Kirkland Lake Gold Ltd.
Q4 2014 Earnings Call Transcript

Published: 10 Jul 2014

[Operator:]

Good morning, ladies and gentlemen and welcome to the Kirkland Lake Gold Q4 and Fiscal Yearend 2014 Earnings Conference Call. 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, July 10, 2014, at 10 AM Eastern Time. I would now like to turn the meeting over to one of your hosts for today's call, Lindsay Dunlop, Director of Investor Relations. Please go ahead.

[Lindsay Dunlop:]

Thank you, operator, and good morning, everyone. Thanks for joining us today for the Kirkland Lake Gold's fourth quarter and yearend results conference call. On the line today, we have George Ogilvie, Chief Executive Officer and John Thomson, Chief Financial Officer, who will be available during the question-and-answer period at the end of this call. At the end of the call, the operator will provide instructions for those who wish to ask questions. Before I begin, I will go through an abbreviated version of our forward-looking statements, which are also provided in the press release. Some of today's commentary may contain forward-looking information for Kirkland Lake Gold. We refer you to our detailed cautionary note regarding forward-looking statements in our press release. You are cautioned that actual results and future events could differ materially from the respective conclusions, forecasts or projections. We refer you to the section entitled, the Risk Factors in our latest Management Discussions and Analysis and other filings available on Sedar, which set out the material factors that would cause results to differ. I will now turn the call over to George Ogilvie.

[George Ogilvie:]

Thank you, Lindsay and good morning, ladies and gentlemen. Thank you for joining us for our conference call today. All figures disclosed in this call are in Canadian dollars unless otherwise stated. This fiscal year 2014 saw a number of notable accomplishments as well as several significant changes to management and the modus operandi of the company. Following the resignations of the CEO and Chief Operating Officer, I was appointed halfway through the fiscal year in mid November 2013. For four of my first six months with the company, I spent time on the ground in Kirkland Lake where I worked with the operations team to implement a cost cutting program concurrent with the lower tonnage, higher grade mine optimization plan to refocus the company strategy to concentrate on quality tons rather than volume, i.e. to get the mining head grade back or close as possible to the reserve grade, which for the entire complex is 0.45 ounce per ton or some 15.4 grams per ton. This new strategy has been successful in raising head grades, reducing overall cost and thus reducing our cost per ounce on an all in sustaining cost and cash cost basis. Calendar year-to-date grades have improved from 0.28 ounces per ton in calendar 2013 to 0.39 ounces per ton or 13.3 grams per ton. In fiscal year 2015 to date, grades on 0.42 ounces per ton or 14.4 grams per ton as we announced on June 24. Fiscal year 2014 revised guidance was met with the company producing 122,309 ounces at an average grade of 0.33 ounces per ton or 11.3 grams per ton, an increase of 34% from the previous fiscal year. Gold sold for the year was 125,273 ounces at the top end of our revised guidance, an increase of 37% over the previous year. The company also made a number of policy changes and reduced headcount from 1,250 employees to 1,059 employees to reduce cost and better align the organizational structure of the business to the anticipated revenues from the new mine plant. This included the elimination of some employee assistance programs, retiring of older inefficient equipment and the elimination of some non-essential spending on exploration and property, plant and equipment. This has resulted in sustainable annualized savings of CAD$24.7 million. It should be noted that today our headcount is 1,044 employees, which we see stabilizing as we move forward. Another major source of CapEx savings for the company was the completion of the CAD$95 million expansion project, which commenced in January 2009. The CAD$95 million was spent on developing a new haulage ramp and additional levels in the South Mine Complex, namely the 5,000 and 5,300 level. It was also spent on developing a new haulage ramp, upgrading the hoist from 1,000 short tons per day to its current capacity of over 3,200 short tons per day, increasing the mill capacity from 1450 short tons per day to 2,200 short tons per day and enlarging the dry facilities and the purchasing of additional equipment. At the beginning of the fiscal year 2014, all-in sustaining costs were near CAD$2,500 per ounce. During the fourth quarter as the new mine plant and cost cutting programs fully started to take effect, all-in sustaining costs were reduced to CAD$1,776 per ounce. During April, the last month of the fourth quarter, all-in sustaining costs were reduced to CAD$1,466 per ounce, which was an average gold sale price of CAD$1,422 per ounce. Looking at these metrics, the company was close to cash flow breakeven. Further productivity and cost cutting measures were introduced in late April and May, which should positively impact first quarter 2015 results. In addition, two electric hydraulic drills have been ordered with the first drill due to arrive at site any day now and the second, a month later. One drill will focus on developing in the main South Mine Complex decline, allowing us to get to the 5600 level where the reserve grade is 0.7 ounce per ton, or some 23.9 grams per ton before the next fiscal year begins. The second drill will be assigned to a stoping complex, where our goal will be to generate an additional 100 tons to 200 tons per day of ore, taking our daily total to between 1,150 tons per day and 1,250 tons per day. Our all-in sustaining cash cost guidance for the current fiscal year is between CAD$1,250 and CAD$1,350 per ounce, which we are on track to achieve in the second half of fiscal year 2015, potentially when one considers the initiatives just mentioned. As a result of the changes in fiscal 2014, cash flow from operating activities was CAD$27.3 million, revenue of CAD$173.3 million for the year increased 14% from the previous year with 33,503 more ounces of gold being sold compared to the previous year. This was offset with a 16% reduction or CAD$270 per ounce decrease in the average sale price of gold year over year. Due to the new mine plant only coming into effect late in the fiscal year, the company's net loss and comprehensive loss for fiscal year 2014 was CAD$11.1 million or CAD$0.16 per share. In addition to the operational grade and financial improvements, the company also completed a number of additional accomplishments this year, including a first-time resource calculation on its near surface ounces, the appointment of a new VP Operations, Mr. Chris Stewart, who will be based at the mine site, completion of the expansion project and development of the new mining level in the South Mine Complex, the 5,400 foot level where mining of the first stope began in May. Looking ahead, we are on track to produce a 140,000 to 155,000 ounces of gold in our current fiscal year at a head grade of 0.37 ounces per ton, which is 12.7 grams per ton or better, with some cost cutting improvements beyond the CAD$1,466 all-in cost realized in April. In addition, we expect to open another level, the 5600 level in the South Mine Complex towards the end of this fiscal year, complete and publish a prefeasibility study on the near surface ounces and continue further exploration in that area. The company also completed in fiscal 2014 a 2.5% net smelter royalty with Franco-Nevada Corporation for proceeds of US$50 million. The company has a three-year option to buy back 1% of this royalty for $36 million, less the royalty proceeds to the buyback portion of the 1% NSR that has been paid to Franco-Nevada prior to the date of buyback. The company considers Franco-Nevada to be an excellent strategic partner and their support to the endorsement of both the Kirkland Lake Camp and the company. At this time, I would like to open up the call for questions for John and myself. Thank you.

