Equinox Gold Corp. (OTCPK:EQXGF) Q4 2019 Earnings Conference Call March 2, 2020 11:00 AM ET
Rhylin Bailie – VP, IR
Christian Milau – CEO
Scott Heffernan – EVP, Exploration
Conference Call Participants
Kerry Smith – Haywood Securities
Arun Lamba – TD Securities
Thank you for standing by. This is the conference operator. Welcome to the Equinox Gold Fourth Quarter and Fiscal 2019 Results Conference Call and Webcast. 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 Rhylin Bailie, Vice President of Investor Relations for Equinox Gold Corp. Please go ahead.
Thank you, operator. And thank you very much and thank you for everybody for joining us today to discuss our Q4 and fiscal 2019 quarterly results. We will of course be making a number of forward-looking statements today. So, please do take a moment to see the continuous disclosure documents on our website on SEDAR and now on EDGAR.
I’ll now turn it over to our CEO, Christian Milau.
Thanks, Rhylin. Welcome everyone to our last standalone quarterly webcast prior to the close of the merger with Leagold. Exciting times turbulent in the markets in the last few days but we’re really pleased with our quarter four results and full year 2019 results. And we’ll walk you through the results here and touch on the merger at the very end.
On the first Page 3 here, health and safety wise Mesquite continues to have a no LTI 3-year period and very well done job there by them. We’ve had two minor incidents at Aurizona in the final quarter so two LTIs, but overall a good year.
In terms of our combined operating results, we had a really good quarter here with 80,000 ounces of gold produced and at a lower cost. So it translates through to very good financial results with a realized gold price of $14.82 as the gold price continue to appreciate in the quarter four period.
Mesquite produced 40,000 ounces and it costs $881 all in sustaining cost per ounce of gold or well below guidance. So it had an excellent quarter. And Aurizona again, had another ramp up versus Q3 into Q4 where they produced 40,000 ounces at $814 all-in sustaining costs, which again is well below guidance. So, good job, well done by the teams of the operations for the quarter.
Turning to the next page, the quarter four financial results. The consolidated financial results in terms of mine operating earnings and adjusted EBITDA were very strong and significantly improved on quarter three, due to the individual mine performances. So we produce $39 million of operating earnings from the mines and almost $50 million of adjusted EBITDA.
In terms of net income. We had an adjusted net income of $21 million. And that was in-line with our expectations. The overall net loss on the P&L was $8.5 million. And the reason for that difference primarily is due to a $27 million noncash loss related to the change in the fair value of Canadian dollar warrants, which are treated as a derivative liability under IFRS.
And as a result of having a very substantial increase of our share price, since the announcement of the merger, we end up recording a loss for a fair value adjustment on these warrants in our P&L. So it’s noncash. And if these were denominated in U.S. dollars under the IFRS rules, there’d be no change. So it’s a bit of an accounting cork.
In terms of our liquidity and cash position, we attached at the end of the year of $68 million. So a very solid cash position surpassed our expectations for sure. Withdrawn debt of just over $130 million, which again is being refinanced in the merger with legals and convertible note outstanding of just over $125 million.
Turn to the next page looking at development. There’s a lot of activity in the quarter and of course in the full year. We commenced the Phase 1 construction at Castle Mountain. We’ll do a short review of that in a couple of slides here.
We initiated the Phase 2 Castle Mountain feasibility study, which is moving along nicely. And we advanced two things at Aurizona, the underground study, which we have targeted for mid-2020, as well as almost 7,000 meters of drilling at Tatajuba, which will get out an amazing resource around midyear this year.
And in terms of the corporate side of things, we’ve graduated from the Venture Exchange to the TSX during the fourth quarter. So that’ll allow us to be included in the TSX composites in quarter 2 of this year.
And again, we announced the at-market merger on December 16th with legal mining. We’ve had great market reaction and support from that. So very pleased with how the market interpreted this premium merger.
