Aura Minerals Inc

TSX:ORA

Earnings Call Transcript

[Operator]

Good morning. Welcome to Aura's Conference Call for the Results of the Second Quarter of 2020. We inform you that the presentation is being recorded. [Operator Instructions] Today with us, we have Mr. Rodrigo Barbosa, CEO; and Mr. Kleber Cardoso, CFO. Before we begin, I would like to note that this teleconference relates to the operational and financial results of Aura for the second quarter of 2020 and may include certain forward-looking information. Any forward-looking statements reflect Aura's current views about future events and performance and are based on certain assumptions and are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from historical results or results anticipated by Aura. Forward-looking information provided during this call speaks only as of the date of this call and is based on the plans, beliefs, estimates, projections, expectations, opinions and assumptions of management as of today's date. There can be no assurance that forward-looking information will prove to be accurate, and you should not place undue reliance on forward-looking information. Aura disclaims any obligation to update forward-looking statements and explain any material difference between subsequent actual events and such forward-looking information, except as required by applicable law. In addition, during the course of this call, we may also refer to certain non-IFRS financial measures, including the references to adjusted EBITDA and cash costs, which does not have any standardized meaning under IFRS and therefore, may not be comparable to similar measures presented by other companies. For more information about both forward-looking information and non-IFRS financial measures including the reconciliation of such measures to IFRS measures, please refer to our management's discussion and analysis. So now I would like to pass the floor to Mr. Barbosa. Mr. Barbosa, you have the floor.

[Rodrigo Cardoso Barbosa, President, CEO & Director]

