Aura Minerals Inc

TSX:ORA

Earnings Call Transcript

[Operator]

Good morning, everyone. Welcome to the webcast of the third quarter 2020 of Aura. [Operator Instructions] Rodrigo Barbosa is here with us, who is CEO and the President of the company; Cardoso, CFO of the company; and then Gabriel Catalani, Investor Relations.

[Rodrigo Cardoso Barbosa, President, CEO & Director]

Good morning, Gabriel, and good morning, everyone. It is a pleasure to be here with you once again. Fortunately, we've been together sometimes with the roadshow, different activities. We had at the Aura Day, and now we're very proud to be here presenting the results of the third quarter of this year. And before starting, I would just like to let you know where we are, and then we're going to talk about our results more directly. Just to remind you, at the end of last year, we got activities. We -- in the third and fourth quarters of last year, we had a significant progress and concluded the year -- last year with the perspective of continuing growing in 2020. Throughout the first quarter -- in the first and second quarters, actually, our operations were affected by the pandemic. We had to stop some units, resumed others and all of that had an impact on production. We spent Q2 trying to implement protocols -- production protocols to avoid disseminating COVID. And we knew that whenever we could resume our operation safely, we would be able to do that strongly and growing again. In the third quarter, we showed how Aura is strong in terms of operations. And we were also positioning ourselves to try to keep on growing from 2020, 2021, '22 with continued growth of our operations. In the third quarter, not only do we resume robustly but we sold for higher prices because we had a valuation of gold and copper with record margins in the company, even though the expectation is for us to continue growing. You're all welcome. I will make a brief presentation. I will talk about the context of the quarter, what happened. And then I will turn over to our CFO, who will talk about the impact on the results. I'd like to remind you of something important because at Aura, we want to be one of the most reliable, respected companies dedicated to results in this sector, and this is what moves us every single day. From the time we wake up, go to work we want to do better. We want to do everything better. So the panorama of the third quarter, you can see a summary. We resumed all of our operations, had increases in Honduras and Brazil. And we also started to have the Gold Road production with the first gold bars. And we also had important progress in geology. We published some relevant facts on EPP, Bananal and Aranzazu and we continue doing our work. And then I have a slide, and we will talk about different arrangements. The price of gold has been appreciated. You can see that it is now 1,918, coming from 1,753. Also, there was a strong recovery of copper going from 2.46 to 2.96. So a lot of the commodities we work with, we have had important value recovery. One of the facts that really marked our quarter is the completion of our IPO in July. And now we conclude -- last week, where we had the follow-on within CVM 400, which enabled us to expand our shareholder basis and consequently significantly increase our daily volume. And this is something that we will be working with over the next few months. Other relevant facts, as I commented, we have an expectation to have our commercial production declared by Gold Road. We are operating in Aranzazu with increased production, the target is 30%. We are in the final preparation phase of the new feasibility state for Almas, this will be concluded within the next weeks. And we will also publish the new Almas feasibility study in December, confirming what we have already published regarding our investments in the beginning of next year and we will start operating in 2022 -- I'm sorry, yes. And then we have the Bananal development so that we can start considering publishing reports early next year. Also in Aranzazu, we have confirmed our activities. We will increase the capacity. And by 2025, our intent is to double our production. We have a strong focus on increasing our daily traded volume. We have expanded our approach in the Brazilian capital market. The company and me, as the CEO, we will develop the market and be present very close to the main cities and the main agents, actors. We will work intensively so that they can get to know us and invest in our company. We have had favorable acceptance. We have a unique advantage in Brazil. We have robust growth. We doubled our -- we will double our size by 2025 and have interesting payment of dividends to our shareholders. Important aspect that we had throughout the quarter, we will always have a focus on the safety of our employees during the quarter. We have a low rate of incidents. We didn't have any accidents in the first quarter. We are having the ramp up in Gold Road without injuries. And in the second quarter, we had no lost time injuries in San Andres in 2020. And as we grow, we are systematically analyzing all our safety standards. We're reviewing it so that we can guarantee that we will keep on growing, according to the existing safety standards. So we're working with the Safety Committee. Our technicians participate so that we can systematically improve our internal standards. Now regarding actions against COVID, they remain a priority. We have an extensive use of test tracking systems. We can track whom at, who, when and when and whatever. We have an employee, who tests positive. We try to test all of the contacts very quickly so that we can control the pandemic within our units. We continue supporting the communities we work in with our many initiatives, making testing available. And some of our initiatives have been copied by the municipality and other neighboring companies. We donate food, masks, gloves, medicines and also higher medical professionals in the communities that we work in so that we can provide them the best we have internally. From an operational point of view, there was no need to interrupt production during the third quarter. But if we have to, we will do so in a controlled manner so that we will be responsible in dealing with the dissemination of COVID within our operations. In