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Alamos Gold Inc (NYSE:AGI)
Q2 2020 Earnings Call
Jul 30, 2020, 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 2020 Conference Call. In addition to myself, we have on the line today both John McCluskey, President and CEO; and Peter MacPhail, COO. We will be referring to a presentation during the conference call that is available through the webcast and on our website. I would also like to remind everyone that our presentation will be followed by a Q&A session. As we will be making forward-looking statements during the call, please refer to the cautionary notes included in the presentation, news release and MD&A as well as the risk factors set out in our annual information form. 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 U.S. dollars, unless otherwise noted.

With that, I'll turn the call over to John to provide you with an overview.

John A. McCluskey -- President, Chief Executive Officer & Director

Thank you very much, Jamie. Good morning, everyone, and welcome to the call. We had a reasonably good second quarter despite having to adjust to operating in the challenging COVID-19 environment. Importantly, we advanced several of our key growth initiatives, which culminated in the completion of the lower mine expansion at Young-Davidson, the announcement of the Phase 3 expansion of Island Gold and the La Yaqui Grande construction decisions earlier this month. With respect to our operations, we produced 78,400 ounces of gold in the second quarter. Production was impacted by temporary suspensions at Island Gold and Mulatos for more than a month related to COVID-19.

Consolidated total cash costs of $933 per ounce, all-in sustaining costs of $1,276 per ounce were also affected. Given the impact of COVID-19 on our second quarter results, we've revised our full-year 2020 production guidance slightly lower to 405,000 ounces to 435,000 ounces. We also made minor revisions to our cost guidance, with total cash cost guidance increasing 3% to a range between $780 to $820 per ounce and all-in sustaining cost guidance increasing 2% to $1,030 to $1,070 per ounce. This primarily reflects higher costs at Young-Davidson in the second quarter due to the delay in completing the tie up.

With Mulatos and Island Gold resuming operations in May and returning to normal operating levels in June and the lower mine expansion at Young-Davidson completed earlier this month, we expect much stronger production, significantly lower cost in the second half of this year.

Moving to Slide 4. As previously discussed on our quarter call, we implemented increasingly strict health and safety protocols across the company with the emergence of COVID-19, ranging from medical screening for all personnel prior to site entry to social distancing practices across our operations. At the beginning of May, we began safely ramping up operations at Island Gold and did the same at Mulatos toward the end of the month. All of our mines are now operating at normal levels, albeit under strict health and safety protocols. These protocols continue to evolve as we look for the best ways to keep our workforce and communities safe.

Our strong outlook is detailed on Slide 5. We started the year working toward several significant catalysts as part of a transformational year for Alamos. Earlier this month, we delivered on three of these catalysts. The completion of the lower mine expansion at Young-Davidson will be a step change for that operation, meaning higher production, lower costs and lower capital going forward. This will be a big driver of strong companywide free cash flow growth in the second quarter -- second half of 2020 and beyond. At Island Gold, the Phase 3 expansion will double the mine life and give us a bigger lower cost and even more profitable operation.

Finally, the La Yaqui Grande project add low cost, high return production to the Mulatos complex. With Island Gold and Mulatos operating at normal levels, Young-Davidson ramping up to 7,500 metric tons per day, we expect higher production and much lower cash costs to drive strong free cash flow growth in the second half of this year.

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. Moving on to Slide 6 of the presentation. We sold 74,600 ounces of gold at a realized price of $1,692 per ounce for revenues of $126 million in the quarter. Total cash cost of $933 per ounce were temporarily higher, primarily reflecting the COVID-19-related delay in completing the lower mine expansion at Young-Davidson. All-in sustaining cost of $1,276 per ounce were also impacted by sustaining capital being spread across lower production at all of our operations.

