Kirkland Lake Gold Ltd.
Q3 2016 Earnings Call Transcript

Published: 7 Nov 2016

[Operator:]

Good afternoon ladies and gentlemen and welcome to the Kirkland Lake Gold earnings call for the third 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, Thursday, November 3, 2016, at 2

[Suzette Ramcharan:]

Thank you operator and thanks to everyone for joining us this afternoon. Today's call will take approximately 15 minutes and we will then allow an additional five to ten minutes for question and answers. Before we begin, I will go through an abbreviated version of our forward-looking information. 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 this morning, a copy of which is available on the company 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 also make reference to non-GAAP performance measures, such as average realized price per ounce of gold sold, operating cost per ton and per ounce sold, all-in sustaining cost per ounce sold, free cash flow and free cash flow per share, adjusted net earnings and adjusted net earnings per share. 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 as well as Appendix C of the MD&A for the period ended September 30, 2016. Please also note that a recording of this call will be available for replay, the details of which are posted on the corporate website. As a reminder to all, we have changed our year-end from the April 30th fiscal year-end to a December 31st calendar year-end effective January 1, 2016. As such, for comparative purposes, we are comparing to the closest reporting period in the previous quarter. Q3 2016, which is the three month ended September 30, 2016 is being compared to the Q2 period of sub-year 2015, which is the three months ended July 31, 2015. For the nine months period ended September 30, 2016, our year-to-date figure, we are comparing to the nine months period in calendar 2015 from February 1 to October 31 of that year. 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 the 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, Meri Verli, Senior Vice President of Finance and Treasurer, Keyvan Salehi, Vice President of Corporate Development and Technical Services, Doug Cater, Vice President of Exploration, Jennifer Wagner, our Corporate Legal Counsel as well as we are pleased to have with us Eric Sprott, Chairman of the Board, joining us on the call today. I will now pass it over to Tony.

[Tony Makuch:]

