Torex Gold Resources Inc

TSX:TXG

Earnings Call Transcript 2022-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Torex Gold Resources Inc. Fourth Quarter and Full Year 2022 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

I would now like to turn the conference over to Dan Rollins, Senior Vice President, Corporate Development and Investor Relations. Please go ahead.

[Dan Rollins]

Thank you, operator, and good morning, everyone. On behalf of the Torex team, welcome to our Q4 and full year 2022 conference call. Before we begin, I wish to inform listeners that a presentation accompanying today's conference call can be found under the Investors section of our website at www.torexgold.com. I'd also like to note that certain statements to be made today by the management team may contain forward-looking information. As such, please refer to the detailed cautionary notes on Page 2 of today's presentation, as well as those included in the Q4 2022 MD&A.

On the call today, we have Jody Kuzenko, President and CEO; Andrew Snowden, CFO; and as well as Dave Stefanuto, EVP, Technical Services and Capital Projects. Following the presentation, Jody, Andrew and Dave will be available for the question-and-answer period. This conference call is being webcast and will be available for replay on our website.

Last night's press release and the accompanying financial statements and MD&A are posted on our website and have been filed on SEDAR. Also note that all amounts mentioned in this call are U.S. dollars unless otherwise stated.

I'll now turn the call over to Jody.

[Jody Kuzenko, President and Chief Executive Officer]

Thank you, Dan, and good morning to all on the line. Welcome to the Torex Gold Q4 and year-end 2022 Results Call. I'll open my remarks this morning by saying that we delivered another strong year in 2022 and with record production and ongoing cost control, resulting in very healthy EBITDA, cash flow and free cash flow. With these results, we've now achieved production and cost guidance for the fourth year in a row.

Opening highlights include: one, record production driven by record milling rates and record contribution from the ELG underground. Two, our ongoing focus on cost control led to strong total cash costs and AISC margins, which in turn resulted in the further strengthening of our balance sheet. Three, in addition to the operational successes, our project team made steady progress with the development of Media Luna which remains on budget and on schedule for first production in Q4 of '24. And finally, on the highlight reel, at the beginning of the year, we released our inaugural five-year production outlook, which even further optimizes the case that was set out in the 2022 technical report, and sees Torex as a minimum 450,000-ounce producer through to the end of 2027.

In terms of the agenda for the call, same as usual, I'll provide a brief reminder of the strategic pillars that we continue to execute on. Then I will step you through the key business and operational highlights specific to the fourth quarter and year-end, then over to Andrew Snowden to provide a review on the financials. And finally, Dave Stefano will provide a progress update on both Media Luna and exploration. And then, of course, we're happy to take questions from any of our listeners.

Starting on Slide 4, I wanted to quickly review our strategic pillars, which set out the long-term vision for Torex. Our strategy remains unchanged. And you can see on this slide, the five really key areas of focus as we head into 2023. On optimize and extend ELG, the five-year outlook that we released earlier this month demonstrated further improvements to the mine plan through to 2027, centered around two key areas: first, drilling success in the pits has resulted in additional mill feed from El Limon and El Limon Sur, which has extended the life of the open pits by six months to mid-2025, providing even further comfort in the transition period from ELG to Media Luna. Second, greater contribution from ELG underground with mining rates expected to hit 1,800 tons per day by year-end '23 and 2,000 tons per day by year-end '24. These rates are higher than the 14,000 tons per day assumed in the technical report.

On the second pillar of derisk and advanced Media Luna, as at year-end, project completion stood at 15% across engineering, procurement, underground development and surface construction. We had 26% of our project spend in the committed category with pricing tracking well to feasibility study estimates. Schedule critical procurement packages remain on track and the Wahas tunnel is advancing well. On the pillar of grow reserves and resources, our reserve and resource update will be released in the coming weeks. On the north side of the river, drilling in the open pits has allowed us to offset some depletion and extend pit life. Staying on the north side, at ELG underground, you can expect on reserves that will mostly replace depletion and expand resources given the success we saw at Sub-Sill South and El Limon Sur Deep.

