Pretium Resources Inc.
Q3 2020 Earnings Call Transcript

Published: 30 Oct 2020

[Operator:]

Thank you for this morning. Welcome to the Pretium Resources Third Quarter 2020 Conference Call. As a reminder, all participants are in listen-only mode. And the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. The conference call today is being webcast live and available along with the presentation slides on Pretium's website at pretivm.com. I will now turn the call over to Mr. Jacques Perron, Pretium's President and CEO.

[Jacques Perron:]

Good morning, everyone. Welcome to our third quarter 2020 operating and financial results call. Before we discuss this quarter's performance, I would like to reiterate that no quarter that Pretium is considered a success, unless it is accomplished safely. With that in mind, I want to acknowledge everyone at Brucejack and Smithers and here in Vancouver for their hard work that contributed to another profitable quarter.

[Patrick Godin:]

Thanks, Jacques. I've now been with Pretium for a few months and have spent a significant amount of time at Brucejack. I've been impressed by both the dedication of the team and the quality of the asset. And I look forward to building on our momentum and continue to deliver on results. Turning to operations on slide 7. We continued our lateral development at our targeted rate of approximately 1,000 meters per month. We processed approximately 325,000 write tonnes of ore through the mill equivalent to 3,537 tonnes per day. During the quarter, the mill operated below the permitted level of 3,800 tonnes per day due to the schedule and non-scheduled maintenance and our focus on lateral development and stope avidity. Production costs were $192 per tonne mill in the third quarter. The increase is due to the additional lateral development and definition drilling and cost associated with COVID-19 safety protocols, mainly related to employee salaries and travel costs. These protocols have increased costs by $6 per tonne mill in the quarter. In the third quarter, we produced just over 86,000 ounces of gold. The mill feed averaged 8.6 grams per tonne gold and the recovery rate was 97.6%. When you look at the quarterly gold production this year, you see that we have maintained our production level within plus or minus 5% of the midpoint of our guidance range. As most of you know Brucejack is a high-grade variable deposit. We will continue to see fluctuation in production on a quality basis, but still expect to deliver on annual guidance. Going forward, our objective is to optimize production, reduce the quarter-to-quarter fluctuations and at the same time, look for opportunities to increase our production. In order to improve our knowledge of the ore body and set up a mine plan to reduce the variability we have two main priorities. Our first priority is to increase our access underground. As we've progressed through 2020 and into 2021 lateral development will continue to advance at a rate of over 1,000 meters per month. The increased development rate will improve access to new areas of the reserves, advance our production front and also allow us to increase our long-haul drill off inventory. Our target is to have about 400,000 tonnes of long-haul drill tonnes and stope ready to be blast by the end of Q3 2021. This will provide more flexibility to improve blending quarter-over-quarter from multiple areas and support more consistent production. Advancing development will also give us the ability to properly establish a mining sequence so we'll be able to soften production at 3,800 tonnes per day on average over a year, which is the limitation imposed by our environmental permit.

[Matthew Quinlan:]

Thanks Patrick. I'm delighted to be joining the team at Pretium and look forward to working in partnership with Jacques, Patrick and the rest of the management team to unlock the value of this unique asset. We continued our track record of positive cash flows and profitability again this quarter as we have every quarter since achieving commercial production on July 1, 2017. For the quarter, we realized gold prices of $1935 per ounce an increase of 30% over the third quarter of 2019. Revenue increased by 17% compared to the same period in the prior year, lower than the percentage increase in the gold price as a result of the timing of sales relative to production in the quarter. Adjusted earnings reached a record of $50.9 million in the quarter an increase of 50% compared to the prior year period. Turning to Slide 16. During the quarter we generated $66.8 million of free cash flow for a total of $191 million so far in 2020. Strong operating cash flow of $83.4 million in Q3 reflects increased revenues as well as increased levels of working capital compared to the comparative periods. Total capital expenditures of $16.8 million reflect the increased investments in lateral development and other construction activities in the quarter, as well as increased seasonal activity during the summer months. Our balance sheet continues to strengthen and we ended the quarter with $175 million of cash on hand, an increase of approximately $50 million after repaying $16.7 million under our term loan. Debt at September 30 of approximately $450 million comprises of bank debt of approximately $350 million and convertible notes of $100 million. Turning to Slide 17. Our ASIC in Q3 of $1016 per ounce remains within guidance for the year and increased by $105 per ounce from $911 per ounce in Q2. ASIC in Q3 includes $25 per ounce of COVID-19-related costs and $17 per ounce relating to the transition of management. Lower production cost per ounce and higher byproduct credits were offset by higher seasonal sustaining capital and the timing of sales relative to production had the biggest impact on ASIC relative to Q2 as we sold approximately 8,000 less ounces in the second quarter. This increased ASIC by $79 per ounce in the quarter relative to the second quarter. For reference ASIC for the year-to-date is also within guidance at $971 per ounce and includes $26 per ounce of COVID-19 costs and $20 per ounce of costs associated with the transition of management.