As John mentioned, we expect cost to decrease significantly in the second half of 2020. Despite the downtime and lower production at Mulatos and Island Gold during the quarter, both operations performed well, generating $19 million and $9 million of mine-site free cash flow respectively. Operating cash flow before changes in non-cash working capital was $45 million or $0.11 per share in the second quarter. Our reported net earnings of $12 million or $0.03 per share included unrealized foreign exchange gains of $10 million recorded within deferred taxes, partially offset by COVID-19 cost of $6.5 million at Island Gold and Mulatos and other one-time losses of $1.9 million. Excluding these items, our adjusted net earnings were $10 million or $0.03 per share.

Capital spending totaled $55 million in the second quarter, including $14 million of sustaining capital, $39 million of growth capital and $1 million of capitalized exploration. Majority of the growth capital was spent on completing the lower mine expansion at Young-Davidson, advancing work on the tailings facilities at both Young-Davidson and Island Gold and other infrastructure projects at Island Gold.

With the announcement of the Phase 3 expansion of Island Gold and the positive construction decision for La Yaqui Grande, we are increasing our capital guidance for 2020. We now expect to spend between $205 million and $235 million this year, an increase of $25 million to $30 million from our previous guidance. This includes an expected $20 million increase in growth capital at Island and a $10 million to $15 million increase at Mulatos for the development of La Yaqui Grande. This was partially offset by lower capitalized exploration at Island Gold, with exploration activities having been suspended for a good part of the second quarter.

We repurchased an additional 527,000 shares under our share buyback program early in the quarter at an average price of $5.05 per share, more than 50% below our current share price. We also paid a quarterly dividend of $6 million in June. In total, we've returned $9 million to shareholders in the second quarter and $17 million year-to-date. We ended the quarter with cash of $201 million, $30 million of equity securities and $400 million of additional liquidity. This includes the $100 million drawn on our $500 million revolving credit facility in the first quarter to enhance our financial flexibility, given COVID-19. We have no additional debt.

With the completion of the lower mine expansion at Young- Davidson, we have transitioned from a reinvestment phase to a period of strong free cash flow growth. We are well positioned to fund our internal growth initiatives while also growing our net cash position and returning additional capital to our shareholders in the form of higher dividend.

I'll now turn the call over to our COO, Peter MacPhail to provide an overview of our operations. Peter?

Peter MacPhail -- Chief Operating Officer

Thank you, Jamie. Moving to Slide 7. Young-Davidson produced 23,100 ounces in the second quarter, total cash cost of $1,564 per ounce and mine-site all-in sustaining cost of $1,809 per ounce. Production and costs were impacted by the Northgate shaft being down for the entire quarter to complete the tie-in of the upper and lower mines. As previously announced, this was delayed about a month into July due to COVID-19 related labor constraints.

During the downtime, ore was trucked to surface from remnant stopes in the upper mine at a rate of approximately 2,700 metric tons per day. Given the delay, we have revised our full-year production guidance at Young-Davidson to 135,000 to 145,000 ounces and increased our cost guidance. With the lower mine expansion now complete, we are expecting a much stronger second half with production increasing to a range of 83,000 to 93,000 ounces and total cash cost decreasing sharply to between $800 and $840 per ounce and mine-site all-in sustaining costs decreasing to between $990 and $1,030 per ounce.

Over to Slide 8. The completion of the lower mine expansion is a significant milestone and game changer for the operation. We are now operating from the new infrastructure that is bigger, more efficient and more productive. Underground mining rates increased from approximately 2,500 metric tons per day earlier this month to 6,500 metric tons per day currently and are expected to continue to increase to 7,500 metric tons per day by the end of 2020. In addition to driving production higher to over 200,000 ounces annually, we will also drive cost lower. Furthermore, with the completion of the expansion, our capital spending will turn lower going forward. Collectively, we expect this to drive strong free cash flow growth starting in the third quarter.

