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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for standing by. This is the conference operator. Welcome to the Pure Gold Mining Inc. Q2 Operations Update and Q3 Outlook Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]
I would now like to turn the conference over to Mr. Adrian O'Brien, Director of Investor Relations and Communications. Please go ahead.
Thank you, operator. Good morning, everyone. My name is Adrian O'Brien. I'm Director of IR and Communications for Pure Gold. First of all, I'd like to thank everybody for joining the call today. And before we begin, we'd just like to note that we are going to be making some forward-looking statements during the presentation, so you should be cautioned that actual results and future events might differ from those noted today. The commentary may refer to various non-GAAP measures, definitions and reconciliations that are included in the company's MD&A released August 15, 2022. All dollar amounts expressed in the presentation and the associated financial statements and MD&A are in Canadian dollars, unless otherwise noted. For today's call, please refer to the Q2 2022 financial and operations news release issued August 16, and the accompanying financial statements and MD&A which were posted on our website and have been filed with SEDAR. This conference call is being recorded and will be available for replay later today through August 23. So if you happen to want to replay it or share with someone else, you're welcome to do so. Replay information and dial-in numbers will be available on our website and will remain on the website until August 23, and the replay is no longer available. On the call this morning, we have President and CEO, Mark O'Dea; Chief Financial Officer and VP Business Development, Chris Haubrich; and Chief Operating Officer, Terry Smith. I'm now going to turn the call over to Pure Gold President and CEO, Mark O'Dea.
Thank you, Adrian, and good morning, everyone, and welcome to our conference call. I'm Mark O'Dea, and I'll be joined by Terry Smith and Chris Haubrich. And together, we're going to share the delivery of this update. Our team has been engaged in additional turnaround since January of this year. So for the past 7 months, it's been a journey of what I call relentless forward progress. And as we all know, this is not a business of instant gratification. Oftentimes, there's a considerable time lag between making a course correction and actually changing direction. We're happy to report that the course correction we started 7 months ago has now pointed us in a much better and much healthier direction operationally. Effectively, our costs are under control and are manageable, and our production is moving up in a predictable and systematic way on the back of a whole suite of internal and external changes. This has come about through a complete rebuild from the ground up, starting with our team, our operating systems, our resource base, our grade control approach and importantly, our understanding of the ore body itself based on 18 months of production. I want to pause briefly here and spend a little bit of time upfront talking about our new mineral resource estimate or MRE, that we announced last week, which was done by SRK. I'll refer to a few slides and the figure in front of you now is a long section showing the new resource model that's color coded by grade. The first thing that stands out is that this is a large continuous high-grade gold resource with 1.65 million ounces of indicated and 370,000 ounces of inferred. Importantly, it is wide open with totally unconstrained growth potential. All that means is more drilling. The next thing that stands out is that there is a general trend for the deposit to get higher grade with depth. And in particular, as soon as you get out of the McVeigh zone, which is in the upper part -- upper left part of that image and into the deeper Austin and South Austin zones, grade picks up, and you can see that with the hotter colors. I'm happy to report that we're almost out of the McVeigh zone and into this better material.
