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Good morning, everyone, and welcome to the Wesdome Gold Mines Second quarter Financial Results Conference Call. I will give the call to Heather Laxton, Chief Governance Officer, to begin today's call.
Excellent. Thanks, operator, and good morning, everyone. Thanks for joining us today. Before we get started, we would like to take this opportunity to remind everyone that during this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could cause outcomes to differ materially due to a number of risks and uncertainties, including those mentioned in the detailed cautionary note contained in yesterday's press release and in the company's management discussion and analysis dated August 11, 2020. Both documents are available on our website and on SEDAR. Please note that all figures discussed on this call are in Canadian dollars unless otherwise stated. The slides used for this presentation and a recording of this call will be posted on the company's website. I'll now hand it over to Lindsay Dunlop, Vice President, Investor Relations.
Thanks, Heather. Here with us this morning, we have Duncan Middlemiss, President and CEO.
Good morning.
Scott Gilbert, Chief Financial Officer.
Hello, everybody.
Marc-Andre Pelletier, Chief Operating Officer.
Hello. This is Marc-Andre.
Mike Michaud, Vice President, Exploration.
Good morning.
And Raj Gill, Vice President, Corporate Development.
Good morning.
We will begin today with an operational review from Marc-Andre, followed by a financial review from Scott. Then a summary of H1 2020 and H2 guidance from Duncan. Mike will then take us through an exploration update, and Duncan will conclude with the summary and outlook. Please go ahead, Marc.
Thanks, Lindsay. During the quarter, the Eagle River mine has performed very well, considering the challenges linked with the pandemic with over 25,000 ounces produced. Some work such as exploration, mine entailing construction activities that were suspended in order to facilitate physical distancing, have gradually restarted in the second quarter. The Mishi Open Pit operations remained shut down and will restart in H2 '20. More higher grade from -- more higher-grade ore from the 303 was processed at the mill compared to budget as we deferred planned mill maintenance from May to August. With this shutdown, production in the second half of the year would be slightly lower than the first half. Mine development continued as per budget and a new drift is being developed to facilitate the exploration of the Falcon Zone from the underground. At Kiena, mine development processed during the quarter with over 300 million of ramp and access developments in the Kiena Deep Zone. The main ramp is now at the 111 meters elevation, and we plan to continue ramping down and to develop ventilation raises in the second half of the year. Following the positive results of the PEA, the company plans to undertake repair work at the processing plant in order to be prepared for an eventual restart of production. I will now give the call to Scott for a financial review.
Thanks, Marc. Compared to Q1 2020, Q2 cash costs decreased by 21% to CAD 882 per ounce. And all-in sustaining costs decreased by 14% to CAD 1,218 per ounce. Cash costs are trending higher during the year. However, the all-in sustaining costs are expected to be within the higher range of the 2020 guidance. During the quarter, we incurred $0.6 million of direct costs related to COVID-19. Q2 demonstrated strong financial performance with mine operating profit of $34.4 million and free cash flow generation of $17.7 million. With the solid performance of the mine and with increasing gold prices, cash margins are currently an impressive $1,483 per ounce and poised to grow further from these levels in the current gold price environment. Net income per share year-to-date 2020 is $0.21 compared to $0.12 per share in 2019. I will now hand the call to Duncan for a review of H1 2020 and H2 guidance.
Great. Thanks, Scott. Production in the first half of 2020 of 50,264 ounces puts us in good shape to deliver on our full year production guidance of 90,000 to 100,000 ounces. We are slightly increasing our operating cost guidance from CAD 875 or USD 670 to CAD 975 or USD 720. The primary reasons for this revision is the inventory adjustment in the first quarter. All-in sustaining costs are still expected to be within the original forecast of the CAD 1,280 to CAD 1,350 or USD 985 to USD 1,040 per ounce, albeit closer to the higher end of the range. Grades are tracking within guidance, and we expect to deliver on both ounce and grade guidance. I think based on where we are in the pandemic, these are excellent results, and I commend our operations team for the resilience during the quarter. I'll now pass the call on to Mike Michaud, our VP of Exploration.