terms of production, as I commented last year, here on the left side, you can see the growth of production. Last year, we went from 30.3 ounces per quarter and increased, as you can see, but we were impacted by the pandemic. Now in the third quarter, we resumed our growth, reaching almost 58 ounces and the expectation is for us to continue growing. Ernesto, which is a mine has an interesting impact during this quarter. We have an expectation of having the commercial operation at the end of the year, which will enable us to continue growing. And I'd like to remind you that next year, we will have additional 30% of -- from Aranzazu and Gold Road, demonstrating that next year we will keep on growing. And looking ahead, thinking of 2022, '23 and '24, we will have an increase in our share. Next year, we will start building Almas, which will start operating in 2022. In 2022, we also have the full Ernesto operation. Next year, we will discontinue and we'll have activities going through the second quarter. And then in 2022, we'll be on full production. In 2022, we'll start building Matupá. And in 2023, it will start operating. So from '22 to '24, we have continued growth plan in the company, which will enable us to double our size by 2024, 2025. Our recovery, moving on to the right side of the slide, we can see an increment in production in all of our units. The Gold Road -- we have an expectation to grow in the semester and also EPP and Ernesto with higher amounts. In terms of cost reduction, we see what we already expected. We have a significant decrease in all of our operations and have consolidated values, which indicate incremental production, but also we have the exchange rate impact with a devaluation that also contributed to decreasing our costs. In terms of expectations, in 2020, we have narrowed our guidance, and we expect to have a production of 200 to 210 ounces. Next year will be better than before, even though we have suffered an impact of COVID. If it hadn't been for COVID -- if we only consider the third quarter where we do not have an impact of COVID on our operations, we would have a running rate of 245 to 264 ounces of production -- I'm sorry, from 245 to 265 ounces of production. And we can see a cost reduction in the company with increments in production and also with the exchange rate devaluation. Our growth operation and the projects that are coming in, I'd like to remind you that we have -- production increases in Ernesto. In Mexico, with 30%, which provides us a scale game Matupá and we will continue with cost reductions throughout the next few years. And the third quarter symbolizes really well, what we can expect for the upcoming years. Increased production, better gold prices has an impact on revenues and also cost reductions, which will be seen in the upcoming years. Now important aspects to highlight. We have Gold Road, a mine, which is already operating. We've had a merger, and we still have not declared our business operation because we need to be close to our maximum production, but we're getting there. It has shown a great production potential for the upcoming years. We are improving the geologic knowledge of the mine. The mine does not have any declared margins, and we are in an intense geology project so that we can quickly convert at least a part of it into a reserve and also create new resources for us to continue our expansion plan for the mine. Important aspects in terms of geology, this is something important to be considered by everyone. Our geologic potential is significant. We have not had a significant investment in geology in the past. But in the last couple of years, we started investing in geology to better understand the potential, some of them are already mature, for example, in Ernesto. But we still have others that will mature in the part of our production plan. In Aranzazu, we have relevant aspects published in August, with -- down dip positive confirming the potential of the mining area, potential to reach over 1,000 meters of depth. And we will significantly expand the life of the mine. We're also working in nearby areas, which were mines in the past, such as copper and investigating the potential of turning it into a mine. And this allows us to have an expectation that we'll be able to double our size in Aranzazu. Another important aspect is the confirmation of reserves -- reports showing the potential we have in Mexico. In EPP, we continue intensifying investments in Bananal so that we can expand the life of the mine. The first results are very positive and allow us to have an expectation that next year, we will be able to work with reports that will be shared with the market. In San Andres, after 10 years without investments, we resume the plans to expand the life of the mine and also find other areas so that we will have cash generation. In Gold Road, as I commented, has an extensive drilling campaign underway so that we can have a robust production plan in the short and midterm. And when we analyze all Matupá and we are advancing work to conclude the feasibility study, which will be published in early December. And in Matupá, we are advancing work to convert M&I to reserves. We already have enough density to have reserves, but we still need to have metallurgy studies, and we will have a quick conversion to reserves and start building the project in early 2022. And we also have a significant potential to increase our resources as well as understand the potential of copper, which has been extensively discussed in the region. Important aspects during the quarter. Continued increase of coverage. We now have coverage in Credit Suisse, Itau BBA and recently, we started a pitch on the company, analysts have placed target values that are much higher than those of the company, demonstrating our potential. In the reports of analysis, important projects that will be developed in the next few years have not been included, and that will provide a better insight to our investors. And I conclude my part here and would like to ask Kleber to move on. He's going to talk about the financial results. Once again, I thank you all for your attention. I'm happy to be here with you sharing expressive results. And not only that, but we have an expectation to continue growing and reducing costs over the next few years.

