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Pretium Resources (NYSE:PVG)
Q1 2018 Earnings Conference Call
May. 11, 2018 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Please stand by. The conference is ready to begin. Thank you all for joining us this morning, and welcome to the Pretium Resources first-quarter 2018 conference call. [Operator instructions] The conference call today is being webcast live and available along with the presentation slides on Pretium's website at pretivm.com.

I will now turn the call over to Mr. Joseph Ovsenek, Pretium's president and CEO. Thank you. You may begin.

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

Good morning, everyone. Welcome to our first-quarter 2018 earnings call. Participating on the call with me today is our CFO, Tom Yip. Before we begin, I refer you to the cautionary language included in our news release issued yesterday as well as the management's discussion and analysis for the same periods.

These are available on our website and have been filed on SEDAR. Please note that all dollar amounts mentioned on this call are in U.S. dollars unless otherwise noted. The Brucejack Mine produced 75,689 ounces of gold in the first quarter of 2018.

And we ended the quarter with a cash balance of $70.5 million and earnings from mining operations of $16.8 million. We are on track to meet our production and cost guidance and reach steady-state gold production by mid- to late 2018. To make things clear, when we refer to steady-state gold production, we're referring to operating substantially reserve grade by mid- to late this year, with reserve grade being our proven reserve grade of 14.5 grams per ton gold. To achieve this, we remain focused on execution and delivery at Brucejack.

For the first part of my remarks today, I will update you on the execution and production ramp-up at the mine and will then turn the call over to Tom, who will comment on our first-quarter 2018 financial performance and our balance sheet strategy. I will close off with a look ahead before opening up the call to your questions. First, a look at the gold production ramp-up at Brucejack during the first quarter. Getting our grade control program implemented at the mine has been our No.

1 focus during ramp-up. A look back at the month-by-month production summary during the first quarter on Slide 5 shows the impact of grade control. January's production was limited by the absence of the operational grade control and limited stope optionality during the month. Gold production subsequently increased significantly in February, with stopes planned for the fourth quarter of 2017 and other higher-grade stopes coming online.

More significantly, in the latter half of February, the first component of our grade control program was implemented and by the middle of March was fully integrated into our short-term mine planning. This first component, the sampling of our long-hole drill cuttings to give us an estimated grade for each ring that we mine from a stope provides us with good clarity on what we're delivering to the mill. With the benefit of grade control in place, in March, we produced 32,910 ounces of gold, creating an average of 10.9 grams per ton, over double the production of January. With Q1 now behind us, we continue to see solid results from the grade control program, which I will discuss in more detail in a few moments.

Turning to cost. Production spending for the first quarter was in line with H1 2018 guidance. And on a production basis, all-in sustaining costs are approaching the range of H1 2018 guidance of $900 to $700 per ounce of gold. However, all-in sustaining costs per ounce of gold sold for the quarter were directly affected by low production in January, with production increasing as we advanced through the quarter.

This impacted on the sale of floatation concentrate as well as Doray, with over 22,000 ounces of gold in finished goods inventory at the end of the quarter recorded at cost of $849 per ounce including depreciation and depletion. Once steady-state production is achieved, we expect these fluctuations between produced ounces and sold ounces to minimize and reduce the timing discrepancy in all-in sustaining costs. As of now, we're on track to achieve our H1 guidance range of $900 to $700 per ounce of gold sold. Turning now to mining operations.

In respect of underground development, we've averaged over 800 meters per month of underground development during the first quarter. We are pushing to open up the Valley of the Kings as quickly as possible to get ahead of the curve in establishing our increased stope inventory this year. We expect the rate of development to trend back down to an average of 700 meters per month over the course of 2018 as we approach steady-state. As we've repeatedly emphasized, developing and implementing our grade control program is essential to achieving steady-state gold production.

Grade control is an iterative process that improves over time. The more data we collect, the better results we can achieve. There are two main parts to the program, predictive and measurement. Predictive is comprised of infill drilling, grade control modeling and stope definition, which allows us to optimize the design of our stopes.

Measurement gives us an estimated grade for each ring of a long-hole stope, which provides us with clarity on the grade we're feeding the mill. On the predictive side, infill drilling is advancing and starting to get ahead of development, which allows for more flexibility in mine planning. The first refinement of our mine plan is in hand, based on the grade control model. And the first stope is based on the grade control model are starting to be developed.

