Alamos Gold Inc (AGI) Q1 2021 Earnings Call Transcript

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Alamos Gold Inc (AGI 1.59%)
Q1 2021 Earnings Call
Apr 29, 2021, 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.

Jamie Porter -- Chief Financial Officer

Thank you, operator, and apologies to everyone on the line. We're a few minutes late getting started, given some issues with the operator there, but we're ready to go now. So thank you for attending Alamos' First Quarter 2021 Conference Call. In addition to myself, we have on the line today both John McCluskey, our President and CEO; and Peter MacPhail, our 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 client person. Also, please keep in mind that all the dollar amounts mentioned in this conference call are in United States dollars, unless otherwise noted.

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

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

Thank you, Jamie. We've had a solid start to the year, producing 125,800 ounces of gold in the first quarter at total cash cost of $757 per ounce and all-in sustaining costs of $1,030 per ounce. Our costs were in line with guidance, while production exceeded the high end of our first quarter guidance. This was driven by particularly strong performances at Island Gold, which set another quarterly record for production and Young-Davidson, which exceeded its targeted underground mining rates, achieving a new record. We remain well positioned to meet our full year production and cost guidance. The strong another good quarter financially. Operating cash flow of $120 million increased 46% from a year ago, supporting strong ongoing free cash flow even with the ramp-up of development activities at La Yaqui Grande and the Phase three expansion at Island Gold. Looking to slide four. This past week, we announced we'll be filing a $1 billion investment treaty claim against Republic of Turkey for its appropriation and unfair and inequitable treatment with respect to our Turkish development projects in 18 months since our mining license expired. We received all permits required to build Kirazli, we were well into construction, and we've met all legal and regulatory requirements for the renewal of our licenses. We've attempted to work cooperatively with the Turkish government, yet we've not received a reason for the nonrenewal nor have we received a time line for when our licenses will be renewed.

We're optimistic that the arbitration process will bring about a positive resolution. Now looking at slide five. We continue to advance our strong pipeline of North American growth projects. Development activities are ramping up on the Phase three expansion at Island Gold, where we recently announced a one million-ounce increase in high-grade reserves and resources. This growth and ongoing exploration success highlight significant upside potential to the already attractive economics outlined in the Phase three expansion study published last year. Construction activities at La Yaqui Grande continue to ramp up with the project on track to begin low-cost production in the third quarter of 2022. Permitting at Lynn Lake is advancing and expected to be completed around the middle of next year, putting us in a position to make a construction decision in the latter part of 2022. We had good exploration success over the past few years. We've increased reserves by 27% to 2.1 million ounces. We see excellent further potential around the existing deposit and regionally across an 80-kilometer long Greenstone Belt that we have consolidated. We're ramping up our exploration effort accordingly. These projects are all key components of our strong outlook with 50% production growth potential for approximately 750,000 ounces per year by 2025, and at significantly lower all-in sustaining cost of around $800 per ounce. This will support substantial free cash flow growth over the long term. In the meantime, we can more than fund this growth internally while continuing to generate strong ongoing free cash flow and support our recently increased dividend.

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

Jamie Porter -- Chief Financial Officer

Thank you, John. Moving on to slide six. We sold 126,500 ounces of gold at a realized price of $1,798 per ounce for record revenues of $227 million in the first quarter. Total cash costs of $757 per ounce and all-in sustaining cost of $1,030 per ounce were in line with guidance despite the impact of the stronger Canadian dollar and Mexican peso. Our 2021 guidance provided last December was based on a Canadian dollar foreign exchange rate of $0.75. At the current Canadian dollar foreign exchange rate of approximately $0.81, our total cash cost and all-in sustaining costs would increase by approximately $30 per ounce with a similar impact realized in the first quarter. Operating cash flow before change to the noncash working capital improved 46% year-over-year to $120 million or $0.30 per share in the first quarter. Our reported net earnings for the first quarter were $51 million. Adjusted net earnings of $49 million or $0.13 per share represented a 63% increase over the prior year period. Looking ahead to the second quarter, the decision to proceed with the bilateral investment treaty claim against the Republic of Turkey is an impairment trigger for accounting purposes. As such, we expect to incur an after-tax impairment charge of approximately $215 million in the second quarter, representing the full carrying value of our Turkish assets.

