Kirkland Lake Gold Ltd.
Q1 2015 Earnings Call Transcript

Published: 9 Sep 2014

[Operator:]

Good morning ladies and gentlemen and welcome to the Kirkland Lake Gold Q1 2015 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, Tuesday September 9, 2014, at 10 AM Eastern Time. I’d now like to turn the meeting over to George Ogilvie, Chief Executive Officer. Please go ahead.

[George Ogilvie:]

Thank you, operator, and good morning, everyone. We are pleased to have joined us today for the Kirkland Lake Gold first quarter 2015 results conference call. On the line today, in addition to myself is John Thomson, Chief Financial Officer, and John and I’ll both be available during the Q&A period at the end of this call. At the end of the presentation, the operator will provide instructions for those who wish to ask questions. Before we begin, I’ll 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’re cautioned that the actual results and future events could differ materially from the respective conclusions, forecasts or projections. We refer you to the section entitled, Risk Factors and the Company’s latest Management Discussion and Analysis and other filings available on SEDAR, which set out the material factors that would cause results to differ. Please also note that all the figures disclosed during this call are in Canadian dollars unless otherwise noticed. The first quarter of fiscal 2015 has been a continuation of the good progress which we reported during our Q4 and year-end conference call. I’m pleased to report that we sold 58,543 ounces of gold at an average price of $1,401 during the quarter, a 25% increase over the ounces sold in Q4 of fiscal 2014 and a record production quarter for the Company. Cash operating costs marginally declined to $340 short ton and cash operating costs per ounce fell 21% compared to Q4 of fiscal 2014 to $788 per ounce produced. Pleasingly with the head grades of 0.47 ounce per ton or 16.1 grams per ton and 0.51 ounce per ton which is 17.5 grams per ton. In June and July, we saw cash costs in those months fall to $720 and $614 per ounce, highlighting the benefits of mining at reserve grade. All-in cash costs were $1,250 an ounce, a 25% reduction over the prior quarter. Again, with mining at reserve grade in June and July, the all-in cash costs for those months respectively to drop to $1,132 and $1,008 per ounce. Certainly having an all-in cash costs diluted price of gold sold for the quarter is encouraging and another step in the right direction for the Company. It is however early in our turnaround and we do expect volatility over the next one to two quarters. A total of 40,528 ounces were recovered from 93,888 short tons at a head grade of 45.45 ounces per ton. This was a 27% increase in grade reported in Q4 and a significant factor contributing to that success was the new mining horizon on the new 5,400 level in the higher grade SMC were a first workplace of 5,417 came into production during the quarter. Offsetting the higher grade to a small degree as the tons per day which averaged 1,020 short tons per day for the quarter, some 10% below our current targets. However, we expect the tons to increase as more working [ph] [phases] become available coupled with the productivity improvements from our newly purchased and commissioned single boom electric/hydraulic jumbos. As mentioned previously, that new 5,400 level provides a third mining horizon in the SMC for the Company and we expect to mine five working places on this level during fiscal 2015 with the reserve grade is 0.7 of ounce per ton, or some 19.5 grams per ton. During the quarter, 71% of the tons and 74% of the ounces were generated from the SMC compared to 60% of the tons and 66% of the ounces in Q4 fiscal 2014. The percentage of total ore tons and grades are expected to continue to fluctuate depending on the availability of SMC headings and the mining sequence. The number of tons mined from the SMC is expected to average approximately 66% of the total tons during fiscal 2015. While we continue to work on reducing variability and production, and its for that reason that in our MD&A we report grades in Q2 may fall back in line with guidance to around 0.37 ounces per ton as the proportion of tons coming from the SMC falls back to around 60% of the total. This is primarily a consequence of the sequencing of workplaces within the overall production cycle. However, our plan envisages that at the end of the second quarter and the first half of fiscal year, we will still be well on track to meet our guidance targets. Operationally, two new electric/hydraulic single boom jumbos were slung underground during the quarter to be used in the SMC. One jumbo is dedicated to the development on 5,400 level and pushing the main decline down to the 5,600 level while the second jumbo will be dedicated to an SMC ore complex, i.e. an area where 78 ore headings are available within the 5,300 level, which will allow the jumbo’s high productivity to be fully utilized. Cash inflows from operations were nearly $17 million and free cash flow for the quarter was $5 million. We are pleased to complete a flow-through financing of $7.5 million during the quarter to support our near-surface exploration program. Cash reported at the end of the quarter was $40.2 million, a $1.3 million over year-end and we continue to pay close attention to managing our operating margins and costs. During the quarter, the Company also paid $3.3 million in promissory notes to its corporate bank which was a further draw on the cash balance, yet we sold the overall cash balance increase. In summary, we’re pleased we’ve made a positive start to the fiscal year and are maintaining our full-year guidance at between 140,000 to 155,000 ounces, whilst daily tonnages continued to be a challenge, grades further cost optimization, the good team work, improving employee morale and communications enable us to remain confident of meeting our production cost and cash flow metrics for the full fiscal year. For those of you attending the Denver Gold Conference later this week and early next week, I look forward to meeting you there. John and I’ll also be doing our best to see major institutions in North America and Europe, following these results and ahead of our AGM which is to be held at 4 PM local time on Wednesday, October 22nd at the offices of Stikeman Elliott at 5300, Commerce Court West, 199 Bay Street, Toronto. And at this time, I’d like to open up the call for questions for John or myself. Thank you.

