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Pretium Resources Inc (NYSE:PVG)
Q2 2019 Earnings Call
Aug 2, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you all for joining us this morning. Welcome to the Pretium Resources Second Quarter 2019 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. Please go ahead, sir.

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

Good morning, everyone. Welcome to our second quarter 2019 operating and financial results call. Participating on the call with me today is our CFO, Tom Yip. First, and foremost, I want to acknowledge our hard-working and dedicated team, another strong quarter of positive earnings is due to the efforts of everyone at Brucejack, in Smithers, and here in Vancouver. On today's call, I will comment on progress toward increasing our production rate as well as the operational highlights for the quarter, and we'll then turn the call over to Tom, who will comment on our second quarter 2019 financial performance.

I will follow with an update on our continued testing of longitudinal long-haul stoping, our reserve definition and extension drilling, and our exploration efforts so far this year, both regional grassroots and drilling at depth below the Valley of the Kings. We will close off with a lookahead to the rest of 2019, then open up the call to your questions. Before we begin, I refer you to the cautionary language included in our news release issued yesterday as well as the management discussion and analysis for the same periods. These are available on our website and have been filed on SEDAR.

Please note all dollar amounts mentioned on this call are in U.S. dollars, unless otherwise noted. In the second quarter, the Brucejack Mine produced 90,761 ounces of gold, and we sold 85,953 ounces at an all-in sustaining cost of $940 per ounce of gold sold. Keeping us on track to achieve our annual guidance. We generated $113.2 million in revenue in the quarter, resulting in $17 million in adjusted earnings, equivalent to $0.09 per share. Operations generated over $41 million in cash. Discontinued cash generation allowed us to reduce our debt by nearly $45 million this quarter.

We now have $415.3 million outstanding on the $480 million loan facility. Mill modifications and upgrades required sustained processing at the increased production rate of 3,800 tons per day are progressing on schedule. The most significant upgrade was the shift from the concentrated bagging system to a bulk loading system. The bulk loading system is now installed in its permanent location and is operating as a fully integrated component of the concentrate process. Modifications to the flotation circuit, which include upgraded pumps and piping, and an additional cleaning cell for the flotation circuit will continue during regularly scheduled shutdowns, as the final components are delivered. At the mine, we successfully advanced underground development toward the targeted rate of 1,000 meters per month.

We expect development to continue at this rate for the remainder of the year to ensure development remains ahead of production requirements and to maximize access to stopes. We remain on track to achieve our 2019 production guidance range of 390,000 to 420,000 ounces of gold. As the mine plan continues to progress through a lower grade area of the Valley of the Kings, all stopes above the cut off rate of approximately 5 grams per tonne gold are being mined as they become available for production. As a result, gold grade over the first half of the year was 8.8 grams per tonne and we expect it will average approximately 10.4 grams per tonne for 2019.

As previously guided, both grade and tonnes are expected to be higher in the second half of the year as the increased rate of underground development opens the mine and further improves access to reserves. All-in sustaining costs in the first half of the year was $905 per ounce of gold sold, above our annual guidance of $775 to $875 per ounce of gold. However, as production increases through the remainder of 2019, we expect all-in sustaining cost per ounce to be within guidance for the year. All-in sustaining cost guidance includes approximately $30 million for sustaining capital, of which approximately $11.6 million was spent in the first half of the year. Approximately, $15 million of the estimated sustaining capital is allocated for nonrecurring costs. Finally, I would like to highlight that we continued our track record of positive cash flows and profitability again this quarter as we have every quarter since achieving commercial production on July 1, 2017.

Now I'll turn the call over to Tom to review our financial performance for the second quarter of 2019.

