Kirkland Lake Gold Ltd.
Q1 2017 Earnings Call Transcript

Published: 8 May 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Kirkland Lake Gold Earnings Call for the First Quarter 2017. At this time all lines are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Instructions will be given at that time. Please note that this call is being recorded today, Thursday, May 4, 2017, at 10

[Ryan King:]

Thank you, Operator, and good morning, everyone. With me on the call today are Tony Makuch, President and Chief Executive Officer; Phil Yee, Executive Vice President and Chief Financial Officer; Darren Hall, Chief Operating Officer; and other members of the management team of Kirkland Lake Gold. Today we will be providing comments on our results for the three months ended March 31, 2017 for Kirkland Lake Gold. We'll then open up the call for Q&A. The slide deck that we will be referencing during this call is available on our website at www.klgold.com under the Investor Relations' Events section. Before we get started, I'd like to direct everyone to our forward-looking statements on Slide 3 of the presentation. 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 cautionary note on Slide 3 of this presentation and the forward-looking information set out in our news release dated May 4, and the MD&A for the three months ended March 31, 2017 filed on SEDAR. During the call today, we will make reference to non-GAAP performance measures. A reconciliation of non-GAAP measures is available within the earnings news release issued today as well as the MD&A for the period ended March 31, 2017. 2017 first quarter results are for the three months ended March 31, 2017 and includes the newly acquired Australian operations compared against three months ended March 31, 2016 including operational results from the former Kirkland Lake Gold Inc., the Macassa Mine complex and the Holt Mine complex from January 26, 2016 after the acquisition of St Andrew Goldfields. All figures are in U.S. Dollars unless otherwise stated. With that, I'd like to turn the call over to our President and Chief Executive Officer, Tony Makuch.

[Tony Makuch:]

