Kirkland Lake Gold Ltd.
Q3 2015 Earnings Call Transcript

Published: 11 Mar 2015

[Operator:]

Good morning, ladies and gentlemen and welcome to the Kirkland Lake Gold Earnings Call for the Third Quarter of Fiscal 2015. 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, Wednesday, March 11, 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 10 minutes for question-and-answers. 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 www.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. Please also note that a recording of this call will be available for replay, the details of which are posted on the corporate website. On the call with us this morning, we have George Ogilvie, President and CEO.

[George Ogilvie:]

Good morning. This is George Ogilvie.

[Suzette Ramcharan:]

John Thomson, Executive Vice President and CFO.

[John Thomson:]

Good morning. This is John Thomson.

[Suzette Ramcharan:]

And Chris Stewart, our Vice President of Operations.

[Chris Stewart:]

Hello, everyone. This is Chris Stewart.

[Suzette Ramcharan:]

We will begin our call with a brief overview from Mr. Ogilvie, followed by a summary of our third quarter operational highlights from Mr. Stewart. Mr. Thomson will then discuss the financial performance, after which we will deliver closing remarks and open up the call for questions. I will now pass the call on to George.

[George Ogilvie:]

Thank you, Suzette. Good morning and thank you for joining us today. Before I begin, please note that all dollar figures disclosed during this call are in Canadian Dollars unless otherwise noted. I’m very happy to report that another consecutive quarter of profitability and free cash flow. We’ve now posted three quarters of improving results, while we are confident that future results will continue to improve as we execute our business plan. If we look at Kirkland Lake Gold and how we’re positioned for success in these challenging markets, I believe the picture continues to look better for Kirkland Lake Gold. When we issued our guidance for this fiscal year, we set achievable targets that we felt could be met as we work through our new business plan. After three quarters, I feel we will not only meet, but will also exceed some of these parameters. On production, after three quarters, we have produced 116,600 ounces of gold and are on track to reach the top end of our 155,000 ounce full year guidance. As such, we are narrowing our production guidance to 153,000 ounces to 157,000 ounces for this fiscal year. Our head grade of 0.43 ounces per ton or 14.7 grams per metric ton is some 16% above the guided 0.37 ounces per ton and should improve over time. On tons and throughput, we still remain 10% below our annual targets of 1150 short tons per day. However, January proved to be our best month year to date, with throughput over 1,200 short tons per day, a very encouraging sign. Our all-in cash costs are also showing continuous improvement with year-to-date CAD CAD1,289 per ounce, while the third quarter was CAD1,249, at the bottom end of our stated guidance. At the end of the quarter, the company had CAD44 million cash in the bank, which was then followed by a very successful bought deal offering which raised an additional CAD32.6 million net of fees. The financing was successful, oversubscribed and completed in a very short period of time. I believe that these factors signal that the market understands and agrees with the new business plan. And importantly, that management and the company are winning back their credibility and reputation. If we execute our plan over the next three years, we will be able to generate enough cash flow from operations to sustain our own capital development, buyback the 1% NSR from Franco-Nevada in October 2016, and pay off the convertibles that come due in June and December calendar 2017. Lastly, we appointed Eric Sprott as our new Chairman, which is a huge endorsement for Kirkland Lake and should give you an indication of where we want to take this company in the future. Eric’s appointment will add to an already reinvigorated and strengthened board. I’d also like to take this opportunity to thank Harry Dobson, our retired Chairman and founder of the company. Harry leaves the company at a time where the future is not just secure, but looks increasingly bright. I’ll now turn the call over to Chris Stewart, our VP of Operations, to discuss the operating results.

