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Good morning, everyone, and welcome to the Wesdome Gold Mines Third Quarter Financial Results Conference Call.I will now turn the call over to Heather Laxton to begin.
Great. Thanks, operator, and good morning, everyone. Thanks for joining us today.Before we begin, we'd 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 November 3, 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.Now over to Lindsay Dunlop, Vice President of Investor Relations.
Thanks, Heather. Here with us this morning, we have Duncan Middlemiss, President and CEO.
Good morning.
Scott Gilbert, Chief Financial Officer.
Good morning, everyone.
Marc-Andre Pelletier, Chief Operating Officer.
Hello. This is Marc.
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 year-to-date results and 2020 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. Production in the third quarter was 20,000 ounces lower compared to the previous quarter, mainly due to planned mill maintenance shutdown and the underground hoist system upgrades. More ore than expected from Eagle mine had to be trucked up to surface due to the delays in the installation of the new hoist controls. The hoist and the mill are now running well, and we have not experienced any problems since then.Production at Mishi resumed in the quarter as planned. Mishi operations were stopped earlier this year in order to reduce the amount of people at the camp, facilitating adequate social distancing. In Q4, we will undertake the construction work for the installation of the second ventilation fan on surface, which will allow more pressure in the west side of the mine, increasing the haulage capacity. This project will be completed early in 2021 and will increase the underground production to around 600 tonnes per day from the high-grade Eagle ore. Q4 grades are expected to be higher compared to Q3.Scott will now give us a review of the financials.
Thanks, Marc. In Q3, the total capital spending at both assets increased to $20.9 million from $11.4 million in Q2, primarily because we restarted exploration and development work at Kiena, after the Québec Government deemed it safe to do so. We spent $13.9 million at Kiena compared to $5.9 million in Q2, and as a result, are almost fully caught up in planned drill and development meters. As well we started the Eagle ventilation project, which will increase our production to 600 tonnes per day and also continue to work on increasing our tailings capacity.Ounces sold in Q3 were 21,700 ounces at an average realized gold price of CAD 2,532 per ounce. Free cash flow was $3.2 million, lower than Q1 and Q2 as a result of the increased capital spend. Cash balance has continued to grow with the cash at the end of the quarter of $73.5 million, up from $66 million in Q2. Net income per share was $0.10 per share, and the operating cash flow per share was $0.18 per share for Q3.Operating cost per ounce for the quarter was higher than budgeted due to less productivity with scheduled and unscheduled downtime and COVID-19 safety measures. Due to the pandemic, the timing of some sustaining capital projects were pushed from Q2 to Q3. And as a result, Q3 AISC costs were above guidance. We expect AISC costs to remain within guidance in Q4.Over to Duncan for a review of guidance and year-to-date summary.
Great. Thanks, Scott. Year-to-date, we have produced 70,272 ounces versus a full year guidance of 90,000 to 100,000 ounces. We are confident in achieving this guidance, likely ending the year in the midpoint of this range. We also expect to be within guidance on Eagle grade of 15 to 16.7 grams per tonne. Year-to-date, all-in sustaining costs are within the high end of the guidance range, and we expect to end the year within this range. Operating costs have been higher than budgeted. And due to the continuing situation of the COVID-19 pandemic, we expect this trend to continue into Q4.Over to Mike for a review of exploration.