As I previously discussed, the measurement part of the grade control program was fully integrated into our short-term mine planning in Q1 and is now informing what material we are delivering to the mill as we advance through the second quarter. From the mine plan refinement process and from what we've learned is we've opened up the underground grant Valley of the Kings. We've determined that there's an opportunity for increased longitudinal longhole stoping beyond that contemplated in the 2014 Brucejack feasibility study. As a result, we've selected an area for the development of longitudinal long-hole stoping to evaluate its benefits.

Overall, we expect longitudinal long-hole stoping to require less development of waste, reducing the overall cost of development. With our grade control program fully implemented and other operational efficiencies under way, we believe we have steady-state gold production within sight. Now I'll turn the call over to Tom to review our financial performance for the first quarter and talk about our balance sheet strategy for 2018 in consideration of our construction financing facilities.

Tom S.Q. Yip -- Chief Financial Officer

Thank you, Joe, and good morning, everybody. In the first quarter, we sold 68,651 ounces of gold, approximately 7,000 ounces less than the 75,689 ounces produced. Total revenues were $89.4 million, and the average realized price for the quarter was $1,271 per ounce. Our average realized price was impacted by TC/RCs related to our concentrate sales, which are narrated within concentrate revenues.

If we'd add back the $3.9 million of TC/RCs, we would realize $1,328 per ounce, which was the average spot price for the quarter. The total cash cost per ounce sold averaged $841 for the first quarter. The cost per ounce sold reflect additional mine development to prepare additional stopes incurred during the quarter and the lag in the timing of sales versus produced ounces. Our cost of sales, which include production cost, depreciation and depletion, royalties and selling costs, averaged of $1,057 per ounce sold.

This yielded earnings per mine operations of $16.8 million for the quarter. Our corporate G&A costs were $2.5 million. Operating earnings for the quarter were $14.3 million. Two significant non-operating items on our P&L relate to our project financing.

The first is accrued interest of $15.4 million for the quarter, which we began to be expensed in the third quarter of last year. The second item is the loss of financial estimates at fair value. The fair value of these items are based on future gold and silver prices, interest rates and production profiles. That adjustment totaled $2.6 million.

This mark-to-market adjustment has been significant since September of 2015. We expect that this may continue to cause volatility in our reported results as long as the offtake and stream obligations are outstanding. Lastly, we have $4.2 million related to taxes: $626,000 relates to the current BC mineral tax and $3.6 million of deferred taxes related to the foreign exchange impact on the BC mineral tax pools. Net loss for the quarter was $6.4 million, or $0.04 per share.

We adjust our earnings for items that we believe are not reflective of the underlying operations of the company. These are noncash items such as loss of financial instruments at fair value, amortization of discount on the credit facility, convertible notes accretion, and deferred taxes. The adjusted earnings were $5.8 million, or $0.03 a share for the quarter. Our all-in sustaining costs, which include sustaining capital, TC/RCs, corporate G&A, restoration accruals and share-based compensation, totaled $1,009 per ounce sold.

This is higher than our six-month guidance of $900 per ounce. But it is primarily due to the low production in January, which attracted the high cost per ounce sold. Our all-in sustaining cost for the first quarter was $69.2 million. This is on track and within the spending guidance range previously announced of $135 million to $140 million for the first six months of 2018.

Since we're holding our production guidance, we expect to fall back within the average cost per ounce guidance for the first half of the year. In terms of liquidity and cash flow with production and sales in the first quarter of 2018, we generated $24.7 million of operating cash flow. We spent a total of $10 million on capex, which includes sustaining capital as well paying down some bills held over from plant construction. We ended the quarter with $70.5 million in cash and net bills of $40 million in the quarter.

I'll turn to our balance sheet strategy. The focus for us is to refinance the 7.5% credit facility by the end of 2018, although we have the option to extend the due date one year to December of 2019 while paying a 2.5% extension fee on the principal and cumulative interest at December 31, 2018. We will also look to extinguish the existing 8% stream that is due to start in January of 2020. We, you have two opportunities to take out the stream, once at the end of 2018 for $237 million and again at the end of 2019 for $272 million.

As we continue to optimize mine operations and achieve steady-state production for mid- to late 2018, we will continue to build our cash balance. Now back to you, Joe.