[Jacques Perron:]

Thanks Matt. Stepping further out from the Brucejack mine, we hold over 12000 square kilometers of mineral claims in the golden Triangle and BC. The 2020 regional exploration program on the company's Bowser claims is complete and we are now awaiting assay results. The program included drilling at the Hanging Glacers zone the ASIC zone, the coupon and the Himalaya zone. The Israel results are pending and we will report back later in the fourth quarter or early next year. There are also several high priority zones even closer to the Brucejack mine where limited work has been done over the last few years. We intend to start prioritizing those proximal targets in 2021. We continue to believe the best value for our shareholders is to invest a portion of our cash flow in exploration of our existing claims and in particular near the Brucejack deposit. In the quarter, we've released our third annual sustainability report. The 2019 report once again highlight some of the remarkable ESG achievement at Brucejack, particularly in regards to our reputation in the region and our limited environmental footprint. We have established positive relationships with the local communities and the first nations in the region about 25% of our total workforce both employees and contractors come from First Nation communities. Brucejack mine does not have a tailings dam. Our tailings and waste rock are disposed of into a glittery or return on the underground as backfill. We are connected to the BC Hydro Power grid at Brucejack. Not only does that provide inexpensive power, but it results in a very low carbon footprint. Our greenhouse gas emissions were just above 0.05 tonnes of CO2 equivalent per ounce of gold produced. This positions us significantly below the average for the intermediate gold producers. Looking ahead to the remainder of the year, we remain on track to achieve our 2020 production ASIC and free cash flow guidance, assuming that we're not impacted by COVID or any other major incidents. We will continue to emphasize safety with a focus on what we can do to improve the safety culture. We will also maintain our strict COVID safety protocols to minimize the potential for an outbreak at site.

[Operator:]

Thank you. Our first question comes from Mark Mihaljevic of RBC Capital Markets. Please go ahead.

[Mark Mihaljevic:]

Hi. Thanks, and good morning everyone. I guess first question from my end. You guys had highlighted prudently that you want to maintain a bigger cash balance than you normally would in case there are any disruptions around COVID. And you've obviously done a great job of that with the free cash flow you've done. So is there a level or kind of what's the target level you'd like to keep in terms of cash on hand before you've started actually directing that to the debt repayments like it had been previously planned?

[Jacques Perron:]

Yeah. Good morning, Mark, so you're correct. We always said that we want to be conservative with our cash and maintain a good cash position in case we have issues or an outbreak at site and we have to make decisions to suspend operations or anything of that nature. Currently, we're developing our budget for 2021, which will be done in the next four or five weeks. And we're -- our plan right now is to keep on the balance sheet about three months of cash -- of equivalent cash for operations about three months. We're spending about $30 million a month right now. So let's say anywhere between $90 million to $100 million is the level of cash we want to keep. As part of the budget we're looking at what we have to do next year in terms of capital expenditures, infrastructure. We're also looking at the increased level of diamond drilling. We're going to be doing going forward. And once that is established, there's going to be some, we believe some cash left. And the intent is to allocate that cash to discretionary debt repayment. So that's our plan for now.