Thanks, Duncan. Although exploration drilling at Eagle is currently operating at a reduced capacity due to COVID-19 restrictions, 3 underground drills and 1 surface drill are in operation. One drill continues to better define and extend the down plunge extension of the Falcon 7 Zone, which now extends from surface to the 1,000 meter elevation. Recent drilling returned 314 grams per tonne gold uncapped over 6 meters core length. This drilling was completed from the 772-meter elevation that was established to test the down plunge extension of the Falcon Zone. Since that time, additional mine development has been completed on 622-meter elevation to allow for drilling and is now within 50 meters in the footwall of the Falcon 7 Zone.With nearby development already established on the 772 and 622-meter elevations, the Falcon zones have the potential to be included in future mine production and ultimately, augmenting production rates in the medium term. Additionally, surface fly drilling program has commenced with one drill to test more regional exploration targets.At Kiena, full drilling and development capacity resumed in June. We are now currently operating 7 underground drills. The ongoing drilling program continues to focus on the definition drilling of the high-grade A Zone in order to convert inferred resources to indicated resources. We expect to publish an updated resource estimate in Q4 of this year, which will subsequently be incorporated into the prefeasibility study. Drilling has now extended the A Zone down plunge in excess of 880 meters.In addition, drilling has extended the VC1 zone 475 meters down plunge from 67 level to 107 level, where development drilling are presently being completed. We're also happy to have commenced our regional expiration with the start of a 10,000-meter surface drilling program.In addition to the ongoing drilling, access development is currently being completed towards the A Zone on 111 Level, so as to position the company to take a bulk sample. Results are expected before the end of 2020. Future bulk sampling on the A Zone will provide an opportunity to assess the geologic block model and rock quality characteristics and will provide the necessary information to complete the ongoing prefeasibility study expected to be completed in H1 2021.Back to you, Duncan.
Great. Thanks, Mike. I'd like to take this time to thank our employees, contractors and suppliers for their dedication and navigation of the evolving situation of the COVID-19 pandemic. Although the year has been challenged with the uncertainty surrounding the pandemic, we have achieved record year-to-date free cash flow of $37.2 million and completed some important steps towards advancing Kiena into operation. We expect to publish an updated resource estimate in Q4, which will be the basis for the prefeasibility study and restart decision expected in the first half of 2021.We have also made strides at Eagle, initiating short-term expansion projects expected to increase underground production to more than 600 tonnes per day and advancing development 9 to 12 months ahead of our production. Our cash position has continued to build, ending the quarter with over $73 million, which will fund the work to advance both the Kiena and Eagle River projects. We are well positioned.With that, I would like to open up the floor to questions.
[Operator Instructions] Our first question comes from George Topping of Industrial Alliance.
I was interested in the development at Eagle. We've seen other companies have underground development fall behind due to COVID personnel restrictions. Should we look for a fairly substantial increase in the costs incurred for the development in preparation for going to the 600 tonnes per day?
Good morning, George. As we know, Eagle mine, because of the type of the ore body, which is a narrow gold vein, we need a significant amount of development in order to maintain our production. So in order for us to get to 600 tonnes per day, we believe we are at this stage that we do have enough development ahead in order to sustain that level of production next year. So in terms of cost, I mean, it's -- I believe it's about $13 million, $15 million a year, just dedicated for development. So basically, we are at that pace as it is.
Got it. And then on the production -- gold production for next year to 100,000 ounces. That's still the -- still a logical or reasonable target?
Yes, absolutely. I mean, we're in the process of just tying up the budget right now, George. But yes, no, we're -- incremental increases towards that level and continue to go. Something I want to point out, and just because we got asked earlier about this ventilation project that we're doing is going to facilitate the production of 600 tonnes per day. Well, that's really just a step in the whole story here. We do expect to expand Eagle River production out to 800 tonnes a day in order to match our mill capacity.And so as we can see things developing with the Falcon 7 Zone and trying to bring that into production as soon as we can and get that shored up, would certainly aid us in that goal. So yes, we're definitely on our march towards that.
Good. Okay. Last question on Eagle before I hand it over, just briefly on the exploration around the mine area, around the lease area. You mentioned that in the last call, have you done much on that -- in that regard?
George, yes, we have. Actually, we had the surface drill, and we found the Falcon Zone, which we thought was very significant, given that it's in the volcanics. And now we're going to be bringing that Falcon Zone into production at some stage here. And so we're really happy with that. And what was interesting was when we drilled off the near-surface expression of that zone, it was a bit spotty. We weren't sure about that zone, but with depth, it seemed to get a lot better. So this is why we've been able to extend down to 1,000 meters. And that kind of looks similar to some of the other zones that we found within the diorite.So that's where we're going back now to looking at some of the other surface showings where we've had some good results on surface and started in the drilling. And really this year was just a program of going to some of those historic places drilling around them, better assessing those targets, so we can hit it with a much bigger program next year on surface. So we expect a lot more brownfields exploration is going to find zones. And we expect the surface drilling that's now ongoing with a bigger program next year, we'll start to follow up on some of these more regional targets. But I think there's a lot of good news to come out of here. I believe we'll be pretty successful. It's really an area that hasn't been very well explored, right?