Okay. Thanks Suzette and good afternoon to everybody on the call. And maybe I get started, I would like to just make that if you look at it, Kirkland Lake Gold had a very special quarter. There were significant achievements in production, lower cost higher grades and productivity at the mines and mills. And because of this, we had really strong profits in the quarter and also the cash flow generation. And I like to say that these results are directly attributable to the people in Kirkland Lake who do their work, not us people, not people here who on just get to talk about the work that theses guys and achievements of others. So I like to say thank you to them and maybe giving us the opportunity to present these results So I will start on slide four and give some of the operating highlights for the quarter. We had talked about record for gold production with 77,274 ounces produced. We had released that previously. We sold 76,400 ounces and we realized an average gold price of $1,321 per ounce. On the cost side, as I said, we had sold cost performance, operating cost of $544 per ounce and all-in sustaining cost of $970 an ounce. Turning to slide five, giving some financial highlights for the quarter. These include, adjusted net earnings of CAD27.9 million or CAD0.24 per share, record net income of CAD24.8 million or CAD0.21 per share and year-to-date, this is CAD0.46 per share, so almost as much in the third quarter as in the first two quarters. We had positive free cash flow of CAD30.2 million or CAD0.26 per share in the quarter and we ended the quarter with cash and trade receivable, which is mostly in gold and bullion form that's been sold but we didn't get to cash yet, of CAD222.9 million. Turning to slide six. A couple of other things we did. We completed the royalty buyback of 1% in Kirkland Lake from Franco Nevada for $30.5 million. That reduces the royalty of 1.5%. I think us buying that royalty back gives you a sense on the long strong belief of what we think is the exploration upside in Kirkland Lake and the production growth that we believe we are going to achieve. It really makes this definitely an accretive transaction for Kirkland Lake and its shareholders. And we also announced in the quarter, the business combination with Newmarket Gold creating a new mid-tier gold producer with annual production of over 500,000 ounces of gold, operating cost less than $650 an ounce and all-in sustaining cost of less than $1,015 as an ounce. Now I will go to slide seven and I will give some color into each of the operation before I hand the presentation over to Perry for the financial review. So starting on slide seven, on consolidated basis, you see operating results year-to-date we are at 208,000 ounces, average of about 8.2 grams per ton out of all the mines and average recoveries of 96%. Over at Macassa, we had record production in Q3 as we talked about, with 42,866 ounces produced, grades of 16.5 grams per ton before taking in account the processing of low grade material that was done to take advantage of some of the excess capacity. And year-to-date, the mine produced about 122,850 ounces and grades are averaging 15.2 grams per ton. So we definitely had an improvement in grade in Q3. On a unit cost basis, the mining costs were CAD307 per ton. Year-to-date, the an ounce rate was CAD326 per ton. So it was definitely an improvement in unit cost in the quarter and the cost per ton was actually 6% better than the first half of the year and 9% better when you compare to Q2 of 2015. On a cost per ounce basis, as we talked about previously, we have $579 an ounce and sitting in year-to-date $580 an ounce. The mine performed very well during the quarter. Development continued with the main ramp to the 5700 level. Development has started on 5400 and 5600 level in line with our expectations. And again, we want to make people aware that the deeper we go along the Holt Mine Complex, the grade gets a lot better. So it's a priority to us and a sense of urgency within the company. We are going to try to build up the momentum to get down deeper as fast as possible. The mine performed very well during the quarter with -- all of this occurred during the quarter and as I said, the mine performed very well during the quarter with mine and mills was impacted was impacted by a one week shut down for ventilation changes and headframe and hoisting plant repairs. At the Holt Mine Complex, Q3 production was 34,409 ounces, record quarter for these assets. The average grade was 5.5 grams per ton. Year-to-date, we have 85,037 ounces, average grade of 5.2 grams per ton. And cost per ton was CAD111 per ton in the quarter, CAD141 per ton year-to-date. As you can see, we have some significant improvements in operating costs here at Holts also during the quarter, not the whole complex. Turning to slide eight. The Holt and Taylor mine produced 14,950 ounces in the quarter and average grade of 4.8 grams per ton and year-to-date production at 37,473 at an average grade of 4.5. Holloway produced just over 7,800 ounces in the quarter, grades strong at 5.1 grams per ton compared to what we are planning and you see year-to-date production is over 16,800 ounces at an average grades of 4.7 grams per ton. Taylor has been a very solid performance and has given us some exceptionally good results. In Q3, production was 11,600 ounces, grades was 7.1 grams per ton. It would have been 7.3 grams per ton, we processed a little bit low grade material. But I think we have had significant operating performance at Taylor. It's one of our lowest-cost producers with operating cost of CAD432 an ounce and all-in sustaining costs of $670 an ounce. Our goal across all of our operations is ensure that we get maximum values for the shareholders. We are looking to swap the assets and produce at the lowest cost possible and get the best margin possible for the shareholders. And I guess getting into it, we look at our operating results in Q3 and leading into Q4, we feel very confident we will meet our production guidance for the year. We did give some, a little bit of guidance towards that. And the company remains focused and committed to ending the year with another solid quarter of production and we like to think we are going to continue to demonstrate lower unit costs. So with, I will pass it on to Perry to give a little summary on the financials. Thanks.

[Perry Ing:]

