Torex Gold Resources Inc

TSX:TXG

Earnings Call Transcript

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Torex Gold Resources Inc. Fourth Quarter and Year-end 2019 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Mary Batoff, General Counsel and Corporate Secretary. Please go ahead.

[Mary Delores Batoff, General Counsel & Corporate Secretary]

Thank you, operator, and good morning, everyone. On behalf of the Torex team, welcome to our Fourth Quarter and Year-end 2019 Conference Call. Before we begin the presentation, please note that certain statements to be made today by the management team may contain forward-looking information. So please refer to the detailed cautionary note in today's MD&A.On the call today, we have Fred Stanford, President and CEO; Steven Thomas, CFO; and Jody Kuzenko, COO. Following the presentation, they will be available for the question-and-answer period. This conference call is being webcast and will be available for replay on our website.This morning's press release, together with the financial statements and MD&A, are posted on our website and have been filed on SEDAR. Also please note that all amounts mentioned on the call today are in U.S. dollars unless otherwise stated.I'll now turn the call over to Fred.

[Frederick M. Stanford, President, CEO & Director]

Thank you, Mary, and welcome to all on the line. We will follow the same pattern on this call as we did in Q3. Jody Kuzenko, in the COO role, will handle the operations portion of the call. Steve Thomas, in the CFO role, will follow with the financial highlights overview of the quarter.Before getting started, I would like to recognize Jody and the entire site team for the recent achievement of a phenomenal safety outcome. Earlier in February, they surpassed the milestone of 5 million hours worked on-site without a lost time injury. Achieving 1 million hours in the mining industry without a lost time injury is something to be celebrated. Achieving 5 million hours is almost unheard of. Congratulations to the entire team.After Jody and Steve have provided their updates, I will provide an update on Media Luna exploration and Muckahi. I will now turn the floor over to Jody for an overview of operations during the quarter.

[Jody Kuzenko, Chief Operating Officer]

Thank you, Fred, and good morning to all on the line. I'm pleased to report that we posted another solid quarter to round out 2019, producing 125,000 ounces in the quarter and 454,000 ounces in the year. This level of production not only places us at the high end of guidance but also surpassed the 2018 production record by 28%.As Fred mentioned, our production achievements were outdone only by our safety performance. We had no lost time injuries in the quarter and closed out the year with a lost time injury frequency of 0.63 over 1 million hours. This represents a 32% improvement over year-end 2018 and stacks up against best-in-class performance anywhere in the world.The 5 million hour milestone is something that we are all exceptionally proud of, and the entire team is committed to delivering 5 million more. Finally, on the ESG agenda, there were no reportable environmental spills in the quarter.Turning now to production. Performance excellence continued out of both the pits in Sub-Sill, but the mine is not breaking stride at all in 2019. In the quarter, an average of 16,000 tonnes per day was mined out of El Limón and Guajes. Grades averaging 2.7 grams per tonne is expected. Similarly, Sub-Sill contributed with an average of 1,000 tonnes per day in the quarter with grades averaging 7.6 grams per tonne, completely in line with the plan.Turning to the process plant. There are 3 key areas to report out on. First, performance excellence in SART; second, soluble iron as it relates to reagent consumption; and third, alignment issues in the SAG mill. Taking these one at a time.First up, SART. During the last market update, I reported that we had an excellent September through the SART plant with the agitators in the neutralization tanks having been changed out, and I am pleased to report that this trend continued for the entirety of Q4. Flow through the plant averaged 452 cubic meters per hour for the quarter against the design of 400. Copper recovery averaged 91% against the design of 91%. And cyanide recovery averaged 0.49 kilograms per tonne of ore milled versus the design of 0.47. With this sustained level of performance, I think we can safely say that we now have SART operating as designed.Next to soluble iron. In the third quarter, we reported the presence of soluble iron in solution was driving up cyanide consumption, and we were just starting to bench test various methods to oxidize the iron. At the tail end of Q3, we tried oxidizing iron in the leach circuit using plant air. That seemed to work so we moved on to bench testing and the addition of oxygen gas.With success on the bench, we moved into a field trial pumping oxygen into tank 3 during the first week of November. I am pleased to say that while levels of iron in solution went up from 61,000 to 66,000 parts per million from Q3 to Q4, our cyanide consumption had a reverse trend, went down from 4.05 kilograms per tonne to 3.52 kilograms per tonne from Q3 to Q4.We were so encouraged by the results that in January, we installed piping to an additional tank in the leach circuit and began to pump oxygen in there as well. Early days on the second level of testing, but results have been promising.In terms of impact to cash flow, every 0.5 kilogram per tonne of cyanide saved results in a cost savings of approximately $400,000 per month in cyanide alone. And there are resulting savings in downstream reagents used in the cyanide destruction process as well.Lastly, SAG uptime and alignment issues. SAG's throughput averaged 12,120 tonnes per day in the fourth quarter, relatively flat from quarter 3. The main vector that negatively impacted throughput in the quarter was an unexpected failure in the SAG coupling on the pinion side of the drive system. This happened in late December and took us 81 hours to repair, taking us off of our track of a record milling month to close out the year.You may recall that we had a similar coupling failure in June of 2019. That one was on the reducer side of the drivetrain. Given that both of these failures were alignment related, we immediately took the following actions. First, we undertook 2 separate independent inspections of the grouting and the soil plates under the SAG, looking to rule in or rule out the theory that some visible cracking in the grouting was contributing to the alignment issues.We landed 2 external alignment specialists on sites, one with global experience and the other from Mexico. And while temperature was already being tracked automatically, we also began to track and plot vibration measurements 3 times per day. And we took some extra time during our January shutdown to fully align all components of the drivetrain. Together with other maintenance being performed, the January shutdown was 88 hours all in.At this point, I can report that temperature and vibration data is holding within design tolerances. And we have seen an excellent run of over 14,000 tonnes per day milled in the period of a month between the January and February shutdown. While I don't think it's prudent to conclusively rule out that craft grouting has contributed to the alignment issues, certainly, the passage of time without temperature and vibration excursion is very encouraging. And I expect that we will have more to report out on this at the end of Q1.I will now turn the call back over to Fred.