[Chris Stewart:]

Thank you, George. Good morning. We pre-released our production results for the third quarter of fiscal 2015 with gold sales 39,158 ounces. Year-to-date for fiscal 2015 we have sold a total of 116,600 ounces of gold. This represents a 23% improvement year over year and a 4% improvement over the previous quarter. We saw a slight improvement in cash operating cost per ton over the previous quarter, but remain consistent at $340 per ton year over year. However, our cash operating cost per ounce improved by 14% to CAD766 from CAD889 in the previous quarter. The positive change in our operating cost is driven by improving head grades and cost reduction strategies that we continue to implement and reinforce within our operation. A total of 39,158 ounces were recovered from 91,418 tons at a head grade of 0.44 ounces per ton or 14.7 grams per metric ton in Q3. Compared to the same period in fiscal 2014, we realized a 25% increase in production, boosted by a 34% increase in head grade, the consequence of bringing higher grade stopes from the 5,400 level online. We currently have three stopes in production on the 5,400 level. We expect a fourth stope to come online by the end of fiscal 2015, however, the fifth stope we plan to come online in the end of April has moved into early May. As we have more active stopes available from this level, we expect the head grade will continue to increase in fiscal 2016. Our tons per day averaged 1,030 for the quarter, below our target. However, in the months of January and February, we have seen throughput average approximately 1,200 tons per day. During the quarter, approximately 60% of the tons and 67% of the ounces were generated from the SMC. I would like to take this opportunity to thank all of our employees for their dedication and hard work. They have contributed greatly to this turn around and our success. I will now pass the call over to John Thomson, Executive Vice President and CFO, to deliver our financial results. Thank you.

[John Thomson:]

Thanks, Chris. As George discussed, we’re tracking well on our guidance metrics and have even beaten some of our stated guidance for this fiscal year. As such, we have adjusted some of our guidance metrics for the remainder of fiscal 2015 which I will outline for you. Revenues reported for Q3 were CAD54.5 million and year-to-date CAD162 million. The average price per ounce of gold sold so far for this fiscal year is CAD1,371 or US$1,175. This was slightly lower than achieved in the previous quarter. We are increasing our guidance on expected revenue generation from CAD200 million to between CAD218 million and CAD222 million. Costs, during Q3, all-in cash costs were CAD1,250 an ounce, which is equivalent to US$1,070. On a year-to-date basis, our all-in cash costs were CAD1,290 or $1,144. As you will see, the business was benefited from the devaluation in the Canadian dollar during the quarter. One item of note, we announced in our subsequent events that as a result of a sales tax audit conducted in September 2014, a reassessment was issued to the company by the CRA on February 20. The company subsequently paid out $7.3 million on February 26 and that covers sales tax, penalties and interest. $6.7 million of this sum was in relation to a royalty payment received in October 2013, which the CRA determined was subject to HST. The company filed a notice of objection to this assessment yesterday and intends to recover $6.7 million of the amount paid from the royalty holder. On profitability, pretax income was CAD7.3 million in the quarter or CAD11.7 year to date. Net and comprehensive income was CAD4.2 million or CAD0.06 per share in Q3 and CAD11.9 million CAD0.17 per share on a year to date basis. Regarding the cash flow and outlook, cash flow from operations was CAD23.7 million for the quarter, a 43% improvement over the prior quarter and CAD57 million year to date. This is already at the higher end of our guidance for the full fiscal year and accordingly we are increasing our guidance to CAD70 million to CAD75 million for fiscal 2015. Despite 2% fall in the average price of gold sold, we generated free cash flow for the quarter of CAD11.6 million, a 90% improvement over the prior quarter. Year-to-date cash flow is CAD22.4 million, again above our original full year guidance number of CAD20 million. So we now expect to generate between CAD30 million and CAD35 million of free cash flow in fiscal 2015. Cash and cash equivalents reported at the end of Q3 were CAD44 million and after closing the bought deal on February 18, our cash balance was CAD76.6 million. Together with the anticipated cash generating potential of the company in Q4, this means that the balance sheet risk is reduced substantially. I will now hand you back over to George for the closing remarks.

[George Ogilvie:]

Thank you, John. We are pleased with the progress made to date and are happy to be able to positively adjust some of our guidance metrics. We have full confidence that we will have a solid fourth quarter and will end the year in good form. I’d like to take this opportunity to thank everyone for their commitment over the last year. It’s been a great team effort and the good news is that there is more to come. We expect to release our updated 43-101 reserve and resource at the beginning of April. We will then publish our fourth quarter and full year production results in early May. In addition, we will publish our full year 2016 guidance also in early May. Thank you for taking the time to attend this conference this morning. And I’ll now pass back to the operator to commence the Q&A session.