[João Kleber Cardoso, Chief Financial Officer]

Good morning, Rodrigo. We're here together, but we are respecting our distancing and wearing masks. Good morning, everyone. I'm going to now talk about some of the main financial results of the company for the second quarter. On this page, we have a summary of the main financial KPIs in the third quarter. As we can see, the main indicators demonstrated significant improvement of our results. This was the highest net revenue reported in a single quarter in the company throughout its history. And in 2020, the accumulated amount is $78 billion. And in the end of that, we also had significant progress, reaching $44 million, benefiting net income with a positive impact of production and also of the costs of copper and gold. We had $69 million accrued in the quarter, the profit was $25 million. We are $11 million positive. And if you remember, in the first quarter, the company had losses that were associated to the strong devaluation of the real when compared to the Mexican peso. And finally, on the lower right side of the graph, we have our net debt. We will close the quarter with a net debt of $44 million. And we have concluded with positive indicators, resulting from IPO, close to $50 million and the adjusted EBITDA of $44 million. And moving on now, we have a consolidation of adjusted EBITDA to net income in the third quarter, you can see that we had expenses associated to the amortization of $5 million, interest expense on debt another $2 million. We had $3 million of net losses with the dilutive in the quarter associated to increases in the price of gold and copper in the third quarter of this year. And we have under net expenses that add up to $1 million. And in the graph, you can see income tax expense associated to positive results that we had in Brazil and Mexico and Honduras in this quarter, reaching net income of $25 million. Here, we can see an analysis of our cash inflows throughout the third quarter this year. And if you look on the left side of the graph, you can see the cash position in the beginning of the quarter, which was $26 million. And on the other hand, we have $86 million. There was an increase of about $60 million in the third quarter and the cash available. We analyzed it and separated it into 2 groups: recurring and nonrecurring items. On the left side, you can see the recurring items, which contributed with the generation of $37 million of cash with a highlight to the EBITDA of $44 million. We also have CapEx -- recurring CapEx in the order of $8 million. On the right side, we have nonrecurring events, which have contributed with cash generation. We have the net proceeds from IPO with $49 million. We had changes in working capital of $5 million. And the main cash used throughout this quarter was CapEx in mine development in the order of $10 million, mainly associated to investments in the Ernesto mine in Brazil, the Gold Road in Arizona and the amount we expect to spend in the fourth quarter, but it will be much lower. And we intend to have Gold Road starting in the near future. We also had $6 million realized losses. And once we started the third quarter with this amount of $4 million, we started the quarter with only $1 million available. And so part of our liabilities were paid for in the third quarter. We also had $5 million in repayment of short-term loans. We then end the quarter with $86 million of cash and equivalents on September 30, 2020. And with that, we end our presentation. I thank you, and I open for Q&A.