On the back of that, our liquidity on a daily basis has gone from $1 million to $2 million a day up to $10 million to $20 million a day. So again, lots of trading with also the expectation of going to the indices later this quarter.
And again, the same time as announcing that merger we announced the $670 million refinancing, which will close at the same time as the merger. Part of that is $40 million investment by Ross Beaty market at the time of the merger announcement.
Another $130 million convertible from Mubadala, which is a sovereign wealth fund of Abu Dhabi, so they’re doubling their investment. And then we’re refinancing the revolving credit facilities and term loans from Leagold and Equinox into one main facilities include a $400 million revolver and $100 million term loan, which should close at the same time as the merger.
Turning on to Slide 6 here. Looking at the quarter four and 2019 highlights. We achieved guidance reproduction and costs at very solid operating results that translate to strong financials for the quarter. So the 80,000 ounces of produced gold sold at $1,482 ounce with a cost of $848 per ounce results in very strong margins.
And when you look at metrics like are adjusted EBITDA of almost $50 million on a quarterly basis that makes up almost 50% of the whole year’s $100 million EBITDA. So, good performance in quarter four.
And again, on an operating cash flow basis, we had $39 million of operating cash flow in the quarter, which is about 65% of our annual $60 million operating cash flow. So again, quarter four being a very, very important part of our year.
And turning to the individual mine. So starting with Mesquite in California. The mine we bought in late 2018. Gold producer as we mentioned earlier with 40,000 ounces. So not quite a third of the year’s production, but it had a very good cost performance in the quarter of $881 per ounce with slightly lower CapEx, a little bit better grades and good cost control for the quarter.
And on a full year basis, we met at the bottom end of our guidance for production. And we were at the bottom end for costs as well. So commendable job by the team. And in terms of the overall developments for the year, there is a significant amount of work focused on drilling. So we did 48,000 meters on historical low grade dumps and leach pads which resulting in significant number of ounces being stacked and also in the plan for this coming year as we enter 2020.
In addition, we drilled 21,000 meters on targets in and peripheral to the pits as well. And those will be factored into our upcoming reserve resource update. And early in the year as we mentioned previously, we did amend the operating permit to give us more flexibility so we can now stack 37 million short tons of ore annually on the pads instead of 25. So it’s allowed us a lot of flexibility this year.
Looking at what that translates to on operating metrics and financial metrics on page nine. Despite stopping mining in December, we did actually mine a lot of ore and place a lot on leach pad with 5500 tons — 5.5 million tons. And the grade was slightly higher for the quarter at 0.31 versus 0.29 for September, which resulted in 40,000 ounces. Overall a very good cost quarter for Mesquite.
When we turn to Aurizona looking briefly at Aurizona’s results on page 11. It was a second full quarter of operations. The commercial production was achieved in early July right at the beginning, and it was a nice improvement on quarter three as we expected, coal produced was almost 40,000 ounces or significantly more than quarter three.
And costs were $814 per ounce. So a lot of that relates to the increasing grade, just above reserve grade for the quarter. And overall for the full year we achieved 75,282 ounces, which is just above the bottom end of guidance. And our costs were well below the bottom end of guidance for all in sustaining costs at $928 per ounce.
In terms of overall developments. Remember at the beginning of the year we finished construction of the mine in April basically. And we spent $47 million on non-sustaining capital, the vast majority of that related to construction. And then we spend another $13.7 million in sustaining capital which a lot of that was relating to the tailing facility raise, which happened mostly in the fourth quarter.
And then at the end of the year, our goal is always to be prepared for the rainy season, which starts in sort of January, February of the New Year. And we’ve stockpiled over 660,000 tons of ore in the ROM pad, just below our 700,000 ton target. Mining has been going well in January. And we’re really pleased to see that we mined almost 1.5 million tons particularly with the articulated fleet that we brought in for the rainy season.