Thanks Tony. I will go through a brief summary of our key financial metrics for the third quarter and the nine-months of 2016. If you look at slide 10, on of CAD132 million, our production expenses totaled CAD76 million. That CAD76 million is broken out as CAD54 million in operating costs between CAD62 million in operating costs, CAD16 million in amortization and depletion , the remaining CAD6 million in royalties. In terms of our operating cost basis, statement the CAD54 million translates into CAD175 per ton and an operating cost of $540 per ounce sold or CAD704 an ounce sold. These operating cost improvements totaled 12% percent compared to Q2 of sub-year last year which was $613 an ounce or CAD807 an ounce. On an all in sustaining cost basis for the quarter, we came in at $970 or CAD1,266. The all-in sustaining cost during the quarter was impacted by significantly higher spend on capital in the quarter, mainly attributable to delivery of new equipment. Of the CAD33 million in capital expenditures, approximately CAD14 million was spent on new equipment with remainder being deferred development at our mines. We continue to invest significantly in our operations. At Macassa, we continue expand our battery fleet and at the Holt Mine Complex we continue to replace older equipments with new modern equipment. As such, we would expect to spend a similar or possible higher amount in Q4 depending on the timing of equipment deliveries late in the year. In terms of profitability, our gross profit was significantly higher than the previous quarter at CAD56 million, compared to CAD36 million in the second quarter of 2015, which is due to higher average realized gold prices and decreased production expenses. In terms of G&A, expenses remained consistent compared to the previous quarter at CAD6.2 million and with additional expenses relating to the proposed Newmarket transaction. We expect similar levels of spending in the fourth quarter. Exploration expenses increased to CAD6 million from CAD4 million in the previous quarter as we have continued to ramp up our exploration program which Doug Cater will update you on shortly. And as well, early in the third quarter we completed the flow-through financing for proceeds of CAD15 million, of which we have already begun to a significant portion. CAD3.5 million was spent as flow-through exploration spend during the third quarter. Finance expense, net of finance incomes, totaled CAD2.7 million in the third quarter which was a slight decrease from CAD3.1 million in the second quarter of 2015. Although we are not currently paying significant cash taxes, our effective tax rate for financial reporting purposes for the quarter and year-to-date is at 37%, a slight increase from our 2015 rate of 36%. The increase is due to higher levels of non-deductible cost for Ontario mining tax purposes, particularly the royalty cost at the Holt Mine Complex which is proportionally higher than at the Macassa Mine. At current gold prices, we would continue to expect an effective tax rate in the mid-30% range for the foreseeable future. We realized net income of CAD24.8 million or earnings per share CAD0.21 per share. In terms of free cash flow, after capital expenditures, we generated just over CAD30 million in the quarter and as Tony mentioned, we reported cash in gold bullion or trade receivables of CAD222.9 million at the end of the quarter, which is a significant increase compared to the prior quarter. And as also noted by Tony, today we executed the $30.5 million buyback of the Franco royalty which reduces our royalty rate from 2.5% to 1.5% Obviously, we believe strongly in the future potential of the exploration effort within the Kirkland Lake Camp and reducing the royalty burden by 40% is a significant opportunity for the company. I will now pass the call over to Doug Cater to talk about our exploration.

[Doug Cater:]

Thanks Perry. Exploration drilling increased during the quarter with a total of 14 drills operating. A total of 47,000 meters were drilled during the quarter and approximately 89,000 meters have been drilled year-to-date. At Macassa, four surface rigs for testing the easterly strike extension of the SMC as well as the '04 and main breaks. Moving to the East. Two drills are currently exploring the mineralized corridor on the former Lake Shore mine property. Underground drilling at Macassa continues to target the SMC mineralization to the East on the 5300 level with two rigs. On slide 16, in plan view, you can see our planned exploration drift to continue to test the SMC further to the East. We expect to provide an update on this within the coming weeks. We also have one underground drill targeting the mineral potential associated with the '04 break above the 3000 elevation. At our properties along the Porcupine-Destor Fault Zone, including the operations, drilling continues to focus on the Holloway property targeting mineralized zone to the North and West of the main mineralized trend. At Taylor, two drilling continues using two surface rigs to explore for mineralized extensions associated with the West Porphyry Zone. Air-borne magnetics or electromagnetic survey was recently flown over many of our claim blocks located along the Porcupine-Destor Fault Zone with the survey results being incorporated into our targeting exercises. This type of survey has the capability to peer down to a depth of approximately 400 meters below surface. In summary, all our exploration programs are advancing well with results to be released shortly. I will now hand the call back over to Tony.