Over to Slide 9. Island Gold produced 19,400 ounces during the second quarter at total cash cost of $501 per ounce and mine-site all-in sustaining cost of $781 per ounce. Production was lower, reflecting the temporary suspension of operations from the last week of March to the end of April. We began a phased restart of the operation in early May and the operation is performing well within the mine -- with the mining and milling rates increasing to average above 1,200 metric tons per day in June. Mined grades of 7.28 grams per metric ton for the quarter were impacted by the deferral of high-grade stopes into the third quarter as such mined grades are expected to increase in the second half of the year. Given the downtime in the second quarter, we have tightened our full-year production guidance to between 130,000 to 140,000 ounces, while keeping cost guidance unchanged.

Looking to the second half of the year, we are expecting stronger production, reflecting higher grades and mining rates.

Moving to Slide 10. Island Gold is already a very good profitable mine but as outlined in the Phase 3 expansion study, it's going to grow into an even more profitable operation. After an extensive review of multiple scenarios, the shaft expansion to 2,000 metric tons per day was clearly the best option to take this operation forward, having the strongest economics, being the most efficient and productive and far and away having the lowest operating cost.

Over to slide 11. Following the completion of the shaft in 2025, gold production will increase to average 236,000 ounces per year at industry low all-in sustaining costs of $534 per ounce. At a $1,750 gold price, which is starting to look conservative relative to spot prices, Island will generate more than $200 million of free cash flow year. This is clearly the best option based on what we know now.

Furthermore, as shown on Slide 12, the shaft gives us the greatest exposure to future exploration upside, particularly at depth. The deposit is open laterally and down-plunge and we are confident that reserve and resource grade base will grow further. The shaft gives us the future flexibility to ensure we capitalize on that growth. For additional information on the shaft expansion and the benefits it will bring, I encourage you to visit our website to review the webcast we held on July 15th.

Moving on to Slide 13. Mulatos produced 35,900 ounces in the second quarter, a total cash cost of $750 per ounce and mine-site all-in sustaining cost of $890 per ounce. Despite the temporary suspension of operations in April and through most of May, Mulatos performed well, benefiting from the large inventory of ounces stacked on the leach pad prior to the shutdown. Although lower tons mined and stacked during the downtime did not have a significant impact on the second quarter, it is expected to have some impact on production in the second half of the year. As a result, our full-year production guidance is decreased 10,000 ounces to 140,000 to 150,000 ounces, while our cost guidance remains unchanged.

Moving to Slide 14. Looking ahead, La Yaqui Grande will be a big part of the future of Mulatos and a significant driver of lower costs. Earlier this week, we announced results of the positive internal economic study on La Yaqui Grande, highlighting as our next low cost, high return project in the Mulatos District. At a base case gold price assumption of $1,450 per ounce, La Yaqui Grande has an after-tax IRR of 41%. At $1,750 per ounce, the return increases to 58%. This follows similarly high returns for our La Yaqui Phase 1 and Cerro Pelon operations and highlights the type of potential in the Mulatos District. La Yaqui Grande is fully permitted and expected to produce 123,000 ounces per year starting in the third quarter of 2022 at mine-site all-in sustaining costs of $578 per ounce. This will replace higher cost production from the main Mulatos pit, keeping combined production at around 150,000 ounces per year, but at substantially lower costs. Initial capital of $137 million is expected to be spent over the next two years, starting in the second half of 2020. We expect Mulatos to self-finance the development of La Yaqui Grande.

With that, I will turn the call back to John.

John A. McCluskey -- President, Chief Executive Officer & Director

Thanks very much, Peter. We will now open the lines to your questions. And with that, I'll ask the operator to take over the call. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question is from Cosmos Chiu from CIBC. Please go ahead. Your line is now open.

Cosmos Chiu -- CIBC -- Analyst

Hi. Thanks, John, Jamie and Peter for the conference call. Maybe first off, my question is on La Yaqui Grande. Good to see the positive decision that was made two days ago and a very strong IRR. But could you remind us in terms of the capex profile, the timing, I think you touched on it and how that kind of fits in in terms of the capex needs for Island Gold Phase 3?

Jamie Porter -- Chief Financial Officer

Cosmos, it's Jamie here, I can take that.