The next figure that I want to walk you through is a plan map of the enveloping surface of mineralization that was attached to that same press release. What stands out here so clearly is the profound change in geometry of the deposit from the McVeigh zone on the left-hand side of your image to the Austin and South Austin zones and the rest of the figure. The McVeigh zone is [ wispy ], it's thinner and much more complicated than the rest of the deposit. And as noted above, it's also lower graded. In contrast, the Austin and South Austin zones are more tabular. They're coherent. They've got simpler geometries and they're also higher grade, and they make up 90% of the resource ounces, which is a great thing. So one of the most profound conclusions to come out of the new MRE by SRK is the realization that the McVeigh zone was in hindsight the wrong place to start this mine. We should have started deeper down in the Austin and South Austin. And starting this month, a greater percentage of material will come from those 2 zones, and we anticipate we'll start seeing better overall production performance. Before we move on, I do want to touch on the robustness of this MRE. It's based on 1,700 new diamond drill holes and 40,000 new underground chip samples and test hole results and is supported by 18 months of continuous mining operations. It's based on 77 individual model domains, and each of those domains had its own tapping parameters and geostatistics. And importantly, MSO shapes were applied so that all the reported gold falls within these MSO mining shapes. What that will likely mean is a higher conversion rate from indicated to reserves when we complete our PFS study later this year because we've already started with these MSO shapes. Before I hand it over to Chris and Terry, I want to emphasize that this is an asset with broad strategic appeal, a fully built operating mine in Canada underpinned by a multimillion ounce high-grade resource that is rounding the corner of its operational turnaround. Yet there is still a massive dislocation right now between our market valuation and the intrinsic value of Pure Gold. For example, the average enterprise value of junior producers around the world is around USD 900 million. The enterprise value of Canadian gold developers and that is companies that haven't even built or, in some cases, haven't permitted a mine that alone operated one is USD 375 million. By comparison, Pure Gold's enterprise value today is less than $150 million. And with operational performance, that value gap should get filled. As I hand the call over to Chris and Terry to get into some more specific operational details, you'll notice that we are much more interested in where we are today and where we're going for the balance of the year as opposed to where we've come from. While it's important, obviously, to understand the past, it is far more important at this stage to recognize that we're through the bulk of the challenges and have largely figured out the blueprint road map for success of this deposit. Over to you, Chris.
Thanks, Mark. At the beginning of the second quarter of 2022, we had some difficult decisions to make. And as a result of the decisions that we did make, the Pure Gold mine underwent significant and foundational changes. These changes were painful, but necessary to position the mine and the company for long-term success. At the beginning of this past quarter, our business was won with costs that were too high, treasury that had been depleted and a turnaround plan that was underway, but only just in its very early stages. And it was in that context that we set our priorities for the quarter: number one, to improve safety culture and safety performance, something that Terry will speak more on later; number two, to attack costs aggressively, but sustainably; number three, to ensure the company has sufficient liquidity and financial flexibility to achieve its goals; and number four, to rebuild short-term and long-term planning processes that Terry will speak on later. At the end of the second quarter, we were successful on all fronts. In a relatively short period of time, we dramatically reduced cost, something that I'll speak on more shortly. We also did so while improving safety performance materially. We successfully closed a series of financing transactions, which collectively provided both near and medium-term liquidity to the company, while also structuring and restructuring new and existing agreements. The changes made in the second quarter we interpret to be nothing short of long-term and foundational in nature, and we believe that these changes will continue to contribute to the success of the Pure Gold mine for years, if not decades to come. But these changes did not come for free. As we made the difficult but necessary decision to focus on cost, safety and financing as priorities 1A, 1B and 1C, the area that suffered the most in the second quarter was production. Second quarter production of 3,509 ounces does not at all represent the production capability of the Pure Gold mine, in our opinion, nor does it reflect all of the significant progress we made in the second quarter. There are several factors which contributed to the quarter's low production, some within and some outside of our control, and we'll discuss those later on. But importantly, we are forecasting significantly improved production in the third quarter and beyond, which we'll walk through shortly. Before we break down production, I want to take some time to discuss some of the important details related to our successes in the second quarter with respect to both cost reduction and financing.
First, on costs. Operating plus sustaining capital costs in the second quarter were reduced 30% compared to the first quarter or approximately $4 million to $5 million per month savings on average. And importantly, we expect to retain the majority of those reductions in the third quarter on and beyond, even as the mill ramps up to full-time duty. In addition, we've identified several other high ROI cost reduction opportunities that could reduce our costs even further, including to name a few that are already underway, installing a new camp, replacing a fleet of diesel compressors with new electric compressors and upgrading our mine air heating system.