[Operator:]

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

[Cosmos Chiu:]

I got a few questions here, maybe first off on the mix of ore coming from the SMC versus the Main Break, I think in the MD&A, George, you mentioned that you’re targeting about 75% of that ore coming from the SMC, is that what you’re looking for on a go forward basis?

[George Ogilvie:]

I think the specific numbers are somewhere between 65% and 70% of ore from the SMC, which because has higher grade, Cosmos, is going to give us upwards of 75% of the actual ounces when compared to the ’04 Main Break. But of course, this last quarter was actually extremely pleasing to see where we saw a little bit more ore actually coming from the ‘04 Main Break, yet we’re able to maintain head grades of in and around 0.44 ounce per ton, which is extremely pleasing to see.

[Cosmos Chiu:]

That’s essentially why I asked that question, George, I saw that the contribution from the SMC came down to 59% in Q3 versus 70% in Q2, but as you said, George, the grade increase from 0.41 to 0.44. So how does that work? In the past, we’ve always been told that the more that you get from the SMC, the higher grade it’s going to be. Has that relationship changed or how were you able to get that higher grade in Q3 and how should we look at that on a go forward basis?

[George Ogilvie:]

I don’t believe that relationship has changed, I mean, obviously, as we access more stopes on the 5,400 level at a reserve grade of 0.57 ounce per ton and then over the course of the next 12 months as we steadily get into 5,600 level where the reserve grade is 0.7 ounce per ton, anymore distribution of tons that come out of the SMC, the overall weighted head grade is certainly going to go up well above today’s current levels. I think maybe Chris can jump in here and comment specifically why we saw such strong grades coming out of the ‘04 Main Break in the last quarter, but it’s probably got something to do just where we’re at with respect to the mining sequence and no doubt Chris is putting further emphasis on minimizing external dilution and getting as close as possible to reserve grades in the ‘04 Break. Chris, would you care to comment?

[Chris Stewart:]

Yeah, I would say, you hit the nail on the head, George. With respect to the ’04 Main Break, our focus there has been reducing our dilution in order to achieve the reserve grade and I’d say our team has done has done a fantastic job of doing that and we’re seeing some of those results in the head grade that’s hitting the mill. We did have a few higher grade stopes on the ’04 Main Break as well within the quarter, which certainly helped boost the overall head grade. But going forward, I would say our focus remains on mining [indiscernible] ensuring that we don’t take any dilution where we don’t have to.

[Cosmos Chiu:]

Maybe one more question here, certainly we’ve seen improvement in terms of the throughput, the mining throughput and what not, and I think George in the past you’ve mentioned it being in part due to better efficiency of the pace back, so as you kind of look at the mining throughput at this point in time as you try to increase that mining rate, is that what you need, like what do you need to get up to say 1,150 tons per day or even maintaining it at even 1,200 tons per day, what would you need, is it the pace back fill or is it something else around that as well?

[George Ogilvie:]

As Chris guided us when he was talking through that section, we’ve seen two months back to back now, January and February, of course, February is the first month of Q4, where we’ve seen approximately 1,200 tons a day go through the mill. So that’s extremely encouraging and it’s a good indicator to us that we’re definitely on the right track. We don’t believe currently we can consistently perform at 1,200 tons or 1,250 tons a day. But as we get the capital development a little bit further ahead and we get more active stopes into production, the fact that we’ve got these electric hydraulic jumbos now which will give us better efficiencies and we’re seeing that in the ore headings and that we’re seeing an uplift in our ability to get paced more quickly into the voids and get those felt to get those next cuts back end ore and online quicker is only going to improve the tons per day on a go forward basis. And I think it’s only two months back to back, but it definitely shows us that we have the capability of moving in excess of 1,200 tons a day out from the Macassa mine.

[Operator:]

Your next question comes from the line of Ron Stewart of Macquarie.