And that as I mentioned earlier, there was drilling at Tatajuba and the underground study continued to advance as well. In terms of how it translates into operating data and financial metrics. Overall, as mentioned, the mining rate was almost 3 million tons per month during the driest part of the season there, double what we were doing in the rains, which is always what was expected.
And the reserve grade you can see there at 1.62 is a nice jump from the 1.3 in quarter three. So we continue to mine for the main part of the pit with reserve grade and a little bit better resulting in 39,000 ounces of production.
As well there’s a small amount of state sustaining capital. You can see there in quarter four a lot of that’s related to the tailings facility raise. And overall the all-in sustaining cost of $814 is well below quarter three, it was $1,070 and overall for the year $928. So a good results in terms of costs at Aurizona.
Turning over to the expansion of our portfolio and looking into California again at Castle Mountain. On page 14, you can see a nice diagram of the work been done to date. That’s fairly recently taken. You can see the leach pad liner laid down there.
We’re actually been putting on the drainage layer and a second liner on top of that at the moment so that continues to advance. A lot of the earthworks are done on site. And the tanks are being fabricated. So we’re seeing good progress on our plan for pouring gold in quarter three this year and we’re on schedule on budget which is good to know.
And looking at 15 in terms of progress. At the end of February pond excavation is complete, leach pad earth works are complete. As I mentioned, the double liner system is partway through. So we’re about 35% complete. Concrete works are 65% of the way done. Steel — structural steel erection is underway at the CIC plant with a quarter of it complete. And equipment manufacturing is in progress with tanks et cetera, being manufactured by the OEMs.
Phase two detailed feasibility study is underway which goes on in the background as we get Phase one into production. And as we mentioned previously, in previous calls, it does require additional water just over double I guess what we require for phase one, which obviously is in place at this stage.
And just we received late last week our record decision for Phase one, which will allow us to go ahead and start drilling water for Phase two in the next few months here. So, some good news that just happened recently.
And just a quick refresher on the two phase approach that we have here. Phase one is just under 50,000 ounces a year and the total capital is just under $60 million which we’re tracking towards for the end of Q2 and into Q3 this year when production starts.
Phase two will be a few years out here as we amend the permit and we finish off with the water drilling. But that’ll be $175 million in capital to get 200,000 ounces a year. And that includes a small mill in addition to an enlarged run of mine heap Leach operation.
Now turning over to the merger, and obviously the recent events. On page 17, just an update on the timeline here. January 28, we received shareholder approval, well over 99% for both Leagold and Equinox. So really good support from shareholders, it was actually overwhelming.
And then in January in February, we received the other approvals we needed to get, which is the Supreme Court approval in DC. Conditional Stock Exchange approval we received as well. And on Friday, as we announced this morning, we received the Mexican antitrust approval on February 28.
So we’re done with those approvals. And now the key item is to move towards closing. So we expect to close in the second week of March, which is the week of March 9. So seven to 10 or 11 days from now. So working hard to get towards that completion next week and then we can come out on a combined basis.
Looking at Page 18. What does 2020 hold in store for us? Completing the merger we mentioned we’re also looking to achieve our corporate and site integration benefits. That’ll start to take effect after close.
In terms of operations, we want to accelerate Los Filos the expansion. We’ve already gotten underway and the team at Leagold that started the Burma [ph] hole underground. So that’s moving forward nicely. Completing Castle Mountain, as we mentioned, should be done in Q3 when we pour gold.
Reviewing Castle Mountain phase 2, feasibility study be done in the second half of this year. And of course, there’s Santa Luz which follows on from Los Filos. And we’d like to expedite the Santa Luz restart. We could be starting construction as early as 2021 in the first part of the year. And we’ll give a bit more guidance on that when we come out with our guidance in the next number of weeks here.
In terms of exploration, that’s something that we’ll be able to look at in a long term basis with a much more solid footing from the balance sheet. We’ll be able to make up some make some plans for the key mines in terms of mine life extension.
