Kirkland Lake Gold Ltd.
Q2 2016 Earnings Call Transcript

Published: 6 Aug 2016

[Operator:]

Good morning, ladies and gentlemen and welcome to the Kirkland Lake Gold Earnings Call for the Second Quarter of 2016. 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, Friday, August 5, 2016, at 11

[Suzette Ramcharan:]

Thank you, operator, and thank you to everyone for joining us this morning. Today’s call will take approximately 15 minutes. We will then allow an additional five to ten minutes for Q&A. Before we begin, I will go through an abbreviated version of our forward-looking statements. Some of today’s commentary may contain forward-looking information and forward-looking statements pertaining to Kirkland Lake Gold. We refer you to our detailed cautionary note regarding forward-looking statements in our press release issued August 4 and on the slides presented today, a copy of which is available on the Company’s website at klgold.com. You are cautioned that actual results and future events could differ materially from their respective conclusions, forecasts or projections. I refer everyone to the section on forward-looking statements in the Company’s latest MD&A and other filings available on SEDAR, which set out the material factors that would cause these results to differ. During the call today, we will make reference to non-GAAP performance measures, such as average realized price per ounce of gold sold, cash operating cost per ton and cash operating cost per ounce sold, all-in sustaining cost per ounce sold and free cash flow. These are common performance measures in the mining industry, but do not have any standardized meaning. A reconciliation of these non-GAAP measures are available within the earnings release issued yesterday as well as within Appendix B of the MD&A dated June 30, 2016. Please also note that a recording of this call will be available for replay and the details of which are posted on the corporate website. Another reminder to all, we have changed our year-end from an April 30th fiscal year end to a December 31st calendar year-end effective January 1st, 2016. As such, for comparative purposes, we are comparing to the closest reporting period in the previous year. For the second quarter of 2016, which is a three and six months ended June 30, 2016, we are comparing to Q1 of sub-year 2015, which is the three months ended July 31, 2015. As well we are now reporting all figures in metrics unless otherwise stated. We have provided the conversion calculations for short tons and troy ounces in the press release and MD&A for your convenience. Please also note that all dollar figures disclosed during this call are in Canadian dollars unless otherwise noted. On the call with us this morning, we have Tony Makuch, President and CEO; Perry Ing, Chief Financial Officer; Chris Stewart, Vice President of Operations; Doug Cater, Vice President of Exploration; also in the room with us we have Jennifer Wagner, our Corporate Legal Counsel. I’ll now pass the call over to Tony, who will summarize the highlights for the quarter.

[Anthony Makuch:]

Thanks, Suzette, and thank you everybody for being on the call. It’s my first call with Kirkland Lake Gold, and I really look forward to the time here and I appreciate the opportunity that we’re going to have, and I think its exciting time and really exciting company within Kirkland Lake Gold. And before I get started talking about the quarter and talking about the results and even results for first half of the year, I think we should also always make reference to the people that really do the work. It’s us people in this room, we just get the benefit of talking of the success of other people, and there’s close to 1,300 people working in Kirkland like working in the mines and the ones that really make the difference. And thanks, everybody, for their efforts in [indiscernible] year and I know we look forward again, I look forward to working with everybody and being part of the team and the success we’re going to create in Kirkland Lake Gold. Getting into the Q2 and H1 highlights here to Slide 5 that’s shown up on the screen here. In terms of ounces produced just a little bit over 68,000 ounces produced in the quarter. It puts us at about 130,600 ounces year-to-date for the first half of the year. And ounces sold 72,000 ounces for the quarter, and for the year 141,000 ounces. The difference is the ounces sold referenced to the St. Andrew’s assets – I’m sorry, these ounces poured after the acquisition in January 25th, so that’s why there’s a slight difference in ounces poured versus – ounces sold versus ounces produced. On to next slide, some of the other highlights in terms of gold sales, averaged realized price of gold in Q2 was $1,271 an ounce compared to $1,211 for the year-to-date, and we are in a positive gold price environment. We expect rising gold prices just to see good – better and better and then average of this in Q3 and Q4 of this year. Operating cost per ounce sold $641 in the quarter, $667 in the first half of the year, all-in sustaining cost of $990 an ounce, $925 year-to-date. And one of the most important things of free cash flow from the operations – free cash flow total is $31.9 million building up to cash $57.3 million for the first half of the year, and we see that as very positive for the company, very, very positive gold price environment and good opportunities moving forward. Going onto the next slide. Good opportunity, I mean, for us is to take for value creation. This slide here in terms of folks for the remainder of 2016, working towards to meet our guidance. And if you look at our guidance and both Perry following me and Chris Stewart will talk about our guidance a bit, you see we’re going to have a pretty solid second half of the year. We expect we’ll be working forward now and improving productivity, lowering costs across all operations of business. We see a lot of opportunity there. And we want to become more aggressive in our exploration efforts, redemonstrate the exploration – potentially exploration value in all of these assets, not just in Kirkland Lake but along the SAS assets. I think you’re going to see some exciting things happening out of Kirkland Lake Gold and build upon this be able to work to demonstrate the organic growth opportunities in the company both from growing gold production, but growing gold production at lower cost. And with that I’ll pass it on to Perry Ing, Chief Financial Officer, and Perry you can give some financial highlights.