And on the south side of the Balsas, where real focus is, you can expect both an upgrade and expansion of resources at EPO and Media Luna. On the pillar of prudent capital management, we closed the year with over $620 million of available liquidity. That current liquidity in conjunction with strong forecast free cash flow from ELG leaves us very well positioned to fund the $750 million in remaining CapEx on Media Luna, continue to invest $35 million to $40 million annually in exploration and drilling and maintain our own internal target of $100 million on the balance sheet throughout.

Turning to Slide 5. We delivered record production of 474,000 ounces in the year, surpassing the 468,000 ounces produced in 2021. This production, coupled with strong margins resulted in adjusted EBITDA of $479 million, operating cash flow of $408 million and free cash flow of $130 million. Importantly, we closed the year with $376 million in cash on hand and $623 million of available liquidity, all earmarked for financing our growth plans at Morelos.

Turning now to some operational highlights on Slide 6. On the top left, you can see there that we produced over 116,000 ounces of gold during Q4, marking another quarter of consistent production. On the top right, milling rates were in line with prior quarters. Bottom left, process grade, you can see it increase during Q4, but it's important to note here that while we see minor fluctuations and head grade from quarter-to-quarter, with our disciplined blending plan, the average process grade for 2022 came in at 3.6 grams per tonne, very consistent with what we saw annually for the last three years.

And on the bottom right, you can see our plan to push mining rates as the ELG underground is materializing nicely with 685 tons per day delivered in Q4. The goal for our team is consistent production quarter-over-quarter and year-over-year, and we are delivering. You can expect similar results over the coming quarters.

Slide 7 outlines operational guidance for 2023. There's a few things to call out here. First, we expect production in '23 to look a lot like it did in 2022. That said, we narrowed the bottom end of the guidance range slightly given the stability we've seen out of our ELG operations. Second, the midpoint of guidance implies a $30 per ounce increase in our total cash costs year-over-year.

With the increases primarily related to higher prices for consumables, such as cyanide, metabisulfite, steel and labor. Third, the midpoint of AISC guidance implies a $100 per ounce increase year-over-year. This reflects the higher TCC that I just talked about as well as higher capitalized stripping related to additional optimizations in the open pits, a one-off spend of approximately $10 million on power upgrades and a higher amount of underground development at ELG now classified as sustaining CapEx versus nonsustaining in the year prior. The other point of attention here should come as no surprise, you can see a material increase in nonsustaining CapEx, which reflects the fact that 2023 is planned to be our peak spending year on the Media Luna project.

Over to Slide 8. This sets out our five-year production outlook, and you can see how the outlook has evolved and improved over the last three years. When we started this work, the goal was to deliver gold equivalent production of 450,000 ounces per year through at least '27, and we're now confident that we have plans to do just that.

Relative to the 2022 technical report, the higher numbers reflect an additional six months of production from the open pits and greater contribution from ELG underground, which has allowed us to defer processing of a portion of lower grade stockpiles to later in the mine life. Important to note here that these improvements are all ELG driven. The mine plan for Media Luna in the five-year outlook is consistent with what you saw in the 2022 technical report. Minor note, we have work ahead of us to even further improve the production outlook in 2024. Currently, we've assumed a one-month tie-in for upgrades to the processing plant in order to begin processing the Media Luna ore in Q4 of '24. We've challenged our project team to work with the site team to reduce that downtime by completing some of the tie-ins earlier during the year during regularly scheduled maintenance. When we have a plan on that, we'll update you accordingly.

Turning to Slide 9. I We delivered a key ESG milestone in 2022 with our inaugural Climate Change Report. We're targeting an absolute reduction of 10% by 2030 with a plan that includes the design decisions incorporated into the development of Media Luna, battery electric vehicle fleet, ventilation on demand and construction of a solar plant. Stated another way that's common in the sector, the 10% absolute reduction implies a 25% reduction from the business-as-usual case. What would otherwise have been if we had built Media Luna without these design decisions being made. Notably, our Climate Plan is based on data. It's realistic, it's executable and it's funded true to our reputation of making commitments that we plan to deliver on.

Importantly, in '22 on the safety side, we exited the year with a lost-time injury frequency of 0.28, still very much industry-leading, but reflects two lost-time injuries during the fourth quarter, with the rapid increasing number of contractors on site, maintaining our systems, our standards and our culture on safety remains a key focus for our entire team.

I'll now pass the call over to Andrew, who will speak to the financial performance for the quarter and the year.