Scott and Doug will be turning their attention to that shortly after close. And on a corporate basis, we’re really looking forward to hear the multiple index inclusions for each H1 2020. The GDX and the GDXJ should be coming into play here towards the end of March. I think the next rebalance dates around March 20th. And then the TSX composites are in quarter two when we’ve had six months on the TSX.
And then we’ll continue to formalize our external ESG reporting, which is obviously a continuously improving area of focus in the sector. And then on the back of all this will be providing you with 2020 guidance after the merger is complete. So give us a little bit of time after we close and we’ll get that out as soon as possible.
So in conclusion, for 2019. We had an exceptional 2019 in all of our metrics and we’re really well positioned for 2020. The new enlarged Equinox Gold with the merger with Leagold will create a diverse scaled, pure leading growth company that’s really in the mid-tier to larger gold space.
One of the top 20 Gold producers in the world. We will have exceptional leverage to gold with almost 13 million ounces in reserve. And we have a fortress balance sheet with the refinancing that’s been put in place as well.
So that’ll bring us to a conclusion in terms of the overall review last year and maybe open it up for questions.
Thank you very much. At the moment, we don’t actually have any questions online or on the phone. So I’ll ask the operator to quickly remind people in case they’ve forgotten that there may be a short Q&A period.
Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question comes from Kerry Smith with Haywood Securities. Please go ahead.
Thanks, operator. Christian, just a couple things. One, could you give me an update on the drill permits that you’re trying to get at Mesquite for some of this drilling to try and continue to expand those resources as the target on the other side of the road, et cetera?
And also I just wondered how the preparations went for the rains at Aurizona. I think you said you mined a 1.5 million tons. I’m not sure if that was for January, but just maybe an update on how you’ve been making out at Aurizona through the rains?
Sure. Maybe I’ll let Scott start with the first question on the drill permits in Mesquite.
Yeah Kerry. It’s Scott here. We’ve been revisiting the permitting approach there. There’s several different land use criteria or classifications that apply on those lands you referred to on the east side of the highway. And given other permitting efforts at site we’ve stopped and kind of rein things in a little bit to restrategize and prioritize how we go about permitting different elements, including to moving more material and looking to explore to the northwest as well.
So we’re probably going to be submitting our applications here in the next quarter. And guidance on timing on that would probably be anywhere from six to 18 months depending on the various sensitivities. But crews have been out in the field and doing the work of the various flora and fauna surveys and so forth, in advance in preparation for that.
So Scott, if you don’t issue the application in Q2 for the permits on the other side of the road, right?
So if you — is there other drilling that you don’t need permits for? Are there other targets that you want to drill at Mesquite that you can drill while you’re waiting for those permits to come if it takes six to 18 months to get those permits, because that’s going to be the end of 2021 right?
Yeah, absolutely. We actually have a fairly aggressive budget at Mesquite this year, committing some $8 million to drilling that doesn’t include anything on the side of the highway. This is focused primarily on drilling off the remaining historic dumps.
There’s another 250 million tons of potentially mineralized historic dump material there that we’ve already drilled some 89,000 feet on this year alone. In between that we’re going to be doing some testing on some in situ targets on the north wall.
These targets represent incremental growth on institute on in situ resources that we hope to convert to reserve. And then I alluded to it in my previous comments. We are with new geological models and sending resources sort of updates. We have recognized structures controlling mineralization and brownie and BE2.
And in this gold environment, we will be looking to hopefully incrementally grow the in situ reserves and resources as well.
Okay. And sorry the budget you said for this year is how much for drilling?
$8 million. Okay. Okay, that’s great. Thank you Scott.
In terms of the rains, maybe I’ll make a quick comment and if Jim has anything to add please go ahead. But I did mention about one 1.5 million tons mine in January which I know when we did our site visit we did indicate it we do a roughly 3 million when we’re at full capacity in the dry season and roughly half of that in the rains.
And that’s what we did in January effectively. And there’s been an increasing number of articulated trucks in the fleet, which has allowed us a little extra flexibility. And I think the guys have done a good job of planning for water drainage and planning for certain areas to be mined during the rains, as well as having about a 660,000 tons stockpile.
