Kirkland Lake Gold Ltd.
Q2 2015 Earnings Call Transcript

Published: 14 Dec 2015

[Operator:]

Good morning, ladies and gentlemen and welcome to the Kirkland Lake Gold Earnings Call for the Second Quarter of the Stub Year for 2015. At this time, all lines are in listen-only mode. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. Please note that this call is being recorded today, Monday, December 14, 2015 at 11

[Suzette Ramcharan:]

Thank you, operator. And thank you to all participants 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 for Kirkland Lake Gold, Inc. We refer you to our detailed cautionary note regarding forward-looking statements in our press release issued today, 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 the 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 sold, cash operating cost per ton produced and per ounce – sorry, cash operating cost per ton produced and per ounce produced, all in cash cost per ounce produced and all in sustaining costs per ounce sold. 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 today, as well as Appendix B of the MD&A dated October 31, 2015. 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 remainder to all, the Stub year for 2015 consists of an eight months period commencing May 1, 2015 and ending on December 31, 2015. Our second quarter results being discussed this morning are for the three and six month’s period ending October 31, 2015. On the call with us this morning, we have George Ogilvie, President and CEO.

[George Ogilvie:]

Good morning, this is George Ogilvie.

[Suzette Ramcharan:]

Perry Ing, Chief Financial Officer.

[Perry Ing:]

Good morning, this is Perry Ing.

[Suzette Ramcharan:]

Chris Stewart, Vice President of Operations.

[Chris Stewart:]

Good morning, everyone, this is Chris Stewart.

[Suzette Ramcharan:]

And Jennifer Wagner, Corporate Legal Council.

[Jennifer Wagner:]

Hello everyone, this is Jen Wagner.

[Suzette Ramcharan:]

I'll now pass the call over to George to summarize the highlights for the quarter.

[George Ogilvie:]

Thank you, Suzette. And good morning, everyone and thanks for taking the time to join us today. Before I begin, please note that all dollar figures disclosed during this call are in Canadian Dollars unless otherwise noted. As Suzette mentioned, the Stub year is shortened eight month period, with two quarters now behind us we have two months left in the year November and December. I am pleased to see that we had another consecutive of profitability and free cash flow generation, despite production levels being below our more recent standards. We produced 33,511 ounces of gold in the second quarter at an average head grade of 0.4 ounce per ton or 13.7 grams per metric ton. Year-to-date we have produced 74,993 ounces and achieved an average head grade of 0.43 ounce per ton or 14.7% grams per metric ton in line with our guidance. While production was lower than anticipated this quarter, we anticipate that we will achieve the mid-range of our production guidance for the Stub year of between 90 to 110,000 ounces. Chris, will go into more detail on the operations shortly. Our operating costs on a per ton basis was slightly lower than what we achieved in the previous quarter, down some 4% and in line on a year-to-date basis over fiscal 2015. On a cost per ounce basis for the quarter our costs increased by 8% to $856 per ounce or US$650 per ounce compared to the previous quarter, mainly due to the lower production ounces. Our all-in cash cost per ounce produced increased by 21% over the previous quarter to CAD$1,490 per ounce or US$1,132. Our all-in sustaining costs per ounce sold during the quarter of CAD$1,266 per ounce or US$962 per ounce increased slightly over the previous quarter. On a year-to-date basis our cost are in line or compare favorably over the previous year, and we remain in the mid to low end range of our cost guidance. We generated $7.9 million in free cash flow during the quarter, up from the $4 million generated in the prior quarter. Our cash balance as of the 31st October, 2015 was $83.4 million. As Perry will discuss in greater detail, we were also able to move $7.9 million out of restricted cash bringing our cash balance as of November 13 to $88.5 million. Our focus remains on continuing to improve and optimize our operations at the Macassa Mine complex and with several initiatives being implemented in 2016 that could be beneficial for future years. I'll now turn the call over to Chris Stewart, our VP of Operations to discuss the operating results in more detail.