Cosmos Chiu -- CIBC -- Analyst

Hi.

Jamie Porter -- Chief Financial Officer

I think, we announced in the press release the total capital for the project is about USD137 million, I believe. We should spend between $10 and $15 million of that this year and that's the reason for the slight increase in Mulatos capital guidance for the remainder -- for the second half of 2020, and we spend up to $100 million of that in 2021. So I mean, at these gold prices, Mulatos is able to entirely self finance that. So if you look forward into 2021, Young-Davidson at these prices is generating $140 million, $150 million in free cash flow. Mulatos -- Island and Mulatos are both generating about $50 million in free cash flow net of all their capital related to the Phase 3 expansion at Island and La Yaqui Grande construction at Mulatos.

Cosmos Chiu -- CIBC -- Analyst

And how does that -- so that the bulk of that capex is going to come before you need to spend any kind of money on Island Gold? Thanks.

Jamie Porter -- Chief Financial Officer

That's right. I mean, we will start next year. We have some capital related to Phase 3, some growth capital in our Island budget for 2021, but net of that Island still generating $50 million, $60 million of free cash flow. Once La Yaqui Grande is built, you've got both Young-Davidson and Mulatos generating well north of $100 million a year in free cash flow and Island able to self-finance the majority of the Phase 3 expansion. So we're very well positioned. We're not going to need to use much if any of our balance sheet, rather this growth will be entirely self-financed.

Cosmos Chiu -- CIBC -- Analyst

And then, I'm not saying it's going to happen but certainly, Turkey, what if that comes back and what if you need to restart sort of construction in Turkey, how does that kind of fit into the picture in terms of capital allocation?

Jamie Porter -- Chief Financial Officer

Yeah, I think from a spending perspective, it would be -- if we get the permit reinstated, it would be six to 12 months before we start heavily ramping up the spending and the project has a north of 100% IRR at these gold prices. So it's obviously something we'd want to go ahead with, with minimal additional capital. We're talking about USD130 million of incremental capital. So we'd have -- we definitely have the ability to move forward with that as well.

Cosmos Chiu -- CIBC -- Analyst

And maybe a bit more on the La Yaqui Grande here. As you mentioned in your press release, a lot of that ore is going to be replacing higher cost production coming from Mulatos, but is there any kind of scenario whereby it would be in addition to Mulatos main pit production whereby instead of 150,000 ounces, you could be pushing upwards to 200,000 ounces, which I believe, Mulatos, that's where it was at one point in time many years ago. But is there a scenario whereby that could happen?

Jamie Porter -- Chief Financial Officer

Yeah, I think under our existing plans, I mean, we've got about six different sources of ore at Mulatos between Cerro Pelon, La Yaqui Grande, the various Mulatos pits and the stockpiles we have. So our plan is to has a relatively smooth production profile averaging around 150,000 ounces over the next six years. We do have the flexibility to increase production, particularly at La Yaqui Grande by effectively just adding trucks and increasing the mining rate. So that's something we could consider if it makes sense to do so. But having a sustained increase in production above 200,000 ounces a year would require us to have some success on the exploration front.

Cosmos Chiu -- CIBC -- Analyst

Of course, and maybe a question on the financial side here. Certainly, I don't know how to forecast this but the US dollar, Canadian dollar and nowadays, it seems like the Canadian dollar is strengthening against the US dollar. Maybe, Jamie, could you remind us of your hedging strategy? How much is being hedged right now and how we should look at it on a go forward basis in terms of, I don't want to call risk mitigation on the foreign exchange component, but I guess that's what it is.

Jamie Porter -- Chief Financial Officer

Yes, certainly. So we've -- as of today, we've got about 50% of our Canadian dollar exposure hedged for the remainder of 2020, on a pretty tight caller range between $0.74 to $0.76. So spot is right in the middle of that range currently and that's generally what we try to do. We use callers to try to approximate our budgeted rate, which was $0.75 for the year. So it's short term in nature. We don't generally go out too far. We're starting to look into Q1 of next year but yes, it's a fairly conservative FX hedging program and we intend to keep it that way.