This is a noncash charge that we expect to exclude from our adjusted earnings. Capital spending totaled $73 million in the first quarter, including $24 million of sustaining capital, $44 million of growth capital and $6 million of capitalized exploration. We also incurred $17 million of capital advances related to work and equipment for La Yaqui Grande and the Phase three expansion at Island Gold. The aggregate increase in spending in the quarter is consistent with full year capital guidance of between $354 million and $384 million and reflects the ramp-up of development activities on our growth projects. Net of all capital spending and capital advances, we generated $10 million of free cash flow. This was also net of $18 million of cash tax payments in Mexico, the majority of which related to the 2020 year. We paid a quarterly dividend of $10 million in the first quarter, representing a 25% increase from the prior quarter and were active under our share buyback, repurchasing 1.5 million worth of shares. In total, we returned more than $11 million to shareholders in the first quarter and are on track to return more than $40 million for the full year. We ended the quarter with $238 million in cash, $27 million of equity securities and $500 million of undrawn credit capacity. We remain well positioned to fund our internal growth projects while continuing to grow our cash position and returns to shareholders.

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

Peter MacPhail -- Chief Operating Officer

Thank you, Jamie. Moving to slide seven. We had another excellent quarter at Young-Davidson, producing 48,000 ounces and generating mine-site free cash flow of $22 million. This was the second full quarter operating for the new lower mine infrastructure and the operation continues to demonstrate its potential with mining rates increasing to average a record seven,800 tonnes per day, exceeding our targeted rate of 7,500 tonnes a day. We continue to expect mining rates of 7,500 tonnes a day in the second quarter with another mining horizon being added in the second half of 2021 that will enable us to increase mining rates to sustain 8,000 tonnes a day. Mill throughput also increased to average a record 8,150 tonnes per day. This exceeded mining rates, reflecting the processing of additional ore that was mined and stockpiled in the fourth quarter of last year. We expect milling rates to match mining rates going forward. Total cash cost of $873 per ounce in mine site all-in sustaining costs of $1,075 per ounce were booked down significantly from a year ago, when the Northgate shaft were shut down to complete tie-in of the lower mine. Costs were above annual guidance in the first quarter due to the stronger Canadian dollar as well as the planned mining of somewhat lower grades earlier in the year.

Grades mined are expected to increase through the year and combined with higher mining rates, this is expected to drive production higher and cost lower in the second half of 2021. Higher production, lower costs and lower capital spending are all expected to contribute to record mine-site free cash flow of more than $100 million from Young-Davidson in 2021. Over to slide eight. Island Gold generated $26 million mine site free cash flow from record production of 43,200 ounces driven by higher grades mined. As previously guided, grades mined process are expected to decrease through the year and average approximately 10 grams per tonne for the full year. Total cash costs of $466 per ounce and mine-site all-in sustaining costs of $732 per ounce were both consistent with annual guidance despite the stronger Canadian dollar. Following up on a very successful 2020 exploration campaign, we ramped up our exploration efforts at Island Gold in the first quarter. The majority of the results remain pending given the longer turnaround times for assays we were seeing across the industry, but we are expecting that to improve in the second quarter. Work on the Phase three expansion is ramping up with the focus of advancing permitting and detailed engineering of the shaft and associated infrastructure and the procurement of long lead items. Growth capital spending totaled $12 million in the first quarter is expected to increase through the rest of the year consistent with annual growth capital guidance of $80 million to $85 million. Moving to slide nine.