[Mark Mihaljevic:]

Okay. Perfect. And then on the cost side of things you guys have kind of bumped the guidance with – at mid-year but you're trending very much in line with the old guidance and towards the low end on the updated guidance. So assuming there are no interruptions, is it fair to say that you should be trending to like kind of in line with what you've been delivering so far year-to-date and could be really well positioned versus the current guidance you've got out there?

[Jacques Perron:]

Well, I think, Mark like we said we're maintaining our guidance. We think who knows what's going to happen in the coming months. But so far we feel comfortable with the guidance that we have both on production and cost and we think we're going to be in there.

[Mark Mihaljevic:]

Okay. Sure. And then I guess just one more question on the stope inventory. If I'm not mistaken with the Q2 results, you'd said you were at about 185000 tonnes. What seems to have ticked down a bit during the quarter. And then also the commentary was I believe late Q2 early Q3 to get to the target $400,000 versus end of Q3 now. Can you give a little more color on those two changes?

[Patrick Godin:]

Well, you know it's a question of variability. In date of today, we have this inventory back at the same level. So it's just a question of variability in terms of the mining and the stoping and also on the grade in the stop and we are processing more focusing on quality than tonnes. That was mainly the impact. Going forward, we are lying, as I said in – previously to be at the end of Q3 at a level of 400000 tonnes of drill up inventory ready to blast. We are over drilling compared to what we need in the current – on the day-to-day basis to make sure that we are building up the inventory for this. But basically it's just a question of the end of the month. Today we're back to the number that we had at the year back. We're back we're close to be at 200 actually.

[Mark Mihaljevic:]

Okay. Perfect. Yes, thanks for the color and I’ll jump back in the queue.

[Operator:]

Our next question comes from Heiko Ihle of H.C. Wainwright. Please go ahead.

[Heiko Ihle:]

Hey, guys. Thanks for taking my question and I hope everybody is staying safe.

[Jacques Perron:]

Yes, we’re all good. We’re all healthy.

[Heiko Ihle:]

That's very important to us here. Your COVID-19 costs are $6.8 million to date. This has been going on for what seven to eight months so far. I mean, if we model $1 million and completely incremental cost per month for the remainder of the pandemic and I understand there is no timeline for this. But I mean, let's just assume this goes on for another year or so. We use $1 million a month. Is that a fair assumption of purely incremental expenditures?

[Matthew Quinlan:]

You're not far. It's Matthew here. Thanks for your question. I hope you're safe too healthy.

[Heiko Ihle:]

Thank you.

[Matthew Quinlan:]

Yes, that's not be fair assumption. As we said we spent $6.8 million year-to-date and we all know how long this terrible occurrence has been with us. So you're not too far off. In Q3 we actually spent a little bit less than $3 million. We spent $2 million over the three months. So we were a little bit below that. But.

[Heiko Ihle:]

So using $700,000 might actually be better than using $1 million?

[Matthew Quinlan:]

Yes depending on how granular your model is it could be.

[Heiko Ihle:]

Fair enough. Speaking of granularity in the model, I mean you're guiding to 7.6 to 8.5 grams per tonne and 97% recoveries for – of 2020. What have you seen in October thus far in regards to grades and recoveries? I don't know how much of that you're willing to get into on this call but maybe just guide us or down a little bit?

[Jacques Perron:]

Yes. Heiko, I think we continue to maintain our guidance of 7.6 to 8.5. It's – the 43-101 reserve grade is 8.4. As I said before, is it 8.4? Is it 8.2? Not too sure. But that range, we're happy with a range that we are currently guiding.

[Heiko Ihle:]

Got it. And then just building on the last cash balance question that came up. I was going to ask something fairly similar. But I'll expand it with a -- at what point in time do you think your shareholders would want to see a dividend?

[Jacques Perron:]

Well, it depends who you talk to. All the shareholders have different opinions. Some would like to see a dividend now, some would like us to put money back in the business. I think for us right now, I go with $450 million of debt on the balance sheet and all the other priorities we have dividend is not on the radar at this time.

[Heiko Ihle:]

Yes, I concur with that. But the question comes up in conversations all the time. Thank you guys very much. I’ll get back in queue.

