Aura Minerals Inc

TSX:ORA

Earnings Call Transcript

[Gabriel Catalani, Investor Relations Officer]

Good morning, all. Thanks for joining us to Aura's First Quarter of 2021 Earnings Release Call. My name is Gabriel Catalani, I'm Investor Relations Officer, and we also have here with us Rodrigo Barbosa President and CEO of Aura, and Kleber Cardoso, CFO from Aura. Rodrigo and Kleber will be presenting a few slides. The presentation is already available on our website. I'll share the link here via Zoom chat. And right after, we will open for a Q&A session. You can at any time post your questions here, via Zoom chat, and on our Q&A session, we will be reading the questions and Rodrigo and Kleber will be answering them. Rodrigo, the floor is yours.

[Rodrigo Cardoso Barbosa, CEO & President]

Thank you very much, Gabriel, and thank you for all attending this first quarter 2021 results. I'm very happy here again to be representing the whole team of Aura, sharing with all of you our results. Very proud of another record revenues, of record EBITDA results, which we will go through during the next slides. Before I jump in, again, as most of you know, that we do want to be one of the most trusted, responsible, well-respected and results-driven mining company in the Americas. We are glad to see that we are moving in the right direction, not only with the results, but also important recognitions that come from outside, such as being named as the Person of the Year in Brazil for the sector of metal, precious metals by one of the most recognized mining magazines, Brazil Mineral. We were very proud to receive this award in the name of the whole Aura team. First slide, and I will have a few more with more information, just as a summary of our first quarter, I would highlight a few things, as I mentioned to you. Record high revenues, that came from production, but also sales of gold that came from last quarter, Q4, production of Q4 2020, that was accounted only on the first quarter of this year. We also had a significant increase in copper price that come from 3 -- 2.7 last year, 70 per pound. Last quarter, we accounted at 3.84, and I would highlight that today, copper price is at 4.70. And so if that continues in that direction, we should be increasing revenues and gold equivalent ounces during along the year. Our EBITDA has reached USD 52 million compared to $50 million on last quarter, although production was lower than Q4 2020. We are very on track to meet our guidance. We are now at 25% of the guidance on the average that we gave to the market. We know that the first semester of 2021, due to the mine sequencing, it's at lower production compared to what we expect to produce during the second semester. If you add that on the higher copper prices, it continues to be at 4.70, 4.80, we should perhaps even pass and produce more that on our guidance on gold equivalent ounces. Another important step that we reached, it is very close to finalize the 30% increase in Aranzazu. We are reaching now 99,000 tons per month at the plant. And our objective is to be 100,000 tons at the plant, if not a little more during the Q2 and fully Q3 and also Q4. Our cash position during Q1 finished at $151 million, significant amount of cash, which allowed us also to pay a dividend above our policies. So we paid the $60 million of dividend, which gave our shareholders at 8.2%, 8.3% of dividend yield, one of the highest dividend yields on the industry and also in Brazil. Gold Road continued to increase production. Geology has shown some challenges in Gold Road. There were some house investments in geology that was postponed because of the COVID during last year. So we could not have enough information to be able to prepay the debt that we had the option to prepay with a discount by the end of March. The information we had at that time was not enough to have a very accurate estimate of production for '23,'24 -- 2023, 2024, 2020 future, which would be enough to serve the debt. So we decided not to prepay. We have a good plan for '21 and '22, but yet we are building up our vision for 2023, 2024, so we continue to invest in geology so that we have enough information to be able to build a long-term mine plan. We are very conservative and very strict on capital allocation until we have a very strong and very good long-term view. We will deal on the monthly basis with Gold Road.Almas, we regret during -- there's some bureaucracy that was delaying some of our rights to initiate construction, the surface rights. We entered with the legal lumina in the