And next, we have a question from Andrew Mikitchook of BMO Capital Markets.
Just a quick question on timing or expectations for the 600 tonnes per day. Is that kind of a ramping thing throughout next year? Or have you essentially done by the end of this year, your homework, so that the vast majority, if not all of next year is it 600 tonnes per day?
Andrew, we basically expect to be around that range in Q4. So really, it's not going to be a ramp-up. We believe that we're going to be there as the ventilation upgrade gets completed early in the year. So we believe we're going to be there.
Okay. And then just one other timing question. You guys reiterated the PFS for Kiena for next year for the first half. What would be the timing of the resource that goes into that? Does that come before year-end this year? Or is that going to roll into next year?
Yes, that's going to be before year-end. I think sometime in the first half of December, probably. We are working with our consultants to make sure we can hit that time line, and we want to make sure we have an independent resource estimate put out. So that should be coming then.
And so the cutoff for drill results is got to be very soon, I'm assuming that.
It's actually already happened, so -- which was sometime during sort of the third week of September. So we have that data and we're putting the resources together now.
Our next question is from Ryan Walker with Echelon Partners.
Just a quick one for me. So the COVID costs during the quarter were up to just shy of $1.3 million up from about just over $0.5 million in Q2. Is this kind of a level we can expect to kind of stick around for the foreseeable future until, I guess, a vaccine ultimately?
Yes. You know what, Ryan, I think we're comfortable with those costs. I mean, it's a matter of capturing. I think that really, we're probably not identifying all the costs. There are so many inefficiencies that I think we've almost just accepted right now in our daily routine. My prime example was 4 guys on the cage at Kiena instead of 12. And it just impacts the whole thing. I mean you need maintenance down there at the same time, you have development crews and the whole bit, and it just doesn't happen. It's always a staggered or delayed effect and the same thing goes with diamond drills and supervision and the whole bit. So that's just an example.I think -- but for certainly, I think we identified about $1.2 million this quarter. And so year-to-date, we're at $1.8 million. I think that that's pretty conservative compared to where some of our peers are probably tracking right now. However, we still strive to identify what we -- and we also look at where people are comfortable and the audit crew is comfortable on those cost collections.
And next, we have John Tumazos of John Tumazos.
Duncan, you've always been very conservative, both at St. Andrew's and Wesdome, avoiding debt and having very strong finances. It's notable that the cash balances are increasing even as you spend or restart Kiena, even making the finances stronger. Is this purely financial caution? Or are you prepared financially for another project potentially going from 100,000 ounces with the Eagle 200,000 neighborhood with Kiena to 300,000 due to exploration success, either at Eagle or Kiena or somewhere else?
Yes. Well, John, definitely right on the horizon is Kiena. There's no doubt. I mean the PEA indicated a fairly low level of capital expenditure, like we're sort of in the $35 million to $40 million range. That, obviously, is within our capabilities, especially if you project out into 2021, we foresee gold prices at this level. We're going to be generating a lot of cash from the Eagle. So really what we generate from Eagle, probably take care of Kiena without even touching our bank balance.So yes, that does certainly then give you to what's the next level. And so -- yes, it does give us the capability. I can't say that we have identified something at this point, but certainly, the opportunity is there for ourselves to continue with that financial position in order to parlay that into growth for Wesdome.
It's really great to finance the next discovery before you drill it out. Are there any parts of the infrastructure at Eagle or Kiena, 2 or 3 years down the road that might require replacement or investment that would be more than $10 million or $20 million?
