Kirkland Lake Gold Ltd.
Q1 2018 Earnings Call Transcript

Published: 5 May 2018

[Operator:]

Good morning. My name is Tessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kirkland Lake Gold First Quarter 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Mr. Mark Utting, you may begin your conference.

[Mark Utting:]

Thanks very much, operator, and good morning everyone. With me today are most of the members of Kirkland Lake Gold senior management team, including Tony Makuch, our President and Chief Executive Officer; Phil Yee, our Executive Vice President and Chief Financial Officer. We have our two country heads, Pierre Rocque, Vice President, Canadian Operations; and Ian Holland, our Vice President, Australian Operations; as well as our two Heads of Exploration, Doug Cater, who is Vice President of Exploration Canada, and John Landmark, Vice President of Exploration Australia. Today, we'll be providing comments on our results for the first quarter of 2018. We will then open up the call for Q&A. The slide deck that we will be referencing is available on the web cast on our web site at www.klgold.com and as well as in the Investor Events section and PDF. Our remarks and answers to your questions today may contain forward-looking information about future events on the Company's future performance. Please refer to the detailed forward-looking statement cautionary note on slide 2 of today's presentation and as set out in our news release dated May 2, 2018, issued yesterday and the MD&A for the three months ended March 31, 2018. Also during today's call, we will be making reference to non-IFRS performance measures. A reconciliation of these measures is available within the earnings news release issued yesterday morning, as well as in the MD&A for the three months ended March 31, 2018. Finally, please note that all figures discussed today will be in U.S. dollars, unless otherwise indicated. With that, I'd like to turn the call over to Tony Makuch, President and CEO of Kirkland Lake Gold.

[Tony Makuch:]

Okay, thanks Mark and thanks everybody for being on the call, and looks like a very good morning and a beginning of somewhat spring in Toronto, even if it’s a month late. Anyway, Kirkland Lake, I am going to slide 3 on the presentation now, I guess you can reflect I am looking at things -- looking out what we put out over the last while. We had a very strong start to 2018. Our Q1 results position us very well as a leading performer in our industry. And before I get too far on, the results that we have achieved, it really is a direct reflection of the people of Kirkland Lake Gold, and I will start by thanking 2,000 employees for their continued hard work and dedication, and I think we should also acknowledge the service providers, contractors and the communities, we are working for all the support that they give to us, and also, we are privileged to have both strong working and respectful relationship with our local First Nations in Canada, and the Traditional Owners in Australia, and we thank them for allowing us to work on these lands. And so going forward, anyway, talking about the achievements we have today, it's really a commitment of all these people. So now turning to our performance in the first quarter of this year, we quadrupled our net earnings prepared for last year's first quarter and achieved record levels of earnings from mine operations and EBITDA. We also continue to generate solid free cash flow, adding another $15 million to this quarter, after generating $178 million last year. Our cash position increased by almost 20% during Q1 2018 to $275 million, and based on our strong financial position and favorable growth outlook earlier this week, we raised our dividend for the second time, increasing it to $0.03 per share. This increase will be effective by second quarter dividend payment. Now going to slide 5, looking at operating highlights; we had a stronger production and lower unit costs year-over-year. We have produced about 148,000 ounces in Q1, which was ahead of our internal plan for the quarter, and a significant improvement from last year. This overachievement in production was due to positive great performance in record monthly production in March of over 71,000 ounces. We really saw grades escalated in March, both at Fosterville and Macassa. Turning to unit costs, operating cash costs averaged $447 per ounce, while all-in sustaining costs were $833 an ounce. Both were significant improvements from last year. We expect unit costs to continue to improve going forward, as the quarterly sales volume increase, particularly in the second half of the year. Now going to slide 6; company achieved significant growth in mineral reserves also, and we recorded in Q1, our consolidated mineral reserves now increased 36% to 4.6 million ounces at an average grade of 11.1 grams per ton. This was up from 3.4 million ounces at 9 grams per ton the previous year. Reserve growth was driven by Fosterville, where reserves more than tripled year-over-year and increased 65% from the midyear we did last year. At Macassa, we replaced reserves after the depletion of about 190,000 ounces. Very importantly, as a result of the large extension to the South Mine Complex we announced last summer, and subsequent infill drilling, we increased our measured and indicated resources by 58% to 2.1 million ounces, and our inferred resources by 48% to 1.4 million ounces. Late last week, we announced additional infill drilling results at Macassa and Taylor, that were very encouraging in terms of future resource conversion and expansion at these mines. In Australia, we are excited about the new mineralization we are finding in the NT and at Robbins Hill and our infill drilling program at Fosterville is progressing well to support continued resource and reserve growth here in 2018. Tuning to slide 7; referencing to our guidance for 2018; as mentioned, we were ahead of plan for production in Q1 in costs and cash flow, we are very much on track. Based on Q1 performance, we enter the second quarter tracking very well against our guidance. We expect quarterly production to increase, particularly in the second half of the year, including at Fosterville, where we will commence stoping production from the Swan Zone. With higher levels of production and sales, we expect to see operating cash costs and all-in sustaining costs improve and achieve our current guidance. We also expect to see our capital expenditures increase, particularly the growth capital at Macassa and Fosterville. A lot of the work in the first quarter at both sites related to permitting and engineering. Both for the number 4 shaft at Macassa and our key projects at Fosterville. Coming into Q2, we are going to begin ramping both procurement and construction activities. Our guidance for sustaining and growth capital expenditures remain unchanged. With that, I will now call on our CFO, Phil Yee, to review the Q1 financials in more detail.