Tom S.Q. Yip -- Executive Vice President and Chief Financial Officer

Thank you, Joe, and good morning, everybody. Overall, our second quarter financial results were quite similar to our first quarter. We generated earnings from mine operations of over $29 million per quarter for a total of $59 million for the first half of 2019, and generated operating cash flows of $41 million per quarter for the total of $81 million for the first half of this year. Turning to Slide 10. During the quarter, we sold 85,953 ounces of gold at an average price of $1,252 per ounce for total revenues of $130 million compared to 81,434 ounces of gold at an average price of $1,257 per ounce for total revenues of $103 in the first quarter of this year.

Included in our revenues were TC/RCs related to our concentrate sales, which reduced our revenues by approximately $66 per ounce for the second quarter and $62 per ounce for the first quarter of this year. Factoring in the TC/RCs, we realized $1,319 per ounce for both quarters. We processed 3,562 tonnes per day in the second quarter versus 3,279 tonnes per day in the first quarter. This resulted in cost per tonne yield of $173 in the second quarter versus $180 for the first quarter. The cost per tonne has declined in the second quarter as a result of our fixed cost lean spread over the additional tonnes being processed. The total cash cost per ounce sold averaged $702 for the second quarter versus $686 for the first quarter.

The higher cost in the second quarter reflects higher mine development and resource drilling versus our first quarter. Our cost of sales, which includes cash production costs, depreciation and deletion, royalties and selling costs averaged $970 per ounce sold for the second quarter versus $908 per ounce in the first quarter. Included in this quarter's results were higher depreciation and depletion charges of approximately $42 per ounce sold due to the updated reserves reported in April. The reduction in proven and probable reserves of approximately $1.7 million contained ounces was perspectively applied to the calculation of the depreciation and depletion for assets used in the unit of production methods. This impact will affect results on a go-forward basis and will be adjusted as the reserves are periodically updated.

Approximately 90% of the depreciation and depletion is calculated on the unit of production basis. Earnings from mining operations were $29.8 million for the second quarter versus $29.2 million for the first quarter. Deducting our corporate administrative costs of $4 million, we generated operating earnings for the quarter of $25.5 million, similar to quarter one. There are 2 significant nonoperating items on our P&L. The first is interest expense of $8.8 million for the quarter versus $9.4 million for the first quarter. Our effective interest rate decreased in 2019 to 5.8%. This is due to the refinancing completed at the end of 2018, replacing the project construction debt with syndicated bank debt. The second item is the loss of financial instruments at fair value.

The fair value of our offtake obligation is based on future gold prices, interest rates and production profiles. That adjustment was a loss of $3.5 million for the quarter versus $7.5 million for the first quarter. This mark-to-market adjustment has been significant since September of 2015 and continues to cause volatility in our reported earnings. Lastly, we incurred $2.6 million of taxes during the quarter, down from $4.1 million for the first quarter. Second quarter taxes consisted of $1 million for the current BC Mineral taxes and $1.6 million for deferred taxes. Of note, we only paid BC Mineral taxes at a minimum rate of 2%, not the 13%, as we jaw down our significant tax bills for the next several years, as well, based on the updated Life of Mine and current gold prices, we do not anticipate any cash taxes for federal and provincial income taxes until 2023. Net earnings for the quarter were $10.4 million or $0.06 per share versus $4.1 million or $0.02 a share in the first quarter.

We adjust our earnings for items that we believe do not reflect the underlying operations of the company. These are noncash items, consisting of primarily the loss on financial instruments at fair value and deferred income taxes. Adjusted earnings were $17 million or $0.09 per share for the quarter versus $16.5 million or $0.09 a share for the first quarter. Turning to Slide 16. For the quarter, we generated $41.2 million of cash flow from operations. And as Joe mentioned, this extends our record of positive cash flow for the 8 quarters since start-up in mid 2017. During the quarter, we paid $44.7 million on the debt facility, spent a total of $7.3 million on capex and $6.9 million on interest. We ended the quarter with $34.3 million in cash. Our syndicated bank debt totaled $480 million at the beginning of the year.