local judge by law. We have the right to do that. And the bureaucracy was impeding us. So now we have the right and we are mobilizing already our team to start construction of Almas in the upcoming weeks. Matupa, we signed the contract with Ausenco. We are now developing a pre-feasibility study. As I mentioned to you during last quarter, at Matupa we already have close to 350,000 ounces of inferred. We expect that can have the potential to significantly increase in the upcoming years, but we decided instead of increasing inferred to converting to reserves so that we can start construction by next year. So we hired Ausenco, we are now conducting metallurgical studies, conducting geotechnical studies, mine design and plant design, so that by the end of the year, we have a conversion to reserves, pre-feasibility study so that we can start thinking about construction early next year. The density of the drills is already enough and compliant with the 43-101, but we do need to do metallurgical, geotechnical, mine design and plant design as well. In the exploration, we recently published our AIF. We are very happy that we saw and we published a higher conversion for Aranzazu and also EPP. What we converted is higher than we depleted, so we are adding reserves more than we are depleting in both assets. In Minas, we just recently started more surface sampling on geology so that we can aim to increase reserves in the next 2 years. Almas also was added as reserves in our estimate, so we had a significant increase in reserves in Aura on a consolidated basis. Another very important good news for the investors, as we continue to increase our daily trading volume. Last year, before the re-IPO in Brazil, we were trading close to $200,000, $100,000 per day. After the IPO, we reached an average of USD 1 million to USD 1.5 million per day consolidated Brazil and also Toronto and the U.S. And then we are gradually and consistently increasing our daily trading volume, reaching values of $2.5 million, $3 million on average per day, and we expect to continue to increase that during the next upcoming quarters as we see still significant room to increase the awareness from the investors about Aura, either in Canada/U.S., but also in the retail market in Brazil. About copper and gold prices, gold price was hovering around Q1, $1,700, $1,750. Now we are trading at above $1,800, $1,850. It's important to mention that that happened also with all the excitement and an increase in share prices of NASDAQ and New York Stock Exchange and also in Brazil. There is an extreme amount of liquidity in the market, which can push inflation higher. More and more, we are now seeing information and analysts talking about concern on inflation and gold is a protection to inflation as well. And also, for some devaluation on dollar if that might happen in the future. Copper prices, as everyone is observing, it has significantly increased during the last couple of months. Even if you compare to last year, copper price has reached during the last year $2.50, $2.20 per pound. And now we are talking about $4.80, $4.70. And we have Aranzazu, most of the production of Aranzazu is on copper, and that will have important impact on the revenues and margins. And we expect to -- if that continues to maintain at this level, it can have a 10%, 15% impact on the revenues, and that goes straight to the bottom line on our margins on a consolidated basis. So I would invite all the analysts and all the investors to observe and analyze this interest impact that copper can have on Aura as a whole. On safety, before I jump into the production and then pass the word to Kleber on the results, we have a zero accident target. Unfortunately, we had low injuries, two injuries accidents, not severe, very low severity, but we continue to improve all our systems in order to reduce that and achieve the zero incident targets. Continue to do a safe ramp up in Gold Road. At Aranzazu we had no lost time injuries during the quarter. And as I mentioned to you, we are continuing to enhance our safety standards now with 3 operations, 4 operations, and then also coming in construction of Almas and then subsequently next year, Matupa. On COVID, we also -- that continues to be our main priority to test, monitor, implement and maintain our standards of social distancing in our operations. Brazil had had a worse part of the curve a month ago. We supported the local communities. We supported also the mayors, giving extra beds for hospitals, extra equipment, sorry about that, to hospitals. We continue to