Orla Mining Ltd. (NYSE:ORLA) Q2 2022 Earnings Conference Call August 9, 2022 10:00 AM ET
Company Participants
Andrew Bradbury – VP, IR
Jason Simpson – President & Chief Executive Officer
Etienne Morin – Chief Financial Officer
Andrew Cormier – Chief Operating Officer
Conference Call Participants
Bryce Adams – CIBC Capital Markets
Operator
Ladies and gentlemen, good morning, and welcome to the Orla Mining Conference Call for the Second Quarter 2022. My name is Sheryl, and I will be your conference operator today.
[Operator Instructions] Please be advised that this call is being recorded.
I would like to turn the meeting over to Andrew Bradbury, Vice President of Investor Relations and Corporate Development for Orla Mining. Please go ahead, Mr. Bradbury.
Andrew Bradbury
Thank you, operator, and welcome to Orla’s Second Quarter 2022 Results Conference Call. During today’s call, we will be making forward-looking statements. I would direct you to the first and second slides of the presentation, which contains important cautionary notes regarding these forward-looking statements. All dollar amounts discussed today will refer to U.S. dollars, unless otherwise indicated.
And on the call this morning is Orla executive team, including President and Chief Executive Officer, Jason Simpson. Jason, over to you.
Jason Simpson
Thanks, Andrew. I’d like to always begin with a refresher on our value-creating formula, a combination of quality assets, team and partners. Today, the Orla team will walk you through our impressive quarterly results. This formula has generated tremendous value for all of our stakeholders, and thus far, we continue to be a company that executes consistently.
The second quarter was marked with some exciting milestones and events. We safely made the transition from gold developer to producer with the declaration of commercial production and the second quarter was our first official period as a producer. Operations have been ramping up, which you will see in the mining, processing and production metrics. We are well on our way to meeting the 2022 annual production guidance.
Operating costs remain on track and as a low-cost producer with robust margins, we generated strong cash flows during the quarter. These cash flows, in addition to the recent debt refinancing puts us in a very strong and flexible financial position, providing the foundation to build upon. We are also on track to meet annual cost guidance.
During the quarter, we were excited to announce the acquisition of Gold Standard Ventures, the owner of the South Railroad heap leach project located in the prolific Carlin Trend. This low capital intensity, high-return project will diversify and strengthen Orla’s portfolio of assets, and we are pleased to step into Nevada, a highly attractive jurisdiction. The Gold Standard securityholder vote is taking place later this morning with closing of the transaction expected by the end of the week.
I’ll now pass the call to Etienne Morin, Orla’s Chief Financial Officer, to discuss the financial results for the quarter.
Etienne Morin
Thanks, Jason. During the quarter, we produced nearly 26,000 ounces of gold and sold just over 25,000 ounces at a net realized price of $1,872 per ounce. Year-to-date production at June 30 was nearly 49,000 ounces, and we remain confident in achieving our annual production guidance of 90,000 to 100,000 ounces. Cash cost for the quarter was $439 per ounce sold, while all-in sustaining cost was $601 per ounce sold, a clear reminder of Camino Rojo low-cost status. I’d like to mention that while we have seen some unit cost inflation on key consumables, these prices — these price increases of about 5% have been offset by lower consumption rates, mainly cyanide, electricity and diesel.
We continue to maintain our all-in sustaining cost guidance of $600 to $700 per ounce. Cash flow from operating activities before noncash working capital was $20.7 million for the quarter. Meanwhile, cash flow generation was — free cash flow generation, sorry, was $28.7 million, supported by VAT or value-added tax refunds received during the quarter. Adjusted earnings for the quarter was $11 million or $0.04 per share. The key adjusting items were noncash expense of $10.7 million associated with the unamortized portion of the transaction cost of the Camino Rojo project loan mainly related to the cost of the warrants issued in connection with that facility. We also adjusted for a onetime $2.7 million premium paid on the early repayment of that facility.
Lastly, we adjusted for $1.6 million of unrealized foreign exchange gain during the quarter. As we previously announced in April, we successfully refinanced our initial project finance facility with a new credit facility, offering increased flexibility at a much reduced cost of capital. As a result of the strong cash flow generation, our cash balance at June 30 was approximately $67 million. The strong cash flow generated in the quarter also included the exercise of warrants and options for approximately $15 million. We also received $10 million of value-added tax refunds from the Mexican government in the second quarter, and to date, we’ve received over $22 million of VAT refunds.
I’ll now hand the call over to Andrew Cormier, our Chief Operating Officer, who will provide an operating and development update.
Andrew Cormier
Thanks, Etienne. Our positive culture at site towards health, safety and environment continued throughout the quarter. We have gone 232 days without a lost time injury and over 99% of the workforce has received at least one dose of a COVID-19 vaccine. During the quarter, site activities were focused on ramping up mine and processing rigs to achieve steady-state operations. In the second quarter, we mined 2 million tonnes of ore at an average grade of 0.71 grams per tonne.