[Jacques Perron:]

Thank you.

[Operator:]

Our next question comes from Anita Soni of CIBC World markets. Please go ahead.

[Anita Soni:]

Good evening. Thanks for taking my call. First question is with regard to the reserve price for next year. Have you guys decided what reserve pressure be, using testament reserves?

[Jacques Perron:]

No, we have not decided, it's not finalized. We're still debating what we're going to do. So we have not established that at this time.

[Anita Soni:]

Okay. All right. And then the next question would be with respect to the stope inventory a little bit more color on that. So, actually, let's go to the sustaining capital question. You guys mentioned that the sustaining capital was trimmed and its timing of expenditures. Could you say -- could you tell me what expenditures were not spent this quarter and can be pushed into the next year or will be pushing into next year?

[Patrick Godin:]

In terms of expenditures, it's mainly related to the COVID restriction that we have outside. We are -- we have to cut the dorms basically to maintain the social distance of two meters and to make sure our employees are safe in this regard. So it's why we delayed investment. So the critical one will be completed. So we just delayed the investment that were not necessarily critical. Majority of the program is completed. This is just the solution that will be delayed to Q1, Q2.

[Anita Soni:]

Okay. So I am just seeing for a little bit more color on what is critical and what's not critical?

[Patrick Godin:]

We're talking about shops, dust collectors, stuff like that.

[Anita Soni:]

Okay. All right. And then in terms of the COVID-related costs, do you -- I think someone's asked a little bit about that, but is it -- do you expect that to be ongoing into next year as well?

[Jacques Perron:]

Yes. Our plan right now, Anita, is that we -- like I said, we're preparing our budget and we're assuming we're going to be under COVID restriction for all next year. That's our assumptions at this time.

[Anita Soni:]

Yeah. That’s it for me. I’ll go back into the queue for now.

[Jacques Perron:]

Thank you.

[Operator:]

Our next question comes from Ovais Habib of Scotiabank. Please go ahead.

[Ovais Habib:]

Thanks, operator. Hi Jacques and team and congrats on another good quarter. And thanks for taking the questions.

[Jacques Perron:]

Good morning, Ovais.

[Ovais Habib:]

A couple of questions have been already answered. Just on my end I was just looking at your infill drilling that you're doing. So you've done about 34,000 meters drilling in Q3. Like, in terms of the information that you're getting, how far ahead of production are you in terms of grade control? And kind of what's your target on that front?

[Patrick Godin:]

So, our target is to increase -- to be in advance. Actually, we want to – first we want to have more mining ores to be able to blend and to module our production on a quarterly business, so to be more efficient. That's the objective. So actually we explained to you that we have -- we're going to have three mining levels. We're going to get to five to. Do this we need to drill more and to develop more. So it's what we are doing now and I'm pleased by the performance of the development actually. We did well in September. We are improving a lot in October. In terms of production drilling, we are drilling actually at a rate that is higher than what we need on the current mining process. So, again, it will help to build up the drill off inventory. So -- and we are -- the fact that we are -- we actually have four drills. We're going to have the fifth one in the next week. And we are pushing hard also to add additional two drills before the end of the year or beginning of next year, mainly to speed up the collection, the data gathering and the analysis, and the investment that we're going to do next year are all in function of that. And increase the volume and the quality of the ore inventory that we have to play better our strategy in production going forward.

[Ovais Habib:]

Got it. And this test drilling, this RC drilling that you're doing right now, you started that in Q2. How has that been faring out? Is that been giving you the right information that you're looking for?

[Patrick Godin:]

Actually we are operating the RCs. We are three war in operation actually. And yes it's useful because we're using all the data to mainly increase the collection of the information. And yes it's performing well for now.

[Ovais Habib:]

Excellent. That’s it for me right now. Thanks.

[Jacques Perron:]

Thank you, Ovais.

[Operator:]

Our next question comes from Marlene Lamothe of Paulson & Co. Please go ahead.

[Marcelo Kim:]

This is actually Marcelo Kim. I have a question. At the midpoint guidance $20 an ounce on your ounces is about $7 million of separation expenses. This is on top of $4.5 million that were paid last year. Just wondering what changes in the agreements with new employees you guys have made so that we avoid triggering similar payouts in the future? Thank you.