provide all the communities with tests and also medicines in order to treat the COVID. And also, an important information to share is, although we have had cases in our operations of COVID, we had to suspend the people. We have a tracker that we know and monitor everyone that had contact with each other, so we can isolate everyone. We don't have yet any case of internal spread of COVID in Brazil, which means that all standards are working satisfactory in order to prevent the spread within our operations. The people that come with COVID in Aura mostly come from outside and bringing it to our site, but we can rapidly isolate them, put them out a few days, and then we bring them back when they are already after 14 days. Gold Road, the United States leaves a completely different situation compared to the whole world. While Brazil, Alturas, Mexico is still ramping up on vaccines, United States has whoever wants to have vaccine in the U.S. has already had. So now what we are doing is encouraging everyone that does not showing up for vaccines or not feeling good to have vaccine, encouraging them to have the vaccine so that we can reduce significantly also the spread within our operations. In terms of impact in our operations of COVID, very limited. We have no need to interrupt production. As I mentioned to you, we have very, very fast detecting, isolating, so that doesn't have any kind of a spread within our operations and no significant impact on production. So as I was mentioning to you in terms of production, during the Q1 we achieved the second highest, 66.8 thousand gold equivalent ounces compared to 69 from last quarter. And I would remind the investors that also during this quarter, we don't have the highest grade of Ernesto and our mine sequencing would also forecast that first semester of this year, we would have a lower production. That was somehow offset also by a higher copper price. When you see operations by operations, you see Aranzazu with an increase from 19,000 ounces to 25,000 ounces in the quarter. That comes from an increased production that we increased 30%, but also a higher copper price. San Andres, we are gradually moving to higher recoveries and higher upgrades during the quarter and we expect that also to continue during Q2, Q3 and also Q4. And we're also now in San Andres in the dry season, so Q3 normally is when it rains more in our areas. EPP, as you can see, we had a significant decrease on production from 26,000 ounces to 16,000. That's mostly from Ernesto that had a higher grade in Q4 last year and significantly increased production. We don't have Ernesto during the first quarter, second quarter, we should come back on Ernesto partially Q3 and also Q4 and fully during 2022. In terms of cash cost, if you compare Q1 with Q4 this year, we had a cash cost of 751 compared to the same basis at 804 if you compare consolidated, including Gold Road. I highlight that at Gold Road we have a significant higher cost per ounce compared to the other mines, which is somehow driving up our cash cost on the consolidated basis. Isolated, and I will talk about Gold Road in the next slide, isolated in comparing Q1 and Q4 of 2021 and 2020 was slightly above cash costs compared to last quarter, although we did not have such a high rate from Ernesto, which is a very interesting result that also is supported by higher copper prices and also improvements on efficiency that we are doing all across our operations. In terms of guidance, we maintain the same guidance we gave to the market for the year, 250,000 ounces at as average, about 290,000 ounces as a high. That understanding if copper price would remain the same that we used on the first forecast. If we use the current copper price for the next upcoming months in our production, then our guidance would be around 277,000 ounces to 217,000 ounces. We will reveal this forecast by the end of Q2. In terms of cash cost, just going back to Gold Road, at Gold Road we are having some lower-than-expected grades. All the mine plant is being built and now we have a consistent model, we should see higher grades coming in in Q2, Q3 and Q4. Our cash cost of 1,500 in Gold Road, we should expect that to be lower during the next upcoming quarters. However, not significant. The main change we can have in Gold Road would be significant higher grades that we still are doing some investment in order to put in our mine sequencing. So it was a very good quarter. We now invite Kleber to go through on details on the results, and then I will come back with questions and answers.