We stacked 1.7 million tonnes at an average grade of 0.8 grams per tonne, at an average daily stacking rate of 18,245 tonnes per day for the second quarter, which is above the nameplate capacity of 18,000 tonnes per day.
Achieving nameplate capacity was a tremendous achievement by the whole team at Camino Rojo, and they will look to stabilize a consistent stacking rate and continues to optimize the operation. In fact, on July 25, we stacked over 27,700 tonnes in a 24-hour period. Mined ore grade antennas are reconciling well to the block model and process recoveries to date are in line with metallurgical recovery model.
Earlier in the quarter, we released a summary of the Phase 1 metallurgical results on our Camino Rojo sulfides project. The Phase 1 metallurgical program has greatly increased our understanding of the metallurgical characteristics of Camino Rojo sulfides with multiple processing options for the Camino Rojo sulfides compared to the previous work. The results also confirmed potential for a stand-alone processing option for the Camino Rojo sulfides, and we will continue to work towards determining the optimal development plan. The metallurgical recoveries and the geometallurgical zones are being used to determine new cutoff grades for open pit and underground mine designs. The respective mine designs will be used to support an updated sulfide mineral resource estimate, which is currently in progress and will form the basis of a PEA of a sulfide targeted for the end of 2022.
To support project advancement, we’re completing an 8,250 meter Phase 2 sulfide drill program. The objective of the program is to reinforce the geologic model and to continue to confirm the continuity of wide zones of higher grade gold mineralization. Five drill holes have been completed and the results are expected to be reported in the second half of the year. We are working to finalize the process design criteria in developing the financial model with the selected mining and processing options. A resource update is also in progress.
In addition to the Phase 2 drill program on the sulfides, we have also ramped up exploration across the portfolio in the second quarter as we continue to build cash. Exploration spending for 2022 is expected to total $15 million across Mexico and Panama. At Camino Rojo in Mexico, near mine and regional exploration in 2022 is focused on increasing oxide reserves, supporting the advancement of the sulfide deposit development scenario and testing priority targets defined in 2021 in an effort to make new satellite discoveries.
In the second quarter of 2022, drilling at Cerro Quema in Panama was completed at the La Prieta and La Pelona targets. Diamond drilling at Cerro Quema will continue through the second half of 2022 with drills moving to metallurgical infill and expansion at Caballito, Quemita and Palona. The drill results are being finalized. In total, approximately 10,000 meters of drilling, along with the other valuation tools planned for Panama in 2022.
And with that, I’ll pass the call back to Jason.
Jason Simpson
Thank you, Andrew. In June, we were pleased to announce our expansion into Nevada with the acquisition of Gold Standard Ventures. We are now taking our building and operating experience along with our cash flow, and we’ll look to build South Railroad, another low capital intensity, high margin focus heap leach project. This acquisition fits nicely into our portfolio and strategy of creating stakeholder value by responsibly building and operating cash-generating mines in prospective jurisdictions with superior geology.
Shareholders of both Orla and GSV have expressed great support for the transaction and the special meeting of GSV shareholders will be taking place later this morning, which we expect will lead to a closing before the end of the week. Gold Standards South Railroad project is very similar to Camino Rojo, a low complexity heap leach project with attractive economics. Key project highlights as outlined in the February 2022 feasibility study include: average annual gold production of 152,000 ounces over the first 4 years and 124,000 ounces over the mine life. Life of mine average all-in sustaining cost of $1,020 per ounce. 8 years of mine life $190 million in initial capital, average annual free cash flow of $98 million over the first 4 years and $315 million after-tax net present value at a 5% discount rate.
That results in 44% after-tax internal rate of return. Reserves are 1.6 million gold ounces at 0.77 grams per tonne and measured and indicated resources of 1.8 million gold ounces at 0.74 grams per tonne. South Railroad starts with an 8-year mine life and production levels that will support our growth ambitions of 500,000 ounces per year. The project is progressing towards a record of decision from the U.S. Bureau of Land Management.
As the permitting process continues, we will look at opportunities to optimize the project, including gold recoveries.
We expect South Railroad will be a foundational — will be foundational in building our business along with Camino Rojo and Cerro Quema. These projects have similar characteristics, low capital intensity, high return with quick payback periods. We will leverage our core competencies of building and operating gold mines with strong margins.
With our strong balance sheet, improved credit facility and free cash flow generation, we have the financial resources to build our next project. South railroad is situated within a prospective 21,000 hectare land package that provides future opportunities for resource expansion, conversion and the discovery of new deposits. The property is the second largest contiguous land package on the Carlin Trend. It is a target-rich environment, and there are multiple zones of mineralization in oxide and sulfide including wide high-grade intersections. Sylvain and his team have already begun determining how to best explore the property, and we believe there is an opportunity for resource expansion, target definition and new discovery.
