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Alamos Gold, Inc. (NYSE:AGI)
Q2 2019 Earnings Call
August 1, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. I would now like to turn the meeting over to Mr. Jamie Porter, Chief Financial Officer. Please go ahead, sir.

Jamie Porter -- Chief Financial Officer

Thank you, operator, and thanks, everyone, for attending Alamos' Second Quarter 2019 Conference Call. In addition to myself, we have on the line John McCluskey, President and CEO; and Peter MacPhail, Vice President and Chief Operating Officer.

I'd like to remind everyone that our presentation will be followed by Q&A session. On this call, we will be making forward-looking statements. Please refer to the disclaimer on forward-looking statements in our news release and MD&A as well as the risk factors set out in our annual information form. All forward-looking statements on this call are qualified by these cautionary statements. There can be no assurance that our forward-looking statements, even though considered reasonable by management based on information on hand, will prove to be accurate. Future results and events could differ materially.

Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Vice President of Technical Services, and a qualified person. Also, please bear in mind that all of the dollar amounts mentioned in this conference call are in United States dollars unless otherwise noted.

Now, I'll turn it over to John to provide you with an overview.

John McCluskey -- President & Chief Executive Officer

Thank you, Jamie. Our second quarter results were solid, both operationally and financially. We produced just over 125,000 ounces in gold at costs that were down significantly from 2018. Our operations performed well, led by Island Gold, which set another quarterly record for production. This contributed to a strong consolidated financial performance with record operating cash flow of $72 million. Consolidated total cash cost was $699 per ounce, or below the low end of guidance, down 16% from the second quarter of 2018. All-in sustaining costs of $926 per ounce were also down 7% from a year ago.

A solid first half of the year. We will remain well positioned to achieve our full-year production at cost guidance. We have several internal growth initiatives under way, which will be drivers for further improvement for our financial performance. We're now less than a year away from starting to reap the benefits of performing strong free cash flow growth.

The lower mine expansion at Young-Davidson is progressing well, as was seen on multiple analyst and investor tours in June. The tie-in of the upper and lower mines remains on track for completion in the first half of 2020.

At Island Gold, we're already seeing the benefit of the Phase 1 expansion, with record production and free cash flow through the first half of the year. We received the Phase 2 expansion permit in May, ahead of schedule, and ongoing exploration results continue to impress, particularly in the untested area between the main and eastern extensions. We've put five holes in this area to date, and have hit high-grade mineralization, including 103 grams per ton over four meters. This ongoing exploration success supports a growing ore body which is being incorporated to a Phase 3 expansion study in the operation.

In Mexico, construction of the high-grade, high-return Cerro Pelon project is on track. We expect to start stacking ore later this year with initial production early 2020. In Turkey, construction activities continue to ramp up with major efforts under way. We expect Kirazli to take our consolidated production to about 600,000 ounces per year in 2021, which will further reduce our costs.

I'll now turn the call over to our CFO, Jamie Porter, to review our financial performance. Jamie?

Jamie Porter -- Chief Financial Officer

Thank you, John. As John mentioned, we had a very strong second quarter from a financial perspective. Highlights include record operating cash flow of $72 million, and the lowest total cash cost we've reported in years of $6.99 per ounce.

Revenues from the second quarter were $168 million from the sale of 128,500 ounces at an average realized price of $13.09 per ounce. Gold sales were approximately 3,000 ounces higher than production in the quarter as we caught up on the sale of ounces produced in the first quarter.

Second quarter total cash cost was $699. We're well below the midpoint of our guidance range of $730 per ounce. All-in sustaining costs of $926 were within our guidance range of our $920-960 per ounce. Lower costs reflected a greater contribution of low-cost production from Island and lower than budgeted costs at Mulatos. In the first half of 2019, higher costs at Young-Davidson was more than offset by lower costs at Island Gold and Mulatos. We expect this to normalize throughout the remainder of the year and for all operations to be within their guidance range. Overall, we remain well positioned to meet our full year cost guidance.

Operating cash flow before changes in non-cash working capital was a record $70 million, or $0.18 per share. This was driven primarily by lower costs and corresponding higher margins. Our reported net earnings of $24 million, or $0.06 per share, included unrealized foreign exchange gains of $7 million, partially offset by other losses totally $1 million. Excluding these gains, our adjusted net earnings were $18 million, or $0.05 per share.