At June 30, the facility totaled $415.3 million. This consists of a term facility with $233.3 million outstanding, representing another 14 quarterly installments, and a balance of $182 million on the $200 million revolver. The facility matures in December of 2022. For the quarter, our cash costs were $702 per ounce sold and our all-in sustaining costs totaled $940 per ounce versus the previous quarter's cash cost of $686 per ounce and an all-in sustaining cost of $868 per ounce sold. This increase largely reflects the higher sustaining capex spent in quarter 2 versus quarter 1.

As Joe has mentioned, with a higher production of sales expected in the second half of 2019, we are confirming our guidance range for the fiscal year. Basic spending totaled $151 million for the first half of 2019, and is tracking our spending guidance for the full year of $325 million to $341 million. We spent $11 million on sustaining capital in the first half of 2019 and still target a total of sustaining cap spend of $30 million for the year. The summer months will allow for more favorable conditions to complete planned projects. To sum up, in the second quarter of 2019, our financial results were similar to the first quarter of the year. We continue to focus on underground development and ramping up to 3,800 tonnes per day. For the first half of 2019, we generated operating cash flows of $81 million and reduce our debt by $65 million. For the remainder of 2019, with higher production, we will continue to generate significant cash to enable debt repayments ahead of schedule.

Now back to you, Joe.

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

Thanks, Tom. We are using what we learned over our first 2 years of production at Brucejack to optimize our mining methods. Turning to Slide 21, this is a planned view of the 1,170-meter level of the Valley of the Kings zone. The gray shaded areas represent our current underground development. The red discs represent drill intercepts greater than 5 grams per tonne gold, and the yellow stars represent visible gold that has been identified underground. As mining has progressed, and with increased infill drilling, we have observed that the high-grade gold occurs predominantly in northeast trending corridors within the ports carbonate being stocked work.

These high-grade northeast trending corridors are highlighted by the orange dashed lines. Domain 20, highlighted in pink, was the first high-grade corridor modeled in detailed on the 1,170-meter level. The model domains incorporate our improve understanding of geology and controls on gold mineralization. They provide the basis for evaluation of longitudinal long-haul stoping. In other words, mining along the direction of mineralization, rather than perpendicular to it. Looking now at Slide 22. You can see the progress we have made in setting up our longitudinal long-haul stoping along the Domain 20 corridor on the 1,170-meter level. If this approach is successful, we expect to reduce the amount of in-stope dilution and better manage grade variability.

We also expect to reduce development cost, as we will be developing an ore as opposed to waste. We are, however, still in the testing phase. Once we have completed additional test stoping this quarter, we will make a decision on its effectiveness. If we do proceed with longitudinal long-haul stoping, it will be incorporated into our annual reserve update and require an updated Life of Mine Plan, which we would expect to complete in the first quarter of next year. Resource definition and expansion drilling is expected to improve reserve definition ahead of mining, and to expand the current mineral resource at the Valley of the Kings, adding gold ounces to the Life of Mine. Turning to Slide 24. This is a section view of the Valley of the Kings looking to the north.

The dark blue lines represent the current underground development. The orange dashed line represents the current mining horizons. The gray area in the background represents the existing measured and indicated resource. The four shaded areas represent a rough outline of planned infill and expansion drilling at the Valley of the Kings. The 70,000-meter 2019 underground drill program started early in the first quarter. The first phase of the drill program focusing on resource definition at depth below the 1,200-meter level is complete. The second phase of the drill program, which is focused on resource definition westward toward the Brucejack Fault is now over 60% complete. These phases target upgrading approximately 50% of the indicated mineral resource to the measured category.

Opportunities for expansion are located at depth, to the west, to the east and to the northeast of the currently defined mineral resource, we previous drill programs have indicated the continuation of high-grade gold mineralization. Underground development is under way to provide access for the third and fourth phases of the drill program, which target resource expansion at depth and to the east of the current mineral resource. In addition, a surface program is being planned to target expansion of the upper parts of the mineral resource. Looking back now, on Slide 25, this is a wider section view of the Brucejack property looking to the north, with the Valley of the Kings in the top left corner. In the middle of this slide, 1,000 meters to the east of the Valley of the Kings, exploration drilling intersected high-grade gold below the Flow Dome Zone.