Okay. Thank you very much, and good morning all analysts and investors. We are pleased to announce the second quarter results, which we published last night. I would like also to invite all of you. We'll promote an Aura Investors Day on August 20th. Further details will be sent along the next days, but we'll be pleased to host all of you to explain in more details about our operations and strategy and some projections moving forward. This week, this -- today, we will focus on the quarter results. Before I start, I think it would be interesting just to mention that this week, gold has broken over $2,000 per ounce and especially sign of that, it should go even further. On one hand, we feel sorry once it shows the rapidly macroeconomic deterioration. On the other hand, we feel it is our mission to produce as much as possible to provide all the ability to buy gold and protect against this unprecedented macroeconomic uncertainty that is ahead of us. Now flipping to the Slide #3. And this -- I would like to reinforce our vision and values. Our vision, as I have shared with many of the investors, and we've been sharing with our documents that we published is to be one of the most trusted, responsible, well-respected and results-driven mining companies. This is how we drive our day-to-day decisions. This is how we drive our day-to-day responsibility. Everything under the values that we have on the 360 mining, all the decisions we make, we respect the impact over the communities, employees and also within the company. Now before we show the results, I will give a brief explanation what happened in the Q2 and also what we see going forward on the second semester. So if I would invite investors to flip to the Page #5. And I would highlight the -- what happened in the second quarter, just as a reminder. So second quarter was the most affected by coronavirus. We had interruptions on our mine in Honduras and Andres and partially also in Aranzazu, Mexico. And the impact mostly happened in the second quarter in April, May, mostly. We had also an increase in gold price coming from $1,609 to $1,768. We had also significant volatility in copper price. We started the quarter with a copper price about $2.20 per pound. It had dropped, $2.15 and then a rebounded to finish $2.75. Today, it's being traded at $2.90. Despite the coronavirus, despite holding operations, we continue to invest. We were fortunate to produce enough cash flow to maintain all our investments, either in Ernesto that we have opened this new mine; Gold Road, the acquisition we made earlier this year; and also developing Almas to start our construction early next year. Everything is going according to schedule.We also approved our dividend policy during the second quarter, which is 20% of our adjusted EBITDA minus sustaining CapEx and exploration, which should provide investors an interesting yield on a yearly basis. We started mining activities in Gold Road during the second quarter. And as a subsequent event, we should not forget to mention that we had a very successful IPO and dual listing in Brazil, close to $150 million, and 1/3 of this as a primary. What we expect for the second half of 2020 will be -- and we already operating at full capacity in our operations. We will have gold production from Gold Road. We expect to declare commercial production by the fourth quarter in Gold Road here in the United States, in the state of Arizona. We should also declare commercial production in Ernesto mine by also on the fourth quarter of 2020 in EPP. Aranzazu, we are working, and we should have a 30% increase in capacity also until the end of the year and fully operating that 30% increase during the next year. We'll finish, and we expect to have the completion of Almas feasibility study. We hired Ausenco during the first half. And now we are finalizing the detailed engineering so that we can publish the new feasibility study of the project. We recently press-released an updated model return that I will discuss a little bit on the next few slides. We also expect to have updates on geology in our assets, mainly in Aranzazu and EPP that we are conducting exploration program. And we should also trigger, as we announced yesterday, new initiatives to promote more daily liquidity volume on our shares at the stock exchange, either in Canada but also in Brazil. Flipping to the Slide #6. Now we would like to share with all the investors what we've done in COVID and how this is also impacting on us. And the actions we took to avoid the spread of COVID, and I -- we are very proud to mention that as of today, we did not have any single case -- confirmed case that has -- of COVID spread within our employees. We do have cases of COVID employees that stayed at home, but that was not spreaded within our mines, which means that the actions that we are taking has been highly efficient. We adopt -- have questioners. We have temperature scanning on our employees before they join on the daily basis, our mines. We have mandatory use of masks. We adopt a home office for those not required to stay on-site, mandatory quarantine for high-risk individuals, periodic test among all employees and service providers and the use of Aura Trackers. Since a very early stage, we co-developed a very easy tracking system, an app in our cell phones and computers so that everyone can put information of the contact they had during the day. So when we have any case of COVID, we can isolate them and isolate all the ones that had contact with the person and then put them back on the workforce