Alacer Gold Corp. (ALIAF) Q1 2020 Earnings Call Transcript

Alacer Gold Corp. (ALIAF)
Q1 2020 Earnings Call
Apr 30, 2020, 5:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by. This is the conference operator. Welcome to the Alacer Gold first-quarter 2020 operating and financial results conference call. As a reminder all participants in listen only mode and the conference is being recorded.

[Operator Instructions]. I would now like to turn the conference over to Lisa Maestas, director of investor relations. Please go ahead.

Lisa Maestas -- Director of Investor Relations

Thank you, Claudia. Welcome, everyone, and thank you for joining us today for Alacer Gold's first-quarter 2020 operating and financial results conference call. Joining on the call are Rod Antal, our president and chief executive officer; Stewart Beckman, our chief operating officer; and Mark Murchison, our chief financial officer. Alacer Gold is listed on the Toronto Stock Exchange as ASR and on the Australian Stock Exchange as AQG.

This conference call is available via webcast, and the link and slides to accompany our remarks can be found on our website at alacergold.com. All documents released today can also be found on sedar.com and asx.com.au. This presentation includes endnotes, and this call will also include forward-looking language. Please refer to the forward-looking information and the endnotes included at the end of our presentation.

Additionally, all dollar amounts in this presentation are expressed in U.S. dollars and on 100% basis, unless otherwise noted. Following today's presentation, we will open up the call for a Q&A session I will now turn the call over to Rod Antal, and if you could please turn to Slide 2.

Rod Antal -- President and Chief Executive Officer

Hi, everyone, and thanks for joining the call today. Before we discuss our first-quarter results, I'd like to remind you of the growth components for both sulfides and oxides we developed over the last few years. Our strategy is simple: To deliver a 10-year production profile of 300,000 to 400,000 ounces per year. Despite COVID, we continue to push forward with our plans to publish an updated technical report later this year that will outline the pathway for us to achieve our strategy.

Stew will talk about the sulfide flotation circuit as one of these growth pathways later in the presentation. But before we get into the quarterly results, let me take a few minutes to discuss some of the highlights from our recently published 2019 Sustainability Report. Please turn to Slide 3. A few weeks ago, we issued our fourth sustainability report and filed the report with the GRI sustainability database.

Our highest priority has always been to protect our people and our assets, and this is evident with our strong environmental and safety record. Some of the highlights from the report include, in 2019, we had no reportable environmental incidents, and we saw a 21% decrease in carbon emissions per gold ounce produced despite increasing gold production from our new sulfide plant. We also operated 22 million hours without a lost time injury. We continue to invest in the country, the local community and in our people.

We spent $1.3 billion in procurement in Turkey since 2015, with $25 million spent with local suppliers last year. We've awarded 142 academic scholarships, with 50% of those to females. And last year, we spent $1 million on employee training and invested in a full-time training facility on site. Our social development fund is in its second year, with 32 projects supported where we have invested around $420,000.

We've already seen a number of success stories coming out of the social development fund and expect to see many more of these in the future. In 2020, we'll continue to not only improve our reporting but also undertake several new initiatives to build on this strong foundation and importantly recognize our new operating environment with the sulfide plant now in full production. If I could turn to Slide 4, and I'm going to take a minute to discuss our COVID-19 management plan. We started planning and preparing for COVID early this year when it became apparent there was a rapid escalation of the risk from this pandemic.

So, far, through the excellent efforts of our team, we have had minimal impacts to our people, communities and assets. We are taking all reasonable measures to ensure that we continue with our safe operations. Our response and mitigation efforts were built from our crisis management plans, and we also implemented an infectious disease management plan on top of that. You can see this slide a number of the protective actions we have taken.

We also put in detailed plans to protect our supply chain, increasing inventories where possible, arranging for extra storage facilities and also engaging with alternative suppliers. Part of our risk analysis was to assess our liquidity position in the event of a full and extended shutdown. While there are a number of possible scenarios that could occur, our balance sheet, which is strong, provides more than adequate liquidity to withstand an extended shutdown if this were to eventuate, though it seems less likely than it did before. Finally, should our operations be reduced or temporarily suspended, plans are in place for a safe and orderly shutdown and speedy restart as soon as the conditions would allow.