[Andrew Snowden, Chief Financial Officer]

Okay. Thanks, Jody, and good morning, everyone. Starting here on Slide 11, as you can see, 2022 was another outstanding year of financial performance for Torex. Despite the inflationary headwinds seen in the sector, which for Torex were seen particularly in ammonia-based commodities, we worked hard to be able to deliver on our annual cost guidance, closing the year with total cash cost of $730 an ounce just below the upper end of the guided range and with an all-in sustaining cost of $1,008 an ounce towards the midpoint of the range. Our realized gold price for the year was $1,809 an ounce, which included a realized price of $1784 an ounce during Q4.

In Q4, we did benefit from over $5 million realized gain on forward gold sales, which were settled during the quarter, and this did positively impact the quarterly realized price by about $43 an ounce. This realized gold price and our strong cost performance resulted in the robust margins that you can see on this slide, with total cash cost margin of 60% and an all-in sustaining cost margin of 44%, which generated close to $480 million of adjusted EBITDA during the year.

As you can also see on the bottom right of the slide, we generated $130 million in free cash flow through the year including over $40 million in the fourth quarter. I do want to highlight here that the free cash flow generation -- generating ability of our ELG operation, excluding the approximately $160 million we spent on Media Luna project capital and drilling in the year, ELG generated close to $300 million of free cash flow in 2022.

And this really demonstrates the financial strength we have to support the Media Luna build. With an elevated level of Media Luna capital planned now through all of 2023 and into the first half of 2024, we do expect free cash flow to be negative over the next several quarters. That being said, with a robust balance sheet, strong liquidity and the strong free cash flow demonstrated at ELG, which I just mentioned, we're well positioned to fund the development of Media Luna.

Turning now to Slide 12. I just wanted to provide a bit more context on our 2022 cost profile and cost performance where our focus on controlling costs and management consumption levels helped to offset persistent inflation -- inflationary pressures during the year. First on open pit mining costs. You can see here; these were higher year-over-year due to increased rehandling costs to ensure optimal blend of the mill some lower equipment availability during the second and third quarters and higher diesel and explosive costs due to inflationary pressures. On underground mining, costs here were down modestly year-over-year with record underground mining rates providing economies of scale.

Next, looking at processing. Costs here are lower driven by reduced cyanide consumption, which averaged about 2.5 kilograms per tonne last year versus 4.7 kilograms per tonne in 2021. These improved consumption levels helped offset the higher prices related to cyanide and metabisulfite.

Finally, a profit sharing was higher in 2022 compared to 2021, which reflects higher profitability and an adjustment related to 2021, which gave rise to a $2.6 million adjustment booked in the first quarter as a result of updated guidance from the Mexican government on the formula for calculating PTU.

Turning now to Slide 13 for a review of our cash movements during the year. You can see here, and as I mentioned earlier, we ended 2022 with $376 million in cash and no debt, and that's an increase of $121 million in cash during the year. I'll just highlight some of our key movements noted in this waterfall. Firstly, changes in noncash working capital, you'll see a $26 million positive inflow here, which reflects movements in accounts payable and prepayments as well as continued benefit from strong VAT collections during the year through strong effort there from our tax team.

Secondly, on capital expenditure. We invested over $277 million in total capital expenditure during the year, including over $143 million on Media Luna project capital. For 2023, we've guided to $390 million to $440 million of Media Luna project capital, which is expected to be the peak year of investment. Based on current cost flow assumptions, we expect the quarterly run rate in 2023 to continue through the first half of 2024 before declining as the project transitions from construction into the ramp-up phase.

Finally, on this slide, I just wanted to provide some color on our tax-related items, particularly as it relates to 2023. Firstly, on tax depreciation. Similar to 2022, we expect tax depreciation in '23 to approximately $90 million for the year, and this is lower than the accounting depreciation, which we anticipate will be in the range of $175 million to $200 million in 2023. Both of those are consistent with what we saw last year.

On tax payments, you can expect monthly tax installments in 2023 to continue at the levels that we saw in 2022, which is approximately $7 million a month. And as in prior year, we also expect to make a number of annual tax payments here in Q1, and which include $30 million in relation to the 7.5% mining tax and that's paid annually in March each year and then $20 million related to the final 2022 income tax, including certain withholding tax payments.