[Phil Yee:]

Thank you, Tony. Before I get started, I just want to provide a second reminder that all figures referenced are in U.S. dollars, unless otherwise stated. Starting on slide number 9; Tony has already mentioned our strong earnings performance in Q1 of 2018, with net earnings of $53.8 million or $0.25 per share. Our Q1 2018 net earnings, compared to net earnings of $13.1 million or $0.06 per share in Q1 of 2017 and $41 million or $0.20 per share in the previous quarter, Q4 of 2017. Net earnings in Q1 2018 are all related to continuing operations. In both Q1 of 2017 and last quarter, we had losses from discontinued operations related to the sale of the Stawell Mine in December of 2017. Loss from discontinued operations totaled $2.2 million in Q1 of 2017 and $24.9 million last quarter. Net earnings in Q1 2018 were 250% higher than earnings from continued operations of $15.4 million in Q1 of 2017 and compared to earnings from continuing operations of $65.9 million in Q4 of 2017. The change from both prior periods largely relates to level production and sales in each quarter. The company reported record production and sales in the fourth quarter of 2017. Tony mentioned our record earnings for mine operations in Q1 2018. Slide 10 breaks out the details compared to the prior periods. Starting with revenue; total revenue in Q1 of 2018 was $198.2 million, that's an 18% increase from Q1 of 2017. The increase reflected 7% growth in sales and a 10% improvement in the average realized oil price to $1,333 an ounce. Q1 2018 revenue compared to $212.4 million last quarter, when the company achieved record sales of 165,700 ounces in the quarter. Turning to production costs; there was a significant reduction in Q1 2018 production costs compared to Q1 of last year. The reduction, mainly related to the inclusion of production costs for the Northern Territory operations in Q1 of 2017, and that was prior to the operation being placed on care and maintenance, effective June 30 of 2017. Lower depletion and depreciation expense also had a significant impact on the change in operating earnings, when compared to prior periods. In our year end 2017 conference call, we mentioned that we would see lower depletion and depreciation costs in 2018, resulting from the large increase from depletable gold ounces following the release of our 2017 reserve and resource estimates. As you can see on slide 10, depletion and depreciation costs declined by $7.5 million or 21% from Q1 of 2017, and $17.7 million or 39% from Q4 of 2017. The reduction from last quarter was particularly significant, which reflects both the increased level of depletable ounces, as well as higher levels of production and sales in Q4 of 2017. Slide 11 breaks out EBITDA. As you have heard, we achieved record quarterly EBITDA in Q1 of 2018 of $105.9 million, which was 58% higher than the Q1 of 2017, and a $2 million increase from the previous quarter's record of $103.9 million. In addition to the improvement in earnings from mine operations, there are a few other factors that materially affect the change in EBITDA compared to the prior periods. First, exploration expenditures were significantly higher in Q1 of 2018 than in both of the prior periods. Reflecting the company's significant commitment to organic growth through exploration success. Exploration expenditures totaled $16.7 million in Q1 of 2018 versus $8.7 million in Q1 of 2017, and $10.7 million in Q4 of 2017. In addition, the other income, other loss category also had a significant impact. Other income in Q1 of 2018 totaled $5.4 million, which compared to other income of just $100,000 in Q1 of 2017 and other loss of $19.2 million in Q4 of 2017. Other income in Q1 2018 related to $3.9 million of realized and unrealized foreign exchange gains, as a result of the U.S. dollar strengthening against the Canadian and Australian dollar in the quarter, as well as the $2.3 million mark-to-market gain on the fair value of the company's warrants in Noble Resources. In contrast, Q4 2017 reported a loss, which is mostly due to a $17.6 million mark-to-market loss on the Noble warrants. One additional item I will highlight on slide 11 relates to taxes. As shown in slide 11, we have higher total income tax expense in Q1 2018 compared to the prior periods, reflecting increased taxable income in the quarter. A significant portion of the total income tax expense is deferred income tax of $18.3 million, which results from the utilization of deferred tax assets to reduce current income tax expense. Income taxes in Q4 2017 included a $10 million net deferred tax recovery, which related primarily to the tax impact of Canadian flow-through shares and the reorganization of our Australian business late last year. Turning to slide 12; Tony mentioned our strong growth in cash in Q1 2018 with company ending the quarter with $275.3 million of cash on the balance sheet. We started the year with $231.6 million in cash and increased our cash position by $43.7 million or 19% during the quarter. The increase results from cash flow from operating activities of $89.6 million, which included a $12.4 million reduction in cash taxes paid, as a result of the utilization of tax losses in Q1 of 2018. Offsetting strong operating cash flow was cash used in investing activities of $38.7 million, which mainly relates to additions to mining interest and planting equipment. We also had a net use of cash from financing activities of $6.3 million, which related primarily to finance lease obligations and dividend payments. As Tony mentioned, we will see our capital expenditures increase from the 2018 level over the balance of the year, as we pursue our growth plans. Our strong finance position and ability of our operations to generate cash flow, positions us to fund our growth internally, while still generating free cash flow, increasing our cash position and rewarding shareholders. With that, I will turn the call back to Tony.