In respect to the Turkish government response to COVID, they initiated a number of restrictions to reduce and lessen the spread, including travel restrictions and lockdowns in major cities over weekends. In addition, the government also recently introduced a short-term package of legislation in line with other countries in order to ensure liquidity and financial stability of companies operating within Turkey. So, in summary, we've been relatively un-impacted but continue to manage and monitor the situation very closely. I'm going to shift gears and now move on to the quarter one results, starting on Slide No.

5. We've had a great start to the year despite the headwinds COVID threw at us. We had another safe quarter and have worked with over 218 days without a lost time injury. On the operational side, our plants produced 88,000 ounces of gold at an all-in sustaining cost of $700 per ounce.

We also successfully completed the planned shutdown of Autoclave 2 during the quarter. Our strong production resulted in $47 million of unlevered free cash flow, and we continue to de-lever our balance sheet, reducing our net debt to below $25 million. Our excellent balance sheet provides us ample flexibility for our various growth initiatives which are under way. All in all, an excellent start to 2020.

I'm going to hand the call over to Mark on Slide No. 6.

Mark Murchison -- Chief Financial Officer

Thanks, Rod, and hello, everyone. This slide shows our key 2020 guidance numbers. We have been fortunate, as Rod mentioned, that COVID-19 has had minimal impact to date, allowing us to maintain this year's guidance. Of note, production guidance remains at 310,000 to 360,000 ounces.

All-in sustaining cost guidance remains at 735 to $785 per ounce. And our growth and capital plans for the year are unaffected. 2020 will be another important year for the company as we build on our great platform. And a key part of this will be the delivery of the updated Copler District technical report later this year.

Moving to Slide 7. The slide has a summary of the financial highlights for the quarter. 90,000 ounces of gold were sold during the quarter, generating $142 million in proceeds. Operating cash flows of $63 million were generated in the quarter as reflected in the cash flow statement.

Attributable net profit or earnings for the quarter were $49 million or $0.16 per share. On the right-hand side of the slide, a chart reconciles the first-quarter attributable EPS of $0.16 per share to a normalized EPS of $0.10 per share, which provides a more meaningful representation of the business' underlying performance. The adjustments made relate to incentive tax credits recognized during the quarter, unrealized noncash losses arising from the devaluation of the Turkish lira, interest rate swap and share-based compensation. In relation to tax.

I've noted in the past couple of quarters that a detailed review of the incentive credits recognized from the almost $700 million investment on the sulfide plant was under way. Detailed review concluded that additional costs related to the sulfide project are eligible for incentive tax credits. As a result, we recognized a $48 million tax benefit in Q1 for the additional incentives that is reflected in the deferred tax asset. At quarter end, there were $224 million of incentive tax credits recognized in the deferred tax asset that are available to reduce current year and future years' corporate tax payable.

In regard to the corporation's effective cash tax rate, we forecast the rate will be around 5% going forward as we continue to utilize incentive tax credits. Finally and most importantly, cash. The operations are delivering strong cash flow. Unlevered free cash flow for the quarter was $47 million or $0.16 per share.

Consolidated cash at quarter end was $239 million. Outstanding debt was $262 million, resulting in net debt of $23 million at the end of the quarter. This strong cash generation in the project company enabled $100 million distribution to be paid in January, of which $20 million went to our joint venture partner. We expect distributions from the project company will continue to be paid going forward as strong cash flow generation continues.

Now, I'll hand the call over to Stew to provide an update of our operations.

Stew Beckman -- Chief Operating Officer

Thank you, Mark, and hello, everybody. Before we get into the details, I'm going to start with a brief summary of our HSEC performance. Our focus on HSEC has been intense over the period, acknowledging that our team is having to continue to operate as normal with the added burden and stress of the pandemic. The completion of the shutdown without any incident late March while managing all of the COVID impositions was a real credit to our team.

We made an early start, and being a little isolated helped us to manage the COVID risk in the Copler District. We have a number of villages, camps and different living quarters, including the camp that we used for the recent sulfide plant construction. This has given us good flexibility to separate our work groups and enforce strict separation and quarantine processes for functional experts, management and all of the people entering the site. We also set up remote operating nodes and oversight control nodes around the world to allow extra support from -- and technical assurance from our subject matter experts to the team on the ground.