[Frederick M. Stanford, President, CEO & Director]

Thank you, Jody. Steve, can you please take us through the highlights of the financial results.

[Steven J. Thomas, Chief Financial Officer]

Thank you, Fred, and good morning, everyone. Q4 was another strong quarter for Torex Gold, both operationally and financially. This quarter rounded out a record-breaking year for the company, leaving Torex with a far stronger balance sheet than at the start of 2019. Record production levels and elevated gold price in the second half of the year delivered over $300 million of cash from operating activities.Given this significant cash generation, in Q4, we elected to pay a further $66 million in accelerated debt payments in addition to the $20 million accelerated in Q3. This meant that we closed 2019 with principal debt outstanding of $180 million and a net debt position of $22 million, approximately $200 million better than at the end of 2018.The Q4 closing cash balance of $162 million underpins a positive working capital balance of $97 million. The reduction in working capital compared to Q3 arises as the debt prepayments made reduced the long-term portion of the debt balance rather than the current liability. Also the income tax accrual increase in Q4 as tax losses were used up in Q3. This current tax liability will be settled in Q1 of 2020.The other major component of the working capital balance is inventory at $129 million, up by $6 million from Q3, due largely to a $10 million increase in the ore stockpile balance reflecting the $300,000 increase in ore tonnes as we continue to mine rates above processing and after taking account of a primarily noncash impairment. The balance sheet reflects also that during Q4, we invested a further $12 million in deferred stripping activities and sustaining capital in line with plan and a further $11 million in the growth projects of Media Luna, Sub-Sill, El Limón Deep and further development of the Muckahi mining program.For the full year, this brings us to over $100 million invested to develop the open pits, invest in sustaining capital and advanced growth projects that will support near and long-term production. Per our guidance for 2020, investment in these programs will continue and grow for Media Luna as we develop the feasibility study, advance the infill drill program and commence the tunnel under the Balsas River.With this future capital program ahead of us and whilst we pay down debt during 2020 and 2021, we implemented a modest hedging program to cover 8,000 ounces of monthly production using 0 cost collar hedges with a call at $1,400 and above. We will continue to monitor the suitability of this program being rolled into 2021.Now turning briefly to earnings for the quarter and full year. Q4 produced over $102 million of EBITDA and $330 million for the full year. Along with the minimal net debt position mentioned earlier, this means our net leverage ratio is below 0.05, and along with other covenants under the credit agreement, we are in full compliance.Earnings from mine operations at $41 million took us to full year earnings of $161 million, underpinned by increasing price in Q4 versus Q3, which resulted in an average realized margin of $864 per ounce for the 127,000 ounces sold. However, earnings were lower than Q3 due to lower volume of sales and higher depreciation, largely reflecting the noncash impact of impairing the long-term low-grade and ore stockpile, along with depreciation of the previously capitalized costs of El Limón C and the Guajes West pits.I'm pleased to say that with all total costs for Q4 at $617 per ounce and full year at $619 per ounce and AISC at $767 per ounce for Q4 and $805 for the full year, both cost measures fall within our guidance range.This was achieved despite cost being impacted by elevated reagent consumption to treat soluble iron and the increased cost of the site-based profit share plan driven by our higher taxable profit position. Income before income tax expense for the quarter was $31 million and $118 million for the year. As indicated earlier, the company is now accruing current income tax in addition to the mining royalty, resulting in a tax expense for the full year of $64.5 million, offset by a deferred tax recovery of $17.7 million.The 2 key drivers giving rise to the sizable deferred tax recovery and the completion of tax losses and the relative change in the book value for property, plant and equipment versus the peso-denominated tax value for which the tax value was impacted by a 4% strengthening in the peso during the year. This has resulted in net income of $35 million at $0.41 per share for the quarter and for the full year, net income of $71 million or on a basic basis, $0.84 a share and $0.80 a share on an adjusted basis.In summary, Q4 has delivered significant free cash flow and earnings per share, and our closing balance sheet shows a healthy working capital position and a continued journey to a net cash positive position expected in 2021. In 2020, our focus will remain on maximizing cash generated through sustained production and cost control, strengthening our balance sheet through effective treasury management and enhancing corporate returns through a rigorous capital investment discipline. Thank you for listening.And with that, I will turn the mic back to Fred.