Okay. Well, thank you very much, Ryan, and good morning, everyone, on the call and, everyone, on the room here with us today. This quarter is the first full quarter of the new combined company for Kirkland Lake Gold. Our teams in both Canada and Australia worked very hard and focus on operational excellence and delivered very impressive results in the first quarter and represents really a strong start to the year on many fronts. Quarterly highlight that I will discuss today include an upward revision to guidance reflecting positive and exciting great performance of Fosterville, including record production and low unit cost. We also had solid operating cash flow which was driven by our flagship mines in Macassa and Fosterville. Before I start though, I guess I would also like to take this time to personally thank the over 2,000 people across the company whose [indiscernible] success has enabled us to deliver these positive results we're talking to you about today. And now moving on to Slide 5. For the company's strong operational start to 2017, we are pleased to announce improved guidance for the 2017 fiscal year. Again, mainly driven by the operational performance at Fosterville. Specifically Fosterville is forecasting to bolster production by more than 50% upon year end as a result of higher grade profile demonstrated in Q1 2017. Fosterville is now targeting revised production of 200,000 to 225,000 ounces of gold at a low operating cash cost per ounce sold of $310 to $330 an ounce. Factoring both the increasing production and great unit operating cost, targeting to improve by 33% as compared to the prior guidance. Macassa gold production guidance also increased from 180,000 to 185,000 ounces to a range now of 190,000 to 195,000 as a result of the increased tonnages mine and note for the remainder of 2017 and the increase to average grade profile supported by the company's updated resources and reserve as outlined in the technical reports filed in March 2017. Some sequence at the quarter end, we have decided to temporarily suspend production at the Cosmo mine, effective June 30, 2017 and have therefore adjusted production here to 20,000 ounces for the year. While this decision was not taken lightly, it supports a strategic objective operating responsible, sustainable and profitable mines. Exploration will continue allowing the company to obtain a better understanding of near mine targets including the newly discovered Lantern deposit to support future reestablishing of operations here. Production at the Holt and Taylor mines remain unchanged at 65,000 to 70,000 ounces at Colt and 55,000 to 60,000 ounces at Taylor. On a consolidated basis, the production outlook increases to 530,000 to 570,000 ounces at an improved all-in sustaining cost of $850 to $900 per ounce including operating cash cost of $475 to $575 per ounce. As compared to the prior guidance, consolidated operating cash cost per ounce sold in all-in sustaining cost per ounce sold decreased by $150 per ounce and $100 per ounce respectively. Working our way down, the rest of the revised items referenced to in the consolidated outlook, the royalty expenses increased to $20 million to $25 million for the year, any reflection of higher production and G&A has increased to $70 million. Items that remain unchanged includes sustaining and growth capital of $180 million to $200 million. Additionally, we remain committed to spend $45 million to $55 million in expiration during the year and during the first quarter, expiration investment totaled $9.3 million, of which $5.4 million related to Australia and $3.9 million related to Canada. For the remainder of the year, we expect to see increased spending over the coming summer months and we believe this is the right thing to do, as supported by the recent exciting results that Fosterville announced yesterday from the Eagle zone of 404 grams per ton over 16 meters with an estimated true width of 7.5 meters including 12,039 grams per ton over 0.4 meter and from the Lower Phoenix Footwall of 381 grams per ton gold, over 2.8 meters. This has a true width of 2.5 meters including 1,062 grams per ton gold. We are very excited about yesterday's results and as they provide extensions of the high-grade zones that are returning some of the highest gold grade seen at Fosterville, and putting over this recent in-field drilling in the Lower Phoenix Footwall and Harrier-based structures have increased both geological and great confidence in these zones and has reaffirmed with us an increasing grade profile with depth at Fosterville, in addition to strong drill results combined with the positive grade reconciliation of mining. The Eagle structure has provided the company greater insight into the higher grade nature of the ore body and really led us to move forward in terms of changing the production guidance. And actually before I move on to the next slide, I'll make one correction. I didn't express that we have a lot more expiration spending with the upcoming summer months, but I should reference that that's the only summer in Canada, it's not summer in Australia. Sorry about that, for anybody that were affected by that comment. Moving on to Slide 6 for the first quarter highlights, Kirkland Lake Gold realized record quarterly revenue of nearly $170 million based on gold sales of 136,000 ounces at an average realized gold price of $1,238 per ounce. As we begin 2016, the company has a strong balance sheet with the cash balance upon quarter end of $280 million, that's up $45 million from Q4 2016. Now moving on to Slide 7. Based on total production cost of $80.6 million in the first quarter, operating cash cost per ounce total $564 per ounce, reflecting the improved performance at our flagship mines, Fosterville and Macassa -- which realized low operating cost of $354 and $571 per ounce sold respectively. Both mines realized increasing grade and recovery profiles, which contributed significantly to favorable cost. All-in sustaining cost per ounce for the first quarter total $873, below prior guidance levels of $950 to $1,000 per ounce which has prompted us to lower our guidance for the rest of the year as we previously mentioned. Turning to Slide 8 now, continuing with our financial highlights. Free cash flow totaled $37.2 million, or $0.18 per share after investing $9.3 million into the exploration programs that will have a positive impact on near-term operations. We generated significant operating cash flow of $68.6 million or $0.34 per share, an increase of 118% from $31.5 million in Q1 2016. The increase in cash flow for the period was largely the result of operation and production success from Macassa and Fosterville. During the first quarter, we have decided to introduce EBITDA as a new non-interest measure to gauge a company's ability to generate liquidity and as a result of the purchase price allocation on the new market acquisition, the company will be realizing an increased depreciation and depletion amount as compared to previous quarters which will continue being amortized at the life of the underlying assets from the expanded operating base. Therefore, if we remove the impacts of significant non-cash items such as depreciation, EBITDA totaled $63.7 million during the first quarter. The company reported Q1 earnings per share of $0.06 or CAD0.09 per share and Q1 adjusted earnings per share $0.08 or CAD0.10 per share when excluding this one-time cost. On Slide 9 now. The operation steams in both Canada and Australia delivered strong performance, attaining consolidated first quarter gold production of 130,425 ounces, more than double the production in Q1 2016. Record production was driven by solid operating results, Macassa in Canada which produced [indiscernible] ounces of gold based on average mill grade of 17.1 grams per ton and a recovery of 97.1%; and Fosterville in Australia which produced 46,083 ounces of gold based on record mill grade of 11.1 grams per ton gold and recovery of 93.7%. These two flagship binds accounted for 73% of the company's total gold produced in the first quarter. I'll now turn the call over to Phil Yee, our Chief Financial Officer to review the financial results for the 2017 first quarter.