Okay. So it sounds like that’s going pretty much as the way you thought it would go. And that’s good. And maybe Christian or Scott, what is the exploration budget for Aurizona for this year?
You’re kind of jumping a little ahead of us here. When we come out with combined guidance after closing we will give you that, but it’s a similar amount in terms of spending to what we’re going to be doing in Mesquite. And we’ll find out a little bit as we come out, but it’ll be a similar amount.
Okay. Okay. Great. Thank you.
Operator, next question?
Sorry. Our next question comes from Arun Lamba with TD Securities. Please go ahead.
Hey, guys, just quickly Aurizona. The Brazilian real continues to weaken. Can you just remind us do you have any currency hedges at Aurizona in place? And I know it’s kind of after the company will place combined guidance, but would you guys look to potentially hedge further currency edges going forward?
We do have some colors in place at Aurizona, certainly been protecting some of the 2020 real position at sort of above 4 to 1. And I think the top end of the color is around 4.4. And it’s a portion of the spend, because a lot of our spend is in real. And we’ll continue to evaluate that as we move forward.
Obviously, our budget period, we were probably in around that 3.6 level. So we’ve been able to sort of protect that at a higher or depreciated level. So it’s been a good result, obviously so far. As we obviously bring more Brazilian mines into the plan going forward. And when the merger is complete, we will certainly review our overall strategy on the real, but so far for Aurizona, it’s been a good benefit.
That’s great. Thanks a lot.
Thanks, Arun. We will now take a question from an investor who’s joining us from the country of Turkey. The question is, upon completion of the merger, what do you plan on doing with the Leagold heading program?
So there’s a historical gold hedge program which was originally about 300,000 ounces. I believe it is 250,000 or slightly less still remaining on that which is spread out over a three year period almost equally. We will inherit that obviously as a combined Equinox.
And those prices I think range from about $1,350, up to almost $1,430 or slightly above, depending on somewhere fixed forwards and somewhere callers. And we will continue to deliver into that hedge for now, certainly we’ll evaluate our capital position and whether we’d ever want to take it out.
But I think it’s slightly out of the money at the moment and maybe a fairly large chunk of capital to commit to it at this stage. We’ll certainly look at our capital priorities before we would consider taking it out. But we have no intention of hedging gold in the future.
Thank you. We have three private investors who are joining us on the phone line. Operator, please go ahead with those questions.
Not a problem. Our next question comes from Lauren Stanley a private investor. Please go ahead.
Good morning, gentlemen. Congratulations on all your successes and thanks for your hard work. My question is about Castle Mountain. When do you foresee the first full quarter of production on Castle Mountain?
So at the moment, our current expectations reporting goals in Q3. And obviously, it’s a heap leach operation, so it’ll take a little time to ramp up. So if all goes really well, I think quarter four could be a first full quarter. But certainly quarter one of the following year.
Thanks. And has this coronavirus affected any of your operations at all?
Yeah, it’s an interesting question and very topical at the moment. Obviously, we look at our supply lines. We also look at our travel of our employees. And that I would say it hasn’t had any kind of material impact at this stage and we’re obviously looking at anything that source that a certain countries and alternative sources of supplies. But at this stage, we really have had virtually no impact.
Excellent. Thanks very much.
Our next question comes from Phillip [indiscernible], a private investor, please go ahead.
Good morning, very good quarter. I have a follow-up question on the Mesquite mine. Both on exploration and on the recent quarter. Maybe first on the recent quarter. Can you explain me how the all-in sustaining cash costs was far lower than your guidance? Is that due to the grade or is it because Q4 is a bigger quarter than other quarters or has anything to do with heap leach variability?
Scott here. I think one of the big drivers in the lower costs that we’re seeing is because we did pivot and we are mining a lot more of the historical dump material that’s carrying 0.3 grams per ton. The associated mining costs with this are a lot lower. There’s no drilling, there’s no blasting, it’s basically just pick it up and haul it.