Thanks, Duncan. While Eagle exploration was temporarily paused in Q2, we compiled and released drilling results completed in Q1 on the recently discovered Falcon Zone. It is interpreted that the Falcon-7 Zone now extends from surface to approximately 1,000 meters down plunge and as part of the up plunge extension of the 7 Zone currently being mined near the 1,000 meter elevation. Recent results include 314 grams per tonne gold over 6 meters of core length or 76 grams per tonne cut over 5.2 meter true width. This certainly is an example of the high grades in this area. This is really significant as the extension of this zone is proximal to mine infrastructure and has the potential to be included in future mine production and, ultimately, augment production rates in the medium term. Additional drilling is required to better define these zones, and this remains a priority in the second half of this year. Elsewhere, underground exploration drilling is continuing down plunge at the high-grade 300 East Zone, and those results will be released in the future. We had initially estimated underground drill meters for this year at 119,000 meters. This will likely come in now at 85,000 meters. Surface exploration meters will remain largely unchanged at around 30,000 meters. Right now, we have 2 drills underground and 1 on surface and expect to add additional drills going forward. At Kiena, all activities were ceased for 47 days until May 11 due to the Québec government's mandated shutdown of nonessential business. We are now returning to 100% drilling capacity at Kiena and expect to drill 70,000 underground meters this year. The development and the drilling activities have continued to focus on the conversion of inferred resources into indicated resources at both the A Zone and the VC Zones. Drilling has continued to confirm the overall continuity of the geometry and the high-grade gold mineralization of the A Zone and identified additional mineralization outside of the most recent resource estimate. The A Zone now extends down plunge in excess of 830 meters. This drilling will be included in an updated resource estimate expected in Q4. In addition, we are very excited to begin a 10,000 meter surface drilling program at Kiena. The drilling program is defined to test several prospective targets based on our reinterpretation of the regional geology after the MT survey was completed during the winter. Back to you, Duncan.
Great. Thanks, Mike. During the quarter, we released our Kiena Preliminary Economic Assessment study. The PEA demonstrates a low-cost, high-margin operation with low capital requirements and a short payback period while minimizing risk and maximizing shareholders' return. This PEA is based on the mineral resource estimate dated September 2019 and includes only those resources proximal to the mine infrastructure, specifically the A Zone, the B Zone, S50, VC Zones and the South Zone. The PEA indicates 102% IRR with low initial CapEx outlay of $35 million. On the basis of these extremely positive results, an updated resource estimate is planned in the fourth quarter, as Mike said, following -- followed by a pre-feasibility study and a production restart decision in the first half of 2021. Flipping the slide now. In the first half of 2020, we had strong free cash flow generation of $34.4 million, a company record. Now that some phase reopening has started to take place. We are in better position to provide details on budgeting for the second half of the year. CapEx spending is expected to be higher in the second half compared to the first half as we resume 100% drilling capacity at Kiena and increase development and exploration rates at Eagle. Free cash flow generation in H2 is expected to remain healthy despite our higher CapEx spending as we would like to achieve our 2020 budget. Interruption to operations due to the effects of COVID have been significant. However, I think that we've been able to manage quite nicely through this period. Exploration news flow will be consistent in the second half of the year, work is underway on the Kiena pre-feasibility study, and we expect this again in the second -- in the first half of 2021. We ended the quarter with $66.7 million in cash, higher than budgeted and more than sufficient to carry out this year's capital projects and fund a potential Kiena restart. As a part of Wesdome's growth strategy, we have now on-boarded a VP of Corporate Development, Raj Gill. Welcome, Raj. I would like to thank our employees for their hard work and stakeholders for their continued dedication during these uncertain times. The commitment shown by all to continue to advance Wesdome towards its goal of becoming Canada's next intermediate gold producer has been commendable. I will now give the call back to the operator to begin the Q&A session.
[Operator Instructions] Our first question comes from the line of George Topping with Industrial Alliance.
Duncan, the Eagle cost per tonne milled is the lowest since start of -- well over a year, anyway, since 2019, I believe. Is there costs that have been deferred there due to COVID and that they will come in with catch-up costs in the back half of the year?
Yes. No, you know what, George, we really have not deferred a lot of costs due to COVID. As it was, we only really captured our direct costs, and we estimated that to be around $600,000, which, in my mind, is a little bit paltry, considering the inefficiencies that we're kind of faced with right now. Like to give you an example, our workforce in order to facilitate social distancing. Like, as you know, Eagle River, we transport people underground by man carriers. All of a sudden, the capacity of the man carrier has gone down to 3 as opposed to 8, so it takes people -- so we've had a few challenges. And I don't think that we've really adequately captured that. So really, we're not shielding any of our costs due to COVID. No, it was just a really good quarter and based on our -- what we're able to do, we did obviously have a reduced workforce to allow for the social distancing. So I think that that really does contribute to where we are.
Got it. Are you attempting to do any work on Moss Lake given the Canadian dollar and gold price?
Yes. We're actually -- we're looking at options for Moss Lake as we speak right now. Yes. So obviously, Moss Lake becomes a very compelling project that's at CAD 2,500. So we definitely would like to certainly examine some of the options for that.
Got it. And then just lastly on the Kiena news flow that you mentioned, the next batch of drilling results, when are you expecting those?