And if we look a little bit longer-term, the opportunities to reduce costs further are effectively endless, and we are integrating many of those opportunities into our ongoing pre-feasibility study and updated life of mine plan right now. We took a big bite out of our costs in the second quarter, but there's a lot more to be done in the quarters to come. Along with reducing costs and improving safety, we needed to address the company's liquidity in the second quarter. On May 25, we closed an equity financing for gross proceeds of $31.1 million, and we also settled $3.1 million in debt per shares on the same terms as the equity financing. Importantly, the financing was structured with a full 6-month warrant design specifically and intentionally to inject a further $40 million of capital into the company before the end of the year, if all the warrants are exercised. This financing and the structure address both short- and medium-term capital needs for the company. In addition to the equity financing, we also negotiated several key changes to our existing credit facilities with our lending partner, Sprott Resource Lending, including an additional USD 6 million credit facility, which effectively capitalized interest stream and PPA payments for most of the rest of the year. A deferral of the first of 4 scheduled principal repayments, which unlocked $12 million of liquidity for the company over the next 12 months. And we reduced covenants to provide financial flexibility while we continue to execute this operational turnaround plan. Given all of these significant positive progresses made in the second quarter in these key areas, we entered the third quarter in a stronger position than otherwise would have been possible. We see much stronger production in the third quarter as a result of our efforts, and we're excited about what's to come, not only in the third quarter but beyond. Now I'm going to hand the call over to Terry to walk through some important operational focused updates, including an outlook for the third quarter and 2023. Over to you, Terry.
Thanks, Chris. I'm proud of the progress we made in Q2. It came at the cost of some production, but allowed us to address some underlying issues that are really holding back the business. As Mark indicated earlier, potential of our assets should not be measured against our Q2 results. What we've created here is a platform we can work with and grow. It is exciting to report that we are nearing the end of our stabilization efforts for the operation. It's been a huge undertaking by the team to revamp how we're doing things while we continue to operate. Back when I started with the company, we indicated that this would take us until the third quarter to [ ride ] the ship, and we're on track to deliver. Chris covered costs and liquidity as the first 2 areas of priority and focus for us. From there, I'll cover highlights from July and the first half of August and the continued progress we've made turning around the operation starting with safety performance, then I'll talk about our retooled planning process. One of the most important things to get right from a culture standpoint is safety. The health and well-being of our employees is paramount, and we know a safe operation is also a successful one. I've personally spent a lot of time in the field with the workforce and have had some really memorable conversations on how we can improve. Likewise, Bryan Wilson, our VP and General Manager, has reset expectations with the team regarding what a safe mine looks and feels like. Our efforts are starting to pay off with our incident frequency rate dropping to 4.1, which is less than half of what it was back in February, and we had a great run of 128 safe days without any injuries. I'd like to thank everyone for their leadership in making this part of our turnaround story possible. Now I'll get into production. As Chris touched on, one of our priorities for the quarter was to retool our planning and execution systems that connect geology and engineering to the miners at the face. Our plans now incorporate the latest infill drilling results, deep geological review, economic analysis beyond simply applying a cutoff grade and significant team collaboration and communication with high visibility of results.
In short, we have all the different departments speaking to each other, working as a team and making good informed decisions. As a result of getting ourselves organized, we now have 12,000 tonnes of drilled inventory ready to blast, 16,000 tonnes of stopes in progress between development and drilling and another 31,000 tonnes completing grade control. Combined, this totals 59,000 tonnes with an average grade of 5.8 grams per tonne, which is good for about 2 months of production inventory, and we'll continue to grow this inventory systematically. With all the measures we've taken from a planning and execution perspective, we now think we have everything we need to be successful. In fact, we are already seeing some great results in Q3. We achieved record ore mining in July, more than filling our available mill capacity for the month. Our mill performance in August so far has been great with month-to-date grade near average resource grade, and our last weekly pour of 41 kilograms was a record for the year. Our team has a strong conviction that great results will continue to roll off the operation in the near-term as we expect to achieve site level cash flow this quarter. Mark did a great job of highlighting our new resource model earlier. Importantly, we are already moving forward with this new model in a few different ways. First, the operation is excited to extend our planning horizon using the new SRK model. We see some excellent opportunities in South Houston and Austin to transition the mine to higher grades in the near-term. Next, we are focused on the optimization phase of our pre-feasibility study where we'll answer some key strategic questions like the timing for recommissioning our shaft for hosting, with the mine and mill throughput -- what mine and mill throughput we should scale up to and the overall development plan to support efficient operations of a long mine life. Also, we expect a large portion of the indicated resource will convert to reserves as we get into detailed planning after optimization is complete. By taking this approach, we can ensure that we have a life of mine plan that maximizes NPV for this high-grade deposits.
I'm looking forward to reporting back in the fourth quarter on our Q3 results, our near-term production outlook with the benefit of this new resource model and the results from our pre-feasibility study. With that, let's open the call for questions.
[Operator Instructions] Our first question is from Rick Hanley, a Private Investor.