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

Thanks, Tom. 2018 will be a busy year for Pretium. While executing to achieve guidance remains our focus, we have two exploration initiatives that I would like to highlight for us before discussing guidance. We recently completed two deep holes, approximately 1,600 meters each, from the Valley of the Kings to the east.

They were drilled with two objectives. First, we targeted mineralization in close to the Valley of the Kings to provide us with information for planning reserve expansion to the east of our existing reserves. Second, we targeted the source porphyry for the Valley of the Kings and Flow Dome Zone, which potentially lies below the flow dome zone. We will provide an update when all assays have been received We also have a grassroots exploration program on a ground 20 to 25 miles east of Brucejack planned for late spring and summer.

This program will follow on our mapping and sampling programs from 2016 and 2017. The Boulder Zone, shown in the center of the slide; and the American Creek Zone on the lower center of the slide are high-grade gold targets. The Koopa Zone to the right of the slide is a VMS exploration target. Both the American Creek and Koopa Zones have well-defined drill targets.

Once the snow melts, we will mobilize the drill and start drilling up the American Creek Zone. We have approximately $2 million of flow-through funds remaining from last year, which will be used to fund the program. Early days, but great potential to make another discovery on our existing claims. Finally, on Slide 18, guidance.

We are on track to meet our production and cost guidance of 150,000 to 200,000 ounces of gold production in the first half of 2018, with all-in sustaining costs of $900 to $700 per ounce of gold sold. We are building our cash throughout the guidance range and working to achieve steady-state gold production as quickly as possible. We expect to provide guidance for the remainder of 2018 at midyear. Catalysts.

Our catalysts are execution and delivery. We continue to be fully focused on execution and delivery at Brucejack, execution to achieve steady-state gold production and delivery of our guidance. Through execution and delivery, we aim to become a premier intermediate gold producer by the end of 2019. Thank you.

That concludes the formal presentation. I will turn the call over to now to the operator who will open the lines for your questions. Operator?

Questions and Answers:

Operator

[Our first question comes from the line of Rahul Paul with Canaccord Genuity. Please proceed with your question.

Rahul Paul -- Canaccord Genuity -- Analyst

Hi, everyone. Joe, would you be able to comment on operational performance for the month of April? We saw a big increase in production going from Jan to Feb and then further into March. So just wondering if you're able to comment on what you saw in April.

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

We can't really get into specifics, but what we can say is the grade control program continues to perform well. We have good clarity on line of sight on what we're delivering to the mill. And that's about it. We will be giving our April, May, June results in early July.

And so stay tuned for that. But at this point in time, things are running very well at the mine and the mill.

Rahul Paul -- Canaccord Genuity -- Analyst

Perfect. Thanks. And just on the mills specifically, the mill has been doing really well in terms of throughput consistently exceeding nameplate of 2,700 tons a day. The permit application for the 3,800 ton a day expansion was submitted at December 2017.

So with the six- to 12-month typical permitting timeline, that would suggest that you could receive permits anytime between June and December this year. So at what point would you start to pull back throughput, so you don't exceed the tonnage gap in the event of a delay?

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

On the permit timing, we would expect -- I think six months is optimistic. But as we get closer to the latter into the year, we would expect to receive our permits, so within that 12 months. We're managing our tonnage through the mill so that -- from this point onwards so that we are in a position to average that 990,000 ton per annum limit over the course of the year. So we're constantly keeping that in mind, and we work with that on a day-to-day basis.

Rahul Paul -- Canaccord Genuity -- Analyst

Fair enough. And if you do receive your permits sooner, then you wouldn't have to worry about that gap as much?

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

Correct. We have the ability to increase some production rate during the year.

Rahul Paul -- Canaccord Genuity -- Analyst

OK. Thanks. That's all that I had.

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

Thanks, Rahul.

Operator

Thank you. Our next question comes from the line of David Haughton with CIBC. Please proceed with your question.

David Haughton -- CIBC World Markets -- Analyst

Good morning, gentlemen. Tom, thank you for the update. With the expansion, assuming that you get the green light from the regulators, I presume that you've pretty much made up your mind that you would proceed with it. How long would it take to get it into production?

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

We've operated the mill at -- in excess of 3,800 tons per day already. That was in Q4 of last year. So we could ramp up fairly fast. But due to the changeovers that we need for the mill, we have a couple of shutdowns, but not a lot, a couple of weeks' worth of work would take care of everything.