only after we have the tests showing that there's no COVID. We also spent a lot of time and effort, helping the communities where we operate. We donated food for over 4,000 families. We distributed more than 9,000 masks and gloves to the communities. We donated medicines, test kits and hand sanitizer dispensers to health centers in the cities that we operate. And we also -- we are hiring additional medical personnel to the community to support them during this pandemic. Flipping to the Slide 7. And then I will give -- and then Kleber will talk about the financial impact, but this is the production. And when we compare Q1 to Q2, despite the halting operations in Honduras, we see that we only had decreased by 7% of gold production during the second quarter, mostly affected by the mine, of course, in San Andres, Honduras. In EPP mine, our mine in Brazil, we had an increase. Mining activities was -- is considered as a essential activity. So it was not affected by lockdown in Brazil. We knew first quarter would be a lower grade. So due to the mine sequencing and also some improvement in operations, we could increase production in Brazil. And we continue -- we expect to continue to increase production along the Q3 and Q4 in Brazil as well. In Aranzazu, we -- despite the COVID, we had some intermediate inventory that we could work on and sell and produce. So we produced on the first quarter 13,800 equivalent ounces of gold, and Q2 14,700, and we also expect to continue to grow along the Q3 and Q4. Flipping to the Slide #8, and then we compare here our cash costs per ounce equivalent. We could also see a decrease in our cash costs in other operations that we have. We come from in Q1, $1,000 -- $1,060 per ounce in San Andres, Honduras, to $900 in Honduras per ounce. That happens mostly because also of the leaching cycle, where we could produce gold that was piled during the first quarter and the second quarter, despite we stopped all the operations, we still had some gold puring that we produced with a lower cost. In EPP, we had a substantial decrease in our cash costs, and we should expect to continue to decrease our cash cost in Q3 and Q4. And this decrease came from 2 variables: number one, we could increase production and efficiency; number two, it's already showing the impact of the valuation of real that also has an impact over our cost in U.S. dollars. Aranzazu, we also decreased our cost from $1,051 thousand to $860 million. This is also a combination of higher production and also the devaluation of the Mexican pesos due to the COVID and exchange rate. And we should continue to expect a decrease in Q3 and Q4 as we are moving to a higher production. Now flipping to Slide #9, where we give guidance to the market about the range of production and also cash costs for the second semester and also for the full year of 2020. So as we can see on the chart on the left, first semester, we produced 78,000 ounces. And during the second semester, we should produce between 118,000 and 138,000 ounces. So that's a substantially higher production compared to the first semester, mostly because of no COVID, no halting operations, but also improvements in the operations that we have in Brazil, Mexico and Honduras with also higher grades and higher recoveries. So during the year, despite the COVID on the first semester, we will have a record-high production from 196,000 to 216,000 ounces. And mostly in the second semester that shows the ability of Aura to produce a substantial amount of gold on the yearly basis. In terms of cash cost, we're coming from Q1, $1,076 on consolidated basis per ounce. Q2, $858 million on consolidated basis per ounce. And when we see the projections for the year on the second half of 2020, it should be between $681 to $844, so we continue to decrease our cash cost per ounce produced along the second semester. As a quick update on important projects that we are investing this year, which we recently published, I would highlight Gold Road, which we acquired early this year. It's a mine that historically, the area -- the district has produced over 2 million ounces. We expect to declare commercial production of Gold Road by the fourth quarter and with a cash cost between $700 to $900 per ounce. On Almas, if we updated the financials when we updated the gold price at that time was between $1,500 and $1,800 and exchange rate at that time was BRL 5 per dollar -- between BRL 5 per dollar and BRL 5.50. We could see that for 13 years of life of mine, a pretax NPV of $220 million and $340 million. And expected pretax internal rate of return of 115% per year along 13 years with a gold price at $1,800. So as we move forward on the gold price, this project is also providing a higher internal rate of return. And construction. We are preparing ourselves to have full feasibility studies published along the second semester, to start construction early next year during the first quarter. So flipping to Slide 11 and before Kleber starts to talk on the financials, I would highlight a very successful IPO we did in Brazil, that was $115 million. Now we are listed in TSX and also B3. We are the first gold producer mine company listed in Brazil. We -- the offer was priced in July 2, total offer of close to $800 million (sic) [ BRL 790.1 million ] not including yet the greenshoe that should be done very soon. I thank you all for meeting with us today. And now I will pass the floor to Kleber to talk about the financial results, and I will come back on the Q&A to answer questions that you might have.