Mulatos has produced 35,600 ounces in the first quarter, a total cash costs and mine site all-in sustaining cost of $915 and 1,039 ounce per ounce, respectively. Mining activities in the first quarter were focused on Cerro Pelon, which along with existing surface stockpiles, supplied the majority of ore stocked in the quarter. Mining activities within the Main Mulatos pit were focused on pre-stripping the El Salto portion of the pit. With the $18 million of cash tax made payments mostly related to last year and the ramp-up of spending on La Yaqui Grande, Mulatos mine site free cash flow was negative $24 million. Excluding the $30 million of growth capital and capital advances related to La Yaqui Grande, Mulatos would have generated $6 million of mine site free cash flow. Moving to slide 10. As you can see in the photo, construction of La Yaqui Grande is well under way. Camp facilities are nearly complete, and we now have approximately 800 employees and contractors on rotation. Capital spending was focused on advancing earthworks for the waste rock dump, heap leach facility and the water treatment plant and pre-stripping of the open pit. Over three million tonnes of waste were mined during the quarter, with the contract to reaching mining rates of about 48,000 tonnes per day by the end of March. The project remains on track to achieve commercial production in the third quarter of 2022, with mine site all-in sustaining costs expected to average $850 -- $580 per ounce, La Yaqui Grande is expected to significantly reduce the cost profile of Mulatos operation.

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

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

Thank you very much, Peter. Now we're going to open the call to your questions.

So I'll now turn the call over to the operator, who will get that started.

Questions and Answers:

Operator

[Operator Instructions] The first question is from Tyler Langton of JPMorgan.

Tyler Langton -- JPMorgan -- Analyst

I guess just to start with Kirazli, I mean, sort of recognizing that the process can take some time to kind of run its full course. But I guess, are there any sort of near-term milestones that we should be looking for?

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

Not particularly. We're going into this with an expectation that it may well just run the full course, go through a full arbitration, but there's always a possibility that sometime over the next year, we come up with some sort of negotiated settlements. That's the way this arbitration process is designed. It's designed to bring the parties together under the auspices of the tribunal with the expectation of the intent at least to come to some sort of negotiated settlement. And if that's not achievable, then it goes to the next stage. So we'll just have to follow the process.

Tyler Langton -- JPMorgan -- Analyst

Okay. And then I guess you called out sort of, I guess, the impacts that exchange rates are -- could have on cost this year. But are you seeing sort of, I guess, just any signs of inflationary pressures from labor or materials just sort of in the day-to-day operations? And then more, I guess, with the Phase three expansion of Island Gold, I don't know if you could kind of remind us sort of how much capex is left to be spent? And are there any sort of potential sort of pressures there for that capital budget?

Peter MacPhail -- Chief Operating Officer

It's Peter here. On the inflationary pressure, certainly not labor. Labor rates have been -- are relatively stable. A few things, a few inputs. Steel a little bit higher, but it looks like it's a temporary thing. So it really hasn't impacted our bottom line at this point. And I guess, who knows, but we are not expecting it to materially impact us.

Operator

The next question is from Fahad Tariq of Credit Suisse.

Fahad Tariq -- Credit Suisse -- Analyst

You mentioned the cost impact or potential cost impact at different foreign exchange rates and the sensitivity, particularly on the Canadian-U.S. exchange rate. Maybe talk about kind of the hedging strategy over the past year and also going forward. I know some peers, for example, tried to lock in a more favorable rate in 2020. Just wanted to get your thoughts on hedging.

Jamie Porter -- Chief Financial Officer

Yes, thanks. It's Jamie here. We look for opportunities over the course of the past nine to 12 months to lock in more of our Canadian dollar exposure. But the way that the Canadian dollar has been strengthening in more or less a straight line over that period, there wasn't much in the way of opportunities to do so. So I think we have 8% of our remaining 2021 exposure hedge at well below $0.80. We'll look for opportunities to do more if there's weakness in the Canadian dollars. But as I said, we haven't seen that of late. Fortunately, we are very well covered in Mexico. We've got about 80% of our exposure hedged between '21 and '24, which those contracts are very favorable relative to current spots. So that's where we're at currently. We'll continue to look for opportunities to do more, but there's certainly none currently.