[Tony Makuch:]

Okay, thanks Phil. Over the next bit on the presentation here, we will go through an operations and exploration review. We will Ian Hall and Doug give a little update on what's happening at Fosterville, and Pierre Rocque will give some color on what's going on in Macasse in Canada, and then Doug Cater will give some color for the exploration in Canada, and John Landmark will give color for the exploration in Australia. So slide 13 I guess is the next slide.

[Ian Holland:]

Thanks Tony. So referring to slide 14 up there, I'd like to just briefly describe the Q1 production results at Fosterville. It was a very good quarter, with just short of 64,000 ounces produced. This was the third highest in Fosterville's history and came in a few thousand ounces of budget. The average mill grade for the quarter was just short of 17 grams, was surely the key driver for the strong performance. The two images on the right hand side of the slide illustrate where stoping and development occurred in Q1 within the Lower Phoenix system, with the sources of greater than 30 grams per ton highlighted in yellow across a number of levels. Production in Q2 was expected to come from similar sources. Looking forward, we see anticipated increase in production in H2 2018, as the Swan Zone begins to contribute. We have exposed Swan in development on two levels so far year-to-date and the first stoping is scheduled for H2. One of the important drivers for the growth profile at Fosterville and the plan to reach 400,000 ounces of production annual by 2020, is the completion of the key projects that are currently underway. So these are expected to ramp up over the course of 2018. So I will just touch on each of these. The ventilation upgrade; so the lower raise is in progress. I mean, it was the majority of the spend in Q1. Permits have been received for the surface works in early April, so that will increase that level of activity over the course of 2018. And with paste fill, the paste delivery holes have commenced this quarter, with construction scheduled to commence in H2, and the water treatment plant construction has commenced in Q2 as well. So with that, I will pass over to Pierre.