Turning now to Slide 14. Here the slide really highlights the strength of our balance sheet at December 31. I've noted, we closed the year with $376 million in cash, no debt and just $4 million in financial leases. We also had $247 million available in credit on our credit facilities with only $3 million of those credit facilities utilized through letters of credit. As a result, total December 31 liquidity stood at $623 million, which in conjunction with strong free cash flow from ELG puts us on solid footing to fund the $750 million remaining on Media Luna capital.

Our strong balance sheet has further improved by gold price protection we put in place, specifically to support capital spending on Media Luna. As outlined here on Slide 15, you can see we've hedged now approximately 25% of quarterly production through to the end of 2024, and that's at an average price of $1,924 an ounce for 2023 and $1,939 an ounce for 2024.

During Q4, we also settled 30,000 ounces of forward sales that we had hedged for Q4 of 2022, and this resulted in a realized gain of $5.3 million in the quarter. Due to the strength in the gold price in December, we did recognize an unrealized loss of $25 million in our Q4 financial results and this unwound the unrealized gains recognized earlier in the year. For the year, a total gain of $8.8 million has been recognized on these forward contracts, $5.3 million of which have been realized and $3.5 million currently unrealized.

And that concludes my remarks today. I'll pass the call over to Dave Stefanuto to provide an update on progress at Media Luna as well as exploration during the fourth quarter.

[Dave Stefanuto]

Thank you, Andrew. Turning to Slide 17, we recap the progress made at Media Luna during the quarter, which was also highlighted in a stand-alone press release earlier this month. This will become common practice moving forward. Overall, after nine months of a 33-month project build, development of Media Luna remains on budget and on track for first production in Q4 of 2024. At year-end, the project was 15% complete with 14% of project expenditures incurred and another 12% of costs committed for a total project commitment of 26%.

To date, costs and delivery windows for scheduled critical procurement packages are tracking to plan with purchase orders or letters of intent in place for a majority of our key deliverables, including the battery electric and diesel portions of our mining production fleet. Following receipt of the MEA Integral in Q3, we now have all required approvals in hand to construct and operate Media Luna.

We expect to submit an amendment letter later this year to allow for in-pit tailings deposition in the Guajes open pit, which is expected to be depleted later this year. We have also received approval to increase the power draw at the site to 65 megawatts by tying into the nearby 230 kV line, this builds on approval to increase the power draw from the existing 115 kV transmission line to 45 megawatts.

With these two approvals, we have enough power to support the Media Luna project and allow for further growth in the underground mines. Turning to Slide 18. We've made consistent progress with our underground development. At the end of January, the Guajes tunnel has advanced close 3.5 kilometers with the tunnel successfully crossing under the Balsas River. Rates have been quite strong, achieving a record advance rate of 7.2 meters per day with the team working hard to top the average daily advance rate in February.

At South Portal Lower, challenges with water inflow related to confined water within cart structures has been resolved and REITs are now hitting over four meters per day consistently over the last weeks. The main 1.5-kilometer tunnel decline of South Portal lower has been completed with development of the 650-meter spiral ramp to the North Guajes tunnel well underway. South Portal Upper work is also progressing well, with underground development advancing to plan over multiple active headings.

Turning to Slide 19, we highlight a few images of the project, including our upgraded development ventilation at South Portal Lower, development of our Mazapa bypass road, pad preparation for the paste plant and backup generators and raise boring as part of the Guajes Tunnel ventilation.

Moving to drilling and exploration on Slide 21. 2022 was another active year of drilling with strong results, both north and south of the Balsas River. At the ELG underground, the primary focus was on testing new potential mineralization, which has identified two new potential mining fronts at Sub-Sill South and El Limon Sur Deep. Given the greater focus on expansion drilling relative to infill drilling, we expect to replace the majority of the underground mine depletion and expand the overall resource size.

As outlined on Slide 22, we have also plenty of success south of the Balsas River. We expect to release additional results from drilling at Media Luna and EPO over the next couple of weeks with the drilling expected to both upgrade and expand resources. Year-end mineral reserves and resources are expected to be released before the end of March.