Operator

The next question is from Lauren McConnell of Paradigm Capital.

Lauren McConnell -- Paradigm Capital -- Analyst

John, Jamie and Peter, congratulations on the good quarter. I just had a question at Island. I know there's a history of positive reconciliation. I just wanted to know, with that 13.2 grams per tonne that you mined this quarter, was that in line with what you're expecting on the reserve model or are you still seeing positive reconciliation at Island?

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

No, that is in line with what we were expecting. It reconciled quite well. We've -- over the years that we've owned it, made changes to the reserve model, and we don't really see significant positive reconciliations for the last couple of years. It's behaving quite well.

Operator

The next question is from Cosmos Chiu of CIBC.

Cosmos Chiu -- CIBC -- Analyst

John, Jamie, Peter and team. Maybe first off on Young-Davidson here. As you mentioned, it's great to see that you're able to get to almost 7,800 tonnes per day when you were targeting 7,500 tonnes per day in terms of mining rates underground. On that point, could you give us some key highlights in terms of how you are able to come to a throughput that was higher than what you targeted? And then the second part of my question is, it sounds like it's not yet repeatable yet in Q2. You're still targeting 7,500 tonnes per day in Q2. And why is it not repeatable?

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

We're always striving to do better than our plan. A few things would have lined up in Q1 that helped us beat it. We had a good quarter. We actually beat it in Q4, if I'm not mistaken as well, beat the 7,500 tonnes a day. Look, we plan -- we're planning for 7,500 tonnes a day for Q2 and ramping up to 8,000 tonnes a day for the rest of the year and what we -- to facilitate that, we're bringing on another mining horizon, which will help us do that. Can we do better? Who knows? I wouldn't expect 8,000. I'm still expecting 7,500.

Cosmos Chiu -- CIBC -- Analyst

Okay. I get what you mean. But I guess, Peter, how did you beat it in Q1 then? Could you tell us one or two key highlights where it kind of surprised you or -- what happened?

Peter MacPhail -- Chief Operating Officer

Look, it's just the ore being there, and it continues to be there. So it's just being able to move it, getting familiar with the new infrastructure. It takes a while to trust it and figure it all out. So look, the difference between 7,800 tonnes a day and 7,500 tonnes a day in -- is not that huge a difference, frankly. So I wouldn't say we knocked it out of the park. It's nice to be on the higher side of that. We might be -- maybe we'll be a quarter -- at a couple of hundred tons a day below our target. It's always going to vary up and down within -- a little bit at least.

Cosmos Chiu -- CIBC -- Analyst

Got you. And then maybe, as you touched on it, the new mining horizon here. Can you talk a little bit more about maybe the location versus new mining horizon. And then can you remind us how many areas are you mining at this point in time?

Peter MacPhail -- Chief Operating Officer

Yes. I mean -- so we have a couple of mining horizons in the upper part of the mine that we're continuing to mine, and this one actually is another one that would be at the upper part of the mine, more to the -- on the Western Flank. We've got a couple of mining horizons in the lower part of the mine. So it varies from time to time between three, four, five mining horizons. We would cycle through as many as 100 stopes in a year and have, at any given time, 30 stopes online. So that's kind of the mix.

Cosmos Chiu -- CIBC -- Analyst

Okay. Great. Got it. And then, Peter, as you talked about, you're still trying to understand -- not understand, you're getting familiar with the lower mine infrastructure, as you mentioned. At this point in time, any areas that you think might be limiting factors? Is it [Indecipherable] to conveyor? everything is running fairly as you would have expected?

Peter MacPhail -- Chief Operating Officer

This is so much better than what we had at the mid-mine that was frankly built for 6,000 tonnes a day and also, frankly, put in as a sort of an interim measure to get to the lower mine. I think we have something like 10 times more bid capacity. We have additional skipping capacity. We have conveying instead of trucking. All of those things help us make our numbers. We're in good shape.