[Ron Stewart:]

Congrats on a great quarter and it reflects on your financials, that’s all coming together the way we knew it would. My question is for John, it’s on the interest expense and accretion line in your cash flow statement, you added back CAD5.8 million to get the strong cash flow and year-to-date it’s about CAD13 million. Where does that go through on your income statement or is this – am I reading this wrong. Can you explain that, John?

[John Thomson:]

If you look in the – just a minute, I’m just pulling up the relevant bits of the document so I can refer them to you, those lines go through in the production expenses, Ron. If you look at note 17 to the financials, you see them there. It’s all summarized and then calculated within the production costs.

[Ron Stewart:]

It’s part of the operating costs then?

[John Thomson:]

Yeah.

[Ron Stewart:]

Okay. Then – because I didn’t see it as a line item under 17 and so that’s baked in through as your operating cost and you add it back on non-cash operating cost?

[John Thomson:]

Yeah.

[Ron Stewart:]

Okay. That’s the question I had. Other than that, the operation looks great. Congrats on the good work and keep it up.

[Operator:]

Your next question comes from the line of Joe Fazzini of Dundee Capital.

[Joe Fazzini:]

I just had one quick question here, I’m just looking at the fiscal 2015 outlook and we’re just trying to reconcile, when we look at the cash flow from operations, you guys have projected CAD70 million to CAD75 million and sustaining capital of CAD50 million. The delta between those two should be the free cash flow generation, but that would suggest something in the order of CAD20 million to CAD25 million, whereas the outlook has CAD30 million to CAD35 million, can you just help reconcile that for us?

[George Ogilvie:]

John, can you seal that question?

[John Thomson:]

Yes. George, just [indiscernible] that question before, again you’re just looking at the reconciliation, aren’t you, between those numbers?

[Joe Fazzini:]

Yeah, I mean, basically what it is is that the free cash flow generation forecast here is CAD30 million to CAD35 million, but if we subtract your sustaining capital from your cash flow from ops, it’s suggesting something in the order of CAD20 million to CAD25 million, so there is CAD10 million there that we can’t necessarily account for, so we just wanted to know how that works?

[John Thomson:]

I think it’s really just to go with the way we’ve struck the guidance ranges, Joe, more than anything else.

[Joe Fazzini:]

Okay. Sorry, can you clarify, we don’t really understand?

[John Thomson:]

It’s a function of the way that we’re forecasting the guidance numbers and the ranges that we’ve got.

[Joe Fazzini:]

Okay. Because, I mean, if you look at that exact range, the range would imply CAD20 million to CAD25 million using the numbers that are just here presented on that guidance?

[John Thomson:]

Yeah. Let me have a look at that, Joe, and I’ll come back to you.

[Operator:]

[Operator Instructions] Your next question comes from the line of Jamie Spratt from Clarus Securities.

[Jamie Spratt:]

Just I have one question related to sustaining capital, so you guys have been able to bring down your sustaining capital guidance, I think, from CAD58 million now down to CAD50 million at this point. I’m just wondering whether you’re finding the cost savings there, is it operating efficiencies and what specifically is helping you there?

[George Ogilvie:]

Jamie, with respect to that, we are seeing efficiency gains and capital development which is coming through the purchasing of one of those electric hydraulic jumbos. Prior to the arrival of that drill, we were using a two-boom jumbo down in the bottom of the ramp going down to 5,400 and then 5,600 and it really was antiquated some 30 years old and we had a lot of issues – we had availability on that. So we are definitely seeing better productivity in the capital development. Also bear in mind that the 230-plus people that we’ve seen our employment over the last 14 or 15 months, some of those people would have come out of capital development and have not been replaced, yet we’re still achieving the meters today. The other thing that we’re noticing and of course, this may not be sustainable, but we are definitely seeing in our business with the lower price of oil that our fuel costs obviously are coming down, propane costs are coming down, cost of tires on equipment are coming down, explosives where fuel is a major component of explosives are coming down and what Chris is trying to do at a site, for example, we just locked in our annual fuel contract in late January for 12 months, we were limited on the threshold of the upside, on the high side, but we can participate if the price of oil continues to fall. So it’s those type of initiatives which are now feeding through into our input costs which are obviously positively impacting the bottom line.