Slide 23 outlines our drilling and exploration plans for 2023. We expect to invest a similar amount in drilling south of the Balsas River in 2023 as we did in 2022. This year's program will be targeting to upgrade and expand resources at EPO as well as test the mineralized potential between EPO and Media Luna west targets. At ELG underground, drilling will be focused on upgrading mineralization at Sub-Sill South and El Limon Sur Deep, with the aim of upgrading the mineralization within these zones to reserves.

I'll now turn the call back over to Jody.

[Jody Kuzenko, President and Chief Executive Officer]

Thanks, Dave. While 2022 was certainly an excellent year for Torex. We had record operational performance resulting in robust financial performance and, of course, the kickoff of the Media Luna project. As we look to 2023, we want more out of the same out of ELG on safety, production and costs. We want to continue to spend money on exploration, and it will be a key year in the development of Media Luna.

With a solid plan in hand, a strong balance sheet, robust forecast cash flow from ELG and a team that has a proven track record of execution, we're well positioned to advance our strategic priorities, which we expect will result in a further rerating and value creation for our shareholders. We're very much looking forward to the year ahead.

So with that said, we'll now open the call to any questions.

[Operator]

[Operator Instructions] Our first question comes from Wayne Lam of RBC.

[Wayne Lam, RBC]

I guess first question, just -- just wondering, a couple of years ago, as you guys mine deeper in the pits, there are a couple of quarters where the levels of iron and copper increased resulting in a significantly greater cyanide usage. As you approach depletion over the next couple of years, are you anticipating something similar in terms of that iron content? Or have you guys been able to optimize to where the level of cyanide required is pretty steady through the end of the mine life?

[Jody Kuzenko, President and Chief Executive Officer]

Yes, I'll take that one, Wayne. It's Jody here. Thanks for the question. Soluble iron, no question, is the primary consumer of our cyanide, which is one of our most expensive reagents. It's really stabilized over the last number of quarters at roughly 70,000 PPM, which is a high rate for sure. But what we've done to deal with that is, a, focus on our blend plan to ensure that we're not chasing peaks and valleys on iron input and our solution with cyanide dosing. And b, introduced additional oxygen to the leach circuit and have trialed and now implemented a mock reactor, which essentially blows bubbles into the solution, oxidizes the iron, reduces cyanide consumption and may even give us a bit of a pop on recoveries. And so as we're getting deeper into the pits at El Limon and El Limon Sur, we feel pretty comfortable that we've achieved steady state with our cyanide consumption and with potentially some even further improvements as we complete our mock reactor program.

[Wayne Lam, RBC]

Okay. Great. And then the next one, just on the ELG underground, the mining unit costs looked like they took a nice step down this quarter. What was driving that? And is that a sustainable run rate to think about as the underground ramps up?

[Jody Kuzenko, President and Chief Executive Officer]

Yes. I'll take that one again. Wayne, unit costs were driven lower as we focused on a couple of things: one, increasing rates, so a higher denominator. And number two, equipment efficiency and optimization. And so what we now do, we have a national contractor supplying our equipment needs at ELG underground. That's driven down some of the costs instead of tucking that into our development contractor costs and paying overhead on that. And then with the optimized rates and improved rates, we're seeing lower unit costs.

We expect that trend to continue as we push that underground to 1,800 by the end of this year and then 2,000 tons per day by the end of next year. Once we hit that 2,000, I don't see much more than that available in that underground. The key then will be to extend it and extend it so that ELG underground becomes a contributor to our mine plan in that post 2027 period when we're looking to fill them down.

[Wayne Lam, RBC]

Okay. Great. That seems like quite a bit of cost savings. And then maybe just last one at Media Luna, have you seen the pricing on tenders now that they've kind of come back and where have you seen the pressure points on costs and where are the places where maybe some of those pressures have eased?

[Dave Stefanuto]

Wayne, Dave Stefanuto here. I'll take that one. So, so far to date, our costs are tracking well relative to our estimates in the technical report. We're certainly seeing offsetting increases and decreases both negative and positive movements on POs to date, but no discernible major trends at this time. Typically, mechanical equipment has been priced within our FS targets. We're seeing a little bit of pressure on electrical equipment supply, but nothing that we haven't been able to manage through early commitments.

[Operator]

[Operator Instructions] As there appear to be no more questions, this concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.