[Perry Ing:]

Great, thanks, Tony. Yes, I’ll just go through a brief summary of our key financial metrics for the second quarter and the first half of the year. Revenue of $118 million, our production expenses totaled $82 million, that’s broken out between $62 million in operating costs, $15 million in amortization and depletion, and the remaining $5 million in royalties. On a per ton basis, that gives you a value of 208 a ton or in U.S. Dollars $667 per ounce gold. Our all-in sustaining costs for the quarter was 990 an ounce. We do expect a notable increase in all-in sustaining cost, at least in the capital equipment purchase side of that as we have significant capital purchases for underground equipment coming in the second half of the year. In terms of profitability, as Tony mentioned, our gross profits was strong. It was $36 million in the prior quarter due to higher realized gold prices. Our G&A expenses were slightly higher, were higher than our typical run rates given we have some one-time costs associated with executive management change. As Tony mentioned, we are going to get more aggressive on the exploration side. Exploration expenses increased to $4.1 million, compared to $2.6 million in the prior quarter as we being to ramp up some of our exploration program. Well off the note, on that note, just in terms of driving exploration, we did complete a $15 million flow through. We announced it in June, but we closed it in July, so you won’t see our cash on the balance sheet until our next reporting period. But that said, we’ve in total added $6 million from the flow through to our exploration budget, so we expect the total 2016 exploration budget now of approximately $24 million. Turning to the finance expense, remains with the prior quarter at $5.6 million, included $1.3 million unrealized loss on our U.S. Dollar holdings. If you look at our income tax expense, I’ll just touch on that briefly before I get to cash flows. Our income tax expense was $8.2 million on $22 million in pre-tax income. You will notice from our statement of cash flows, we are not paying significant cash taxes at this time. I think less than $100,000 for the quarter and less than $200,000 year-to-date, and that relates to Ontario Mining Tax. But just in terms of accounting basis we are coming in higher in terms of the effective tax rate than prior periods due to higher levels of profitability at these Canadian Dollar gold prices, and we’ve, it has actually fully utilized our historic deferred tax positions at least on the OMT side, the Ontario Mining Tax side. You’ll see that’s reflected in our taxes payable. We stood at $1.7 million at June 30, which was all related to OMT. From a federal and provincial standpoint. We do still carry a significant tax calls of over $400 million as noted in Note 20 to our financial statement. Just in terms of net income and EPS, our net income for the quarter after-tax was $13.8 million, which translated to $0.12 per share, that’s consistent with the first quarter. So now just turning to the free cash flow, we did generate $39.1 million as Tony mentioned earlier, bringing our cash balance at the end of the period to $157.5 million. Of that cash balance, we currently hold $37 million in U.S. Dollars. The bulk of that is intended to buyback 1% of the Franco Nevada royalty, which we expect to do in the fourth quarter of this year. Also, I’ll just touch briefly on our convertible debenture. The first Tranche of our convertibles to 6% with a face value of $57 million are now considered current on our balance sheet as they’re due June 30 of next year. The other convertibles, the 7.5% will become current at the end of this year as they’re due in December 2017. I will note that both of these debentures continue to trade significantly above par, as such we’ve not made any repurchases under our renewed NCIB repurchase program. In terms of where we are tracking year-to-date against out metric, Tony mentioned production-wise, we expect to have a strong second half, spread out into our guidance range. Our U.S. Dollar operating cost worth $667 an ounce, which is slightly on the higher end of guidance. We hope to bring that down. All-in sustaining cost are at 925 year-to-date which is below the low end of the guidance range, which was $1,000, but again as I mentioned, depending on the timing of delivery of our equipment purchases in the second half, you will see that component increase to a moderate degree. Our cash balance, again as I said, $157 million, which doesn’t include the $15 million from the flow through, and our earnings per share year-to-date stands at $0.24 a share. So with the operations focused on driving down cost, we think we have a great ability to continue to generate strong cash flows and put us in a very favorable position against our upcoming financial obligations. So with that, then I’ll pass over the call to Chris Stewart, our VP of Operation.