Cosmos Chiu -- CIBC -- Analyst

And then one last question if I may on this COVID-19. Certainly, Q2 was impacted but it sounds like you have a lot of protocols in place and you are in a good place. But based on observations up until now, any kind of permanent changes, permanent impact that we could expect on a longer term basis in terms of cost, in terms of operations, in terms of efficiencies, anything on that front?

Jamie Porter -- Chief Financial Officer

Yeah, I think from -- I mean, you would have seen it with our revised guidance, our cost guidance is effectively flat but a slight increase relative to what we published at the start of the year. The COVID cost we reported in our Q2 financial statements of $6.5 million, those were incremental related to the temporary suspension of operations at Island and Mulatos. We don't expect those to recur. You're not going to see COVID costs in our financials going forward unless we are required to suspend one of the operations again because of the -- because of an outbreak or something else. The impact on our operations and productivity, I think is fairly muted. We're saying less than 5% and at least for 2020, it's certainly been offset by the weaker currencies and diesel prices that we've seen. But we wouldn't expect the changes that we've made to have a material impact on our cost structure at any of our mines.

Cosmos Chiu -- CIBC -- Analyst

Great. Thanks a lot. Those are all the questions I have. Thank you.

Operator

Thank you. The next question is from Kerry Smith from Haywood Securities. Please go ahead. Your line is now open.

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

Thanks, operator. Peter, you say that you will be at 7,500 metric tons a day from the underground by the end of the year. How long would it take you to get to 8,000 metric ton a day roughly? Is that -- does it take another six months to get there, so that will be the middle of next year?

Peter MacPhail -- Chief Operating Officer

Hey, Kerry. I don't know. We haven't entered into our budget setting yet, but I would expect that we'll be getting into 8,000 at some point next year, I mean, 7,500 metric tons a day and we'll see as we go through this -- the latter half of this year. But I mean, the mine is currently really well positioned, I would say, with all that brand new infrastructure, lots of broken ore underground, lots of drilled off ore underground. We're in pretty good shape right now. So yeah, we'll see. I don't want to give you a prediction.

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

Okay, OK. And then just a second question on why the -- do you plan to maintain any sort of a surface stockpile from underground or you're just going to have that -- the fine ore bins underground, the 6,000 metric tons for access sort of ore?

Peter MacPhail -- Chief Operating Officer

Yeah, I mean, it could -- we could end up with an underground ore stockpile on surface. It depends on -- during mill shutdowns and things like that, we could put a little bit out in the yard. We have the capability of doing that. We wouldn't expect it to be significant though. We've got lots of -- we've gone from, as you know, something like very minimal amount of storage like 500 metric tons of storage in the upper mine infrastructure to 6,000, 7, 000 metric tons of storage currently in the lower mine infrastructure. So we've got reasonable amount of storage. We also have storage, of course, in stopes and things like that. So I mean, we've got -- we're in much better place than we've ever been with that.

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

Okay. But by this, I mean, is a day of storage capacity, of milling capacity is enough in terms of storage? It just seems like you probably want to have a bit more, I guess is what I'm wondering?

Peter MacPhail -- Chief Operating Officer

Yeah, we'll probably end up with the few days on surface to go to, if we have to.

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

To -- just to manage. Okay. Okay, that's great. Thanks.

Operator

[Operator Closing Remarks] If you have any further questions that not -- have not been answered, please feel free to contact Mr. Scott Parsons at 416-368-9932, 368-9932, extension 5439. Thank you for your participation.

Duration: 26 minutes

Call participants:

Jamie Porter -- Chief Financial Officer

John A. McCluskey -- President, Chief Executive Officer & Director

Peter MacPhail -- Chief Operating Officer

Cosmos Chiu -- CIBC -- Analyst

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

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