[Joao Kleber Cardoso, Chief Financial Officer]

Thank you, Rodrigo. Good morning, everyone. Thanks for having us here. Next slide, I'm going to present a summary of the results for the first quarter of 2021. So on this page, we bring the main financial KPIs for the company. We are presenting here the evolution by quarter since the first quarter of 2020. So as we can see on the left side of the page on the top, net revenues have been improving quarter by quarter since the first quarter of 2020 and mainly since the third quarter. The first and the second quarter, as Rodrigo was saying, we had impact of completing our operations. And since the third quarter until today, the last 9 months, we were able to operate without major interruptions. And we reached record high revenues in each of this quarter. Q1 2020 in dark blue, we reported $116 million in revenues, and we are bringing here as well the column in red, highlighted in red, the last 12 months of revenues that we achieved $367 million by the end of March, but including also the revenues from the second part of 2020. So if you take just the last 9 months, our running rate in terms of revenues for a yearly basis would be closer to $400 million. Going to adjusted EBITDA, a very similar story. We see an evolution of EBITDA per quarter since the first part of 2020. And more importantly, a new level of EBITDA since the third quarter. It's been very consistent, $44 million in the third quarter, then $50 million in the fourth quarter and then $52 million now we are reporting the first quarter of '21. Bringing in total on the last 12 months to $166 million. And again, this is because we included Q2 of 2020. Otherwise, if you take our running rate, it should be between $190 million and $200 million in EBITDA considering only the last 9 months. When we go to the bottom and left side of the page, on the net income, the story is a little bit different. We come from a $58 million net income in Q4 2020, down to $14 million in the first quarter of '21. That's mainly due to noncash items that impacted both quarters. In the fourth quarter of 2020, we had -- the company recorded a $25 million gain related to deferred tax assets from Ernesto/Pau-a-Pique. And now in Q1 2021, we reported $8 million noncash loss due to the decision of not exercising the option to prepay the debt. So if you take those 2 noncash items, that makes most of the difference in net income between the previous quarter and the current quarter. And still if we take the last 12 months in net income, that would come up to $100 million. And then finally, in terms of net debt, we see an improvement in our net cash position, again, going from Q4 2020, $48 billion in net cash, which is $62 million in net cash by the end of March '21, despite some expenses that were above the average of the previous quarters. For example, taxes paid was $7 million in the quarter, exploration and expansion CapEx and OpEx added another $7 million in CapEx and OpEx, which I will show in more details in the coming slides. Here, we have our bridge between the adjusted EBITDA and net income for this first quarter of '21. So as we saw previously, the adjusted EBITDA for the quarter was $52 million. That includes $5 million in EBITDA related to ounces that were produced, shipped and sold in December 2020. But due to accounting rules, the quarter required just in January '21. So those $5 million were not recorded in Q4 2020, and we're recording into '21 and was a benefit for this quarter. Amortization and depletion, we had a $9 million expense. Interest expense on that was another $2 million. Income tax expense is $60 million, of which $9 million are current income tax expense or taxes that we end up paying in April, and $7 million were paid with tax credits that the company had, especially in Apoena and Aranzazu. Then another $8 million in expenses that are explained related to the fair value option loss, another $3 million related to FX coming down to $40 million in net income. And finally, we had a change in net cash bridge, which show -- as we showed, we started the quarter with $48 million in net cash. We produced $25 million in cash flow of cash, what we call cash flow from operations, which $52 million came from EBITDA. We had minus $5 million in deferred revenues. That was what explained the sales that we made in December, the cash we received in December, and had a negative impact on our working capital in January. Then we had $17 million in sustainable CapEx. That was above average. On average, we had the last 3 quarters $10 million in sustaining CapEx. This quarter was a little bit higher due to Gold Road that is still ramping up, and also, the construction increasing the activities in Aranzazu that consumed another $1.5 million in cash. Coming to a total of $25 million in cash flow, what we call the cash flow from operations, adjusted free cash flow from operations. And then on the right side of the chart, we had $7 million related to exploration expenses and exploration CapEx and also expansion CapEx that are investments for the growth of the business. Another $2 million in interest expenses, another $2 million in cash outflow minor items, FX and in the quarter reached $62 million in net cash and $151 million in cash and cash equivalents. And then subsequent to the end of the quarter, we had the payment -- dividend payment of $60 million in early April. So as you can see, even with the payment of the dividend, the company still was still able to end the quarter with a positive cash position. And with this, we end our presentation and open up to questions. Thank you.

[Rodrigo Cardoso Barbosa, CEO & President]

So thank you very much. I will have some questions, but before I read them, just to highlight the importance of our strong results, but not only the strong results, the consistency of -- since the pandemic has allowed us to resume operations at full on Q3, last year Q3, Q4, Q1 this year, breaking record high results and production. Our projects are in course. We are increasing capacity at Aranzazu. We are now mobilizing in Almas. This year, we should increase production by 20% to 40%. Next year, we have projects also coming in line. Almas should start production during the second semester next year. We'll have a higher grade of Ernesto, so production of next year should be above 300,000 ounces. So we are on track also to double our capacity [indiscernible], so to reach over 400,000 ounces in the near future. Our cash costs are also on track. We continue to reduce our cash. We have good news that was not expected, such a higher copper price that will definitely boost our results if that continues to be on that level. So we are on track, consistently growing, and building the projects that we announced during the IPO. So not only that, we continue to have very strong balance sheet. We paid dividends. We continue to be a negative net debt, even after the dividend, which was a significant amount of $60 million and providing our shareholders at 8.3% of our dividend yield.