[Chris Stewart:]

Thanks, Perry. The operations continue to perform well during the quarter, and we are setup to meet our production guidance for the year. I’ll discuss the overall operational highlights and then touch on each of the operations individually. During the quarter, our overall operating cost per ton was $208. The cost per ton was positively impacted by the addition of the Holt-Holloway and Taylor mines, as well as the additional throughput from the low-grade stock piles processed during the quarter. On a cost per ounce basis, we achieved US$641 per ounce, overall a strong performance by our operations during Q2. Capital expenditures were below budget due to equipment deliver delays. Our two new ST2G battery Scooptrams from Macassa, the first of their kind, were delayed due to some minor software issues that have since been addressed. Our first unit is currently on site and heading underground this week. As such we expect how the all-in sustaining cost number to increase from the US$990 per ounce achieved in the quarter, due to the expected increase in capital spend on the equipment. Taking a closer look at the operations, I’ll start with the Macassa mine complex. Macassa produced 38,929 ounces during the quarter at a head grade of 12.2 grams per ton. This included 714 ounces from low-grade material at average 1.7 grams per ton. Development on the 5400 level and 5600 level progressed well during the quarter. The horizon on 5400 level is being converted over to track haulage during Q3. The main deep line has been split into two headings and will simultaneously be driven towards the 5700 level to access the SMC and will be turning back towards the main break to access the LDN zone, which sits mid-way between the SMC and the main break. The LDN zone runs from the 40,000 level down to below the 7,000-foot level. The ventilation project is on schedule to commence towards the end of August and preliminary work is already underway. We’ll be switching to ventilation flow whereby fresh air will be delivered underground from number three shaft. We’ll continue to provide updates on the progress of this project when we can. The cost per ton of Macassa during the quarter was $302 which was positively impacted by the additional throughput achieved during the quarter. At our East Timmins operations, our Holt-Holloway and Taylor mines realized production of 29,409 ounces at an average grade of 5 grams per ton. This included 313 ounces from low-grade material from the Taylor mine at an average grade of 2.3 grams per ton. Holt produced 12,862 ounces from Zone 4 and Zone 6. Holloway produced 4,826 ounces from the Smoke Deep and Black Top zones. And Taylor continues to grow well producing 11,408 ounces derived from the 1004 East Lens at an average grade of 7.1 grams per ton. The cost per ton from the three operations during the quarter was $135 per ton, and it was in line with our expectations. We are working to increase our production rate at each of the operations throughout the course of this year, while our focus is also to insure a successful integration of our people and systems between the business units. On a consolidated business, our head grade was 7.6 grams per ton, which was impacted by the low-grade material and slightly lower-grade at the Macassa Mine Complex. It was nice to see that both mills were able to take advantage of their experimental capacity for the processing of the low-grade stockpiles. This exercise actually allowed us to reduce our milling cost during the quarter at Macassa by approximately $2.50 per ton. Assuming gold remained near current prices of just over CD$1700, we anticipate supplementing the mill feed with low-grade material at Macassa going forward, as well with Holt and Taylor ramping up their throughput levels, we’re confident we’ll see a strong second half of the year on production. We reiterate our guidance for 2016, production between 270,000 and 290,000 ounces. I will now hand the call over to Doug Cater to speak to you about the exploration programs.