Capital spending totaled $71 million in the second quarter, including $20 million of sustaining capital, $47 million of growth capital, and $4 million of capitalized exploration. Capital spending is expected to increase in the second half of 2019, primarily driven by higher spending at Island and Kirazli, with the ramp-up of construction. Our full year capital guidance remains unchanged at between $290-315 million for the year.

We repurchased and canceled another 200,000 shares under our share buyback program in the quarter, bringing the number of shares repurchased for the first half of this year to 2.7 million at an average price US$4.17 per share, for a total cost of $11 million. We've purchased these shares at very attractive levels, with the current share price approximately 60% higher. We will continue to be opportunistic with the buyback, balancing it with capital spending on our growth projects.

We ended the quarter with no debt and approximately $200 million in cash and equity securities. We remain well positioned to fund our internal growth initiatives over the next year before transitioning to a period of strong free cash flow growth starting in the second half of 2020.

I'd now like to turn the call over to our Chief Operating Officer, Peter MacPhail, to provide an overview of operations.

Peter MacPhail -- Vice President, Human Resources & Chief Operating Officer

Thank you, Jamie. Each of our mines performed in the second quarter, and each remains on track to meet annual guidance. Young-Davidson produced 45,000 ounces of gold, with underground mining rates increasing to 6,700 tons per day. Grades mined and milled were somewhat below our annual guidance due to stopes sequencing. And we're expecting those grades to increase in the second half of the year.

Total cash cost of $828 per ounce, and mine site all-in sustaining costs of $1,084 per ounce, were higher than the annual guidance due to lower grades mined and higher maintenance costs. Both are expected to decrease in the second half of the year to be consistent with guidance.

The lower mine expansion is on track to be completed in the first half of 2020. As previously guided, this will require approximately three months of downtime at the Northgate shaft to tie-in the upper and lower mines, during which time ore from the upper mine will be trucked to surface for processing at a reduced rate. Once completed, we expect mining rates to ramp up to above 7,500 tons per day in the second half of 2020, and toward 8,000 tons per day in 2021.

Island Gold set another quarterly record with production of 39,500 ounces, a 48% increase compared to the second quarter of 2018. The outperformance was driven by higher mine grades of 14.5 grams per ton, and throughput of 1,130 tons per day, both above annual guidance. We're continuing with a large exploration program and incorporating the ongoing success into a Phase 3 expansion study.

Total cash costs of $473 per ounce were consistent with guidance and down 19% from a year ago, reflecting higher mine periods. Mine site all-in sustaining costs of $631 per ounce were lower than annual guidance, reflecting lower sustaining capital spending in the first half of the year. We expect to catch up in the second half, bringing mine site all-in sustaining costs in line with the guidance for the full year.

Mulatos had another solid quarter, producing 36,300 ounces at total cash cost of $725 per ounce and mine site all-in sustaining costs of $815 per ounce. Production was consistent with annual guidance while costs were well below plan, reflecting higher grade stacked and the recovery of an additional 2,000 ounces of concentrate from the mill. Which carried minimal costs. Total cash costs and mine site all-in sustaining costs are expected to return to guidance levels for the remainder of the year.

Mining activities at La Yaqui Phase 1 are expected to wind down in the third quarter, concluding a relatively short but highly profitable mine length. As it winds down, we'll begin stacking ore from Cerro Pelon, another high-grade and highly profitable project. We also completed permitting of La Yaqui Grande, having receiving approval for both the environmental impact assessment and change of planned to use permits over the past few months. The focus at La Yaqui Grande is to complete detailed engineering and support the project design and economics.

We continue to evaluate value engineering initiatives and ongoing exploration results at our Lynn Lake project. Our understanding of the project has greatly improved over the past 18 months. We're seeing opportunities for higher returns and need more time to properly evaluate the various production scenarios and incorporate ongoing exploration results with additional drilling planned in the second half of the year. Once complete, this will be incorporated into an updated feasibility study.

At Kirazli, construction activities are ramping up with various contractor having mobilized to the site. Work force continues to grow with over 200 people on site. Earthworks are under way and construction of the water reservoir and powerline are expected to be completed by the fourth quarter. We expect Kirazli to bring consolidated production to over 600,000 ounces per year in 2021, while significantly lowering our cost profile.

With that, I'll turn the call back John.