[Rodrigo Cardoso Barbosa, CEO & President]

So first question I have here goes exactly on that direction. It's Rafael Gama from [indiscernible] Metals. He says, good morning. First of all, I would like to congratulate the whole management team for the strong results. How much of the dividend paid in 2021, should we expect to be kept to be paid in the following years? We do have a dividend policy, which is the 20% of EBITDA minus the current CapEx. We do respect that policy. However, the Board has autonomy together with management to decide a higher dividend if that's the case, and we see that's the best capital allocation such as we did during the first quarter. Another question I have is from Caio Ribeiro in Credit Suisse. Thank you for the opportunity. My first question is related to capital allocation. Company's net cash position increased further this quarter. And my question is, could you look to accelerate investment in any other project as a function of that? Perhaps the second stage of expansion of Aranzazu to increase processing capacity, 1.6 million to 1.7 million tons per year? And secondly, given strong copper price, could you look to hedge a greater portion of your volumes in the near future market to lock down higher copper price? So first question is capital allocation. We don't think we can advance too much on our expansion. That is not limited by capital, but has been limited by geology and groundwork that we need to do in Aranzazu in our operations. Of course, we are doing our efforts to speed that up, but I don't think that we will have the higher prices and higher cash flows. Might not have significant impact in terms of accelerating more what we have in terms of the projects. Also, copper hedges, we are constantly monitoring prices. We do not like to speculate on copper or gold prices. Normally, we do not do long-term hedges. We understand that investors that invest in Aura wants to have exposure either to the gold and copper prices. However, there is a significant investment. There's a significant capital allocation that will depend on cash flows that come from either of our operations, gold or copper. And we know at that level, we will guarantee that level of debt or investment, then we would consider. But not on the day-to-day as a long-term hedge. Yuri from XP also is asking. Congratulations. I would like to be reminded what we should expect about San Andres grades going forward? Also, can you give us some updates on potential M&A? San Andres, we should continue to increase slightly and gradually grades along the year. Gates and also recovery, but not significant really this year. Perhaps next year we can also have a little higher grades compared to this year. So that will be constantly and gradually increasing grades and also recoveries. M&A, we continue to actively monitor the market. We analyze many companies. What I can share with the market is that last year there was a wide gap between seller and buyer expectations. Gold price has increased too fast last year, and that created a significant gap of price expectations in seller and buyer. As gold prices now becomes more stable, that gap is narrowing down. And the whole industry, as we can see, should see more M&A during the year. We are actively looking. We have no negotiation, nothing yet, but it's something that as all the investors know, is something that we would like to have if it will add value to our story. As you know, we already have a significant pipeline internally to grow. We do not depend on M&A, but we will be actively looking so that we can also boost our growth through M&As. Bueno, make one question. At the end of June, BASL3 new regulations regarding gold take effect, meaning it will be upgraded to a Tier 1 asset for bank reserves in the composition of their net stable funding ratio. And that any gold held by financial institution will have to be 100% backed by physical, no pool on allocated gold allowed. How do you expect this to influence gold price going forward? This is all new, I don't know. There is a lot of discussions about gold prices moving forward. What I would invite all the investors is, we see the pandemic cases slowing down, the vaccine works. The United States is down 80%, 85% compared to last year in terms of COVID. So it's significantly reducing life in the United States pretty much going back to normal. And as vaccines move up in other countries, we will see the whole world moving out of the pandemic during this year. So it seems that the pandemic is going away. It will be over, hopefully sooner than later. However, the macroeconomic effect of the pandemic is still in the beginning. We see United States at the highest leverage ratio ever since the second World War, the highest deficit, fiscal deficit in the U.S. and all over the world. It's going up in terms of our debt ratios, assets due to the amount of incentive to offset the effects of the pandemic. And also in the U.S., not only that one thing that's important to observe is that the democratic government has more structural plans for the country, more expensive, more investment. You see Biden announcing $1 trillion, $2 trillion, or 3, $4 trillion of new investments in the economy on the top of the highest debt ratio ever since second World War. That can work, but that will definitely bring the United States through unprecedent terms in terms of fiscal deficit. There is this trend in the democratic government of modern monetary theory, which switches completely from interest rates and inflation targets through employment and even at the cost of higher deficit in the government. So