George, well, it certainly is good to be drilling at Kiena again. Obviously, it takes a little time to ramp up here with the restrictions. But it's good to be drilling there. And we expect to start getting in the results from this recent drilling, sometime during August here. So we'll probably have a release sometime in September.
And our next question comes from the line of Don DeMarco with National Bank Financial.
On Capex, you mentioned CapEx is going to be higher in H2. It seems reasonable, but should we model the 2020 CapEx guidance? Or do you expect to push some of this into 2021?
Well, you know what, Don, our intent is to try to maintain our capital programs as we had planned. Whether or not we're going to be successful -- I mean, there's just a lot of sort of returning to full capacity. Isn't quite complete, I would say, so it's a matter of being able to get the work done. And the purchases are not, so obviously, that's -- you can definitely say that we are going to do that. But I think it comes down to some of the capital projects, I think, which have been delayed, obviously, with the COVID things. But our plan is to undertake a full capital plan as we had anticipated in the 2020 budget.
Okay. Sure. And congratulations on your corp dev hire. Is there any read-throughs here on strategies for M&A or long-term growth?
We haven't been shy about talking about our aspirations to become mid-tier. We think that there's opportunities out there. I mean we're very focused on the Abitibi in Canada. And I think that we definitely want to maximize our growth potential and accelerate it. So having Raj with us now certainly is going to give us a lot of breadth in terms of developing the organization. So I think it's really good.
Okay. And just finally, just continuing with the question that George had. So we're looking for maybe some Kiena drill results possibly in September. What about Eagle? Do you expect some drill results at Eagle in the next few months?
I would say that September, October, for sure. We only do have the 2 underground drills right now. We're adding the third in a couple of weeks here. But we are drilling at Falcon and the 300 East Zone. So of course, we expected things from those zones, so we'll be releasing those results, probably September or October.
And our next question comes from the line of Ralph Profiti with Eight Capital.
Really just one for me. Duncan, you talked about sort of this upward pressure on operating costs, and some of this is inventory adjustments and really accounting items. I'm wondering if this is translating into increased drilling costs because across the industry in different provinces, you're seeing exploration focus is getting ramped back up. And I'm wondering if that's causing any pressure on costs or getting contracted drillers out and what you're seeing on that side of the equation.
Well, Ralph, it had to really hit our cost. I mean what happened in the first quarter is as the COVID pandemic was becoming evident, we really accelerated our processing of our stockpile. We had like about 18,000 tonnes to begin with. So we weren't able to clearly see the future, are we going to be able to continue to operate or whatever. In Ontario, we are lucky enough to be declared an essential business. So we are fortunate now. We've been fortunate to manage COVID. I mean we've had no incidence of COVID in our operations. So we've been very fortunate. The drilling piece you do talk about is interesting because we are seeing that. It hasn't translated to cost yet, but it's been difficult to get a fully manned drilling force out. I think what it is a little bit is the CERB, which I understand, is due to stop August 30. So perhaps we'll have a more engaged workforce after that happens. But yes, you're right. I think there is certainly some issues with providing steady drilling manpower right now, but it hasn't translated to costs.
And the last question comes from -- we have a follow-up with -- from the line of George Topping with Industrial Alliance.
Just more of a cerebral question, but you do have a lot of cash on the balance sheet. Any thoughts about holding back gold sales, building up an inventory of gold on the balance sheet rather than cash?
Well, you know what, George, if you would ask me Monday, I'd say, yes, it's a great idea, but we got kind of counted yesterday. So I don't know. I mean I don't think that's really going to be a strategy of ours. I mean if you can foresee, like I say, the future, whatever the Ouija board or the crystal ball says that yes, maybe we can do that or look at some forward sales or something like that. But I think right now, we're quite pleased where the price of gold is. We budgeted at CAD 1,885 for 2020. And I think Scott's been selling gold at significantly above that. So it's been good. I mean you look at the cash we got on our balance sheet like a $66 million that's -- we never forecast that for 2020. So we're, all of a sudden, in a great position to be able to self-fund Kiena restart and look at different options for 2021 and get aggressive on our exploration programs. I mean since we've started here, we've always been maintaining and trying to build up the mines and the infrastructure. And now we're only starting to sort of expand our breadth of exploration along the strike length at Eagle. And as Mike mentioned, here we are, we've done this MT survey at Kiena, and it's shown some new structures that we weren't aware of. And has given us some really good drilling targets. So we're going to hit those with the surface drilling. And we've got a huge land position at Kiena. We've got 70 square kilometers of relatively untouched land. So lots of known resources on it that we need to sort of develop. So we're pretty excited about having the capacity within our own cash on hand to be able to start to contemplate a lot of these things.
Yes. Fair enough. Good use of cash.
And ladies and gentlemen, this does conclude today's question-and-answer session as well as today's conference call. Thank you for participating. And you may now disconnect.