[Operator]

[Operator Instructions]

[Rodrigo Cardoso Barbosa, President, CEO & Director]

I have a first question here from [ Gabriel Galvan ] from Credit Suisse. He wants to understand when we will release our results with the updates of our resources and reserves because of the intense program we're having in geology throughout the third quarter and the fourth quarter, we will probably publish something early next year. In the first quarter of next year, we will publish an update of our resources and reserves. There's another question. It is from [ Vasconcelos ]. I want to know about the production of Gold Road so far. What is the sensitivity, expectation of growth for the 2020 guidance? We think that it will be within the expected 8 ounces for the year. Then there's another question also from Crédit Suisse. They're asking if we have an increase -- or if we have an expectation to increase our average content, yes, because we will declare the commercial operations in Ernesto. The content of the mine is significantly higher with almost 3 grams per ton. And when we combine that because it doesn't come in alone, there's always a combination with the previous one. It will increase the average content for the fourth quarter and then next year, we will decrease it a little bit because we will have a pushback in Ernesto in the second and third quarter of next year and then resuming a higher content by the end of the year and in 2022. Do we have any questions, please feel free to submit them to us. I have a question here from [ Vitor Ugo ] he is asking about EPP, which was much lower than in the previous quarters. And he wants to know what we can expect from the upcoming one? During the third quarter, we had an expansion of some of the mines we work with. For example, where we were able to have lower content so that we can have higher values, and this contributed to our ratio. We do not expect it to be as low as it was. Even though costs will be reduced, because of the results of our Ernesto. And next year, we'll have a push back. There's another question here about the dividend payment expectations where [ Gabriel Galvan ] comments that we have had strong cash generation throughout the quarters. We had an IPO and with the levels of the price of gold, which is higher than expected. He wants to know whether we will each include an extraordinary payment of dividends. This is something to be analyzed. Yes, the company has a dividend policy that has already been approved by the Board. But if the company generates more cash and we see internally that this cash will work better in the hands of our shareholders, we'll do that and then we'll decide whether we will pay or not higher amounts than planned, but we will discuss this along with all of you in our next year meeting. [ Daniel ] asks about our purchase strategy from now on. He wants to know whether this is something that will remain strong or whether the focus is on the expressive growth we have ahead of us. Well, our #1 priority is for us to develop the projects we have in Aura. They are robust enough for us to have this plan to double our size by 2025. And of course, we have a lot of access to the industry, and we will have other opportunities for M&A, but we will only do it if we understand that we have relevant conditions with adequate price. It is not in our pipeline, but the focus is going to be for us to develop our internal projects, and we will only purchase anything if it is going to add value to our shareholders. [ Uri ] from XP asks about our reserves, and he thinks that we can have changes in the feasibility study. We do not expect to have any major updates in our resources, even though we may have some. There have been optimization of our projects with the reduction of payback, and we also have a very interesting project. Even though we have a significant reserve, we have an important potential for us to expand these reserves, including increasing our capacity and therefore, the plant is being well designed so that it has flexibility to increase capacity over the years. Because we can expand the number of mines and reserves, we are already designing a plant that has that kind of flexibility. [ Luis ] asked us about the pushback. He wants us to better explain the pushback in Ernesto. Ernesto is a mine where we have declared commercial operations, the line is pretty deep. We spent 2020 opening it to get to the main deposit. We will start operating, and then we have a restriction in the mine. And we have to open more space to be able to expand the operation. We will operate this quarter. And then in early next year, we'll have a pushback to resume production in Ernesto towards the end of next year. And then in the meantime, we have the sequencing of our other mines. [ Ricardo ] from DDA asked about the expectations of prepayment of our debt. I'd like to remind you that we have this finance and debt with a face value of $34 million evaluated at $26 million in the market. We will pay