[Tony Makuch:]

Okay. Thanks Doug. And maybe before I continue on and close off the Q&A session, I will go to number 20 now. I believe the slide number 20 gives you a little highlight on the business combination which we announced with Newmarket. And I am going to say that the Board of Directors of both companies and management teams of both companies are very strong and I know Dave and myself here strongly believe in this business combination and the value it will create for all shareholders. Both sets of shareholders will continue to benefit from the upside in the Newmarket assets and Kirkland Lake assets, whether on either side. And really what it is, is the Kirkland Lake shareholders will get 57% of the Newmarket assets and the Newmarket shareholders will get 42% if the Kirkland Lake assets. What it does is really creates, as I said, a new mid-tier gold producer, plus 0.5 million ounces a year gold production with the potential for significant organic growth within that, cash cost below $650 an ounce, all-in sustaining cost for gold $1,015 an ounce, three core assets that will produce over 300,000 ounces at cash cost well below $600 an ounce and all-in sustaining cost below $800 and ounce. So really a good solid profitable company with significant free cash flow and annually of over $200 million and they will start off with a strong balance sheet in excess of $275 million. So well set up and well-financed to move forward and fund itself which on the other side and I talked a little bit of organic growth which we have district scale land positions in two leading jurisdictions with lots of exploration upside at Fosterville and I would say the Northern Territory installed in Australia and within the Abitibi greenstone belt where we are in Kirkland Lake, both in the Kirkland Lake Break and the Kirkland Lake Camp and along the Porcupine-Destor Fault Zone along Holt-McDermott or what we call the whole complex. So we feel pretty excited about what this new company is going to be or what Kirkland Lake us going to become. Turning the slide, the next slide is slide 22, as such leading up to our shareholders meeting. We filed a Joint Information Circular and Form of Proxy on Monday of this week. Our meeting date is set for November 25 at 10

[Eric Sprott:]

Hi Tony. Thank you. I really just wanted to be here to express the gratitude of the Board to the current management team. As you all know, we had to make some material management changes during the year. I can tell you that based on how things are progressing, we couldn't be more pleased with the outcome. We have also been incredibly pleased, of course, with St. Andrews acquisition, which occurred earlier in the year and the integration of the various personnel from those companies. And I am quite frankly looking forward to working a lot g with Tony in terms of what we can do in the future. I still think there is lots of opportunities out there and I really appreciate Tony's style and definitiveness and I think he is going to take our companies quite a ways. I just wanted to thank him and we all appreciate to the great things that you have accomplished in a very short time.

[Suzette Ramcharan:]

Thanks Eric. I will now pass the call back to the operator. We will be opening up the lines for Q&A.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Craig Johnston with Scotiabank. Your line is now open.

[Craig Johnston:]

Hi guys. Thanks for taking my call. I had a whole list of questions, but I will pick the most important. On unit costs at Macassa, on previous site visits I have been on we had spoken more to the range of CAD$375 a ton all-in on the operating side. It looks like the score was more in the CAD300 range. I know that has some low-grade material to it. But Tony, just wondering if you could give us some color on where you see costs at Macassa going, say, in the 2017?

[Tony Makuch:]

Well, I think we have got to move things little bit at a time. I look at Macassa and recognize it's one of the highest grade underground gold mines in the world and definitely it's one of the deeper underground gold mines in the world. So we know we recognize that but it's also one of the highest costs underground gold mines in the world. We have got to make maybe a lot of incremental improvements and I think the biggest opportunity we have there is the people. We have really good workforce. And so if we can have a good motivated workforce, give them a lot of time at the phase and give them good equipment, that helps them to be productive and improve methods in training. I think we are going to see some marked improvements in costs year-over-year. And if you benchmark the mine against other mines, in different depths, you can see that our cost per ton is high. Maybe I am trying to go around a little bit to say, I don't want to give a full number where it is, but I would say I think we can make anywhere from to 10% to 35%, maybe even higher than improvements in unit operating costs over the next few years, just by doing things a little bit better or a little bit different as we go.

[Craig Johnston:]

Okay. Thanks Tony. And maybe my follow-up question to that would be, talking about how it's deepest or one of the deepest underground gold mines and how grade gets better at depth. Just wondering, if you could speak to grade reconciliation so far this year? How that's looking relative to plan and if the reserve grade as you get lower, you are still confident in those grades?