Cosmos Chiu -- CIBC -- Analyst

Great. Maybe switching gears a little bit. The La Yaqui Grande, I think there's already been some discussions in terms of inflationary factor and potential or maybe no issues in terms of the impact on costs. Could you comment on La Yaqui Grande, any kind of inflationary factors that we should be aware of, that we should be concerned about in terms of capex?

Peter MacPhail -- Chief Operating Officer

We haven't seen any. We're well into construction. I mean most of the capex associated with La Yaqui Grande is earth moving, Really pre-stripping, building leach pads, putting liner down. We ordered the liners on site, came in on budget and our mining contract is a fixed rate per tonne. So sort of diesel moving around a lot, don't really see much opportunity for inflationary pressures.

Cosmos Chiu -- CIBC -- Analyst

And that's good. And that leads me to my second question here, I guess. As you -- can you remind me, I guess, when is the rainy season in Mexico? I think it's coming up. And are there any key things that you want to wrap up and then finish ahead of the rainy season? Or is the rainy season not really an impact, not an issue in the northern part of Mexico?

Peter MacPhail -- Chief Operating Officer

No, we do have a rainy season, and it's kind of August, September, can start in July a little bit. And you try not to do certain things. You try not to be doing clay liner on your leach pad during the rainy season. That's about the only thing that you -- the underliner, that's the only thing we try not to do, and we're well ahead of that, and it's not going to be an issue.

Cosmos Chiu -- CIBC -- Analyst

Sounds good. And maybe one last question just to wrap things up. I guess your capex budget for the year is $320 million to $350 million. You did about $73 million in Q1. Could you maybe give us a bit more granularity in terms of the remainder and how that's going to be distributed throughout the remainder of 2021?

Jamie Porter -- Chief Financial Officer

Cosmos, it's Jamie here. Yes, I can take that. It should be pretty evenly distributed. You will note we had, I think, $16.8 million of what we classify as capital advances in the first quarter as well. So that causes on long lead items, other contractor advances. So if you factor that in, the actual cash spending was a bit higher in Q1. But overall, I'd expect that capital to be incurred pretty evenly.

Operator

The next question is from Mike Parkin of National Bank.

Mike Parkin -- National Bank -- Analyst

Congrats on certainly a solid start to the year. Following up on Cosmos' questions on Young-Davidson. Just with respect to the stopes, I know they've always kind of been massive, but is there any movement to using larger stopes in the underground now? Or is it pretty much similar sizes to what you've been extracting for the last year or so?

Peter MacPhail -- Chief Operating Officer

Yes, Mike, I guess it's Peter here. In the upper mine, our stope height was 30 meters. And in the lower mine, we've gone to 35 meters. And the lower mine tends to have wider zones as well. So thickness into the page, if you like. I think we would have -- I can't remember the numbers exactly, but we might have been averaging 20 meters in the upper mine and more like 30 meters in the lower mine, thickness. So the stopes tend to be -- or are on average, bigger and so more tonnes per stope on average.

Mike Parkin -- National Bank -- Analyst

So generally, you're set up well to have that as a tailwind for you as you open up the lower mine then? In terms of productivity?

Peter MacPhail -- Chief Operating Officer

Yes.

Mike Parkin -- National Bank -- Analyst

Okay. That's great. Most of my questions were answer. Just one more. On Island, I know you guys were planning to do a bit of regional exploration last year, that got delayed due to COVID, plans are to do it this year. What could our time frame in terms of news flow around that be? Obviously, you're having great success at the actual Island mine. Just wondering if we stumble upon something else that's interesting, when could we maybe see initial results?

Peter MacPhail -- Chief Operating Officer

Yes. I guess as the year progresses, I mean we do have one drill, let's say, that's going to be poking around more regional targets, but continue to have 2.5 or three on surface and a couple of underground as well drilling. So yes, we've got lots of exciting things to look at in the regional setting and I can't give you a time frame on when you'll see results. We're currently waiting for assays on some of those holes. So there you go.