David Haughton -- CIBC World Markets -- Analyst

And what about the ability for the mine to match that throughput?

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

Yes, on the mine side, we're advancing as we mentioned, at the rate of 800 meters per day. And that will average out to about 700 meters -- sorry, per month. That will average out to about 700 meters per month over the course of the year, which we expect to provide us with the optionality that we need to produce 3,800 tons per day going into the new year.

David Haughton -- CIBC World Markets -- Analyst

OK. And with that 700 meters per month kind of development, how long would you anticipate to keep that rate? Would it be extending into 2019, 2020? What's your current thinking about how long you need that elevated level to find development?

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

At this point in time, we see the 700 meters per month development through 2018. And then we'll look at it for '19, whether we pull back some. At this point in time, we're still accelerating to get ahead to build up our stope inventory. Once we have a full stope inventory, we can pull back a bit on development as we won't need to be accelerating any longer, right, and just stay at steady state.

David Haughton -- CIBC World Markets -- Analyst

OK. Now Tom had shown on Page 12 of the deck the all-in sustaining cost in millions of dollars, about $135 million to $140 million for the first half. Now that's inclusive of the 700 meters per month. So is that -- should we be thinking about that component going forward for the balance of the year as far as what the sustaining capex could be?

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

We will give guidance on our cost for the remainder of the year come midyear. But as of this point in time, yes, we budgeted 700 meters per month over the course of the year.

David Haughton -- CIBC World Markets -- Analyst

And just last question, looking at the sampling system. Now all of the rings and all of the other drills going into the various places, are they all going through the sampling system now and being tested and being integrated into your planning ideas?

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

[Inaudible] much about quality on that one, David. But right now, all of our stopes are -- we are sampling all rings that we drill for blasting within stopes. And we also do the same for all of our development rounds, jumbo rounds, we sample the drill cuttings and get RCs reach those as well.

David Haughton -- CIBC World Markets -- Analyst

OK. That was the question. Is all of that going through the sampling, and the answer is yes?

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

Yes, yes. Everything is going through the sampling process.

David Haughton -- CIBC World Markets -- Analyst

OK. Thank you, Joe.

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

Oh. Thank you, David.

Operator

Thank you. Our next question comes from the line of Joseph Reagor with Roth Capital Partners. Please proceed with your question.

Joseph Reagor -- Roth Capital Partners -- Analyst

Hi, Joe, and team. Thanks for taking the questions. First one on the cost guidance. Given you have 22,000 ounces in inventory, I'm sure those will be sold first.

What should -- I think the implication is, is that your production cost for this quarter into quarter, excluding the inventory, is -- the expectation level would need to be $800 or less all-in sustaining in order to meet guidance? Am I doing the math right there? Is that the way you guys are thinking internally?

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

Yes, that's very close. Just keep in mind that for cost of sales, we're bringing forward now the ending inventory that you mentioned in March, right, of 22,000 ounces. And those are valued at $849, including depreciation and amortization. So if you strip out depreciation and amortization, that's really closer to $668 per ounce that's coming into the second quarter.

Joseph Reagor -- Roth Capital Partners -- Analyst

OK. And then you guys mentioned the impact on price realizations, some concentrate sales. How should we think about that going forward? Should we expect that to be a similar amount, $50 an ounce per quarter? Is that going to decline? And how does that look out for you guys?

Tom S.Q. Yip -- Chief Financial Officer

Well, that's pretty [Inaudible]. Our contracts are -- we're pretty much on a tonnage basis are producing same amount of tonnage throughout.

Joseph Reagor -- Roth Capital Partners -- Analyst

OK. Thanks.

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

Thank you, Joe

Operator

Thank you. Our next question comes from the line of Mark Magarian with UBS. Please proceed with your question.

Mark Magarian -- UBS -- Analyst

Hi, guys. Good job on getting things going on from a free cash-flow perspective this quarter. My question is just regarding the situation of the various financing needs. What is top of the mind on that at the moment? Is there a possibility of potentially issuing a bond sort of to wrap up a couple of these different items in onego and avoid any equity dilution?

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

We -- yes, absolutely, no plans to issue any equity. Just be firm on that. We're looking at building our cash flow to take out the stream. And we're looking at debt opportunities to refinance the credit facility, but no plans for any equity.