[Phil Yee:]

Thank you, Tony. Good morning, everyone. Before we get started, I wanted to provide a second reminder that all figures referenced are in U.S. dollars unless otherwise stated. Starting on Slide 11, I'm pleased to announce the strong cash position for the company at March 31, 2017. This includes cash and cash equivalents of $279.7 million and working capital of $125 million at the end of the quarter. Working capital includes the full carrying value of the company's convertible debentures which total $86.9 million, all of which matured in 2017. Working capital has increased $32.7 million from the December 31, 2016 balance of $92.3 million, primarily the result of higher cash generation in the quarter. Since December 31, 2016, cash and cash equivalents have increased by $44.8 million in Q1 2017. The increase in cash during the quarter was a product of significant increases in production, resulting in increased revenues from higher volume of gold sales, timing of sustaining capital outlays, reduction in inventory from the end of 2016 and auctions exercised in the quarter. In addition, the company hold the majority of its funds in either Canadian or Australian-denominated dollars and the impact of both currencies strengthening in Q1 2017 has positively affected the company's overall cash position. With regards to the company's convertible or unsecured subordinated debentures that are all scheduled to mature in 2017, the first strong CAD57.5 million with a 6% coupon and a $15 convert price matures on June 30 of this year. The second tranche totaling CAD59 million was a 7.5% coupon and a $13.70 [ph] convert price matures on December 31, 2017. As previously mentioned, the company currently exhibits a strong balance sheet and Management believes the company has the flexibility to adequately manage the convertible debentures as it can do. Net of paying out the convertible debentures, the company would currently still have a cash position in excess of $190 million. Notably in other significant milestone announced during the quarter was the initiation of dividend policy for our shareholders representing confidence in the company's growth profile and ability to generate free cash flow. As a starting point, the Board approved the payment of a quarterly dividend of CAD0.01 per common share with the inaugural payment to take place on July 14, 2017 to shareholders of record as of the close of business on June 30, 2017. On an annual basis, the dividend would equate to CAD0.04 per common share. Turning to Slide 12, I've outlined several key financial highlights for the first quarter of 2017. It is important to note that the prior comparative quarter, which is Q1 2016 includes the full quarterly results for the Macassa mine and the results from the Holt mine complex only after the acquisition of St Andrew Goldfields on January 26, 2016. For the first quarter 2017, record production resulted in the sale of 137,841 ounces of gold and an average realized price of $1,223 per ounce, generating total revenue of $168.5 million. Revenue for Q1 2017 increased significantly when compared to the prior period as the current period includes the consolidated operations for the combined company. The acquisition of new market contributed $69 million in additional total revenues for the quarter. Revenues were also higher as a result of an increase in the average realized gold price in the period. Kirkland Lake remains unhedged in order to fully benefit from the increases in the price of gold. In terms of costs, total production cost of $80.6 million, royalty expense of $4.7 million and depletion and depreciation of $35.5 million were incurred in Q1 2017 to arrive at earnings for mine operations of $47.8 million. In comparison to previous year, mine earnings have increased by 105% from $23.4 million in Q1 of 2016. This increase reflects higher revenues as a result of the previously mentioned acquisition, as well as higher royalties related to higher production and higher depreciation and depletion expense when compared to Q1 of 2016. The increase in depreciation and depletion in Q1 of 2017 was a result of the significant fair market value additions to mining interests and property plan equipment acquired to the business combination with new market gold in Q4 of 2016. Total depletion and depreciation charges are expected to increase by approximately $45.1 million in 2017 over 2016 levels. The impact to Q1 of 2017 was a reduction in earnings by approximately $16.8 million when compared to Q1 of 2016. During Q1 2017, general and admin expenses increased to $5.6 million compared to $1.6 million in Q1 of 2016. This increase is related to increased staffing, consulting and integration initiatives implemented in 2017 and is reflective of the overall increasing corporate activity. In addition, stock based compensation for Q1 2017 was $1.2 million compared to just $200,000 in Q1 of 2016, a result of the granting of certain auctions to directors, officers and employees of the company. Care and maintenance cost for Q1 2017 total $5.1 million, at which $3.4 million related to care maintenance at stall and $1.7 million related to the transition of hallway into a production-ready state. Finance expense during the quarter is consistent relative to previous periods and relates to various financial instruments held by the company including the accretion of the convertible debentures and the cost associated with financing's obligations. The provision for current and deferred income taxes expense total $11.8 million for Q1 2017 as compared to $5.4 million for Q1 of 2016. This is a result to the increase in taxable income as a result of increased earnings in the quarter. Looking to the bottom line, the company posted 2017 first quarter net earnings of $13.1 million or $0.06 per basic share, based on a weighted number of common shares outstanding of $204.5 million. Net earnings for the full year includes growth exploration expense of $9.3 million as the company focus on growing its resources, all the while continue to maintain strong cash flow generation. In total, $5.4 million related to exploration in Australia and $3.9 million related to exploration in Canada. When excluding one final cost in the quarter, adjusted net earnings for Q1 2017 amounted to $16.1 million or $0.08 per basic share. Overall Kirkland Lake Gold delivered strong first quarter financial results. I look forward to continued success for the remainder of the year as we continue to strengthen our balance sheet and further improve our financial position. With that, I'll turn it over to Darren Hall, our Chief Operating Officer for a review of the operations.