[Pierre Rocque:]

Thank you, Ian. Q1 was a record production quarter for the Canadian operations at 84,000 ounces. Leading the way was Macassa, which produced 54,000 ounces during that time, and kept cash costs in line with guidance. Looking at the isometric view of Macassa's SMC zone on the right side of the slide, producing stopes for Q1 are highlighted in red. In green, we are showing existing stopes and development. We mined 22% of the ounces for Q1 from the three stopes located at the bottom of the page. Grades in those three stopes vary from 25 gram per ton at the far right to 58 gram per ton for the stope on the left. While our sustaining capital expenditures were in line with guidance, our growth CapEx at number 4 shaft reflected a level of activity in Q1, which consisted mostly of permitting and engineering work. With construction and procurement activity starting, we will see higher capital spend in Q2 to Q4. On that note, I will turn it to Doug.

[Doug Cater:]

Thanks Pierre. Last week, we released exploration drill results for both the Macassa and Taylor properties. On slide 16, at Macassa, we released new underground drill results from the 5,300 foot level, which targeted the South Mine complex. The new high grade intersections are situated within the 259 meter eastern extension of the South Mine Complex, that was recorded on June 28, 2017. The results are significant, as they will support both the conversion of the existing inferred mineral resources, as well as mineral resource expansion, given the many intersections that are located outside the existing mineral resource blocks. These intersections are located approximately 550 meters southeast of the number 4 shaft, which was approved for development in January of 2018. By comparison the intersections are situated 2.1 kilometers east of our current production shaft. On slide 17, at Taylor; we announced drill intersections which provide significant results at key exploration targets at the mine. At the West Porphyry deposit, the results of surface drilling include a 150 meter extension of the new high grade gold zone, first reported last December. The zone has now been identified over an area between 350 meters to 500 meters below the existing mine development, which translates to a depth of 780 to 930 meters below surface. In the gap area, between the West Porphyry and Shaft deposits, multiple high grade intersections highlight the potential that exists at Taylor to add significant new mineral resources, most of the existing mine infrastructure. And finally, drilling east along the Porcupine-Destor Fault continued to intersect high grade gold bearing quartz banks, with the furthest intersection now located 2.9 kilometers east of the shaft deposit. Our exploration programs will continue to expand the mineralized zones at Taylor. A total of four surface drills and one underground drill are active on the site at this time. I will now hand over to John Landmark.

[John Landmark:]

Thanks Doug. Turning to exploration in Australia; we just put out two recent new releases on progress of Fosterville and the Northern Territory. On slide 18, you will see a summary of our drill program at Robbin's Hill. This is over 3.5 kilometers to the north of Fosterville, and mineralization here is on a parallel trend to the Fosterville bend, which hosts the Phoenix and Harrier systems. The deep drilling at Robbin's Hill has recently intersected higher grades, including visible gold, quartz veining and stibnite, similar to what we see at the Swan and Harrier zones, and we certainly believe there is potential for more mineralization at depth and a long stroke. Elsewhere at Fosterville, we are conducting exploration drilling in several targets on the exploration needs, and we are continuing our in-mine exploration at Fosterville. We have ongoing resource infill drilling at Swan, and we have also commenced a program of down plunge extension drilling 500 meters to the south of the currently defined Swan Zone. Moving on to the Northern Territory on slide 19; at Cosmo, we have commenced two exploration drills underground from the decline across into the lands and deposits, and this is exposing into this mineralization for the first time. At the same time, we still have three underground rigs continuing to define these deposits. 60 kilometers to the south of Cosmo, at Union reefs; we drilled about one kilometer below surface of the prospect target, and we intercepted significant high grade intervals there. This is actually an important progress in our program of exploration, as we are working towards building a sustainable mining plant for the Northern Territory. And with that, let me pass it back to Tony.