Mark Magarian -- UBS -- Analyst

OK. Great. Thank you very much.

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

You're welcome.

Operator

Thank you. Our next question comes from the line of Lobo Tiggre with Louis James. Please proceed with your question.

Lobo Tiggre -- Louis James -- Analyst

[Inaudible] got one name, right. Hi, guys. Thanks so much for taking the question, and for the improved results. For the average newsletter reader out there, could you comment on your current production characterized as high grade as opposed to your reserve grade? And how close to reserve grade do you think you'll be getting as you achieve steady-state? Steady-state is great.

But if we're at nowhere near the reserve grade, some people could be disappointed. Could you address that, please?

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

Sure. When we say steady state, we're referring to our reserve grade. So our reserve grade, we're always going to be wanting to mine within our proven reserves, where we have the best drill definition. The current grade of our proven reserve is 14.5 grams of gold per ton.

So when we hit steady state, we expect to be 14.5 grams of gold per ton. We're never going to be exactly 14.5 grams of gold per ton, but plus or minus 10% or 15% will be what we'll be targeting and will mine in that range on a plus or minus 10%, 15% basis.

Lobo Tiggre -- Louis James -- Analyst

OK, great. If we put the math together from the previous questions, if you're maintaining guidance on cost and you're maintaining reserve grade as steady-state grade, then putting those numbers together is a pretty good picture. Thank you very much.

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

Thank you for the question. And yes -- no, look, we need to get to steady-state reserve grade. That's our focus, and we're pushing hard to get there. The quicker we get there, the better.

Operator

Thank you. Our next question comes from the line of Heiko Ihle with H.C. Wainwright. Please proceed with your question.

Heiko Ihle -- H.C. Wainwright & Company -- Analyst

Hey, guys. Thanks for taking my question.

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

Hey, Heiko.

Heiko Ihle -- H.C. Wainwright & Company -- Analyst

A follow-up to the earlier financing question. And I was going to ask this question anyways, but you sort of pre-empted me. But you have the option to extend that bond for 2.5% fee. Given that the mine is now operational and by then hopefully is actually going to spin off some cash, is it fair to assume that the game plan right now is to get a new facility rather than to pay 2.5% fee and maintain the current facility?

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

Well, we're going to look at what's the best, cheapest cost to the company, right? So as of right now, we pay the 2.5% fee where -- accumulating 7.5% after that. So we're normally 10% going forward in '19. We feel we can do better this year. So we'll look at all opportunities to bring the cost of that down.

Heiko Ihle -- H.C. Wainwright & Company -- Analyst

Because that was sort of my thinking too. I mean, one would hope as the last thing to the current interest rate environment you guys could do better. Fair enough. And just completely off the wall, I mean, you guys hit those 1,600-meter deep holes from Valley of the Kings and the Flow Dome Zone.

My gut feeling is you would have not mentioned these holes as extensively in the release and on this call if the initial look-see assays weren't pretty good. I guess, what I'm saying is, are you expending capex in that area? Is there a plan to some step-out drilling just to sort of see what you can find? Are we maybe underestimating the potential for the area a little bit even?

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

We have no plans at this time for additional cash to spend out there. As we get into next year, we'll be looking to get a budget together to where we would actually drive underground out to the east from the Valley of the Kings and look to do some infill drilling to expand our reserves. But at this point in time, look, we're just focused on execution and delivery of Brucejack and no additional drilling to the east.

Heiko Ihle -- H.C. Wainwright & Company -- Analyst

Very well. Well, thank you, guys, and keep up the good work.

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

Thanks, Heiko

Operator

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Ovsenek for closing remarks.

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

I'd like to thank everyone for joining us on our call. We look forward to updating you in July with our Q2 production results. Thank you very much. Goodbye.

Operator

[Operator signoff]

Duration: 30 minutes

Call Participants:

Joseph J. Ovsenek -- President, Chief Executive Officer, and Director

Tom S.Q. Yip -- Chief Financial Officer

Rahul Paul -- Canaccord Genuity -- Analyst

David Haughton -- CIBC World Markets -- Analyst

Joseph Reagor -- Roth Capital Partners -- Analyst

Mark Magarian -- UBS -- Analyst

Lobo Tiggre -- Louis James -- Analyst

Heiko Ihle -- H.C. Wainwright & Company -- Analyst

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