Yes. I'd like to know with all this new financing, how many additional shares have you issued or will issue in the future? And what that will bring your total shares to in the future?
Chris, do you want to answer that?
Yes, happy to answer that one. As a result of the equity financing that was closed in May, we issued around 227 million new shares. That brings our total share count today to approximately 729 million. We have, as a part of that financing, as I mentioned, the same amount of warrants with the November expiry date. So 227 million warrants that may be exercised. If all of those warrants are exercised in November, that would bring our share count to something like 955 million shares.
In addition, there are some options outstanding as well at various strike prices, but the majority of our options are not in the money and not likely to be exercised at these prices.
But moving into the new area, I know you gave out the numbers of ounces per tonne, but third and fourth quarter overall, how much gold are you expecting to recover from the new area?
Yes, I think you're -- Rick, what you're getting at, this is Terry here, is sort of the split between McVeigh, Austin and South Austin. Mark was referring to McVeigh and the structural complexity there relative to Austin and South Austin. We're particularly interested in the South Austin area. It's been a relatively small portion of our production project to date.
As you can see in the long section that we had up on the presentation, our West ramp actually sneaks down to the top of that portion of the deposit. It's the highest grade limb of the deposit that we have access to. So year-to-date, we've been sort of 50-50 between McVeigh and the Austin zone, which is accessed mainly with our East ramp on that long section image. And as we move forward, that percentage will increase up to 70% and 80% as we progress through the end of the year. Does that answer your question, Rick?
To some extent. You must have some projections of what you're looking at for how much gold you will pull out of the ground in the third and fourth quarter based on your drilling results and the access -- to ease your access to getting to the gold, that's what I'm really looking for.
Yes. So in our news release, we provided some tonnage and grade ranges that get you to the end of the third quarter. And we're looking to get that in our back pocket and then come back to everyone with some near-term production guidance as the third quarter wraps up.
The next question is from David Smith with Morgan Report.
If you can hear me now?
Yes, we can hear you, David.
Am I speaking with Mark?
Yes.
Mark, you may remember about a year ago, you and I had tremendous talks, and I listen to you as someone who has been able to pull off this concept successfully several times before. And then I hear this thing goes first for was the best place to take a profit on the way down to USD 0.02 to USD 0.07. And I'm just wondering how someone with your capability has done this before, and who builds this as one of the best projects out there, 94% better than anything else is going to put out such a torturous circumstance was basic things were overlooked like drilling low -- drilling a stope that has a low yield and you're paying too much for a [ camping ] stuff. I mean I wouldn't know this since automatically just be [ strucked ] out and taken care of. I'm not worried about the yield right now when we're going to get gold, but all-in sustainable cost.
And I look to this thing and read it twice in the last few days. And it's -- I'll tell you, it's the most tortuous thing that I've read in 25 years in looking at a project and trying to parse out what what's likely to happen to go on and all the real important details. And I'm not trying to be a sticker too much, but going months without any real information apparently through several management teams and they're expressed involved. This is a sharp [indiscernible]. How do people get so far off based on this? Or am I missing something really, really fundamental and important?
Well, that was a long question, David. I guess the short answer is mother nature surprised us in a lot of ways at the beginning of our mine life here. We started life in the McVeigh. It's turned out to be geometrically more challenging than we had anticipated and required a lot more drilling than we thought it needed. We paid the price for that. We all have. It's required a whole new assessment in terms of how to approach this operation, it's become a lot more drill-intensive. We've had to retool our team, as we said, and build a whole new operating system around success here. And it's taken a lot of time, a lot more time than any of us feel comfortable about. But we've pushed through this, and we remain optimistic that this is a deposit that can be and will be mined successfully, and we're trying our best to do that.
Our next question is from Alex Terentiew with Stifel GMP.
Just a couple of questions here. First one on the financials. I understand. I appreciate how it's been difficult to see you guys have had to do a lot of refinancing and restructuring of stuff over the past few months. But can you just clarify for me, debt repayments or debt payments, interest payments? Any other financial commitments that you have before year-end? I just want to make sure I have a better -- a good handle on what those are in your current ability to meet those obligations? So I'll just start with that one first.