Gold Standard also owns the Lewis project, which is strategically located within the boundary of the Nevada Gold Mines Phoenix operations plan. The Lewis project has an inferred mineral resource of 206,000 ounces of gold at 0.83 grams per tonne and several additional prospective targets that have the potential to expand the resource space there.
Building on this year’s production guidance at Camino Rojo of 90,000 to 100,000 ounces, we believe through the addition of Cerro Quema oxides and South Railroad oxides we can increase production by 300% in the medium term. Of course, this will require the necessary permitting, engineering, financing and construction steps to get into production, but this is our strength. Beyond just the high-margin heap leach projects, we believe that sulfide resources in Mexico, Panama and now Nevada will provide the next leg of production growth. Orla’s pipeline includes three oxide heap leach projects; three sulfide resources for the future, three large exploration land packages, all of this charting a path to 500,000 ounces of annual production. Beyond the resources already discovered, we have almost 200,000 hectares of exploration land within prolific mining districts.
This provides the opportunity for shareholder value through discovery and will feed our future production profile. Our geologists are very excited with the current opportunities and additional targets and prospects in Nevada.
This quarter was emblematic of the company we strive to be year-over-year, producing gold, generating cash and pursuing growth. We remain steadfast in our strategy of creating stakeholder value through exploring, developing and operating high-quality assets, and we appreciate the support of our key partners and stakeholders who contribute to our shared success. Performance like this comes from a tremendous amount of effort by our team. I would like to express my personal and sincere gratitude for the hard work they have all undertaken to achieve and communicate the results you’re seeing today.
At this point, I’d like to pass the call back to the operator for any questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question is from Bryce Adams of CIBC Capital Markets.
Bryce Adams
I wanted to touch on operating costs and CapEx in Mexico. So firstly on operating costs, can you talk to the Q2 mining cost per tonne of rock as well as processing and G&A per tonne of ore? If you have those metrics available, that would be very useful. And then the second question is on CapEx. Guidance calls for $5 million in sustaining and $20 million in non-sustaining. It looks to me like year-to-date, your burn rate on those items is tracking below guidance. Do you expect us to still spend the full CapEx outlined in the guidance?
Jason Simpson
Yes, thanks for the question, Bryce. I’ll start the answer and Etienne’s got the cost per tonne that you’re looking for. Let’s start with CapEx. So in terms of the sustaining CapEx, we do expect to spend it — that money is primarily for water diversion and dust control, including a dome over the stockpile that you saw when you’re on site. So that work is still scheduled to continue. In fact, we’re selecting the contractor now for that dust control work.
In terms of the non-sustaining, a lot of that had to do with the completion of the construction project, and we do not, as we’ve previously communicated, intend to spend all of that money because we were under budget on the construction of the mine. When including the installation of the power line, which was out of scope, we were still under by about $8 million, just over $8 million. So that will be reduced from that $20 million nonsustaining capital spend.
Now over to the OpEx cost per tonne. So I’ll hand it over to Etienne, he can give you some color around that.
Etienne Morin
Just at high level, Bryce, year-to-date mining unit costs at Camino Roj is $1.67 per tonne, process cost is $2.45 per tonne, and the G&A year-to-date is $1.53 per tonne.
Bryce Adams
$1.53 G&A?
Etienne Morin
Yes.
Bryce Adams
Perfect. So tracking positively against the technical report. Is there anything in the next 12, 18 months, do you think that could drive a step change in those costs?
Jason Simpson
Yes. In terms of what we’re seeing cost and Etienne touched on it in his script as — and again, we talked about this on site in previous quarters. We’re not immune to inflation. We are seeing some unit price increases across key consumables that we use in mining. But what that’s been offset by, as Etienne pointed out again, is lower consumption, specific to that feasibility that you cited, Bryce, in doing that feasibility and in our first year of budgeting we presume that, that engineering work would represent the kind of consumption.
But the fact of the matter is we’re consuming less power, diesel and cyanide in the process and still achieving the same kind of results that you saw today. So that’s — those two things heading in different directions have essentially offset.
I think it’s too early to say whether we could carry that forward into the future years of life of mine. When we get into the budgeting process later this quarter, we’ll start to consider over the year of operation under our belt what we might want to build into our mining costs and processing costs for 2023. At this point, I don’t think — I think we wouldn’t offer that we’re going to plan any reductions.
Bryce Adams
Okay. Thanks a lot. Much appreciated. It does look like very good work on the cost control. So congratulations.
Jason Simpson
Thanks, Bryce.
Operator
There are no further questions at this time. I will now turn the call over to Jason Simpson, CEO, for closing remarks.
Jason Simpson
Thanks. Since there’s no further questions, I’d like to thank our team for their continued efforts in advancing our key projects and creating stakeholder value. As always, never hesitate to reach out to Orla, should you have any follow-up questions, we are always available. And I’d like to thank everybody for their time and tuning into our conference call this morning.
Operator
This concludes today’s conference call. Thank you for your participation. You may now disconnect.
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