[Tony Makuch:]

Thanks everyone. Thanks for the presentation, and giving an outlook for -- sorry, providing some color to what we did in Q1 2018. When we are looking at the -- with a very strong start to the year, as we say here in the last slide, slide 20; production unit costs were ahead of plan in Q1 2018, and we are tracking very well against our 2018 guidance. The company remains very profitable. We had record earnings from mining operations in the quarter. We generated significant strong free cash flow of over $50 million, and we are well positioned to fund growth with the current cash and future cash flow from our business. The company has continued to grow reserves and resources at very high grade deposits. So not only are they growing reserves and resources, but these are -- as Eric Sprott would say, they're very valuable ounces as well, as the margin is high, in terms of what we have done in our gold mines. And you know, we are going to continue to achieve extensive exploration success, which will support future resource conversions, and lead into future growth. We gave guidance of growing production of over 1 million ounces in the next five to seven years. Ian mentioned of growing production at Fosterville, of over 400,000 ounces in 2020, and the company is really going to achieve good results. We had a good Q1. We expect Q2, Q3, Q4 this year to all be better, and 2019 and 2020, lots of exciting things happening with Kirkland Lake Gold, and because of all that, we want to reward our shareholders, and we have increased our dividend to $0.03 a share. So with that, I will call a conclusion to the presentation, and we will be happy to take any questions. Thanks.

[Operator:]

[Operator Instructions]. And your first question comes from the line of Ovais Habib from Scotiabank. Please go ahead.

[Ovais Habib:]

Thanks for taking my question. Just starting off at Fosterville; obviously, we have got Swan Zone kicking in by the end of the year. And just wanted to know, in terms of -- are we still on track for Q3 and you know, how much kind of production do you expect coming from Swan Zone as a percentage in 2018, and going into 2019 as well?

[Ian Holland:]

Thanks Ovais, I will cover that from my end. We are on track for some stoping in the second half of the year, from Q3. By volume, it's a relatively small part of the overall production profile. But obviously, the grade has an impact. We expect that to grow over the course of 2019 and then to be really in full production by 2020. In terms of percentages, I wouldn't like to be that precise. It's obviously 25% of the total reserves by tons, and that's what it will average over the cycle, but it will grow over that time.

[Ovais Habib:]

Okay, perfect. And in terms of further drilling that's required into Swan Zone, are you currently doing that infill drilling, or is it just more stope preparation right now?

[John Landmark:]

Hi Ovais, it's John here.

[Ovais Habib:]

Hi John.

[John Landmark:]

Look, we have a number of rigs that are actually drilling off what is the resource. We are looking to upgrade that significantly. And then, as I mentioned, we have commenced a program -- we stepped from Swan significantly to the South, and we are drilling that as well. So we really have, I suppose two phases of exploration; the one is a resource to reserve conversion, and the second one is of course, down plunge extension exploration.

[Ovais Habib:]

Okay. So just moving a little bit towards the Harrier Zone then; obviously, that development is going well, according to plan, and are we going to see any more or any exploration results coming from Harrier drilling?

[Ian Holland:]

Yeah Ovais, just in terms of the development of Harrier; so the production decline for Harrier South is progressing well. We have actually had some stoping contribution to the production profile set by year-to-date and likewise, that will grow over the course of this year and into 2019 as well. In terms of drilling results, we have recently had full permits for the extension of exploration drill drive to the south [ph], so beyond the mine leasing to the exploration lease, that's in progress and we'd expect more significant drill programs in the second half of the year, in particular, Q4.

[Ovais Habib:]

Excellent. Guys, that's it for me. I will leave it at that, and then, if there is more questions, I will come back online. Thank you so much.

[Operator:]

Your next question comes from the line of Kevin Chiew from CIBC. Please go ahead.

[Kevin Chiew:]

Hi, good morning Tony and team, and congratulations on a good quarter. Few questions for me; at Macassa, obviously, tremendous grade. Were the fewer tons as per plan? I noticed it was kind of similar last Q1.

[Tony Makuch:]

Hey Kevin. What we have done here at Macassa is -- we are really focusing on the high grade tons, as opposed to using stockpiles, as we did in past few years. So that essentially is our plan for this year, focusing on good quality tons and high margin ounces.