[Doug Cater:]

Thanks, Chris. During the quarter, the company had a total of ten diamond drills operating on exploration targets. A total of 28,500 meters of drilling was conducted company-wide during the quarter. In the Kirkland Lake camp, surface diamond drill programs continue to assess the mineral potential associated with the South Mine Complex or the SMC. Firstly, a long strike to the East and then testing the main break extension at depth between minus 6,000 to 8,000-foot elevation. And then last, we targeted the Amalgamated Break which was also drill tested at various depths. The yellow stars on the longitudinal section denote the pierce points of the drill holes. Underground drilling on the 4250’ level targeting the ‘04 break mineralization commenced in mid-April. Initial results were released in May and the drilling continues with one rig. Underground drilling to test the extensions of the SMC to the south and east continued with two drills from the 5300 level. Results from the SMC underground drill program were released on May 24 and included new asset [ph] results which continue to extend the SMC zone to the South and West. Along the Porcupine-Destor Fault Zone, the main objective has been to actively explore near the existing operations Holt-Holloway and the Taylor mine. At Holloway, underground drilling continued to test the Smoke Deep zone, down plunge and further to the East. The property was also drill tested from the mineralized extensions to the west of the Lightning zone, which is located west of the shaft. And to the east of the Deep Thunder zone, which lies approximately two kilometers east of Smoke Deep zone, with two rigs operating on surface. Both of these targets have favorable geology and structure, however, historic drill coverage in these areas has been sparse. The hatched areas on the longitudinal section identify the areas being targeted by the drilling this year. At Taylor, exploration drilling is being conducted from surface and underground from the 450-meter level. Exploration drilling is looking at possible extending the West Porphyry Zone to the west and to depth. In early July, the Company announced the close of a $15 million flow-through financing, approximately $6 million to flow-through have been approved and added to the budgets and is to be spent this year. The proceeds will be utilized on the SMC main break trend along the strike to the east and to continue to test the amalgamated break. As many as nine drills, six on surface and three underground, will be used in the Kirkland Lake camp, with a total of 68,000 meters of planned drilling. Drilling will be increased at the Holt, Holloway, and Taylor properties, with a total of four surface drills and one underground drill, and 56,000 meters of planned drilling in 2016. I look forward to providing future exploration updates from our drill programs as they become available.

[Suzette Ramcharan:]

Thanks, Doug. We’ll now open up the call for the Q&A session, and I kindly ask the operator to please review the procedures before we begin.

[Operator:]

[Operator Instructions] Your first question comes from the line of Cosmos Chiu of CIBC. Your line is open.

[Cosmos Chiu:]

Thanks. Hi, Tony, how are you doing? Just a few questions from me here. Maybe first off – maybe for Chris. Chris, you mentioned you’re going to continue to supplement the mill with the low grade stockpiles. How much should we be expecting in terms of that supplement, in terms of tonnage?

[Chris Stewart:]

For the first half of the year, we ran through at Macassa Mine of 22,000 tons. We have a stockpile of about 180,000 tons sitting out in the yard. So I would expect probably in the similar – somewhere between 20,000 to 30,000 tons.

[Cosmos Chiu:]

Okay. And how do you sort of calculate excess capacity? Because my understanding is the actual nameplate capacity of the mills about 2,200 tons per day, so what do you mean when you talk about kind of reaching or using up the excess capacity for the lower grade material?

[Chris Stewart:]

Currently, we can run up to around 1,550 tons per day, we are running two mills, and we need to run those two mills regardless of whether we run at 1,100 ton per day or 1,550 tons per day.

[Cosmos Chiu:]

That’s true. Yes.

[Chris Stewart:]

So our objective is to based on where the gold price is, is essentially to maximize the throughput at running two mills, but we’re starting up a third mill and incurring more costs.

[Cosmos Chiu:]

Great. And maybe another question on the operations. Tony, you certainly talked about the potential for improving costs all the operations. But in terms of East Timmins focusing on Holloway, costs in the quarter were quite high. Canadian $1,700 an ounce or over $1,700 an ounce any opportunities in terms of how you can lower cost here. How much lower can it go?