[João Kleber Cardoso, Chief Financial Officer]

Thank you, Rodrigo. Good morning, everyone, and thanks for having us here today this morning. If we flip to Slide 13, we have a summary of the main financial KPIs for the reporting period. As you can see on the top of the left side of the chart, we have the net revenues, and we are reporting a 21% increase in revenues for Q2 compared to Q1, reaching $61 million in the second quarter. And for the year -- the first 6 months of the year, there was an increase of 26% in revenues. When we reached $110 million in revenues, such increase was the results not only of higher gold prices but also increases in production, as was shown by Rodrigo, despite the pandemic. Such increase in the net revenues was reflected in -- and reduction in cash costs were reflected in a higher adjusted EBITDA. There was a significant increase in the second quarter adjusted EBITDA for 2020 compared to 2019 where we recorded $19 million in the period and $25 million for the first 6 months of 2020. Going to net income. After reporting a loss of $18 million in the first quarter of 2020, such a loss mainly due to no operational items in the -- arising mainly due to impact of the stronger devaluation of the Brazilian real and Mexican peso in the period. In the second quarter, we are reporting a $4 million profit despite $7.5 million with losses with derivatives associated with hedge -- short-term hedging positions for gold and copper and currency, as we're going to see in the presentation in more details. And finally, for the net debt, there was a slight increase in net debt between the first and second quarter of 2020 despite the interruptions of our operations and the fact that we kept investing in some expansion projects such as the Ernesto Gold project, EPP, in Brazil and Gold Road in Arizona. On Slide 14, we have a breakdown of the adjusted EBITDA by business units. As we can notice all operating business units reported positive EBITDA in the quarter. San Andres reported $6 million EBITDA in the quarter despite producing only 9,000 ounces. That is less than half or even close to 1/3 of the potential for the mine, and the production, the 8,800 ounces produced in the quarter was mainly produced in June. In June, the total ounces produced was above 5,000 ounces. So the result in San Andres is mainly from the month of June. EPP reported EBITDA of above $11 million in the quarter. That's due to an improvement in production. There was an increase in production of 12% in the quarter compared to the same period of -- compared to the previous month. And also, there was a positive impact from deferred revenues from the first part of the year when part of the production, the shipment of the production was delayed due to the impact of the pandemic on the supply chain, and it got sold just during first days of April. And finally, Aranzazu produced close to 15,000 ounces in gold equivalents in the second quarter of 2020, despite the partial interruption. And was stable to report positive EBITDA of $3.6 million, despite the interruption, also a lower average copper prices for the quarter. The average for Q2, for the second part of the year for copper, was $2.46 per pound and now it's close to $2.90 per pound. Flipping to the Slide 15. We have a bridge between adjusted EBITDA and net income. So we see -- we start with $19 million in adjusted EBITDA, had amortization and depletion expenses in the amount of $5.3 million. In the quarter, interest expense on debt in the amount of $1.7 million in nonrecurring losses with derivatives in the amount of $7.5 million was the main expenses for the month, coming to a total net income of $4 million at the end of the quarter. On Slide 16, we have more details on the impact of the realized and unrealized losses with derivatives. We see with gold derivatives, there was a loss of $3 million. Gold was up 17% this year between December 31, 2019, and June 30, 2020. With currency, another $2.4 million loss in the quarter due to the strong devaluation of the Brazilian real against the dollar. And finally, with the copper, $1.7 million for the quarter. As Rodrigo explained, there was significant volatility in copper prices during the second quarter of the year. And it ended at a higher level at the end of the quarter, 26% increase in copper prices compared to the beginning of the quarter. In the outstanding positions as of June 30 for gold, copper and currency, so that we have between 1 month and 2.3 months, we had on June 30, between 1 and 2.3 months in production coverage considering here for the calculation of the production, the results of the first semester of the year. And then on Slide 17, we have a bridge demonstrating the change in the net debt for the quarter. As I said before, there was a small change. The adjusted EBITDA generated cash and contributed with $19 million and then main cash outflow was with capital expenditures in the amount of $10.8 million. The main items for the CapEx for the quarter were the investment in the Ernesto mine in EPP Brazil and the Gold Road. Both mines that we expect to declare production before the end of the year. And we ended the quarter with close to $45 million in net debt. And here, just as a reference, on the right side of the chart. The net proceeds the company received on July 7 at the date of the settlement of the IPO. The cash received was $ 47 million -- point million (sic) [ $ 47.9 million ] net of underwriters and depository agent's fees. And with that, I'd like to thank you for your attention, and we are going to open for questions.

[Operator]

[Operator Instructions]

[Rodrigo Cardoso Barbosa, President, CEO & Director]