[Operator:]

(Operator Instructions) Your first question is from Tom (indiscernible). Please go ahead.

[Unidentified Analyst:]

Good morning and congratulations on the good results for the quarter. You mentioned in the discussion that you would probably go back to an average grade of 0.37 ounces -- 0.45, pardon me, how much do you anticipate that will raise your cash operating costs per ounce produced? I realize there has been some pick up in efficiency, but obviously some of the recent reduction was moving to a higher -- from moving to a higher head grade. I’m just trying to sort out the two factors.

[George Ogilvie:]

Yes, good morning Tom. It’s a good question. I mean, obviously we’re still looking for efficiency gains and cost cuttings at site. I think if we go back to a head grade of in and around 0.37 ounce per ton, we’d be expecting to see an all-in cash cost of between $1,550 and maybe $1,400 an ounce Canadian. It is, however, important to realize that we have forward sold some of our gold in Q2 as we said here this morning, we’ve got just over 10,000 ounces sold out through the end of September at an average price of $1,419 an ounce Canadian. So we have protected ourselves a little -- for a little bit on the downside over the next month.

[Unidentified Analyst:]

Okay. Thank you.

[George Ogilvie:]

Thank you, Tom.

[Operator:]

(Operator Instructions) Your next question is from John McClintock with Pareto Securities. Please go ahead.

[John McClintock:]

Hi, George. I guess my question is focused particularly on -- through your guidance, with great -- you maybe sort of talked, but a little bit before early on the call, but do you see that 0.37 grade changing in 2016, 2017 as you better access to the 5,500, 5,600 levels?

[George Ogilvie:]

Yes, good morning John. Yes, absolutely. I mean, when we put those guidance grades in for fiscal 2015, ’16 and ’17, which were put on 0.37 ounce per ton, 0.39 and 0.41 ounce per ton respectively. Those numbers were based on historical years where we had actually achieved those head grades. Therefore we felt that those head grades could be achieved going forward. Now with the end of Q1, our head grade after three months is 0.45 ounce per ton and is bang on in line with the reserve grade. Theoretically next year if we were to mine at the reserve grade, we should see a grade of 0.46 ounce per ton and in fiscal 2017 that would be 0.48 ounce per ton. What will happen as at the end of this fiscal year with myself then having some 18 months of operating experience with the Company, when we come to update our three year plan and rule it forward one year, obviously if we go in a full fiscal year with the grade has been in excess of let’s say 0.4 ounce per ton. I think we can then look to confidently bump up the grades that we’ve given guidance on for fiscal 2016 and ’17 above those numbers that we put out into the market currently, because we will then obviously have some 15 to 18 months of operating experience, knowing then what we can achieve.