[Operator:]

[Operator instructions] And we have a question from Catherine Wolfe with Canaccord. Your line is now open.

[George Ogilvie:]

Yes, hello Cathy.

[Catherine Wolfe:]

Oh, hello George. I did not push a button for a question. I am sorry, I was just listening. I don't know how they got my name for a question.

[George Ogilvie:]

So you have no questions at this time, Cathy?

[Catherine Wolfe:]

No, initially, I [missed] (ph) the initial first part of the -- just give my name and everything, did you say the head grade is 0.45.

[George Ogilvie:]

The head grade fiscal year to date is 0.42 as we announced on the 24th of June.

[Catherine Wolfe:]

Yes. Okay.

[George Ogilvie:]

And expect to remain at those levels.

[Catherine Wolfe:]

Okay. And the 5,600 foot level, you expect to be at by the end of this calendar year.

[George Ogilvie:]

No, before the end of this fiscal year. So…

[Catherine Wolfe:]

Before the end…

[George Ogilvie:]

Yes, our fiscal year closes at the end of April. Now in our actual plan and what we've communicated to the market this year, there are no stopes planned to be mined down there in the current guidance or our internal plan, but obviously if we can get there early and access any stopes down there particularly when the reserve grade is 0.7 of ounce per ton, that could be extremely advantageous for the company before the end of this fiscal year, but that's an upside opportunity for us.

[Catherine Wolfe:]

Okay. Yes, with very good grade [having] (ph).

[George Ogilvie:]

Yes, thank you, Cathy. Appreciate your -- all the questions.

[Catherine Wolfe:]

Thank you. Bye, bye.

[Operator:]

[Operator instructions] Your next question comes from Alison Turner with Panmure Gordon. Your line is open.

[Alison Turner:]

Hi George. What I wanted to ask was you gave a quite detailed guidance what you expect to do over the next three -- and I think it's time [out to charge] (ph) on how you expect to get there, but can you give us any sort of color around what happens beyond the end of that three-year period? Would it be the intention to actually ramp up production from underground at all or would you be looking at sticking at similar levels underground and then looking to near surface etcetera to fill the mill?