Later in the year, we plan to drive underground roughly 200 meters to the east and start resource expansion drilling. In addition, to follow up on last year's deep hole drilling, 2 additional deep holes totaling more than 3,500 meters were drilled in the first half of this year from the eastern edge of the Valley of the Kings underground development toward the Flow Dome Zone. The deep underground exploration drilling confirmed expectations for continuation of Brucejack style mineralization to the east of the Brucejack Mine as well as proximity to porphyry style mineralization at depth. Of particular note, hole VU-1787 intersected a zone of mineralized stock work, including visible gold, extending over 107 meters, approximately 240 meters downhole below the eastern limit of the existing Valley of the Kings mineral resource.

The follow-up on these successful results, another deep hole VU-2019 was added to the program in June to test both the extent of Brucejack style mineralization at depth and porphyry potential directly below the Valley of the Kings deposit. Hole VU-2019, which is planned to reach a length of 20,000 meters is targeting the center of a low resistivity anomaly approximately 1,400 meters below the Valley of the Kings deposit. Drilling in hole VU-2019 is over 70% complete and an update will be provided following receipt of assay results and further reevaluation. The 2019 grassroots exploration program on the regional Bowser Claim surrounding the Brucejack Mine is under way. The program includes a minimum of 5,000 meters of drilling to further evaluate several distinct areas that have the potential to host Eskay Creek style VMS deposits and Brucejack style high-grade epithermal gold systems. 2 drills are currently testing the high-priority VMS targets on the northern and central parts of the property. A third drill is testing epithermal targets on the southern part of the property.

The grassroots exploration program will continue through the summer and also includes sampling, regional mapping, prospecting, airborne geophysics, ground geophysics and hyperspectral mapping. Let me conclude with a summary and a look ahead at the remainder of 2019. Our gold production and grade were in line with expectations for the quarter. We remain on track to meet guidance, with both tonnes and grade expected to be higher in the second half of the year. We posted a solid performance in Q2, with profitable production in cash generation that allowed us to pay down $45 million of debt. We pay down a total of $65 million in debt in the first half of the year, and continue to target $140 million of debt reduction this year. Our primary focus remains on the operational execution required to deliver on guidance. With the progress we have made in our production ramp-up and the solid first half of the year, we are confident that we will succeed. Thank you. That concludes the formal presentation.

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

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Justin Chan of Numis Securities. Please go ahead, sir.

Justin Chan -- Numis Securities -- Analyst

Morning, guys. Thanks a lot for hosting the call. My first question is just on unit costs another really good quarter this quarter at $173 a tonne. That seems to be tracking below where you thought you'd be and I'm wondering, I guess, what update you could give on what -- where you expect to be for the rest of the year? And also next year with more development and more drilling, where do think that gets to? Or is $173 or around $175 a good level?

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

Justin, thanks for the question. What I'll do is, I'll point you to our ASIC sheet, which is Slide 19, and basically what that shows you is, is that on the top line, our cash cost is approximately $255 million to $265 million for the years. We incurred $116 million of that already in the first half. Basically, that includes royalties and shipping costs. In the first half of the year, we've incurred about $9 million to $10 million of that. So basically our production cost is going to be in the range of $125 million to $135 million for the rest of the year, which implies that this is going to be a little bit higher and that's because we still have some maintenance that we've scheduled, some camp and road maintenance, liner maintenance and the like, primarily in the third quarter. So I'll just leave you with that as where you think we're going to be for rest of the year.

Justin Chan -- Numis Securities -- Analyst

Okay. Sure. It seems like you're tracking low, but I'll take those numbers at face value for now. On -- my second one is just in capex. If you're sustaining budget is -- or if your sustaining budget includes $15 million of nonrecurring and your expansion budget was $24 million. Am I correct in saying the other $9 million goes into nonsustaining capex? And just looking at Q2, it looks like the majority of capex was sustaining. So I'm just wondering what you're nonsustaining budget is for the full year? And is $9 million that number?