[Darren Hall:]

Thank you, Phil. Facing as a value of Kirkland Lake Gold, we're committed to providing a safe and healthy workplace for all employees and business partners. As we continue our journey to [indiscernible], I'm pleased to report a 15% reduction in our first quarter 2017 last time into frequency rate compared to the fourth quarter of 2016. Turning to Slide 14, first quarter Canadian operations, value production of 75,250 ounces was underpinned by Macassa, which delivered 48,723 ounces. The Macassa mill produces 91,460 tons at a record average price of 17.1 grams per ton on recoveries of 97.1%. The first quarter operating cost was $514 per ounce, marking the fourth consecutive quarter of improving costs. Reflecting continued positive operating performance, we have improved Macassa 2017 full year guidance increasing production 10,000 ounces to 190,000 to 195,000 and are in operating cost guidance to $520 to $550 per ounce. Turning to Slide 15, the company's newest mine, Taylor, produced 10,942 ounces of gold during the quarter, a 9% increase over Q4 2016. Tons mined increased 31% over Q4 2016 and as planned, mining rates will continue to increase during the year. The operating cost and all-in sustaining cost for the quarter was $607 and $798 per ounce respectively. The low cost Taylor mine is a cornerstone asset for the company with a significant exploration potential along the prolific mineral rich Porcupine DestorFault. Moving to Colt on Slide 16, first quarter production total 15,319 ounces. During the quarter, the mine delivered 105,629 tons of ore with an average rate of 4.8 grams per ton on newer recoveries of 94.9%. First quarter operating cost and all-in sustaining cost was $681 and $1,077 per ounce respectively. The operating cost per ounce was high in Q1 2017 and Q4 2016 due to changes in mining sequencing. However, our full year guidance remains unchanged. Turning to the northern territory on Slide 17. Cosmo first quarter gold production totaled 9,092 ounces and an average grade of 2.5 grams per ton and 95.2% recovery. As Tony mentioned earlier, the company has decided to suspend production in Cosmo, commencing June 30, 2017 to focus on an aggressive resource definition and exploration phase at the Cosmo and Lantern deposits. They recently announced Lantern discovery has significant upside potential and full appreciation of this development opportunity is required. Additionally during Q2 2017, our regional exploration program focused on the balance targets will be expanding. The Cosmo mine will be maintained in the state of readiness to allow operations to recommence when this exploration resource definition and development planning phase is completed. Reflecting the suspension, Cosmo at full year production guidance has been revised to 20,000 ounces. Turning to Slide 18, Fosterville delivered record operating production of 46,083 ounces on record-operating recoveries of 11.1 grams per ton and 93.7% respectively. During the quarter, mining focused on optimizing extraction of the high grade lenses on multiple levels in the Lower Phoenix area. As a result, the positive trend in cost continued with the mine delivery record quarterly operating cost of $354 per ounce and an all-in sustaining cost of $571 per ounce. Considering the continued positive production performance and recently improved drilling results, the company has increased possible full year 2017 production guidance to 200,000 to 225,000 ounces, a reduced operating cost guidance to $310 to $330 per ounce. Reflecting the production revisions at Cosmo and Macassa and Fosterville, the consolidated production guidance has been increased to 530,000 to 570,000 ounces. Additionally, operating cost and all-in sustaining cost guidance have been reduced to $475 to $525 per ounce and $850 to $900 per ounce respectively. I'll now pass it over to Tony for closing comments before we open the up the call for questions.