The control node in Turkey was even used to allow quarantined control room specialists to take part in bringing the plant back online after the shutdown while they remained in a two-week isolation after returning from break. We have been working very closely with local authorities to best protect our communities and people and are providing them with direct support where we think we can help. This has included equipment donations to local and regional hospitals. Our team is absolutely committed to continuous improvement of ESG and health and safety performance, including critical risk management.

These difficult times are a poignant reminder of how important these are. Now, if you could please turn to Slide 8, and I'll provide you an update on growth and operations. The work done to prepare for COVID and manage COVID has paid dividends, and we remain committed to delivering on our 2020 guidance promise. The performance of the sulfide plant has been really pleasing.

On an annualized basis, the plant ran at about 105% of design rate for the quarter with an autoclave operating utilization of just over 90%, pretty impressive given the quarter included a shutdown of Autoclave 2 for its first major internal shutdown and a short total plant shutdown to complete some tie-ins for stage two of the TSF. The autoclave was in fantastic conditions, and we will be rescheduling autoclave shutdowns as a result, including probably pushing out the major shutdown of Autoclave 1, which was scheduled for this quarter. We made some changes to the mine sequencing to both manage a temporary shortfall in mine equipment operators due to COVID-related age and travel restrictions and to make the operations even more resilient in the event that the pandemic escalates. The new mine plan reallocates mining fleet to opening up mining areas, in particular, accessing ore from Main Pit and defers some of the accelerated build of the TSF.

While there is a small increase in mining costs with this new schedule, we will see immediate, real operating benefits for the mine and plant with more blending choices for the sulfide plant rather than just relying on what is at the face of the stockpiles at any time. The TSF is an upstream lift design with a wall built with competent mine waste. The rate of wall construction has been a function of mine schedule. If you like, you can think of the TSF wall as a waste dump for the mine.

The new mine schedule will slow movement of waste to the TSF wall. However, we are maintaining the wall rate -- rise rate at about 120% of what the plant requirement is. Plant recovery was 92% for the quarter. As we said last quarter, we have a project under way to improve process chemistry, which we are aiming to have complete in Q2.

We completed some of the tie-ins just last week. We've had some specialist equipment fabrication in Europe delayed due to COVID. The team is driving to get this sorted. And with some of the restrictions lifting, we are hopeful that we'll see the gear by June.

Along with developing operational capability and discipline, a key driver for the improved plant throughput and recovery has been the improvement to our plant control systems. This initiative to improve plant performance and assurance continues. We just started detailed and vendor engineering for the proposed supplemental flotation circuit. Wood Engineering, who worked with us on the construction of the sulfide plant, are doing the engineering.

This debottlenecking pathway was made possible by the now evident significant installed latent plant capacity, in particular, the capital-intensive unit operations of combination pressure oxidation in the oxygen plant. Our expectation is that we can achieve a throughput of up to approximately 3 million tonnes per annum, which will more than offset a reduction in the overall plant recovery. The initial estimate, including contingency is about $15 million capital, which includes some equipment for the CIP circuit. Subject to board and other approvals once the technical work is complete, our ambitious target for commissioning is in Q1 next year.

There will also be the normal permitting requirements. And in preparation for this, the flotation circuit was contemplated in the recent EIA amendment, which is currently in process. The flotation circuit also has some other real advantages above just the marked increase in throughput and gold production. It is expected that the float plant will reduce reagent consumption and reduce overall unit processing costs.

It will also ease the constraints on ore presentation, allowing the sulfide plant to accept higher carbonate and lower sulfide grades and so is expected to help reduce mining and rehandle costs. The float plant will also add some coarser material to the tailings which will assist in compaction of the tailings in the TSF, effectively increasing the TSF capacity. This extra TSF capacity, along with the construction of a second TSF facility, are being considered in the update of the technical report to allow us to convert some of our very large resource into reserve and to extend the mine life. In summary, we believe that the flotation circuit will reduce unit operating costs and increase total sulfide plant throughput and gold production.