Tom S.Q. Yip -- Executive Vice President and Chief Financial Officer

Well, the nonsustaining is primarily the expansion-related expenditures, and we've guided that to be about $15 million. But that's going to be incurred over this year and a little bit in the first part of next year.

Justin Chan -- Numis Securities -- Analyst

Okay. And then just my last one, just in terms of mine plan and where are you expect to be mining from in the second half and getting up toward your guided grade for the full year. Is mining now moving primarily further west toward the Brucejack fault? Is that where you see more of your stopes coming in the second half?

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

Justin, no, we're still mining essentially in that between that, say, 1,200-meter level and 1,410-meter level. We all will be pushing down and would like to get some -- work on these longitudinal test stopes down on the 1,170 level and then up on the 1,380-meter level. So still within the same area of the mine through the quarter.

Justin Chan -- Numis Securities -- Analyst

Okay. Thanks very much, that's that's very helpful. I'll clear the line for everyone else.

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

Thanks, Justin.

Operator

Our next question comes from Joseph Reagor of Roth Capital Partners. Please go ahead.

Joseph Reagor -- Roth Capital Partners -- Analyst

All right, guys, thanks for taking the questions. I guess the first thing is, is there any maintenance downtime planned for Q3 or Q4 that might impact tonnage at all?

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

Joe, so we had a 5-day shutdown this quarter, and we'll have some more coming up in the next quarter. But that's about it. Nothing other than the ordinary. Just changing sag with liners and things like that.

Joseph Reagor -- Roth Capital Partners -- Analyst

Okay. And then thinking about, as you guys have said, second half of the year, higher grades. Is it going to still be staging, like Q3 is going to be better than Q2 and Q4 be better than Q3? Or do you think the last 2 quarters will be kind of even? What should we think about with that?

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

I think you have that right on the first part there, Joe. So Q3 is expected to be higher than Q2, and Q4 is expected to be higher than Q3.

Joseph Reagor -- Roth Capital Partners -- Analyst

Okay. And then not to beat the cost question to death, but it appears as though your costs have been below expectations looking back multiple quarters. Should we take this as an indication that you guys are finding additional ways to cut costs? Or that aren't planned when you give guidance? Or is it more an indication that like just the mine is operating better-than-expected?

Tom S.Q. Yip -- Executive Vice President and Chief Financial Officer

Joe, I think, some of that is also timing of when we will incur the expenditures. I think we're tracking pretty well on what we had guided in our Life of Mine. Recall that when we put that together, in the first 5 years with the extra resource drilling, we were targeting about $178 per tonne on average, so we're tracking pretty close to those numbers right now.

Joseph Reagor -- Roth Capital Partners -- Analyst

All right, fair enough. I'll turn it over. Thanks.

Operator

Our next question comes from Ovais Habib of Scotiabank. Please go ahead, sir.

Ovais Habib -- Scotiabank -- Analyst

Good morning, everyone. Hi Joe, Hi Tom. Just a couple of questions from me. For number one, in terms of grade for the second half, obviously you guys are looking at grade moving higher in the second half and then in terms of throughput as well. The question was just in terms of more kind of looking at Q3 and Q4, are we looking at a step-up change or from Q2? Or is this going to be more of a Q4 situation where grade significantly improves?

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

So you're going to see grade. We expect to see grade improve through Q3 and then again in Q4. And look, we're still holding to that target where we're about 10.4 grams per tonne of gold for average for the year. So you're not -- we don't expect to see Q2 and Q3 the same. Q3 will be a step up from Q2 and then Q4 is a step up again from there.

Ovais Habib -- Scotiabank -- Analyst

Perfect. Okay. And just going into -- obviously, you've done some test stoping as well for longitudinal mining. Joe, when is the next time we can expect to see some sort of update on that? Or just in terms of decision wise?