At Eagle, I mean, we are going to continue to spend money at our tailings management area to build up some more capacity as we are growing our reserves. So that's something that we plan to continue spend. We have spent quite a bit of money at the mill last year and this year, and our mill is getting in good shape. So I think we're pretty well covered on that. For Eagle, mainly the Eagle mine, it's mainly equipment. So we are going to spend some money on equipment.At Kiena, we have spent quite a bit of money at the mill this year to get the mill back in production. So I think that is behind us. The key cost at Kiena is going to be development. So as we keep expanding the Kiena deep zone at depth, so we are going to drive that trend. And that's going to be the domain cost there, about 50% of the cost is just development.
Yes. The one thing just speculating on how the future may go at Eagle. I mean, it would be great to get a shaft deepening in there. We're -- but obviously, we have to have the encouragement to do that. So we need to understand what potential resources we would have below the 1,000-meter level at Eagle right now. So I think that, that might be that sort of level of CapEx, John, you're alluding to, like, what would be sort of the $40 million to $50 million. Really, that's just a raise up into the bottom of the shaft. We don't transport men and materials in that shaft. It's for rock only. So we could certainly do it certainly a less expensive cost and a different system of shaft.
And next, we have Phil Ker of PI Financial.
Just a question on Kiena. Other than the updated resource and fees coming next year, what other key milestones do you see being required to make a full go ahead restart decision there?
Phil, it's Duncan. Yes, really, what we're looking for is a comprehensive prefeasibility study that makes it very easy for our Board to say, yes, this is a go. And essentially, that's it. So we're locking down the resource right now. We're working hard on the PFS. We've got all -- everybody on deck in order to facilitate that. We're aiming for H1 of 2021. I mean, we would love nothing more than to put Kiena into production and getting into a commercial readiness by the end of 2021. So really, I think that's the next step for us.
And any significant infrastructure requirements? I think the previous question may have touched a little bit on that. But anything for the mill, hoist, shaft, things like that, required in the meantime?
In the meantime, though, the mill repairs are going very well. We're almost at that level where we could give it a test. We do want to upgrade some infrastructure, like we -- essentially the same thing that we did at the hoist at Eagle, which is just to put a digital drive-in, essentially, I think we have to do that at Kiena also. Other than tweaking ventilation and power, I think that really -- that -- Kiena is in pretty good shape, really, in terms of infrastructure.
And the bulk sample, are you planning and processing it there or elsewhere?
Absolutely, processing it in-house.
And next, we have a question from Ralph Profiti of Eight Capital.
Duncan, the Stage 4 that added 4 years to the TMF, are my calculations correct that this takes you to about 2029?
No, no. Ralph, that's only 4 years. So Stage 4 take us to 2024 sort of in around there. Yes. So we're planning what's the next. And with growing reserves and resources, of course, it becomes much more to the front burner of the stove, as we say. So a good problem to have.
Understood totally. Yes. And my second question on the ventilation project. Are you good now for 1,000-meter -- down to 1,000 meters at 600 tonnes per day because you talked about 800 tonnes a day being the milling capacity? So should we just kind of straight line it that, that's probably another $5 million or so to get you up to that? And if that's the case, I suspect that there's going to be no issues from a technical perspective as you move ventilation into the volcanics?
Yes. So really, what we're seeing here right now, Ralph, and that's a good point. I mean that ventilation provides adequate flows down at the bottom of the mine, which we're sort of pushing down to about 1,150 right now. So -- but as you know, the Falcon 7 is actually more of a lateral drive. So it's further up in the mine. So it won't actually have the same resistance for ventilation, we'll be able to provide volume.The other thing that's going to perhaps lessen our ventilation is our exploration here of the battery electric vehicles. And so that would lessen our ventilation requirements also. So it's 2-part, I would say. Right now, we're expanding out the ventilation that we have, and we're also examining battery electric vehicles plus wherever the next workplace comes around. And I think that Falcon 7 is a likely candidate. And I think -- I don't think it's going to be as difficult to ventilate as the bottom of the mine.
The big upside of the Falcon Zone is the shorter haulage distance to the shaft. So we see some production growth on that aspect.
And speakers, I see no more questions in the queue. So ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.