And the way we’ve prioritized the drilling off of the historic dumps, we’ve started with the most proximal dumps first. So we’re also looking at a lot shorter haulage links. And I think that’s probably the biggest driver in our lower costs.
And being oxides. Also, the recovery process and period is much shorter than some of the non-oxidants you’re only had a little more non oxide factored into our original plan.
How much historic material do you have remaining for the future?
Stay tuned. We’re in the middle of our year-end resource reserve updates and the material that was drilled off that was remaining as of December 31 2019, will be included. And of course, we’re drilling now to continue that exploration at those dumps.
Now, we’ve seen some positive upsides to that and we’ll continue to add that to the program.
And regarding exploration, looking at your or measured and indicated resources on Mesquite grade is somewhat lower than your reserves. Going forward, if you expand your resources or your reserves would be and on the lower grade side or is it too soon to comment on that?
Steve battled with the resource reserve grades and pat performance. And there’s a bit of fuzziness with that if you will. But everything that we’ve done through the course of last year to increase confidence in the resources reserves grow or convert resources suggests that we should be expecting more of the same nothing materially different.
Okay, that’s it for me. Thank you very much.
Our next question comes from Robert Caesar a private investor. Please go ahead.
Thank you very much and good morning. My question concern Solaris Copper which is now Solaris Resource. I noticed on my statement for my brokerage firm, the name was changed. Are there any plans for that company?
Yes, it’s actually a good question. We haven’t talked about that. Recently, there’s been so much activity of the merger. But Solaris Resources is now obviously being managed through Dan Earle who’s now the new CEO and full time on that project and company.
And he’s also got the backing of Richard Work behind the company in terms of investor group. So it has a real champion supporter that’s taking it forward. We continue to own about a third of the company. And they’ve started drilling it [indiscernible], which was always our goal before it went public.
And I think they have now have an ability to consider going public in the next number of months here. So, all tracking really well. We’re really excited as a big shareholder and see that as a nice long-term investment for us. So I think stay tuned to keep an eye on that and hopefully, you’ll be having a liquid stock that you’ll be able to trade at one day, back in your brokerage account.
Thank you very much.
All right. So we have a question online from Ovais Habib. Apologies Ovais that you weren’t able to get into the phone line, that’s strange. In any case, I will ask your question for you. So Ovais says — and who’s an analyst from Scotiabank. Forgive me, I should have introduced Ovais properly.
Ovais says it’s great to see that you’ve received approvals to start drilling for water at Castle Mountain for Phase 2. So a two part question what are the next steps going forward assuming you’re successful in discovering the water you need and what are your other options and backup plans to bring water to Castle Mountain?
Well, just at high level Ovais. We’ll go out and drill all the targets on our property which has been pre identified. We also bought some in holdings in the monuments and preserve land which would be our second option for drilling that’s land that we now own. And that will start the drilling in terms of the on our permits area in the next couple of months here.
So we should be able to see some results this year. And as a backup, of course, we mentioned we were also sourcing water from other places. And including various towns and private properties that are give or take 15, 20 miles off of our permit area. And those will be our backup sources of water which have a slightly higher cost and haulage distance. So first prize would obviously be drilling straight on our property and getting the access to the water right there.
All right, at the moment, there are no further questions online or from the phone lines. The webcast will be archived on our website for three months. And we’ll have the transcript up there soon. So, if you do think of any other questions, please don’t hesitate to get in touch with us. I’ll turn it back now to Christian for closing remarks.
Thanks Rhylin. Thanks, everyone, for your support this year, shareholders and analysts. We’ve had an exceptional year in 2019. I think 2020 shaping up to be really exciting as well. So please continue to follow the story. And we look forward to talking to you on the next webcast as a combined group here once we close the mergers legal next week. So thank you very much.
Thank you for joining us today.
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.