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

Well, look, we'll we get our reserve updated reserve under work going in the fourth quarter. So we'll need to make decision prior to get going on that work. So by the time we have our Q3 call, we should be in a position to update you on what direction we're taking on the longitudinal stoping.

Ovais Habib -- Scotiabank -- Analyst

Got it. And just my last question. On your realized price for the quarter, I believe it was around the $1,250-ish level. Can you give us some color on in terms of the treatment and refining charges and just how we should kind of model going forward as well? Or should we kind of stick with this percentage?

Tom S.Q. Yip -- Executive Vice President and Chief Financial Officer

Well, we've disclosed in our results that those treatment charges are roughly about $4 million to $5 million each quarter. So about $10 million for the first half. And that's pretty consistent, and I would suggest using that for the rest of the year.

Ovais Habib -- Scotiabank -- Analyst

That's perfect, Tom. I appreciate that. Thanks so much, for the questions, guys.

Tom S.Q. Yip -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

Our next question comes from Anita Soni of CIBC. Please go ahead.

Anita Soni -- CIBC -- Analyst

Good morning, guys. Thanks for taking my question. I'm just wondering, in terms of the grade profile just as Ovais had asked about. How is the quarter going relative to your expectations for this quarter?

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

Anita, Joe here. Look, we're tracking along where we expect to be and so we'll continue. We're not giving guidance on a quarterly basis, but look, we're moving in that direction, and we expect Q3 grade to be higher than Q2 grade.

Anita Soni -- CIBC -- Analyst

Okay. You do have a little bit of buffer though in terms of, I think, your tonnage rates are a little bit ahead of what you would've forecasted for the year, assuming you continue on -- you've reached sort of the 3,500 tonne per day pretty quickly. So is there some variability or sort of buffer there in the grade? Or should we be sticking to that 10.4 and it's going to be this -- with potential for tonnage of the tire?

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

Look, I stick with what we've guided on tonnage. We averaged 3,500 for the year. We will be continuing that ramp up. We're still targeting 3,800 tonnes a day by year-end, but we'll get you an update when we have our Q3 call and how that's going.

Anita Soni -- CIBC -- Analyst

Okay. And then lastly on the total cash cost. You've guided to full year guidance of $255 million to $265 million, I think, that's reiterating your numbers. And I'm just wondering -- and given that you've only spent about $116 million to date, so that implies sort of at least of $115 million -- sorry, $150 million into the back half of the year. What's driving that increase in the costs?

Tom S.Q. Yip -- Executive Vice President and Chief Financial Officer

Anita, it's primarily capex. You see that we're still targeting $30 million, but we've only spent just shy of $12 million in the first half. So that's probably a large part of it.

Anita Soni -- CIBC -- Analyst

Okay. I would say that, that's probably about $5 million to $3 million, but or maybe $6 million, right? So that's -- do you expect the unit costs to go higher in the second half of the year? Or are there other sites or additional site services costs that we're still not forecasting or baking into our numbers this year?

Tom S.Q. Yip -- Executive Vice President and Chief Financial Officer

Well, yes. There's some maintenance that has been scheduled in the third quarter, and we generally would expect roll in camp maintenance and liners primarily to occur in that third quarter. So we're expecting a little increase just for those maintenance items generally in the third quarter.

Anita Soni -- CIBC -- Analyst

Yeah, OK. All right. Thank you very much.

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

Thank you. Anita. Thanks.

Operator

Thank you. This concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Ovsenek for any closing remarks.

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

Thank you, everyone, for dialing into our earnings call this morning. We appreciate all comments and questions. Have a good weekend, everyone. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

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

Tom S.Q. Yip -- Executive Vice President and Chief Financial Officer

Justin Chan -- Numis Securities -- Analyst

Joseph Reagor -- Roth Capital Partners -- Analyst

Ovais Habib -- Scotiabank -- Analyst

Anita Soni -- CIBC -- Analyst

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