[Chris Stewart:]

Thank you, George. I'll go through some of the numbers first and then discuss some of the challenges faced during Q2. During the second quarter we processed 85,869 tons of ore at an average head grade of 0.4 ounce per ton or 13.7 grams per metric ton and sold 34,606 ounces of gold. Cash operating cost per ton of $334 saw a slight decrease over the previous quarter of $348 per ton. On a year-to-date basis, our cost per ton was $341. Our cash operating cost per ounce increased to $856 per ounce, which is an 8% increase over the previous quarter, and slightly lower than our – than that achieved in the second quarter of fiscal 2015. However, as George stated, we are pleased to see our cost per ton improving. Our tons per day during the quarter averaged 933 tons per day; the lower throughput in grade resulted in lower production during the quarter impacted by the following

[Perry Ing:]

Thanks Chris. I'll go through some of our key financial metrics for the quarter and year-to-date. From a revenue standpoint we generated second quarter revenue of $50.6 million based on gold sales of 34,600 ounces at an average realized price of 1,461 per ounce. In US dollars this is equivalent of 1,107 an ounce, which slightly ahead of the average London pm fix of 1,101 an ounce for the period. On a year to date basis our revenues are $112.3 million, which puts us on track to meet our guidance for the year. During the second quarter our all in cash cost per ounce produced was 1,490 an ounce or US$1,132 and on all in sustaining cost basis was 1,266 an ounce or US$962 ounce. Year-to-date our all in cash cost was CAD$1,325 and all in sustaining cost was 1,226, both are on the lower end of our guidance for the year. In terms of profitability, our pretax income was $6.3 million in the quarter, and $11.7 million year-to-date. Net and comprehensive income was $2.1 million or $0.03 a share and year-to-date was $6.3 million or $0.08 a share. Our effective tax rate during the quarter was higher than normal as disclosed in Note 19 of our financial statement due to results of an Ontario Mining Tax audit assessment received during the quarter for prior tax years. This had an impact of $2.6 million to our tax provision, but did not result in additional cash taxes being paid or payable. Cash flow from operations was $20.3 million for the quarter and $35.2 million year-to-date. This puts us on track to meet our guidance for the Stub year. We generated free cash flow of $7.9 million and $11.9 million year-to-date. The free cash flow was positively affected by the deferral of PP&E into 2016, as a result of the delayed delivery of new equipment caused by the manufacturer as Chris Stewart had previously noted. The [Audio Break] guidance for Stub year 2015 on CapEx and free cash flow. Our cash balance at October 31, was $83.4 million and as George previously mentioned subsequent to the end of the quarter we moved an additional $7.9 million out of restricted cash and after some accounts payable items we were left with $88.5 million as of November 13, 2015. I'll now hand it back over to George for closing remarks.

[George Ogilvie:]

Thanks, Perry. I believe the company has certainly come a long way in the past two years. However, importantly I see our journey just beginning with a lot more potential upside [Audio break] mine and when I consider the organic growth potential within the Kirkland Lake Camp. There have been a lot of changes made in order to improve our business. Our team is committed to continuously looking for ways to improve, innovate as we move ahead. We strongly believe we are heading in the right direction. Our 2Q performance however is a reminder that mining is inherently risky and there can be setbacks. Our team at site have worked hard to overcome these setbacks and will achieve our guidance metrics for the year. Many of you heard me say this before, but as CEO I am constantly looking for ways to manage and mitigate risk within the business from a safety standpoint, production, technical and financial perspective. Our new bonus system was implemented at the beginning of 2Q as one step towards achieving risk mitigation, ensuring employment longevity for employees, and rewarding them more for performance, as well the proposed acquisition of St. Andrew is one that helps de-risk the operation at the Macassa Mine complex and provides tremendous upside for both sets of shareholders. We believe that with the Macassa Mine complex as the cornerstone asset we will be able to build a stable and profitable intermediate gold producer with multiple assets in a safe jurisdiction, while the exploration potential in both camps is unprecedented and abundant. The shareholder meetings for both companies is set for January the 19, and thorough detail will be available on the Kirkland Lake website shortly. Management recommends that the shareholders vote in favor of the transaction. Meeting materials will be mailed out within the next week which will detail the transaction and voting instructions. Should anyone have any questions or require further information, please don’t hesitate to contact myself or us at head office. I will now turn the call back to Suzette.