Operator

The next question is from John Tumazos of John Tumazos Very Independent Research.

John Tumazos -- John Tumazos Very Independent Research -- Analyst

With the deemphasis of the Turkish projects, how will you reallocate management time and resources? Does this mean a little more attention for Lynn Lake? Does this mean a little more exploration budget or potentially a property acquisition? Separately, I just want to commend you for your adherence to the Foreign Corrupt Practices Act, not caving in to troubles in the third world. And if you need to commemorate several thousand genocides in addition to the Armenian genocide, my family can help you with that content in history. I'm kidding you a little bit. But I commend what you're doing.

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

This is John McCluskey, I'll take your question. Just to say that we were not -- we were not sacrificing budget or management time on the back of what we were involved with in Turkey. Essentially everything -- everything going on at the company was being well managed in addition to Turkey. So I would say that given the fact that we weren't doing any work in Turkey over the last year, the bulk of the responsibility for what was going on was really being handled by the Turkish team. We have about 16 people employed in Turkey. We'll be reducing that team, of course, going forward. But given the fact that they were the ones responsible for what was going on for the vast majority of the work, there's going to be really no big change to the way we manage things.

Operator

The last question is from Kerry Smith of Haywood Securities.

Kerry Smith -- Haywood Securities -- Analyst

John, when does the claim for Turkey actually get filed? Like how long does it take to file that claim?

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

Generally, within a couple of weeks, when you announce that you're going to be filing a claim, you would actually file the actual claim. So you -- it starts out with effectively something like this with a news release and a notice and then you move it forward. So it's something that you do a fair amount of preparation on. And so we were sort of well prepared going into the announcement. So it won't be too long.

Kerry Smith -- Haywood Securities -- Analyst

Okay. Great. And Peter, in Q2, are there any large maintenance no maintenance shutdowns planned at YD?

Peter MacPhail -- Chief Operating Officer

I mean, we have maintenance shutdowns every quarter, but nothing that would impact the numbers.

Kerry Smith -- Haywood Securities -- Analyst

Right. So nothing extraordinary basically?

Peter MacPhail -- Chief Operating Officer

No. No.

Kerry Smith -- Haywood Securities -- Analyst

Okay. Got you. And when does the prestrip also actually finish? And will the ore that's left in that could actually run you through to the start-up of La Yaqui Grande then?

Peter MacPhail -- Chief Operating Officer

Sorry, when does the -- when does the pre-strip at El Salto finish, is that what your question --

Kerry Smith -- Haywood Securities -- Analyst

Yes. Yes

Peter MacPhail -- Chief Operating Officer

Towards the end of this year. And yes, we haven't -- obviously, we have enough ore between -- in excess between pit Mulatos and the [Indecipherable] stockpiles in Cerro Pelon, all of three of those sources to well pick us to the start of La Yaqui Grande.

Kerry Smith -- Haywood Securities -- Analyst

Got you. Okay. And then just a last question on the new hedges that you added post the end of the quarter, January is 46,000 ounces through to the end of this year. Would that kind of be evenly spread over the course of the next nine months then? Is that the way to model it?

Jamie Porter -- Chief Financial Officer

Yes. That's right, Kerry.

Operator

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. Please disconnect your lines at this time, and we thank you for your participation.

Duration: 33 minutes

Call participants:

Jamie Porter -- Chief Financial Officer

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

Peter MacPhail -- Chief Operating Officer

Tyler Langton -- JPMorgan -- Analyst

Fahad Tariq -- Credit Suisse -- Analyst

Lauren McConnell -- Paradigm Capital -- Analyst

Cosmos Chiu -- CIBC -- Analyst

Mike Parkin -- National Bank -- Analyst

John Tumazos -- John Tumazos Very Independent Research -- Analyst

Kerry Smith -- Haywood Securities -- Analyst

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