Eldorado Gold Corporation
Q1 2019 Earnings Call Transcript

Published: 3 May 2019

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Eldorado Gold Corporation First Quarter 2019 Results Conference Call. . I would now like to turn the conference over to Peter Lekich, Manager, Investor Relations. Please go ahead, Mr. Lekich.

[Peter Lekich:]

Thank you, Operator, and thank you, ladies and gentlemen, for taking the time to dial in to our conference call today. With me in Vancouver this morning are George Burns, President and CEO; Phil Yee, Executive Vice President and CFO; Paul Skayman, Executive Vice President and COO; and Jason Cho, Executive Vice President and Chief Strategy Officer. Our release yesterday details our 2019 first quarter financial and operational results. This should be read in conjunction with our first quarter financial statements and Management's Discussion & Analysis, both of which are available on our website and have been filed on SEDAR and EDGAR.

[George Burns:]

Thanks, Peter, and good morning, everyone. Here's the agenda for today's call. I'll give an overview of the quarter's highlights and then pass it over to Phil to go through the financials. Paul will follow by reviewing operations and then we'll open it up for questions. Over to Q1 highlights. On the next slide, we have started the year with the achievement of two major milestones, Lamaque commercial production and resuming mining and heap leaching at Kisladag. These successes come on top of a quarter of solid operational results. We expect the increased production from Lamaque and Kisladag will generate free cash flow over the next several quarters, giving us the financial flexibility to pay down debt and reinvest in our business. We had solid operating results in the first quarter of approximately 83,000 ounces, which is in line with our plan. We maintain our guidance of 390,000 to 420,000 ounces of gold at cash cost of $550 to $600 per ounce for the year. Production is back-end loaded as a result of the higher second half production at Olympias and the ramp-up of production at Lamaque and Kisladag. A major milestone was achieved this quarter with commercial production at Lamaque. We declared commercial production on March 31, in line with our guidance. Lamaque is a fantastic asset where we see a lot of long-term potential. With over 37,000 meters of exploration drilling planned for this year and excess capacity at the Sigma Mill, we are well positioned to continue creating value at Lamaque. I'd like to take a moment to recognize the efforts of the entire Lamaque team for their focus, drive and determination in achieving this commendable goal. Very few mines go from a preliminary economic assessment to production in 24 months, or successfully maintain a solid safety record during the construction. This is a testament to the quality of the team we have in Québec. I have equal regard and respect for our team in Turkey, who superbly pivoted from building a mill to resuming mining and heap leaching at Kisladag in 3 short months, the second major milestone achieved for this company for the year. Mining and crushing at Kisladag resumed on April 1. This is no small feat and the team's success clearly speaks to the tenacity and can-do attitude. Our operations in Turkey continued to deliver operational excellence for Eldorado. I am proud that our team continuously raises the bar and sets the standard for responsible mining practices in Turkey and beyond.

[Philip Yee:]

Thanks, George. Good morning, everyone. On Slide 5, we presented an overview of our financial results for Q1 2019. Before I get into the details of the slide, I would like to point out a timing issue in the recognition of revenue from sales of the Q1 production. Q1 2019 production was in line with expectations for the quarter. However, as George indicated, we experienced delayed sales of the concentrate produced at Efemçukuru in Q1 2019. But the buildup of concentrate inventory during the quarter was attributable to a contract dispute with a customer and shipping delays due to inclement weather at the port. Sales of the concentrate containing approximately 20,000 ounces of gold were delayed in the quarter. The sale of a majority of these Q1 produced ounces are expected to be completed this quarter in Q2. The timing of the recognition of the revenue from the delayed sales of these Q1 produced ounces have a significant impact on the reported financials, specifically metal sales revenue, net loss for the period, adjusted net loss for the period, loss per share, adjusted loss per share and cash. In April, subsequent to Q1 2019, sales of the concentrate containing approximately 5,000 ounces of gold have been completed. The proceeds from this sale are recognized in Q2 2019 revenue. Contracts with alternate customers have been finalized, and we expect the remaining concentrate inventory from Q1 2019, containing approximately 15,000 ounces of gold to be sold during the remainder of this quarter and into Q3 of 2019. Turning back to Slide 5. Eldorado Gold generated $80 million in metal sales revenue in Q1 2019 compared to $131.9 million in the first quarter of 2018. Included in this total, gold revenues are $54.5 million compared to $115.5 million in first quarter of 2018. Total metal sales revenue were lower in Q1 2019 as a result of lower gold sales volumes in the quarter, largely due to the delayed concentrate sales at Efemçukuru in Q1 2019. Sales of 43,074 ounces of gold were lower than the 86,587 ounces of gold sold in the first quarter of 2018, predominately due to the delays in shipments from Efemçukuru in Q1 2019.