Okay. I have one question here from [ Caio Ribeiro. ] His first question is on the Gold Road project, and he's asked, could you please talk a little bit about when you expect you will be able to make progress with converting further resources into reserves? And any preliminary assessment of what percentage of those resources, you would expect to eventually be able to convert into reserves? And secondly, on Aranzazu, if you could provide some color on what cash costs were ounce equivalent, you expect, to be able to be delivered in 2021, once you complete the 30% expansion. So thank you for the question. We will provide more details on the Aura Investors Day. We are conducting exploration program either -- in Gold Road to either convert inferred into reserves, but also to create and to approve more inferred. And this program is -- it's moving according to expectations. We believe we should convert inferred to our reserves early next year. At the same time of also creating a new inferred for the project. We do not send yet expectation on the percentage of the resources that we will convert. But we will inform the market accordingly along the second semester. The second question is about Aranzazu, and how do we expect the 30% expansion to impact our costs. Of course, there will be a reduction in cost because of scale. We do not yet expect a variable reduction because it should be -- the more -- the same grade as we have today but the fixed cost will be maintained at the same. So we will have additional improvement in our cash cost. I also received another question from Richard. Will you be providing future updates on exploration and drilling results?Yes, as we will constantly be publishing the results from our drilling campaign. And as I mentioned to you, we are focusing now in EPP, also Bananal in Aranzazu and Gold Road. So we will be updating the market as soon as we have information back from the drill holes, and we have built this in the model. I have another question from [ Yuri. ] It's -- should we expect this favorable strip ratio in EPP going forward? Do you have some update on the mine sequencing? The strip ratio varies along the year, depending on the mine sequencing that we have as we operate a few different mines under the same plant in EPP Brazil. And depending how much the mine sequence usage, mine Lavrinha, Japonês, Nosde or now Ernesto. It can change and vary the strip ratio. But on August 20, on Aura Day, we will provide more insights on how this sequencing is moving forward along the semester. I also have one question from [ Daniel. ] Can you remind us what is the percentage of costs in local currencies in your operations in Brazil and Mexico? Or tentatively quantify how much of the cash cost reduction come from efficiency and how much more from local currency devaluation? In Brazil, around 85% of our costs are related to local currency. In Mexico, around 50% is related to local currency. So then you can translate that. I would say, in Brazil, it came 70% of the cost reduction, 60% to 70% of cost reduction came from devaluation, and the remaining 20%, 30% came from efficiency. And still room to -- the second semester, we will see more room to improve on efficiency on higher grades from most -- the mine of Ernesto that declared commercial production on the last quarter. We also have one question. Considering current high gold price levels, do we consider changing our policy on hedges? Our hedge is already very short-term driven. As Kleber mentioned, we have 1 or 2, maximum 2.5 months of production hedged. As we see -- yes, as we see gold price moving forward, we should slow down the hedges, respecting then when we are ramping up production such as Gold Road, we like to have a little bit of hedge on that to be -- to make sure we have a very predictable cash flow coming from that operation. But we should -- you should expect lower hedges along the Q3 and also Q4. I also received a question here. How do we see opportunities in M&A in the sector? Close -- similar to what we've done in Gold Road. We are actively -- we are interested in seeing other alternatives on M&A. We do not have any negotiations, any approach. But we see opportunities as Gold Road in other states of the U.S. or also other countries in the Americas. So we would be analyzing those alternatives as they show up. I have another question. How does our M&A strategy stands in this new gold price environment? It doesn't change. We are very conservative when we enter in any kind of M&A to make sure that it will be accretive to the shareholders. But we will provide, and we will discuss more about this on the strategic level for the Aura Investor Day. Today, we should be focusing more on the Q2 and a little bit of production of the second semester. You may -- have another question from [ Conrado. ] You mentioned a pushback phase in Ernesto mine during first of 2021. Can you give an idea what grades could be during this phase and after that?We are not providing yet guidance for 2021, but we will do so in the event of our Investor Day on August 20. We declared commercial production in Ernesto by the fourth quarter. Yes, then next year, we will have a pushback until we access the higher grade again by the end of next year, but we will be providing this guidance, more detail on August 20. Any questions more? If we don't have more questions, then I will thank you all for participating for this quarter results. This is the first time we are doing in a couple of years. We welcome feedbacks. If we could improve this, please, you can send it directly to our Investor Relations, Gabriel. And we will make sure we will consider all the suggestions for the next conference call. I thank you all for participating, and hopefully, to see you in Aura's Day on August 20. We are trying to prepare very interesting subjects and discussions with all of you. Thank you.

[João Kleber Cardoso, Chief Financial Officer]

Thank you.

[Operator]

This concludes Aura's conference call for today. You may disconnect your lines, and have a nice day.