The work on the flotation circuit continues, and we plan to include detail on the technical report which we will deliver later this year. The other significant item for the technical report which I haven't already mentioned, will be the preliminary development plans for Ardich. This is probably a good segue into the next slide, so if you could please jump to Slide 9. Oxide plant performance has been in line with expectations for the quarter.

We're continuing to drive, to find, develop and deliver extra oxide ounces from both within our existing mine footprints and adjacent deposits. The 2020 ramp-up of exploration drilling was slowed by the COVID restrictions. However, the exploration team have done a great job and managed to get 10 rigs into the field in the Copler District. Drilling is under way in Ardich, Cakmaktepe, Copler in-pit and the Copler Saddle at the moment.

We are working to increase the exploration rate so that we can minimize any delay impact of the COVID slowdown. We are seeing some delays in analysis of drill core as the contract labs struggle with COVID restrictions. There is an expectation that we will likely see at least some delay of the permitting process while the government departments are impacted by COVID restrictions. That said, there is a very strong push from top government to try to help industry to keep working through the pandemic.

We are seeing this reflected in our interactions with state and local authorities, and so it seems to be working. Work started on Phase 1 of the heap leach expansion in 2019, which will provide us approximately 6 million tonnes of additional capacity for about $12 million. This phase of the expansion will be available to start stacking on in the next few months and before the existing heap leaches fall. If you look at the photos, you can see in Slide 9 part of the heap leach expansion ready for lining.

To close out, the business is well positioned to weather the storm, and we are committed to and expecting to deliver our guidance for this year. I've been very proud of the team who've been able to keep the mine safely operating despite the challenge of COVID. Several of the team have been at site for an extended time, some separated from their families. They've really stepped up, protecting our communities, our people, our business and still managing to push forward our very tangible and value-accretive growth plans.

Thank you very much. And I'll hand back to Rod to wrap up.

Rod Antal -- President and Chief Executive Officer

Thanks, Stew. And thanks, Mark. Despite the challenging times, I'm pleased to reaffirm our 2020 guidance, especially given our excellent start to the year, thanks to our great team. We will continue to focus on disciplined investing using our strong balance sheet to deliver the next phase of growth for Alacer.

We appreciate you attending the call today, and I'll now open up the call for questions. Thanks, Claudia.

Questions & Answers:

Operator

[Operator instructions] Our first question is from Mark Mihaljevic with RBC Capital Markets. Please go ahead.

Mark Mihaljevic -- RBC Capital Markets -- Analyst

Hi. Thanks, and congrats on a good quarter and very helpful color from the team on the call so far. Just -- well, I guess, I got a few questions. So, first off, the 15 million you quote, would that be kind of all the changes you need to see for -- on the plant, and then it would just be maybe – or, I guess, really just some TSF capital aside from that? Is that really all you need to get up to the 3 million or toward that 3 million capacity?

Stew Beckman -- Chief Operating Officer

Yeah. There's no extra spend on the TSF. And as I said, what we've seen in the laboratory is quite a significant compaction when we add the flotation material, so we will be able to fit more into the current TSF.

Mark Mihaljevic -- RBC Capital Markets -- Analyst

OK. And then, I guess, following up on that TSF point. Can you quantify how much incremental capacity or the delta that you could see there and then, I guess, just the scope of that second TSF that you mentioned you're also investigating?

Stew Beckman -- Chief Operating Officer

The first -- the second TSF was contemplated during the initial permitting for the business. And so, it's already part of our EIA. And so, it's partially permitted. And from memory, it's about 25 million tonnes extra capacity in the second TSF.

Mark Mihaljevic -- RBC Capital Markets -- Analyst

And then do you have a sense of how much excess capacity you can get in the existing one from the compaction?

Stew Beckman -- Chief Operating Officer

We're still completing those numbers, but it'll be substantive.

Mark Mihaljevic -- RBC Capital Markets -- Analyst

OK. Yes. No. That's really encouraging to hear.

And then, can you just give a little more clarity on some of the challenges? I guess you quoted in the MD&A about -- and, I guess, you mentioned just with the blending of the stockpile that you're seeing with some of the chemistry and grade profile. So, just a little color on that.