[Paul Skayman:]

Thanks, Phil. Good morning, everyone. Starting with Lamaque on Slide 6, is a time line of our rapid progress, taking this asset from acquisition to production in just under two years. We poured first gold in December 2018 and had a great first quarter with almost 20,000 ounces of precommercial production. Recoveries averaged 91% on the lower grade ore processed during commissioning, which met our expectations. Gold recovery so far in Q2 is in line with our budget at 95%. As you know, we declared commercial production on March 31. Underground development continued throughout the quarter and remains on plan. The activities at the Sigma Mill during the quarter included completing construction and commissioning of the remaining process systems and hiring and training of a second shift at the mill. We're now fully staffed and operating 24 hours per day. Exploration during the quarter focused on resource expansion below the C5 zone in the lower triangle deposit and testing early-stage nearby targets. New intercepts from the program confirmed the exploration potential of the C9 and C10 shear zones and peripheral zones of mineralized stockwork veins. The current drill locations are not ideal for testing the C6 to C8 zones, and we expect to be able to provide more color later in the year.

[George Burns:]

Thanks, Paul. Let's turn over to Slide 10. Before I wrap up, I'd like to say a few words on recent management changes. I'd like to extend a warm welcome to Cara Allaway who joined Eldorado as Vice President, Finance in March. I'd also like to congratulate Jason Cho who was recently promoted to Executive Vice President and Chief Strategy Officer. I'd like to thank Krista Muhr, Senior Vice President of External Affairs and Sustainability, for her significant contributions to Eldorado. It's been a pleasure working with her over the past two years. Krista departed the company in April to pursue other opportunities. Refinancing remains a priority for the company with a focus on near-term maturities and capital structure to meet the company's long-term debt -- long-term needs. With an excellent operating quarter behind us, we remain focused on continuous improvements to increase productivity and efficiency and to realize additional value. Thank you, everyone. I'll turn it over to the operator for questions.

[Operator:]

. Our first question is from Mike Parkin with National Bank.

[Michael Parkin:]

Can we get a bit more color on the background of the inventory build at Efemçukuru? What was the dispute? And was it with a -- you had one single customer taking product, and now you derisked that, by -- it sounds like by moving to a group of customers?

[Paul Skayman:]

Yes. So it was a fairly heavy contract with a single customer, Mike. And we consequently record on the back port a little as they refused to take that material early in the quarter. We have subsequently signed a number of contracts with other buyers at similar terms and are shipping that material but it was just a very slow start to the quarter. So I'd reiterate

[Michael Parkin:]

Okay. So why was the original customer refusing to take it?

[George Burns:]

Well these are commercial terms, we can't get into those sort of details, Mike.

[Michael Parkin:]

That wasn't like a capacity on their end, kind of restrain or something like that?

[George Burns:]

Yes, just really can't comment any further what their challenges were.

[Michael Parkin:]

Okay. And then with Lamaque, how are sales tracking there?

[Paul Skayman:]

Now we're selling door rights to the local refinery. So sales are not an issue, but that material's moving out pretty well as it's produced.

[Operator:]

Our next question is from Steven Butler with GMP Securities.

[Steven Butler:]

It is a great start for Lamaque this year, George, almost 20,000 ounces. So precommercial was expecting to be 10,000 ounces, can you maybe just explain, obviously there's a difference of 10,000, but how did that come about? And just to reiterate, were you again still expecting commercial production timing to be April 1, roughly? And again, just explain a bit here from some any ounces how that can both?