[Suzette Ramcharan:]

Thanks, George. We will now open the lines up for Q&A session and I'll kindly ask the operator to please review the procedures.

[Operator:]

Certainly. [Operator Instructions] And our first question is from Andrew Mikitchook with M Partners. Your line is open.

[Andrew Mikitchook:]

Good morning and congratulations on another cash flow positive quarter. Just on these adjustments to full year or Stub year sorry, CapEx expenditures, should we be taking that entire reduction and just rolling it over into the next period or is it not as clear cut as that?

[George Ogilvie:]

Andrew, its George. No, you're quite correct, last week we completed our fiscal 2016 budgets which was approved by the Board and the deferment of some $8.5 million in property, plant and equipment in Q4 has been rolled over into 2016.

[Andrew Mikitchook:]

Okay. And then you guys gave us quite a bit of detail on I guess the ground, I am not sure if it’s fair to call it ground control events. But just so the events that are underground in the quarter. Is it just part for the course or do you think that this might with time require a different approach to distressing in ground control?

[Chris Stewart:]

Yes. Hi, this is Chris. Just touching on that, the Kirkland Lake Gold mine as we all know is highly seismically active; from time to time depending on the areas that you're mining we do end up with the odd rock-burst immediately after we blast. The issue that we had with this one on 5300 Level was the area that occurred in, we had a main power cable running through the area. So we had to take the extra time to actually shut down drill a new hole and move that cable. Normally we can go in and just rehab and the ground support we used in areas like that is called the dynamic ground support. So it’s designed to absorb impact from seismic event. And that’s another reason we do central blasting as to ensure nobody is underground immediately after blasting to ensure everybody’s safety. But is not - this wasn’t an unusual event other than the location where it occurred had a bunch of infrastructure that we had to move which made it more prominent than in the past.

[Andrew Mikitchook:]

Okay. Well, congratulations on the quarter. And I'll let other people ask questions. Thank you.

[George Ogilvie:]

Thank you.

[Operator:]

[Operator Instructions] And our next question is from Raj Ray with National Bank Financial. Your line is open.

[Raj Ray:]

Thank you and good morning everyone. Just a quick question on the grades during the quarter. What percentage of the grade impact was due to the operational issues? Because I see the SMC tonnage was 79% which is – which was quite higher from previous quarter, but the grade decreased in the SMC to 0.41?

[Chris Stewart:]

Yes, Raj, during that quarter, we're actually mining along the edges of a number of reserve blocks that we had and grade ended up being more spotty than we had anticipated. So we've actually adjusted our mine plan to keep ourselves more into the meat of the deposit, instead of mining the edges. We ended up with I think it was five stopes in total, that we're sort of mining the edge of the reserve block that resulted in the grade dropping off on us in the quarter.

[Raj Ray:]

Okay. Thanks. And can you remind us how many stopes you have in the 5400 Level now?

[George Ogilvie:]

Right now on 54 we have five stopes up and running and then we have two more coming on line little bit later this year.

[Raj Ray:]

Okay.

[George Ogilvie:]

Sorry, coming into the New Year, Q1.

[Raj Ray:]

That’s it from me. Thank you.

[Operator:]

And I am showing no further questions at this time. We'll turn the call back over to our presenters.

[George Ogilvie:]

Thank you, moderator. Well, I'd like to thank everybody once again for joining us on the call this morning. I want to wish everyone a safe and happy holidays. And we look forward to speaking with you in the New Year as we look to close the St. Andrew transaction before the end of January. Thank you and have a good day.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.