[Tony Makuch:]

I think the biggest things that can happen probably in the quarter and year-to-date the Holloway is, it was something – and what going forward is we started to get some reinvestments, some new equipment I think that’s going to have a significant impact on Holloway. A lot of the equipment fleet underground is fairly old or dated. And so that’s one of the big things we started doing. The other thing that happened in the quarter that happened at Holloway but there was a scoop jammed in a stoke that effected throughput coming out of the mine in the quarter. So we have a lot of fixed costs. So that we take that away and deal with the equipment availability to use so having better equipment there and then we see a lot of chance for improvement. I think the goal for the company is and when Doug has talked about some of the exploration going on at Holloway, our goal for the company is really to demonstrate with Holloway a much longer mine life. And we think there’s significant opportunity to show that and demonstrate that over there next year or two.

[Cosmos Chiu:]

Great. And then on Taylor, certainly we’ve seen the improvement in terms of tonnage in Q2, now reaching 669 tons per day. Can you remind us once again what you’re targeting in terms of that ramp up? Say by year-end or even same next year, what you’re trying to target in terms of tonnage?

[Tony Makuch:]

Our current plan is basically to run between 550 and 600 tons per day. We’ve done it for permitting to increase our ability to actually produce at higher rates. So we’re looking over the next 12 to 18 months, looking at pushing that up maybe to 750 to 800 tons per day. Once we get the permitting in place. And the permit’s being done to allow for even, what Chris talking about we’ll kept to double that production rate. But we’ve got to drill and access more mineralization. There’s significant exploration upside on that property, we can see some potential for growth there over the next few years.

[Cosmos Chiu:]

Yes, and maybe one more question from me in terms of the CapEx guidance for the year in 2016. I believe that’s CAD120 million. You’ve kind of spent about CAD40 million so far in the first half. Understanding that certainly there’s equipment deliveries in the second half and certainly the ventilation reversal projects going to cost some money. But are you going to reach that $120 million by year-end?

[Perry Ing:]

Yes, certainly the plan, as I said some of that will depend on the timing of delivery, but a lot of these things are scheduled for delivery in the third quarter rather than very late in the year so I do expect us to try to get up to that range.

[Anthony Makuch:]

And we also have advanced some equipment purchases that may have been in the plan for 2017. We worked towards advancing some equipment purchases now and trying to get things much earlier. An example would be what we just talked about was over at the Holloway mine.

[Cosmos Chiu:]

Yes, and then Tony, as a follow on to that, the ventilation reversal project. Would that require any kind of shutdown? Could that in anyway impact production in the next two quarters?

[Anthony Makuch:]

I mean that does require a shutdown and that shutdown has been put into budget and is in the forecast for the year, so yes, there is a shutdown plan. I believe it’s in the plant to suffer the seven day shutdown during that period of time for Macassa.

[Cosmos Chiu:]

Okay, great. Thanks Tony and team, and congrats.

[Operator:]

Your next question comes from the line of James Field of Bank of Nova Scotia. Your line is open.

[James Field:]

Hi everyone. Congrats on the good quarter. Just a quick question from me. The last couple of quarters our cash G&A excluding stock-based comp has been a little high, and I recognize you’re digesting an acquisition and a senior management change. Just wondering what a good run rate looking forward would be.

[Perry Ing:]

Hi James. I think if you – a run rate of closer to about $3 million for the quarter, I think that’s kind of where we’d like to get to on the run rate. I think that you identified the issues; Q1 was primarily as a result of the St. Andrew acquisition, and the second quarter is primarily as a result of management changes.

[James Field:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Raj Ray of National Bank Financial. Your line is open.

[Raj Ray:]

Thank you, operator. Good morning, everybody, and Tony, good to have you here. I have a couple of questions; the first one has already been answered regarding the ventilation. And the second one was is there any exploration update that we can expect in Q3?

[Doug Cater:]

Good morning, Raj. Doug Cater here.

[Raj Ray:]

Hey, Doug.

[Doug Cater:]

Yes. You can expect, as they say, an exploration update in Q3, with all the drilling activity that we’ve got, yes. I can’t give you any more details at this point in time, but most definitely.