[Paul Skayman:]

Yes, hi Steve. When we initially gave guidance, we anticipated that March would be commercial rather than starting in on April 1. So it's just, again a timing issue. We guided 10,000 ounces for the first 2 months and ended up with 20,000 for the first three. We're still reiterating that guidance of 100,000 ounces for the year, yes.

[Steven Butler:]

Okay, understand. And then on Olympias, Paul, maybe you can give us a sense of, I mean, have you ironed out some of the challenges in the metallurgy there or still to iron a few more things out there in the metallurgy?

[Paul Skayman:]

Yes. I think very much improved metallurgical performance over the first quarter. I think we're getting a better handle on the blending requirements from underground. Not quite ultimately where I'd like it to be, but very much closer to that target, compared to where we were late last year. I'm sorry, but that's largely a little bit of opportunity, but largely derisked at this point.

[George Burns:]

And then I might add, supplement that answer is, I think you've also noticed the recoveries bumped up during the quarter. So not only did we see an improved blend and as a result, improved concentrate quality, but we're seeing the recoveries move up, and obviously that adds to production in margin. So things are looking positive.

[Steven Butler:]

Right. And George, can you go over again, you said the cash costs and the ASIC would be different, Efemçukuru, by what dollar per ounce range? I wrote one of them down, but can you give those numbers again. And maybe why would the cost had been so dramatically less if most of your costs for that, those 20,000 ounces should be on the balance sheet under inventory?

[Philip Yee:]

I can address that. All right, Steve, it's Phil here. And it's all -- in the cash operating cost number, you have, as you mentioned inventory component. So that would be on the balance sheet. So the impact is slightly less because part of that, part of those costs have been put on the balance sheet. On the all-in sustaining side, all of the sustaining capital spend is going to be spread over all the deferred ounces. But that's why you see such a significant swing between what the cash cost, because part of it is already in -- is booked in inventory, whereas in all-in sustaining, you don't have that inventory component, all of the sustaining capital then gets spread over the -- if all the ounces would have been sold, a little the 20,000 ounces, you get a much bigger reduction in all-in sustaining.

[Steven Butler:]

Okay. So what were the differences then again, just to review them again with you guys, for Efemçukuru?

[Philip Yee:]

Well yes, so if you take a look at Slide 5 in the presentation, we've highlighted the numbers. But for Efemçukuru, Q1 on a sold basis, the cash cost were $636 per ounce. And in 2019, if you used the produced numbers and all this is in our disclosure, it's approximately $525. So about $100 lower. On the all-in sustaining cost on a per sold basis, it's $1,394, but if you assume we sold the concentrate in, therefore use the produced number, it's about $670 an ounce. And that falls through -- it's all dated numbers and not quite as a dramatic impact, but again, cash costs were $625 on a per ounce sold basis, and it would drop to $580 on a produced basis. And then all-in sustaining is $1,132 per ounce, on a sold basis, and it drops to $920 if you use the produced number. But really what we're trying to illustrate here is, it really is a timing issue. If we had a normal quarter in sales or our production costs and own sustaining cost would have been lower, and our financials would have been dramatically different. And so got to work itself out during Q2 and Q3 as we get that concentrate on the ships and off to customers.

[Operator:]

Our next question is from Josh Wolfson of Desjardins.

[Joshua Wolfson:]

Looking at the total capital number of $86 million, I saw the disclosure for sustaining being $11 million, and Lamaque being $34 million, which leaves a gap of roughly $45 million. Any sort of insight you can provide as to where that would have been allocated to?

[Philip Yee:]

We're putting that together, Josh. Just 1 minute. Okay Josh, can you just reiterate those numbers you just...