[Tony Makuch:]

Okay. Thanks, Darren. We're going to move on to Slide 19 and I'll summarize a few things in terms of where we came through at the end of Q1. I know we had a strong start to the year as Darren alluded to just previously, that has resulted in upward revision in our 2017 production to 530,000 and 570,000 ounces. And a lot of that is really a result of the increasing grades over at Fosterville and we truly believe that as time progresses here, we continue to present exploration results at Fosterville, went to market and understand how special the deposit is here. It's a very high grade deposit. We don't know how big it is, it's much bigger than what we said it was at December 31, 2016. Additionally, we have reduced our unit operating cost including cash cost per ounce to $425 to $525 per ounce and our all-in sustaining cost per ounce to $850 to $950. Again as Darren alluded to, we have strengthened our balance sheet by $45 million during the quarter, we have announced a quarterly dividend for our shareholders and we continue to demonstrate discipline in our business, we rationalize the business, we have taken a step back in terms of what we're doing at Cosmo. Spending some time, I guess you might want to say sharpening the soft, trying to understand what's going on here and wok towards bringing it back at a much improved operation and with our focus is as we talked about before, delivering high quality production profitable gold mine responsibly so that we can create value for our shareholders. In closing, I'll go to Slide 20. We look forward to delivering our primary goal of creating shareholder value by remaining focused on four key value drivers as outlined in this slide and we think this differentiates us from other investment opportunities in the gold sector where we focus on delivering on responsible, low-cost, predictable and achievable production from our solid operating platform in Tier 1 mining jurisdictions; continuing to generate strong free cash flow and maintain a strong balance sheet; and demonstrate growth through exploration success and improved efficiencies. And lastly, I strongly believe that our recent dividend initiation policy would be another key driver value for our shareholders. Thank you very much for dialing into the 2017 first quarter conference call with Kirkland Lake Gold. I would like to thank our shareholders for their support and we look forward to delivering exceptional results during 2017. As usual, myself and Ryan are always available for any additional questions that you may have after the call. We look forward to seeing you all at the annual general meeting and special meeting of shareholders taking place today at 4

[Operator:]

[Operator Instructions] Your first question comes from the line of Phil Ker with PI Financial. Your line is open.

[Phil Ker:]

Good morning, everyone. Congrats on the fantastic quarter. It's been a very heartwarming following the story over the past couple of years and seeing the progress being made and the success down in Australia. Just a question for you, Tony. I've seen you on BNN mentioning maybe a production forecast exceeding 700,000 ounces. Could you just overview some of the organic or even inorganic potential to start meeting that 700,000 ounce, start to get.

[Tony Makuch:]

That was sort of something, a vision in two to five years where do we expect to get them. Where do we expect with them straight in some of that today? You can see the growth and production at Macassa and at Fosterville and we think there's significant potential for further growth there, but particularly, Macassa is going to need some investment in infrastructure. Fosterville from where we're looking at, opening up additional mining fronts over with Harrier, Upper Phoenix North, really put to the mill over the next few years. Similarly at Colt and Holloway, we want to bring those back to the level of production over the next few years that they were when they were originally being run by both Newmont and Barricks, so that's plus 100,000 a year. And then we see Taylor being able to grow production and we see what we're going to do with Cosmo in terms of trying to grow production from those assets. When you put it together, you can see that these assets is mill capacity everywhere, so you can see the potential for that growth in production. But the caveat is we're always going to do it responsibly, if not at the sake with profitable production and creating value for your shareholders.

[Phil Ker:]

Okay.

[Tony Makuch:]

Was that a good enough answer there, Phil?

[Phil Ker:]

No, that's great. There's obviously a lot of moving parts and it's been fantastic to see guidance increase despite putting three operations on suspension in current maintenance. But just on Mad Creek [ph], there was a pretty attractive PDA put out last year. Has there been any developments or internal discussions down continuing to move that forward?

[Tony Makuch:]

There has been not a lot of significant discussions on it. It is something we're aware of. This is something that we intend to come and look at. But our priority in that region right now is to try to get a good handle on what Cosmo could look like and what Lantern deposit is, the potential expiration success there, plus [indiscernible] some of the other targets that people have down there in terms of what they want to explore. So first priority would be to try to get the mine to stable operations and keep that mill running and then things like Mad Creek, that's sort of a second phase growth.

[Phil Ker:]

Okay. Fair enough. Thanks again and congrats on the fantastic quarter.

[Tony Makuch:]

Okay.

[Operator:]

[Operator Instructions] We have no further questions at this time. This concludes today's conference call. You may now disconnect.