Stew Beckman -- Chief Operating Officer

Yes, of course. So, blending from the stockpiles has been tough as the first thing we need to do is to get the chemistry right. So, we have to build them a particular -- in particular, sulfide grades and carbonate grades, and then we chase after the gold. In more recent years, with our mining, given our better understanding of how the plant was going to react, we've been really diligent about how we've blended those together.

Some of the old stockpiles are less ordered in how they're presented. So, we are grade-controlling those in front of ourselves to let us know what's coming, but we are restricted somewhat by what's presenting in the faces of the stockpiles because you have to take the bit at the front before you can get to the bit at the back. So, it makes it quite difficult for us sometimes to get the grades we require for chemistry, and to keep the gold grade up. And of course, the very best piles that we put together in the last couple of years, we've consumed those.

So, opening up an area in the mine -- and we have actually -- we are starting to present ore already. So, the builds that we're currently feeding to the plant, we're just starting to see ore coming out of Main Pit now, give us a lot more flexibility. So, if we open up a stock -- if we're in the stockpiles, and we presented with an area of lower sulfide, for example, we've got more choices to be able to supplement it.

Mark Mihaljevic -- RBC Capital Markets -- Analyst

OK. Perfect. And then, just a little more high level. I guess you guys have had some recent copper discoveries.

Just how are you guys thinking about those? Is that something you want to flesh out a little more value for and kind of figure out exactly what you've got and then look to monetize similar to what you did over at Gediktepe? Or is that something you're thinking about differently at this stage?

Rod Antal -- President and Chief Executive Officer

Yeah. Look, it's, obviously, very early, Mark, in terms of -- and I'm assuming you're talking about the recent exploration results that we put out. As we've always said, if we have a discovery, we're sort of agnostic about the metal. So, it will depend on what we find and how that turns out and how that transpires into some future prospect and hopefully project and hopefully mine.

But early days. We'll see where we get to, but we'd be open to all permutations, taking it forward on development or if the right price was made, selling these things in the future as well. But we need to do more work yet.

Mark Mihaljevic -- RBC Capital Markets -- Analyst

Perfect. That's it for me. Thanks, guys.

Operator

Our next question is from Nick Herbert with Credit Suisse. Please go ahead.

Nick Herbert -- Credit Suisse -- Analyst

Thank you. Good morning, Rod. Just a few for me. Apologies if you've covered these.

My line dropped out partway through the call. But starting on the exploration side and the two to three-year timing you mentioned for Ardich and the Saddle. How should we think about next year, 2021? Is that sort of expected to be a similar rate as to what you're guiding this year before we can potentially get a step-up from 2022? And then also, do those deposits contain any sulfides? If so, is there any implication for the sulfide economics?

Rod Antal -- President and Chief Executive Officer

Nick, so the answer to the first question, I'll let Stew answer the second part, it hasn't changed. So, we'll do everything we can to sort of maintain the current run rates for oxides going into 2021. But remember, that will be a big upgrade of what was put out in the previous tech report. So, by inference, that has to come through continuing with the small incremental additions toward.

So, we'll do everything we can until we can sort of get that step change moving into one of these other areas in the future. But we'll, again, update that as the year progresses and the work starts to unfold itself, for '21, I'm talking about.

Nick Herbert -- Credit Suisse -- Analyst

OK. Yes. Understood. I mean we'll wait on the detail for the tech report.

But conceptually, is there much of a capex spend to get into those deposits?

Rod Antal -- President and Chief Executive Officer

Everything -- that's the beauty of this. I think if you look at the portfolio we have, we consider most of the options has been low capital intensity because of the infrastructure builds that we have at Copler and its proximity to Copler. So, think of it as a district play, sort of a central processing facility. So, it gives us all the benefits of having a lower capital intensity.

And some of these deposits, as you've seen, are relatively shallow. So, there shouldn't be anything that would surprise us in terms of where we get to in the future. I think the limitation we have now is really just the drilling and continuing with that drilling. So, we can start converting these into reserves and start getting the mine plans and details around them.

