opposed to one in Youle.

[Operator]

[Operator Instructions] And our next question is from Ernie [indiscernible] who is a private investor.

[Unknown Attendee]

Congratulations on the great quarter once again. And I've got a couple of questions here. My understanding based on some e-mails that I had back and forth with Mr. Nguyen is that your milling circuit is pretty much maxed out. The ball mills are maxed out, the cyclones are maxed out. And so -- could you go over what the possibilities are to expand the processing circuit at Björkdal? Is it a new mill or perhaps ore sorting? And what's the trade-offs on those?

[Dominic Duffy, President, CEO & Non]

Yes. So that is something that we are currently looking at. [indiscernible] 2 years ago. We are looking at again time because [indiscernible] original feasibility and upwards because of technology, and it's becoming a lot more commonplace in mining these days. We do feel that, that may be options to be able to do that cheaper than there were several years ago. But currently, with that, we are looking at the possibility of updating the whole process in the facility, which is the best option going forward.I can't commit to either of them being done next year because we still [indiscernible] through our budgeting process. But the ore sorting is definitely much cheaper than upgrading the processing facilities. So the last study we had was a little $11 million for the ore sorting and [indiscernible] low-grade 0.6 gram per tonne material [indiscernible] a gram per tonne.And that we do have a lot of low-grade stockpiles, and that would probably be the most likely where we would go down the first half. So [indiscernible] $20 million for an upgrade of our processing facility at Björkdal. We have a ball mill and rod mill, would most likely have to upgrade -- add an additional mill to the circuit. The crushing circuit is currently adequate for it, but we would have to change out all the pipelines to increase capacity there. Our gravity circuit is pretty much maxed out as well. So that would have to be upgraded.Flotation is fine, we completed that back in 2017, and I think we upgraded that. So that could definitely handle quite a bit more capacity. But you probably will be looking at $20 million to carry out that whole theme, and we are -- we are currently in the process of costing out the conversion of our rod mill to a ball mill, which will get us a little more capacity but that's not significant.

[Unknown Analyst]

Okay. And my understanding is that the reason for the lower overall recovery is because the Aurora zone contains more pyrrhotite. Have you considered using what high magnetic separation as technology for separating out the pyrrhotite?

[Dominic Duffy, President, CEO & Non]

I don't think there is pyrrhotite within the mineralization to justify that part of the measure. But we still -- we're not 100% certain as to what that [indiscernible] within the flotation part of the circuit. So it probably is one of the [indiscernible]. We are starting to see [indiscernible] several weeks where the recoveries were impacted, that [indiscernible] several week period. So -- whereas we have been progressing constantly from [indiscernible] it is unlikely that it is something associated to the higher -- whole of Aurora and it was just a localized area, possibly within Aurora with larger levels there or it could also be related to [indiscernible] as well. But we are trying to get a high handle on exactly what we have. It was quite a significant [indiscernible] period, and it was related to the [indiscernible].

[Unknown Analyst]

And then at Costerfield, I've got a question on antimony. I noted the -- that you produced or that you had produced 858 tonnes, but only sold 644 tonnes. The price of antimony shot way up. So why didn't you sell the other 200 tonnes or how much antimony do you have in stock right now?

[Dominic Duffy, President, CEO & Non]

We don't have -- we really don't have that. It's just the planning of the shipments. So it's whether they are leased before the end of the month or after the end of the month, but we always have very [indiscernible] and then it goes off. The reason relative gold sales were higher than antimony is because we actually have a high gravity gold as well. So more than 50% of our gold goes -- go to small refineries in Australia.So all of the gold is -- a lot more of the gold is sold if [indiscernible] China with gold [indiscernible]. But we did -- antimony price took off at the start of the year. That then fell back again, but we see over the last several weeks, it has lifted back to the extremely high levels again, which is -- we're very happy with that.

[Operator]

And we have reached the end of the question-and-answer session. I'll now turn the call back over to Dominic Duffy for closing remarks.

[Dominic Duffy, President, CEO & Non]

Thanks, operator, and thank you, everybody, for joining us today. We really look forward on updating the market on our progress as we go forward, both on production, which we expect to see lift over the coming quarters and also a continuation of updates from Chris Davis on some strong exploration results we're getting at both of our sites. Have a great day, everybody, and stay safe. Thank you.

[Operator]

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.