[Joshua Wolfson:]

Yes. So I believe the total capital was reported for the quarter, corporate was $86 million. And then in the statement, so the MD&A talks about Lamaque spending of $34 million and sustaining of $11 million. Sorry, so those 2 -- so the items that were disclosed, sustaining capital and Lamaque spending would be $45 million compared to the total overall capital of $86 million. So that would be a difference between those two of $41 million. Any sort of insight you can provide as to where that was spent? The smaller operations, development projects, TZ, Certej, Skouries, this is not usually more than a couple million dollars with their big spending at Kisladag or Olympias in the project side of things?

[Philip Yee:]

No, I think a big part of it, Josh, the Lamaque capital, the $86 million I think you're quoting there is including gross capital spent in the precommercial production period for Lamaque, but part of that is offset by precommercial sales. And then there's also there was a fairly large accounts payable balance for the Lamaque project at the end of 2018. So that would have been put through then, and that was paid. So there's a cash component to that. So I think those two items are probably explaining the difference. What I can do is try and put together reconciliation and show it to you. I'll send it to you.

[Joshua Wolfson:]

Okay. It looks like a sizable chunk would have been the payables number, because I guess, the Lamaque $34 million is pre-revenues. But if there's any big spending in other operations, which I guess we wouldn't be aware of, I'm just trying to figure out if there's something that's different than expectations, if that would be...

[Philip Yee:]

No, there's no other significant capital. It's mainly the, like I said, it's -- the biggest chunk was Lamaque, but there was a significant carry forward from the Accounts Payable from year end, and the offset of the revenue from the precommercial sales in Q1.

[Joshua Wolfson:]

Okay. And back to the Efemçukuru item. I assume you guys are -- you have a good handle, at least, on what's coming out of mine regardless of what someone else's terms or views may be. Are you able to disclose if there were any changes in terms of the concentrate quality or the grade from your own test that you do on-site before shipment?

[Philip Yee:]

No, there's no impact on concentrate quality at Efemçukuru. I think we've talked a bit about the Olympias concentrate quality in the market issues we had late last year that are largely resolved. But in terms of Efemçukuru, I'd tell you the concentrate we're producing and the terms are consistent with what we have in our guidance and our expectations. And the new contracts that we've signed, again are consistent with our assumptions that flow through in all of our guidance. So we're not concerned at all about being able to sell that concentrate, consistent with our expectations.

[Joshua Wolfson:]

Okay. And on the variance between sales and production there, trying to understand how that's affecting the statements. I would have -- given that the sales don't flow through the income statement, typically we would expect to see I guess, a very big working capital outflow, but there is a net inflow of $12 million this quarter. What sort of caused that, versus I guess, our expectations of the outflow for just looking at Efemçukuru timing variances alone?

[Paul Skayman:]

This is a flow, I'm guessing, but selling the inflow from the Kisladag, that would all have been through production. That was 27,000 ounces -- 20,000 ounces of outflow from Efemçukuru delayed sales, but that will probably account for the lion's share of that. So now, Josh, at Kisladag, it's back in, you'll see inventory start to tick up. But Kisladag and you will see Efemçukuru come down, but again, Kisladag will probably swamp Efemçukuru in terms of volumes.

[Joshua Wolfson:]

Okay. It's a bit difficult to hear you guys there. Yes, there seems to be a gap versus, I guess, what our expectations would have been on working capital, if there's any insight you have on that, that would be helpful. Or maybe just understanding, in case the accounting is maybe perhaps different for either the Lamaque ramp-up or Efemçukuru sales differences, the accounting seems to be slightly different than what we're typically used to. If there's any information you can provide on what those capital changes are? Or where costs are being categorized for Efemçukuru if they're not -- sorry, Lamaque, if it's not strictly capital that would be helpful.

[Philip Yee:]

Okay. We'll get back to you on that now Josh.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. George Burns for any closing remarks.

[George Burns:]

Now thank you, operator, and thank you, everybody for joining our call today. Again, I think I'd just highlight once again that from an operating perspective, we felt we got a solid quarter and it's unfortunate that the timing of Efemçukuru concentrate sales got a fairly significant impact on our financial results. But rest assured, we're confident we'll deliver our guidance for the year, and look forward to next quarter's call with Lamaque being in its first quarter of commercial production. Thank you, everyone.

[Operator:]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.