[Tony Makuch:]

Actually, we run monthly meetings there now and actually we are just having a discussion with our chief geologist at Macassa last week, [indiscernible], exactly those types of questions. Are we seeing this as we are going deeper? More or less, yes. Do we have excess dilutions or anything in the mine? I would say, dilution is not a problem for us. It's sequencing and getting down there and getting deeper. I will say this also thought, if you look at, when you are talking about CAD375 a ton unit costs, even that CAD300 a ton, our cutoff grade is fairly high, above eight grams per ton, eight to 10 grams per ton. So the opportunity we have, both, we have two opportunities at Macassa. One is, to get down deeper and get into the higher grade material. Two, is to reduce or operating cost and even reduce our cutoff grade so that we can open up more of this asset at more margin to what we can in terms of produce. We have significant mill and mine capacity and we have got significant people capacity there and equipment capacity in the mine and we are going to take advantage of that. But in the first part, the grade reconciliations have been very good and the grade at depth, it seems to be holding up very well.

[Craig Johnston:]

Okay. Great. Thanks Tony. That's it for me.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Gregory Toney [ph], a private investor. Your line is now open.

[Unidentified Analyst:]

Hello everyone. I have been around the company since Harry Dobson founded it and we have seen it through all the great times and the tough times and now we have moved back to something more realistic. But I am wondering about this Newmarket thing and I am wondering whether you can explain to me what cost synergies will be even if you can dream of any with that sort of a business combination dealing with the remoteness of their assets as compared to those that we own already?

[Tony Makuch:]

I won't get into too much of that. I think that's something for a different call, but I will give you some general sense. You know people talk about synergies all the time. And you look what the synergy is between Kirkland Lake and St. Andrew's, I think we have got a lot of market synergies that are there with this. There is a lot of things that they do in Australia that I think can be really we can bring back here and it is going to be a lot better for us at Macassa and I think how they utilize equipment, how they run ramps, there's lot of operating improvements that we are going to see and I think I can attribute. But the biggest part of this is, we are becoming a larger company, financially very strong, with significant organic growth built in, a whole different type of a company and not having to make business decisions just related to those small movements in the gold price et cetera. So all the synergies come from a lot of areas and just saying we are going to save $1 a ton because we are going to buy five less pounds of grinding media or something like that. I think this is a lot bigger than that and I think there is lot of upside in terms of what we are going to do from that perspective.

[Unidentified Analyst:]

Well, I am afraid, I really don't understand that unless you can start saving substantially with the combination on labor costs, both in Australia and in Canadian operation and I have not, in any of your materials, seen anything that demonstrates that there are any such cost synergies coming.

[Tony Makuch:]

Again, we never reference anything to direct cost synergies as a whole. By this, I mean there's head office synergies and there's something that's similar to what happened with the Kirkland Lake and St. Andrew's. I guess the main synergies and the main thing here is growing up the ladder, building a mid-tier gold producer. You got profitable, going concern operations in Australia that met the same criteria as we have been in Canada in Kirkland Lake, all-in sustaining cost below $1,000 an ounce, cash cost below $650 an ounce, cash flow generation. These are good businesses and it is built upon that and as we grow, it gives us the opportunity. I will say this, the cost of capital is going to be lot more for the company if we need to take on any further financings. But we are going to generate so much cash here in this company, we will be well positioned.

[Unidentified Analyst:]

Well, I am still not convinced that this is a good idea for Kirkland Lake Gold. And I doubt that it has my support when comes down to voting time, guys.

[Tony Makuch:]

We will be happy to talk to more give you more and give you more detail and more color on this at any time at your convenience. I am happy to come to see you wherever you are.

[Operator:]

And there are no further questions in queue at this time. I will turn the call back over to Suzette Ramcharan for closing comments.

[Suzette Ramcharan:]

Thanks everyone. And again, just to reiterate what Tony said, if there is any additional questions, we are running out of time, but please feel free to contact us at the office. Thanks.

[Operator:]

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