John McCluskey -- President & Chief Executive Officer

Thank you, Peter. That concludes the formal portion of our presentation.

...

We'll now turn the call over to the operator to open the session for questions and answers.

Questions and Answers:

Operator

Thank you. We will now take the questions from the telephone lines. If you have a question and you are using a speakerphone, please lift the handset before making a selection. If you have a question, please press *1 on your telephone keypad. If at any time you wish to cancel the question, please press the # sign. Please press *1 at this time if you have a question. There will be a brief pause while the participants register. Thank you for your patience. We have a question from Cosmos Chiu from CIBC. Please go ahead. Your line is now open.

Cosmos Chiu -- CIBC World Markets, Inc. -- Analyst

Hi. Thank you. Thanks, John, Jamie, and Peter. Congrats on a very good Q2. Maybe first off on Island Gold here, as you mentioned the grade was good in Q2, and actually better than what you had budgeted. Could you maybe talk a bit more about that? Was that based on any positive grade reconciliation? Ultimately, I'm just trying to figure out the sustainability of that higher grade for the rest of 2019.

John McCluskey -- President & Chief Executive Officer

Hey, yeah. Thanks, Cosmo. We don't provide quarter-by-quarter guidance, so we do see some variability in the grade quarter-by-quarter. It did actually, though, outperform a bit during the quarter. We're in that high-grade -- well, the entire mine is a high-grade mine at 7.5 grams. But we expect the -- for the year to be in line with the guidance. I would -- we're expecting it to be in the 10- to 11-gram range for the remainder of the year.

Cosmos Chiu -- CIBC World Markets, Inc. -- Analyst

Okay. So, it was just getting into the higher grade pockets in Q2. It wasn't any positive grade reconciliation that you can recognize?

John McCluskey -- President & Chief Executive Officer

In Q2, we did actually -- we were actually positive a bit on grade, maybe in the range of 5-10%.

Cosmos Chiu -- CIBC World Markets, Inc. -- Analyst

Okay.

John McCluskey -- President & Chief Executive Officer

Which is always good.

Cosmos Chiu -- CIBC World Markets, Inc. -- Analyst

Yeah, it's not -- that's good. Your mining rate in Q2 was a big lower -- 991 tons per day. Peter, maybe -- could you maybe talk a bit about that? And what do you need to do to get up to 1,100 tons per day, which is your guidance?

Peter MacPhail -- Vice President, Human Resources & Chief Operating Officer

Yeah, thanks. Yeah, we were a bit lighter in the quarter at just shy of 1,000 tons per day. But it is related to grade as well. So, we mined 14.5 grams per ton at 1,000 tons per day. And when we're in those -- that means that in those higher grade stopes we were mining 20 grams per day. So, 20 grams per ton. So, in those high-grade stopes, which are the transverse stopes, we -- it was really the first time that we were mining that method. So, there's cemented rockfill that we need to place for the first time. We're mining transverse stopes for the first time. I think we did a pretty good job.

We -- at 20 grams per ton in those stopes -- if you recall, when we were there earlier and you were looking at the grades on those stopes, you want to make sure you get it all. So, on balance, we took it a little bit easier to make sure we got it all. And I think it was the right decision. We really have no challenges on getting to that 1,100 ton per day rate.

Cosmos Chiu -- CIBC World Markets, Inc. -- Analyst

For sure. And then, looking at -- you talk about Phase 2 expansion. You talk about also Phase 3 expansion in your Island Gold. You talk about potentially over 1,200 tons per day. I'm just trying to merge it together in terms of -- you're doing a lot of drilling right now on Island Gold. You're expanding the resource. But based on the size of your current resource, what kind of throughput can you -- is it big enough right now to be -- for you to look at significantly over 1,200 tons per day? Or do we need to see more ounces coming out for what you're doing on the exploration front before we can start looking at a much bigger throughput here? How should we look at it?

Peter MacPhail -- Vice President, Human Resources & Chief Operating Officer

At 1,100, going to 1,200 tons per day, with that expansion, I think that's just -- we're not permitted at that 1,200 tons per day. So, that will just be a natural evolution over the next -- into early next year. We should be there -- anything beyond that really is subject to studies that we're -- scoping studies that we're doing now. And it would require additional capital, so any increase in throughput that we would get would need to be economically justified to spend that additional capital. And we also need to permit that to -- another permitting exercise to get to whatever that might be. We do see ongoing exploration success. It continues to evolve. And I think we'll just take our time and make sure we do this right.