if that is put in place, it will bring other capitalism into new waters. It might work, it might not work. So I would invite all the oil investors, take a look. It's very stable in terms of microeconomic in the world. There is a lot of hype in terms of stocks, which is recently now being repriced, but the digestion of the pandemic, of the macroeconomic effects of the pandemic, is just in the beginning. And considering gold, together with other real assets is very important and any portfolio manager today due to the uncertainties that we will go through the next years. Then we have [ Marcelo Azeng ][indiscernible], what is the expectations of the company for gold prices and copper? We see all the trends of gold. Gold has stabilized during Q1 between 1,700 to 1,750, 1,50 to 1,800, and now it's moving up above 1,800. All the variables are in place for us to see gold prices moving up in the upcoming months, although we will see, continue to see volatility in the short term. As I was mentioning, there's extreme amount of liquidity in the market, and that can drive the valuation of currencies, can drive also inflation. And gold, historically, has been the best protection against both variables. In copper prices, there's a lot of new, there's updated studies that due to a combination of tighter supply in Chile, higher cost in Chile, is reviewing all the taxes implied to the corporate and all the mine sector they are reviewing also internal laws that should be more labor focused. That might also increase the cost of production in Chile. And also on the demand side, the whole green energy moving out of carbon will drive copper demand significantly higher. A lot of projections say that by '23, '24, there will be a significant shortage of supply compared to demand. And apparently, the market is already anticipating that move. So that's why copper prices are moving up. We have from Taylor, Red Cloud, congratulations on the great quarter. Given the challenge with the geology at Gold Road, are you still planning to publish an updated technical report this quarter? Are you able to provide any additional color on the timeline for ramp-up or that is something you are still working on determining? Yes, We are planning to publish a new report of Gold Road between Q2, perhaps Q3, that will be mostly focused on short-term planning for production of 2021, 2022. Yet, we don't expect to have any reports on the longer-term view very soon. That still requires a geology investment that we are doing. We started to do a couple of months ago and continue to do. In terms of ramp-up, we should see gradual improvements in terms of production. We aim to achieve at least 2,200 ounces per month by July and August. So we are moving in the right direction. On the other hand, while we are doing all the geological studies and analysis to see how we could be the creative costs in production from 2023, 2024 and 2025, which we yet -- we don't have this long-term view. Ricardo Mangala from Itau asking, could you give us more color on the decision not to prepay the liabilities of Gold Road? I explained that. We would do that if we had the longer-term view. We are very conservative in terms of capital allocation. The debt of Gold Road requires 3 or 4 years of operations to be paid. And as we had only 2 years good view and not year 3 or year 4, we were conservative in order to maintain our capital policy, reminding that it's only recourse debt. And the play we did with Gold Road is, let's buy, invest, see if we can create. It was an option to invest and create a long-term view in order to have a strong production on 2023,'24, which is our objective to double the production. But once we don't have that view yet in plant, we decided not to prepay Gold Road. What is the status of Serrote projects? Serrote project is moving forward rapidly. They should be -- April should be about 80%, 90% done, if not 100%. They already started producing. They have not yet declared commercial production. That's why we have not yet accounted. Remember, I would remind investors that we have $10 million to receive from a Serrote project as they complete and declare commercial production, we enter in the process of receiving this along the years. But there are many triggers on the contract that would invite and incentivize Serrote to prepay us in advance, although that's an option for them. But they should be -- I expect that they should be announcing commercial production very soon. There's a question from Max Bueno, Mac Investments. The Brazilian financial market is not well served when it comes to retail bullion products. Does the company have any plans for the future to offer bullion gold and silver retail product, the Brazilian retail, much like some companies like First Majestic Silver does? We sell our bullions to refineries. They are the ones that will elevate the purity of gold to 99.9% and put the bars on the standards to the financial market to commercialize. We should not -- we don't have any plans to sell bullions directly to the market, and we should continue to sell our bullions to the refineries, and they will decide to hold or they sell. Any more questions? Well, again, thank you very much for the call. I'm very proud to be here in the name of the whole Aura team. We're moving to the right direction, strong and record high results. We continue to work hard in order to reduce and improve safety standards and deliver the results to our shareholders under our own 360 concept that includes very important high standards for ESG and also how we manage our employees. So thank you all, and see you next quarter.