[George Ogilvie:]

Yes, Alison, what we're seeing, we're busy working on our life of mine plan now. What we see ourselves doing is continuing to drive the main decline obviously below the 6,000 foot level where the grades are even better. Right now, we would anticipate that we would keep the tons constant at in and around 1,250 short tons per day from the underground Macassa Mine. I would expect year-over-year with the reserve grade improving with debt, we would see head grades higher than what we put forward with respect to the three year guidance and therefore I would expect the ounces to improve year-over-year beyond fiscal 2017. I think ultimately we would like to get our production above the 200,000 ounce mark from underground, but of course the main opportunity that we have is with respect to the near surface mineralization that we have not included in the current plan and certainly I think there is an opportunity therefore potentially a deposit which could have in excess of a 10-year mine life perhaps mining between 20,000 and 30,000 ounces of additional gold per year, but that will come out next year as part of the high level engineering study and the preliminary economic assessment that we're looking at.

[Alison Turner:]

Thanks very much. That's very useful.

[George Ogilvie:]

Thank you, Alison.

[Operator:]

[Operator instructions] Your next question comes from [Phillip] (ph) with Resolute Funds.

[Tom Stanley:]

Hi, it's actually Tom Stanley from Resolute Funds. Well congratulations George on your continued operational improvements. I just would like some clarification at this time on your hedge book. Have you forward sold any gold and if so how much?

[George Ogilvie:]

Tom, good question. As of yesterday, we had forward sold about 10,000 ounces of gold, which for ourselves is about three weeks production. That was forward sold at in and around CAD$1,400 per ounce. Last night there was a CAD$25 increase per ounce spike in the gold price and this morning myself and the CEO -- CFO were actually in the process of forward selling an additional 8,000 ounces to 10,000 ounces at in and around CAD$1,435 per ounce. Obviously with our all in sustaining cost in April, the last month of fiscal 2014, being at CAD$1,466, we believe forward selling now a little bit more aggressively starts to make sense so that we can protect ourselves with any downside risk over the next couple of months. So I would say that at the end of today, we probably have close to about 18,000 ounces to 20,000 ounces forward sold at an average price probably somewhere in and around CAD$1,420.

[Tom Stanley:]

Thank you.

[George Ogilvie:]

Thank you, Tom.

[Operator:]

[Operator instructions] Your next question comes from [Jamie with Claris] (ph). Your line is now open.

[Unidentified Analyst:]

Hi guys. Congrats on the progress.

[George Ogilvie:]

Hey. Thank you, Jamie.

[Unidentified Analyst:]

Just a quick question with respect to the grade guidance for fiscal 2015. So its 0.37 ounces per ton for the year, we're seeing a trend above that so far this year at 0.42 for the first 50 days or so. So I guess my question is, is the 0.37 relatively constant over the year or do you see some variability in the plan over fiscal 2015?

[George Ogilvie:]

Well the 0.37 was [prudent] (ph) because historically we had achieved a 0.37 head grade in 2010 and 2011, but when this plan was put together three or four months ago at a point in time, I had only two months with the company and therefore very little history with the company. It would be fair to say that over the last three or four years, we have not been able to mine at a head grade anywhere close to the reserve grade and therefore and putting forward a plan, I felt it was better to aid on the side of caution. Hence the reason why we chose a head grade of 0.37 ounce per ton. Theoretically, if we mine all the stopes to their reserve grade, we should see a head grade of in and around 0.44 ounce per ton for this fiscal year. Now we are doing better on the grade, but it would also be fair to say that we should be mining at in and around 1150, 1100 to 1150 tons per day at the moment, which we're not, but we're only doing a 1,050 tons per day. So therefore, some of the gains that we're making and head grade we're losing slightly at the moment in tons, but the two of them seem to be balancing out and therefore that's why we're on track for attaining our guidance that we've given the market.

[Unidentified Analyst:]

That's great. Thanks very much.

[Operator:]

At this time, there are no further questions in queue. I'll turn the call back over to the presenters.

[George Ogilvie:]

Well, thank you so much for joining us today on the call. In summary, I believe that the business plan that the company now has in place is taking us in the right direction for this gold price environment. All the key performance indicators are trending in the right direction month over month and with further productivity and cost cutting initiatives, we expect to be at a breakeven in fiscal Q1 2015, followed by moving marginally into a positive free cash flow position in Q2 with further gains to be realized in the second half of fiscal 2015. Thank you for your time today.

[Operator:]

Thank you for joining ladies and gentlemen. This concludes today's conference call. You may now disconnect.