[Jacques Perron:]

Marcelo, I'm not sure, I understand your question. Could you repeat that please?

[Marcelo Kim:]

Yeah. In the last two years you guys have paid almost $11.5 million by the end of this year of separation expenses to employees. And I'm wondering if you've made any changes to the contracts that you write with employees, so that you avoid paying these golden parachutes out?

[Jacques Perron:]

Yeah. Okay. I understand your question now. So our contracts, the agreements, the new agreements that are in place mine and Patrick and Matt are fairly standard agreement compared to what was in place at the company in the past their market are different than what was done in previous years. But again they're definitely market and matches what is being done in the mining business at this time.

[Marcelo Kim:]

Can you be a little more specific as to how they are different from the prior contracts?

[Jacques Perron:]

I would say that the previous one were more generous Marcello, and the new ones are like I said more market.

[Marcelo Kim:]

Okay. Thank you.

[Operator:]

Our next question is a follow-up from Anita Soni of CIBC World markets. Please go ahead.

[Anita Soni:]

Hi. Two questions. So, first off the drilling that you're doing this year, how will it be incorporated next year into your new, I guess your end reserve resource estimate? Will you be incorporating that new drilling and reevaluating your reserves? Or is it just -- or is there some other plan?

[Jacques Perron:]

No we – Anita, we are not planning to incorporate the drilling that we're doing in the reserves at the beginning of this year. Next year we'll just do a depletion calculation. We want to accumulate more data. So we think by -- I don't know third -- midyear third quarter we're going to do a cut off and then we're going to start to integrate all the information in our block model. So we can have a new reserve coming -- a new formal resource and reserve coming out in early 2022.

[Anita Soni:]

Okay. And then secondly if I'm just looking at slide 7. And I can see the mining rate as you mentioned is ahead of the mill throughput. My understanding is that you don't have any stockpiles it's just broken or inventory. So when you're talking about this mining rate it's basically everything that remains is what you've developed is broken or inventory but still not hold to the mill yet?

[Jacques Perron:]

No, no, that's not correct Anita. Mine tonnes are reported as wet tonnes and the mill tonnes are reported as dry tonnes, something we're going to change next year but the difference is moisture. So there's no -- we're not building a mine tonned inventory.

[Anita Soni:]

Okay. All right. So effectively you're mining at the same rate as the mill will hick?

[Jacques Perron:]

Approximately yes, yeah.

[Anita Soni:]

All right. Okay. So the differential there if I divide that's about the approximate differential. Okay, thank you.

[Operator:]

Our next question comes from Bill Fleckenstein of Fleckenstein Capital. Please go ahead.

[Bill Fleckenstein:]

Hi, thank you. Jacque, I was wondering, if you had -- as a follow-up to the dividend question that was asked earlier. I was wondering if you guys have given a thought to a target debt level you'd like to get to in either 2021 or some other time before you're going to consider what you might want to do from a dividend perspective? Thank you.

[Jacques Perron:]

Yes. I think Bill, our level of tolerance for depth. I'm not a fan of debt. But we think we would be fine with $100 million to $150 million debt on the balance sheet. That's where we say. But again, I made some comments regarding the dividend, but I just want to make sure that you understand that a dividend is a decision of the Board. It's not my decision. It's not the management team decision. It's a Board decision. But at the end of the day, the management team feels like $100 million to $150 million the debt on balance sheet would be acceptable. Hopefully, that answers your question Bill?

[Bill Fleckenstein:]

It did. Thank you.

[Operator:]

Thank you. This concludes the question-and-answer session. I would like to turn the call back over to Mr. Perron for any closing remarks.

[Jacques Perron:]

Well, thank you everyone for dialing into our earnings call this morning. We appreciate all the comments and the questions and we look forward to updating you in the coming months. Once again, I would like to conclude the call by thanking the entire Pretium team for their dedication and hard work, as we continue to operate through the unprecedented time. Thank you and have a good weekend.

[Operator:]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.