[Frederick M. Stanford, President, CEO & Director]

Thank you, Steve. I'll conclude with an update on Media Luna exploration and Muckahi. The infill drilling program at Media Luna provided a nice boost to the confidence in the geological model for the deposit. The team had 100% success rate in upgrading targeted inferred tonnes to the indicated confidence class, with a modest increase in grade.In 2020, we will drill to intercept another 100 targets with the objective of upgrading 2 additional areas of the deposit. This will give us 3 mining areas to include in the feasibility study, which is planned for release in Q1 of next year. Several trade-off studies are underway in preparation for the feasibility study. One of the critical trade-offs was how to access the deposit. We looked extensively at options to go over the Balsas River, on it or under it. And we have recently decided to go under the Balsas River with a 7-kilometer tunnel from the ELG to the Media Luna deposit.In effect, this makes Media Luna and extension of ELG, and we continue to use the facilities and systems that we have established over the past few years. The tunnel under the river will be far and away the best option from an environmental perspective with no risk of anything falling or leaking into the river. It will also reduce costs and permitting risk. With the designs we are working on, we expect that Media Luna will be one of the most environmentally and socially optimized mines in the world. We expect it to be an all-electric mine, and Jody is looking at solar power options to take advantage of the high solar loading in this part of the world.However, the tunnel under the river has a longer excavation schedule than some of the other access options. We expect it to be of lower cost, but it does pose a schedule risk if not started this year. Hence, we have advanced some of the Media Luna project build CapEx to 2020 to get started on this tunnel and for infill drilling to further add to the reserves. Note, we have diamond drilled under the river and the rock quality is excellent for tunneling.Drilling in ELD and Sub-Sill also continues to be successful in extending the high-grade mineralization. We will be investing capital in 2020 to get ELD opened up for mining and extending the Sub-Sill infrastructure. Interestingly, these deeper discoveries are getting down the elevation of the processing plant, which opens up options for future lower cost access.Continuing with a Muckahi update. 2019 was a year of testing the more innovative aspects of the mining system. We demonstrated that we could excavate tunnels using overhead monorail-based equipment that we can excavate tunnels at a gradient of minus 30 degrees, which is 4x deeper than conventional tunnels and hence, 1/4 of the length to achieve the same elevation change. We demonstrated that we can achieve conveyable fragmentation in both short-haul and long-haul primary blasting. We also demonstrated that we can muck out a long-haul open stope with a low-cost 30 horsepower electric slusher.2020 will be a year of perfecting the processes that we have demonstrated as viable in 2019 and moving on to test the conveying systems that are part of the Muckahi system. The flexible tramming conveyor has been commissioned now. The steep ramp conveyor has been manufactured and is in transit to site. The conveying solution from the open stope brow to the football -- foot wall will be tested later in the year.In the Media Luna tunnel, we will test using conveyors in the excavation process. We are expecting to excavate that tunnel at advanced rates that are -- that will challenge the modern era records for drilling blast tunnels. We are also advancing on the design work for the services to support this mining system of the future. The current focus is on automating mine design. The pace of inbound queries from other companies, corporates is increasing. 2020 is going to be a very interesting year for Torex on a number of fronts.I'll now turn the floor over to the operator to coordinate any questions from call participants.