this debt by the end of March $24 million, and we are evaluating that possibility, what the benefits are going to be so that we can have a strategy for next year. Even though we still have not made any decisions, this seems to be something that we will evaluate so that we can pay the by the end of March next year. We have not made a decision, but we are learning a lot about the project. [ Uri ] is asking about the guidance for the fourth quarter. For us to get to the 2020 guidance, production should be very strong. Yes, in the fourth quarter, we have significant increases in the production in Brazil with Ernesto's operations. We're also having an increase of 30% in Aranzazu. We will have lower content in Aranzazu, but we still have increased production in the next year and the beginning, we will go back to the usual content. In Honduras, during the third quarter, it usually rains a lot and that has an impact on production. And we have an expectation to expand production in Honduras also Gold Road that has declared its commercial operations. [ Luis Garcia ] asks about the hedge policy. What are the hedges made by the company? And why should they be maintained? Our hedge policy is to try to understand and generate cash flow in areas where we're having a ramp-up, for example, in Gold Road. We know that we have minimal prices of $1,700. We already have the ramp-up concluded. We usually have 0 cost we end up selling by so that we can protect the minimum price of the gold, which will guarantee our ramp up. And this is what has given us the hedge we have today. It is 6,000 ounces in Gold Road. In Gold Road, 6,000. And this is what we have. We do not have hedges for the other units because we have been on constant operations already back in the Aranzazu Funding Project, we have to have hedges of 50% of our production for the next 4 months. So every month, we have a hedge of 40% for copper and gold in Aranzazu. Asks about the M&A front. We do not have anything decided yet, but we have evaluated the market. We still do not see anything for the short term. What we have seen is a gap in terms of price expectations between buyer and seller and had significant increases in gold in the last few months. And that generates a gap -- a significant gap between seller and buyers $2,500 per the ounce. We have been diligent in evaluating, understanding how far we can go to add value to our shareholders. And I'd like to remind you that we have a lot of interesting projects to be developed. M&A is healthy. We want to analyze it, but it's not a priority. And we will only do it whenever it is really necessary. Another question about the COVID situation in Mexico and Honduras and whether the governments are talking about a new lockdown. The second COVID wave is not as strong as in Europe and United States, even though you can see that it is there. And as far as we know, there are not -- no plans for a new lockdown, but we're always implementing new protection measures to avoid contamination among our employees. I'd like to remind you that mining operations in sub-training open pitch is not a favorable environment for COVID transmission. We work in open environment and with the measures that were implemented. We have avoided contamination of our employees. But of course, we're always careful. And right now, there is no expectation of new lockdowns or significant production reductions in these countries because of COVID-19. We have a new question from [ Vito Rugo ] about the split, I think I've already mentioned it. In fact, we have access to higher content in areas that we were not expecting and that ended up favoring the relationship in the quarter. [ Felipe ] is asking about the San Andres potential. The mine had higher oscillations in the quarters, and I wanted to understand what the potential of the mine is and what we have to do to get there. San Andres mine has a potential to produce 80,000 to 85,000 ounces. We have worked with higher contents, and we believe that the mine will operate 100,000 ounces in 1 year because of the recovering content that we are already reaching in San Andres. It was impacted by the rains. And I think that once we have more stability, we will have a running rate of almost 100,000 ounces. This is our expectation. Well, I think that these are the questions. I would like to thank you for your participation. We're totally committed with our projects. We're delivering what we had planned. We're delivering growth. We're delivering cost reductions and are also looking ahead. It's important to have investments in geology and developing projects that are already in our portfolio. I thank you once again, and I see you in the next quarter.

[Operator]

Thank you, Rodrigo. I just wanted to inform you that presentations are available in our IR site. Just ask the replay, which will be made available throughout the day in our website. Thank you very much, and have a good day. And we have a new institutional video, check it out. Thank you very much.