[John McClintock:]

Okay. So as you get under lets say 5,600 level, some of those pretty high grade George, that you think that you would see a 0.5 ounce, 0.6 ounce of grade level?

[George Ogilvie:]

John, its too early to say that at this present point in time. Yes, we know from 5,600 level up to 54, the reserve grade is 0.7 ounce per ton. What the overall reserve grade becomes is really not just the function of the reserve grade there, but how many tons and how many stopes we have in operation at that point in time, I’d say that we want to get our diamond drills set up on the 5,600 level to be able to drill below 5,600 level where we’ve no reserves, but we have 700,000 ounces of measures [ph] [indicated] which is actually running at 0.91 ounce per ton. So I think with diamond drills down there, we probably wouldn’t want to get too aggressive on moving a lot of tonnage from the very bottom of the mine while we do the delineation drilling below. But the good news as that the fact says 5,600 level, we will have four mining horizons in the SMC complex with an average grade in the range of about 0.55 ounce per ton and the flexibility to pick and choose the stokes we wish to mine, so that we can see more consistency and a constant in the grade.

[John McClintock:]

Right. So it -- like it does, you’re not giving guidance on at your point into more flexibility and in what higher grades still varies, so its almost -- as along as those tons stay at the same, that guidance of 160,000, 180,000 ounces is probably going to change?

[George Ogilvie:]

Potentially John, yes, but I’d like to set here next year with as I said, 12 months behind me of what we’ve actually achieved and of course if we achieved a much higher head grade this year than the guidance we’ve given for this year, then we can more confidently look to bump up those guided grades for the ensuing two to three years.

[John McClintock:]

Okay. Thanks. That’s all my questions.

[George Ogilvie:]

Yep. Thank you, John.

[Operator:]

Your next question comes from Derek Macpherson with M Partners. Please go ahead.

[Derek Macpherson:]

Good morning, George. How are you doing?

[George Ogilvie:]

Yes, I’m well. Thank you, Derek.

[Derek Macpherson:]

Just a quick question on the CapEx guidance for fiscal ’15. Obviously, CapEx came in a little bit lower than sort of what the $58 million run rate would be. Do we still be expecting the full $58 million to be spend in this quarter or in this year and is there a particular quarter we expect that to be a little bit more loaded than the others?

[George Ogilvie:]

Yes, Derek, we just broke out the $58 million evenly between all four quarters. But obviously, now with the two jumbos arriving in on site during the second quarter we’re already starting to see the productivity rates pick up and the main capital development down to the 5,600 level. So although the CapEx for the first quarter was only some $12 million, which extrapolate, maybe some $48 million to $50 million for the full-year, I think we’re going to see an acceleration in the CapEx as we go forward and therefore I think the $58 million number that we gave at this point in time is still accurate. However, we do continue to access all operating and capital costs this year and if we believe that we can defer our costs and its not going to immediately impact the business, then obviously we will look to save monies in this transitional year.

[Derek Macpherson:]

All right. Thanks, George. That was the only question I had.

[George Ogilvie:]

Thank you, Derek.

[Operator:]

(Operator Instructions) Your next question comes from Bob (indiscernible). Please go ahead.

[Unidentified Analyst:]

Could you just give us an indication of your balance sheet and the direction of your going in there? You have debt out there that has fairly high interest rate on it that could potentially be purchased at a discount?

[George Ogilvie:]

Good morning, Bob. Yes, obviously we have two tranches of convertibles on the balance sheet which gives us a total of $120 million. The yield on those two tranches is some 6% and 7.5%, which today I’d actually consider to be quite inexpensive. The good news for the Company is that those convertibles only have to be dealt with in the second half of calendar 2017, which is some three years away. I believe between now and then we’re going to see a major turnaround in the Company and we can generate significant cash flows from this operation. And that if we’re successful in executing our plan, we can buy out those convertibles at the appropriate point in time. What’s also pleasing for me to see as that some three months ago, those converts were trading at some $0.70 on the dollar and as of last week they had moved up to $0.91 and $0.90 respectively. So they’re starting to come back to par now which is very pleasing to see and I think it’s a good indictor that the Company is really starting to turn the corner.