[Operator]

[Operator Instructions] Our first question comes from Trevor Turnbull of Scotiabank.

[Trevor Turnbull, Analyst]

Yes. I had a couple of questions. I guess the first one, just related to some of the work you were doing with cyanide consumption and the iron. You mentioned that you've got it down about 0.5 kilogram per tonne. And it sounded like it was around 3.5 kilograms per tonne. I just wondered, in a perfect world, kind of what is your target for cyanide consumption.

[Frederick M. Stanford, President, CEO & Director]

I'll answer that. We've just started with tank -- the second tank on the cyanide consumption. And we would expect the results to about double what we saw in the first tank. But if we get down to 3, we're doing well.

[Trevor Turnbull, Analyst]

Okay. And then a quick question on Muckahi. You've talked about having tested the ability to do these excavations at 30 degrees. And I know you're waiting to get a conveyor so that you can convey up that steep ramp. I just wondered, what are you doing in the meantime to actually get material up that ramp? Or is it going out to -- is it going out another way?

[Frederick M. Stanford, President, CEO & Director]

Right now, we slush it up the ramp. And the site tour will be there tomorrow and the next day, and people will get a chance to see that. But we slush it up the ramp. And later on, when we use the conveyor and the excavation process, we'll slush onto the tail end of the conveyor as we advance it down the ramp.

[Trevor Turnbull, Analyst]

Okay. And then the last question, Fred. You came out with the first tranche of updated infill drilling for Media Luna and I couldn't recall. Had that resource calculation also taken into account any dikes that you have at Media Luna? I know you've gone and done those calculations in other parts of the mine. But I couldn't remember if that had been adjusted for Media Luna yet?

[Frederick M. Stanford, President, CEO & Director]

Yes. Going back a few years, Trevor, it was the work on the dikes in Media Luna and the age dating of them relative to the period of mineralization that led to the changes in ELD. So all of those things were included in the very original Media Luna resource.

[Operator]

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Stanford for any closing remarks.

[Frederick M. Stanford, President, CEO & Director]

Thank you, Ariel. In conclusion, Torex has a lot of exciting catalysts in play for the near, medium and longer term. ELG is a beautiful foundational asset. The team is delivering on the potential of that asset. The Media Luna Project is moving forward on schedule and shows great promise to make the ELG asset a cash generator for many years into the future.Muckahi continues to demonstrate that it has the potential to be an industry disruptive mining system and a strategic advantage for Torex. These are interesting times to be a part of the mining company that Torex is and is becoming.We look forward to the next call to report the Q1 results and signing off. I hope that you all have a wonderful day.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.