[Kevin Chiew:]

Excellent. And you provided a number of positive exploration updates this past week, and one of them was for the Northern Territory. You kind of outlined your criteria to restart operations there with a five year plan. How quickly do you see that all coming together?

[Tony Makuch:]

Well, I mean we are working on it aggressively right now. We'd like to be in a position to be working in 2019 on that zone. We have an operating mine already -- a potential operating mine, that's in care and maintenance we are developing at Cosmo. We have a mill that's just sitting there, ready to be turned back on. So the restart of operations is more, as we understand the geology better, and really get some good mine planning, which we are doing it now in the second half of this year. So yeah, so in a nutshell, the sooner the better, and really we are tracking for Q1 2019 to really restart operations.

[Kevin Chiew:]

Okay. Sounds good. And just my last question and I was looking for an update on the share buyback; and obviously your share price has done quite well. Are you planning to renew that NCIB, once it expires?

[Tony Makuch:]

Yes, yes. We will be. We didn't do much share buyback in Q1 this year, only because we had, maybe other things that we were watching and trying to get our heads around. But yeah, we are going to renew our share buyback coming up very soon, and then, we expect again to be strategic with it, as the year progresses.

[Kevin Chiew:]

All right. Okay. Thanks very much.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Phil Ker from PI Financial. Please go ahead.

[Phil Ker:]

Thank you. Good morning Tony and team. How are you all doing?

[Tony Makuch:]

Good, really good.

[Phil Ker:]

Thanks for having the call here. So just -- probably a question for Phil. So in Q1, you noted here in the presentation, you used some of the deferred tax assets. But you also have a climbing deferred tax liability, upwards of $150 million. When can we expect this to begin to unwind?

[Phil Yee:]

Well Phil, some of that deferred tax liability comes from the vis-à-vis the time of the acquisition of Newmarket, and some of it is offset by other. I mean, it's netted -- the deferred tax liability is netted against the assets; and there are some timing differences in there as well, because of differences in tax depreciation and so forth. I think, in terms of timing, I think it's spread out over the next little while. Most of what you are going to see, for example, in terms of the deferred tax asset; we expect to use up that deferred tax asset, probably within -- if not all, in 2018, at least the first part of 2019. So you are going to see that, as that deferred tax asset starts to get drawn down, you can see the deferred tax liability, the net amount start to increase, and that's really just a matter of the two amounts being netted, and it's spread out over the next few years.

[Phil Ker:]

Okay. But at some point, your tax payments, because of the liability should go up?

[Phil Yee:]

Well, the tax payments in the future will go up, yes, because of the timing differences with the fair market bump in the acquisition accounting, when Newmarket is accounted for, as well as the differences in the depreciation rates. That deferred liability, you're right, that will come in over time, and the amount will increase. Yes.

[Phil Ker:]

Yes. Okay. And then, just last question, maybe for Tony; could you give us a sense of the CapEx schedule related to the shaft initiative at Macassa?

[Tony Makuch:]

Well I mean, we outlined that it's a $240 million phase one capital program, and the phase two is an additional $80 million, so $320 million in total. We expect to spend somewhere between $40 million and $60 million this year. I think some of the first things we are going after is long lead items, such as hoists -- the hoisting plant, I should say, and then this year, really the work in progress is related to getting surface infrastructures to support the sinking operation. So you have got to get your collar down, you have got your bank rates in place to support the sinking, as well as, head frame, hoist, surface plant and electrical facilities. So that's what's going to happen in 2018. Does that answer your question good enough, or Darren Tschanz is here, he can give you even some more color if you want.

[Phil Ker:]

Yes. No that's fair. That's it for me guys. Thanks a lot.

[Tony Makuch:]

Thanks.

[Operator:]

There are no further questions at this time. I turn the call back over to the presenters.

[Mark Utting:]

Thank you very much, operator, and thanks to everyone for taking part in today's call, and we will look forward to our next quarterly call in the summer. Have a good day.

[Operator:]

This concludes today's conference call. You may now disconnect.