Cosmos Chiu -- CIBC World Markets, Inc. -- Analyst

Yeah. Of course. Maybe switching gears, a little bit now here, going to Turkey. Congrats again for getting all the permits earlier on this year. It sounds like things are getting -- rolling in terms of construction. But could you remind us in terms of some of the key deliverables here that's coming up? I guess you mentioned earthworks, and water reservoir, and whatnot. But what are some of the key items that you need? And can you remind us, is there any kind of rainy season in Turkey where you are? And do you need to, say, build the water reservoir before the rain comes?

Peter MacPhail -- Vice President, Human Resources & Chief Operating Officer

Yeah. We're in construction of the water reservoir. We're in construction on the power lines. Those should be completed by the end of the year. There's no real season that would be -- yeah, there is a rainy season. It comes in the winter, January/February period. It's not so much rain. It's snow, rain, muddy. We're in construction on the site and all the -- getting down to bedrock in the area of the leach pad. So, all of that becomes easier -- is easier in this time of year when you're not in the wet season. And there's some work that we need to get done to make sure that we smoothly transition into the muddier season. But it's all going fine.

Cosmos Chiu -- CIBC World Markets, Inc. -- Analyst

Maybe a quick question here for Jamie. I was reading here in the MD&A that you're applying for the strategic investment incentive certificate so that can further reduce your taxes. How much lower can you go in terms of your taxes in Turkey?

Jamie Porter -- Chief Financial Officer

So, that -- the additional incentive -- so, as we noted in the MD&A, we were successful in obtaining what's called the regional tax incentive, which gets our effective income tax rate down to 4.4% -- and being able to reduce that down to 2.2% if we are deemed eligible for the strategic incentive.

Cosmos Chiu -- CIBC World Markets, Inc. -- Analyst

Okay. And when will you find out, Jamie?

Jamie Porter -- Chief Financial Officer

Probably within the next couple months.

Cosmos Chiu -- CIBC World Markets, Inc. -- Analyst

Okay. Great. That's all I have. Thanks, guys.

Operator

Thank you. Once again, please press *1 on your telephone keypad if you have a question or comment. We have a comment from Kerry Smith from Haywood Securities. Please go ahead. Your line is now open.

Kerry Smith -- Haywood Securities, Inc. -- Analyst

Thanks, operator. Maybe Jamie can answer this -- or Peter. The $75 million that you planned to spend at Kirazli this year, is that going to be evenly spread over the year? And will it be possible to actually spend all that capital?

Jamie Porter -- Chief Financial Officer

Kerry, this is Jamie here. Yeah, so I mean the $75 million was the target that we put out at the start of the year assuming we were full steam ahead effectively in January. We have experienced some delays, so I would suggest that that's a conservative -- well, depending on how you look at it. Maybe an aggressive target for the rest of this year. There's a good chance that we'll come in between $50-60 million for the year, and that would be equally spread between Q3 and Q4. So, probably $20 million in Q3, maybe $30 million in Q4?

Kerry Smith -- Haywood Securities, Inc. -- Analyst

Okay. And then, that would leave, I guess, $80 million to spend next year in -- or maybe a bit more than $80 million, I guess?

Jamie Porter -- Chief Financial Officer

Yeah, the residual. I mean, we've spent about $20 million already, so $20 million plus another $50-60 million gets you to $80 million. We'd be looking at $70-80 into 2020.

Kerry Smith -- Haywood Securities, Inc. -- Analyst

Yeah. So, that $20 million you spent is to the end of Q2. Is that correct?

Jamie Porter -- Chief Financial Officer

Right.

Kerry Smith -- Haywood Securities, Inc. -- Analyst

Okay. Okay. And --

Jamie Porter -- Chief Financial Officer

[Crosstalk] And that's $10 million that was spent this year and $10 million that was spent in the latter half of last year.

Kerry Smith -- Haywood Securities, Inc. -- Analyst

Okay. Okay, great. And for La Yaqui Grande, what is the timing on the completion of the engineering studies or some sort of engineering document that we would be able to take a look at?

Jamie Porter -- Chief Financial Officer

So, we're working through that now, Kerry. The plan would be to have -- undergo that internal review by the end of this year. We put out our guidance for 2020. In January of next year, we'll look to update the market with respect to our plans on La Yaqui Grande.