[Unidentified Analyst:]

Right.

[George Ogilvie:]

Thank you, Bob.

[Operator:]

Your next question is from Kent Neale with Dundee Capital Markets. Please go ahead.

[Kent Neale:]

Good morning, guys. Congratulations on the quarter. I know its still early days, are the two new jumbos living up to your expectation so far?

[George Ogilvie:]

Kent, the first one that came in on site, in July, once it was slung underground and it went through its commissioning and we train the operators on it, that was assigned exclusively to the 5,400 level where we still have to complete the capital development on that level, although we have one stope in production there and a second one due to come into production in October, and it was also assigned to the main decline where we’re now pushing the ramp down below 5,600 level. Prior to the jumbo coming in, at best we were seeing some five feet per day advancement down in that area. Now, we’re seeing an advancement of in the range of eight feet per day after only one month. So it’s a 60% improvement. We are not changing our schedules internally at the moment as to when we anticipate to be down on the 5,600 level, but obviously with further improvements there, the sooner we can get to the 5,600 level as John McClintock at Pareto has already indicated, the sooner that will give us access to 0.7 ounce per ton material and also allow us to drill off [ph] [indicate] and measured material which is setting at 0.91 ounce per ton. The second unit is in the 5,300 level complex, but there is still work to be done there such as electrical work and there is a couple of stopes which are currently being (indiscernible) before that jumbo can actually go into production and be used to increase productivity in the ore headings there. But I would anticipate that would happen before the end of the second quarter which then sets up nicely for hedging the ground running for 3Q which is the point in time we’ve given guidance to the market when the tons per day should start to rise.

[Kent Neale:]

Okay, perfect. And with that significant increase in productivity, is there room to continue adding these machines over time or is it sort of to the most you have room for in your operations?

[George Ogilvie:]

No. We got the potential to add more. However, we brought these two drills in at a cost of about $1.8 million to the Company, of which we’ve taken now over a full-year capital lease with very low interest rates. But that’s a little bit of an experimentation, but of course as the drills do prove to be successful over the course of the next six to nine months, then there are certainly opportunity in certain areas of the mine for adding these type of drills to other areas.

[Kent Neale:]

Okay, perfect. And then just changing gears a little bit, could you sort of give a little bit more color, like I know you mentioned the five stopes in the 5,400 level by fiscal 2015. Is there any indication you can provide as sort of the total throughput you expect from stopes just in terms of the size of those stopes?

[George Ogilvie:]

Good question. I don’t know the answer to the total throughput for the entire year, but the first stope that we -- that have in production, the 5,417 it reconcile very nicely with the reserve and actual fact the grade, the reconciled grade from that stope was 0.63 ounce per ton and I believe that was part of the reason why we saw the grades improve significantly in June and July to 0.47 and 0.51. I think overall there were some 4,000 or 5,000 tons which came out of that stope. We actually were pleasantly surprised because when we hit the end of the strike according to the reserve we were still in ore and there would have few off [ph] [SUDs] that we encountered as we went -- as we took out the (indiscernible). So we actually ended up getting some additional tons out of that stope which boosted the ounces which is a nice surprise for us because sometimes it doesn’t always go in our favor that way.

[Kent Neale:]

It sounds good. That’s it for me. Thanks very much.

[George Ogilvie:]

Thank you, Kent.

[Operator:]

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

[George Ogilvie:]

Yes, thank you operator. Well, thank you ladies and gentlemen for coming in on the call and listening to our Q1 results, and asking some important questions. Obviously, we’re very pleased with the turnaround in the Company. We do recognize however that as very early and one quarter does not make our Company, but we’re confident that we’re absolutely on the right track. We have the right business plan for this gold price environment and given time we can produce more consistent results and better results than what we’ve seen in Q1. Thank you all so much for your time today. I really appreciate it. Thank you.

[Operator:]

Thank you for joining. This concludes today’s conference call. You may now disconnect.