[Operator:]

Your next question comes from the line of Derek Macpherson from M Partners.

[Derek Macpherson:]

Just two quick questions. Just on the CRA ruling, when do you expect to get an updated ruling from them, when the objections gets filed and then also when do you expect to get a resolution with the royalty holder?

[George Ogilvie:]

John, can you take that question, please?

[John Thomson:]

We filed the objection yesterday, we’re hoping to fast-track that objection, but – so the initial process goes that the rulings officer has six months to consider the objection and if after six months we haven’t got a response, then we can expedite that and seek judicial review of our notice of objection. The implications of that are that we choose them, we opt to bypass one of the stages in the objection process. But the company is confident of its position as regards to this tax matter. I think as regards when we may be able to recover the cash balance, we are in discussions with the royalty holder currently about recovering some of that money prior to our year end. And the recovery of the full amount, it’s possible that that could be as quick as four to six weeks or could take 18 months. A lot depends on obviously the COGS and the way the process plays out from here. We are and our advisors are confident of a positive resolution for the company on this matter.

[Derek Macpherson:]

And then just as far as how it’s been accrued, so that CAD6.7 million that’s payable from the royalty holder, does that come through the working capital in fiscal Q3 or is that going to hit the working capital in fiscal Q4?

[John Thomson:]

Actually it’s a little bit confusing and it’s a good question. If you look at one of the mills to our fiscal statement, our fiscal Q3 statement, what’s happened is that the receivable and the payable are actually netted and reported within accounts receivable, so if you look at note six, there’s actually a very small sentence at the bottom of that note and draws the readers’ attention to that. So both the receipt and accrual from CAD6.7 million are netted and reported within accounts receivable.

[Derek Macpherson:]

Okay. And so I guess the recovery of the CAD6.7 million then would be a cash inflow on working capital in a future quarter, potentially this fiscal Q4?

[John Thomson:]

Correct.

[Derek Macpherson:]

And then just on the operating side, you guys mentioned that the fiscal throughput was staying up in fiscal Q4, where do you guys see or how is the grade then?

[George Ogilvie:]

Chris, can you take that question, please?

[Chris Stewart:]

Certainly. We’re continuing to see consistent head grades in and around what we’ve seen for the majority of fiscal 2015. So in and around that 0.4 to 0.45 area. So we’re confident that we will see similar results coming here in Q4.

[Operator:]

Your next question comes from the line of Alison Turner from Panmure Gordon.

[Alison Turner:]

Given how much the Canadian dollars been moving, I just wanted a reminder of what proportion of your costs I should think about as not being Canadian dollar denominated? So presumably there are some pass through of in international oil price and you’re potentially [indiscernible] not Canadian, but what else would you strip off of that?

[John Thomson:]

Well, it’s a good question, Alison, and we’ve looked at those numbers internally and we’d have to say that 95% of our costs are actually truly denominated in Canadian dollars. So there is only 5% of the costs which are affected by the US currency. Obviously, it’d say maybe stuff like resin rebar which generally gets brought in through the US which we use for ground support is probably one of the next cost which although we pay for in Canadian dollars, is truly linked to the US dollar. But other than that, I’d have to say about 95% of the costs are Canadian dollars.

[Operator:]

As there are no further questions, I would now turn the call back to the presenters. You may now close out the call.

[George Ogilvie:]

Well, I’d like to thank everybody for their time here today. Obviously, the turnaround continues at pace. And once again, I’d just like to reiterate that it’s been a wonderful achievement and great commitment from the entire team and our employees at Kirkland Lake and they should feel proud of the achievements that they’ve seen for the last 12 months. I would, however, like to say that we are not going to be resting on our laurels, there’s still a lot more to do with this company as far as efficiency gains, increases in production, further cost containment and ultimately debt repayment, but we are certainly on the right track. I would like to thank everybody for their time today. Thank you.

[Operator:]

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