Kerry Smith -- Haywood Securities, Inc. -- Analyst

Okay. Okay, great. And then, maybe John can answer this question. In your opening remarks, John, you had mentioned a comment about internal growth initiatives that were under way to improve your financial performance. Are those the projects that we're aware of or are there other things that you're looking at internally?

John McCluskey -- President & Chief Executive Officer

Those are the projects that we're speaking about throughout the call -- the tie-in of the lower mine at Young-Davidson, bringing on lower costs production at Cerro Pelon, lower cost production at Kirazli in Turkey. Those are essentially the initiatives. We've got things like -- projects bringing great power in Mexico, which is going to further reduce costs. There's a variety of things like that. The whole focus on -- of what we're doing is to bring on more lower cost production, be more efficient at mining the ore where we're already mining it, and essentially capitalize on this whole approach we're taking to expand our margins, increase production, and lower costs to expand margins.

Kerry Smith -- Haywood Securities, Inc. -- Analyst

Okay. And John, perhaps you can make just a comment generally on Esperanza. I know this new governor -- and I think you've had some discussions, or you're going to have some discussions. Just wondering how you see that process going?

John McCluskey -- President & Chief Executive Officer

We met with the governor's office when -- a month and a half ago. And we had a very productive meeting. They're -- between the federal government, who sent representatives along with us to attend that meeting with the governor's team. They're quite supportive of the initiatives that we're taking and would like to see -- I would say we were very encouraged by the feedback that we received. They'd certainly like to see more economic development in the area. And it's just a question of them getting more familiar with what exactly the project entails.

Kerry Smith -- Haywood Securities, Inc. -- Analyst

Okay. Okay. So, is the process now that you need to provide them with some updated engineering study? Or what --

John McCluskey -- President & Chief Executive Officer

Well, I think there -- it's a pretty new government and they're fighting fires on a variety of fronts in that state right now. And I would say the team that's focused on a project like this is fairly busy right now and not that familiar with the mining industry. Mining isn't something that's done in Morelos state. It's a fairly small component of what goes on. It's mostly quarries and that kind of thing -- sand and gravel and that kind of thing. So, we've got some work to do in terms of just bringing that particular part of their team up to speed with the project. And they're -- like most people, they're -- being unfamiliar with mining, with open pit heap leaching, they're certainly concerned about environmental risks on the one hand. But they're also very concerned about the high unemployment in that state right now, and they want to see what kind of benefit that we can bring through our investment and job creation.

So, it's an attractive enough opportunity that they realize where the upside is quite ready, but they -- on the other hand, they want to assess what the risks are. And on balance, we're quite confident that they're going to come around to a very supportive point of view when it comes to developing the project.

There's another wrinkle to it. There's a few kilometers away -- about six kilometers away, there's a fairly interesting archeological site which I visited when I was down there six weeks ago. And it's seen some fairly significant damage from an earthquake that happened a couple of years ago. And they're looking for some help in terms of helping to rehabilitate and preserve that archeological site. And that's something that, I would say, gives us an interesting opportunity in order to work on that social life side of things. It's often what we do to try to find something where we can get involved and be very, very helpful, where otherwise the government might be short of funds or lacking the financial wherewithal, for the time being anyway, to get behind something like that.

So, we're looking into that. We've got some young archeologists that we actually employ, and they're working on site and taking a good measure of what might be involved. And that's just another thing that we're working on that I think will help bring in a broader base of support in the state to support the development of the project.

Kerry Smith -- Haywood Securities, Inc. -- Analyst

Okay. Okay, that's helpful, John. I appreciate that. Thank you.

...

Operator

Thank you. There are no further questions at this time. This concludes this morning's call. If you have any further questions that have not been answered, please feel free to contact Mr. Scott Parsons at 416-368-9932, extension 5439. I will repeat the number. 416-368-9932, extension 5439. Thank you.

Duration: 29 minutes

Call participants:

Jamie Porter -- Chief Financial Officer

John McCluskey -- President & Chief Executive Officer

Peter MacPhail -- Vice President, Human Resources & Chief Operating Officer

Cosmos Chiu -- CIBC World Markets, Inc. -- Analyst

Kerry Smith -- Haywood Securities, Inc. -- Analyst

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