[Raj Ray:]

And then that’s going to be across all the assets or is it Macassa?

[Doug Cater:]

Well, it’s still premature at this point, but we’re just – I can say that we’re ramping up the drilling at basically all of our assets, adding an additional three drills at the Kirkland Lake surface, and then we’re adding additional drills at Taylor and Holloway.

[Anthony Makuch:]

Yes. And you know what? I mean, some of it’s always going to be reflective in terms of the results you get. But as Doug showed in his previous slide that some of the big things on surface was – they’re not only to try to test the eastern extension of the South Mine complex into the capital closer towards, originally big traditional Lake Shore and Wright-Hargreaves and Teck-Hughes mines out in that area, as well as testing for depth along the Main Break. And so some of those are long hauls, I mean, we can’t say what kind of – predict what kind of results we’re going to get, but as stuff comes in – there’s a lot more drilling going on, so you could expect to see some interesting things there. And then we talked about Taylor being an area we want to grow – it has the potential to grow productions, but we have to grow resources and reserves at Taylor, so there should be some significant success we expect to have over the next well. And as we get the information, we’ll put the exploration results up.

[Raj Ray:]

Okay. Thanks, Tony. As a follow-up, remember there was a study being undertaken to look at the potential for treating Taylor or at Macassa? Is that still ongoing?

[Doug Cater:]

Yes. Is the still ongoing? I’m not sure it’s quite a study at this point in time, we think we’re at the point now where we’re just figuring out whether – what’s the best alternative to do and it’s all about trying to maximize the two mills. One of the things that we do have to do for Taylor, we have to taken into consideration is there’s a little bit of higher gravity component to that feed, and so if it does go to the Macassa mill, we’ve got to look at putting in a gravity circuit. Because we’d trap a lot of gold or delay the recovery of some gold in the mill by putting it in the mill at this point in time.

[Raj Ray:]

Okay, thank you. That’s it for me.

[Doug Cater:]

Yes.

[Operator:]

And there are no further questions at this time. I’ll pass the call back to Tony Makuch for closing remarks.

[Anthony Makuch:]

Okay, well, thanks and thanks everybody. And I’ll – just a summary slide here that, if you look at the last slide, in terms of Kirkland Lake Gold and where – what our goals are for this year, what you see – getting back to what both Perry and Chris talked about; our targeted gold production at 270,000 and 290,000 ounces this year, and we’re really focusing on meeting that guidance in 2016. Cash cost below $6.50 an ounce and all in sustaining costs of US$1,050 an ounce. The metrics really, in terms of the company, are to manage those in Canadian terms and so, with the exchange rate can potentially helping us we are definitely in a good gold price environment. And by being a low-cost producer, we can be very competitive in the industry. And big part is, we have $170 million in cash, the company is well-financed, not only to continue going forward in terms of what the activity, but as Perry also talked about purchasing the Franklin Nevada royalty down in October of this year, we expect to continue to have strong cash flow generation, both at budgeted levels of $15.50 an ounce in Canadian, but at current gold price levels, we should see some more significant improvements in cash flow generation for the company. We do have a large resource and reserve base and, with our focus now on exploration, really strong focus on replacing and even adding to the reserve base at all mines, we’re going to really demonstrate what we can do there and try to extend mine life at Holloway and grow mine life at Taylor, and besides would demonstrate the exploration upside in the Kirkland Lake camp. I think that Kirkland Lake itself is – and with the South Mine complex and what’s the potential is there, we can really demonstrate the exploration excitement back in the story or – there’s always been a lot of exploration excitement, I think, in Kirkland Lake and we’ve just got to demonstrate this and just start getting some results also. We see that as very positive going forward for the company. And, I think that the other aspect – we are in a rising gold price and we talk about $1,350 U.S. and that’s a pretty good gold price, but at $1,770 in Canadian dollar terms, most of our costs are equated in Canadian dollars, so we’re going to really continue to focus on that. We see this as a very positive company, very good times with Kirkland Lake Gold, and thank you for being on the call. Thank you for listening, and let’s look forward to some really good success in Q3 and the rest of the year. Take care.

[Operator:]

And this concludes today’s conference call. You may now disconnect.