Nick Herbert -- Credit Suisse -- Analyst

Yeah. Understood. And then, one, just interested in your thoughts on how you're thinking about capital management and weighing up sort of the limited growth funding needs that you have and , obviously, strong cash flow, net cash this quarter. So, I guess you can't speak for the board, but broadly, how are you thinking about that potential some capital returns coming up?

Rod Antal -- President and Chief Executive Officer

Yeah. Look, we're in a very strong position. We've always said that our objective is to live within our means and to utilize fully our balance sheet to become self-funding for the -- managing the portfolio and growing the portfolio in the future. And I think we're, obviously, well on our track to do that.

And turning our attention to what else to do with the cash because we do generate a lot of money and a lot of cash flow over the next few years. The capital returns of some shape or form is definitely on the agenda with our board to keep on discussing and considering. But the objective for this year is, as I've said before, is we wanted to build some cash on the balance sheet, provide us with that sort of another -- liquidity on a cash positive perspective and set out the sort of three to four-year plan around the growth initiatives, so we can see what would be left and how we would consider those capital returns. But it will be on the agenda later this year.

Nick Herbert -- Credit Suisse -- Analyst

OK. Great. Thanks, Rod.

Operator

[Operator instructions] Our next question is from Daniel McConvey with Rossport Investments. Please go ahead.

Daniel McConvey -- Rossport Investments LLC -- Analyst

Hi. Good day Rod, Stew, everyone. Congratulations on another good quarter. And I guess, around now, you've eliminated your net debt, so congrats.

Two questions. One, just on COVID, getting people in, the restrictions. So, if you have a driller coming from, I don't know, Canada or Europe or somewhere, how -- what are the -- what does he have do to get into Turkey to site right now? Is there a quarantine period or --

Stew Beckman -- Chief Operating Officer

So we don't bring drillers in from Canada because it's too expensive.

Daniel McConvey -- Rossport Investments LLC -- Analyst

But they --

Stew Beckman -- Chief Operating Officer

When we bring -- yes. So, they have batten down. So, moving in and out of the country is restricted at the moment. But within the country, anybody who comes to site, we quarantine them before they start working with anybody else for two weeks.

So, they have to go in isolation for two weeks. And we've been doing that since the beginning of March. So, if you go in for a break, including if we find out that the locals have been going into the next city across [ Inaudible]. So, we've been very tight about controlling movement.

Daniel McConvey -- Rossport Investments LLC -- Analyst

Where do you quarantine them, Stewart? Do you just -- to a facility, or --

Stew Beckman -- Chief Operating Officer

Yeah. So, yes, we've been using the CCP camp. So, we have the camp from the construction that just completed, and it has a number of separate wings in it. We have a camp on site, and then we also have separate residences in the town.

So, we've separated where different people are. We've also separated the management team. For example, Berham site general manager, and Basel, who is -- he's the assistant GM, haven't been together for a number of weeks despite being on site. So, we've kept the groups and functional experts apart as well.

So, the mining engineering group don't all go to the office at the same time. They're going in, in alternate days. So, if we lose a mining engineer, we don't -- if somebody comes down, we don't have everybody come down at the same time. And we've also set up these remote control nodes to allow people who -- the subject matter experts who helped us commission and build the plant are also able to dial in to the plant to provide a bit of extra oversight while we go through this process.

Daniel McConvey -- Rossport Investments LLC -- Analyst

OK. Great. Can you remind me what -- the lira is helping you, I can see here again. What percent of your costs – will a third of your costs be lira-denominated?

Mark Murchison -- Chief Financial Officer

Yeah. Dan, it's Mark. About a third is right.

Daniel McConvey -- Rossport Investments LLC -- Analyst

OK. Great. Alright. Thanks, guys.

Operator

[Operator signoff]

Duration: 36 minutes

Call participants:

Lisa Maestas -- Director of Investor Relations

Rod Antal -- President and Chief Executive Officer

Mark Murchison -- Chief Financial Officer

Stew Beckman -- Chief Operating Officer

Mark Mihaljevic -- RBC Capital Markets -- Analyst

Nick Herbert -- Credit Suisse -- Analyst

Daniel McConvey -- Rossport Investments LLC -- Analyst

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