Alex, it's Chris here. So with respect to our credit facility with Sprott, which is our only credit facility, we make quarterly interest payments at the end of the quarter on the quarter, so June 30, September 30, December 31. Our June payment has been made, of course. With respect to September, that payment will be made, though we won't be making it out of our treasury. We will instead draw down on the additional USD 6 million facility that we agreed with Sprott in July, and that's what that facility is there for.
As I mentioned in my remarks, it's a way of capitalizing interest payments for the balance of the year. The same is true of stream and PPA payments. PPA stands for production payment agreement. Those are a part of our credit agreement with Sprott. They are revenue based. So we only pay them as we sell gold. All of those are effectively covered by the USD 6 million credit facility and don't require any additional new cash outlay for the company until the end of the year. With respect to principal repayments, we amended our principal repayment schedule just last month, such that we won't be making any principal repayments until September 2023. And those payments that we moved, there are 4 of them in total, have been deferred out to the bullet of our repayment schedule in August 2026. So in aggregate, those principal repayments freed up another $12 million of liquidity for the company over the next 12 months.
All right. So aside from those, I mean, there's -- I guess, just your basic working capital needs is what left, but there's no other Sprott-related obligations, is that correct?
That's right. There's no more obligations related to our secured credit facility. We do have several unsecured creditors just as a part of day-to-day operations, but no scheduled or contractual payments with any of them.
And then with regards to those, I mean, covenant-wise, how are you currently on staying within your covenant requirements?
At the end of the second quarter, we were in compliance with all of our covenants in the credit agreement.
Okay. And do you -- I mean, I know it's a tough question to ask, but to answer sometimes, I'm sure. But are you -- do you anticipate to remain compliant with those as long as you hit your target of getting cash flow positive at the mine later this quarter?
Yes. I mean, yes, we have a very strong and collaborative relationship with our lending partners at Sprott. They are very much in the know with respect to the progress and pace of the operational turnaround. They know everything we know. We've -- you've never received a notice of default from Sprott or had to get even close to that. We have in our past negotiated and renegotiated principal repayments, as I just discussed, as well as covenant amendments as needed, and we expect that going forward in the future, we will continue to be able to come to those agreements as needed.
And I will add, particularly in the context of our ongoing strategic review process, Sprott and Pure Gold share some common interest in -- a lot in allowing the company to continue and remain on side of its covenants. So yes, I expect that we'll be able to continue to amend as necessary covenants going forward. But of course, I can't guarantee that until it happens.
Okay. And one last question, if I can, just on the resource. I mean, the grade came down the resource. Now -- and I understand this could be a difficult one to answer given you're doing the feasibility or previews and new life of mine plan and everything right now. But any read-through you can give us as to what we can expect in the reserves and kind of longer-term plan? Should we anticipate reserve grades to also come down kind of a similar amount? Or is there an opportunity to get the costs lower than they were before, if the grade does come down? I'm just trying to think there's the near-term and obviously, kind of getting your guys selves ramped up and showing that you can see near-term, but I'm just trying to get a better handle on what this means longer-term?
Alex, it's Terry here. I can take that one. I mentioned in my remarks that we feel pretty strong that a large portion of that indicated resource will convert to reserves. I'll punt on getting any more specific than that for a couple of reasons. The optimization work that we're doing is ongoing, and we actually flex cutoff grade, throughputs, OpEx, CapEx, a whole string of variables as we seek to really find that maximum NPV for the life of mine plan. And by flexing all of those things, dropping cut-off will mean the reserve grade is lower. Increasing cutoff in the reserve grade will be higher. So we need to kind of keep that in mind as we solve for a maximum NPV. So I can -- that gives you a little bit of color from that perspective. And I also mentioned in my remarks that the resource model is now being used by our team at the mine to extend our planning horizon out one of the questions earlier just around proportions of McVeigh versus Austin and South Austin and sort of generally kind of a guidance question. We've been reluctant to put guidance out because one of the key pieces there was having a confident resource model to plan with, and we haven't had that until now. And so by the time the fourth quarter rolls around, we'll be able to provide some of that near-term guidance based on this new resource model and that will give you sort of the first indications, I think, of how that resource model is translating into planned grades, which would be analogous to reserves. Does that make sense?
Yes. It does.
[Operator Instructions] As there appear to be no further questions, this concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.