Pretium Resources Inc.
Q2 2018 Earnings Call Transcript

Published: 10 Aug 2018

[Operator:]

Thank you all for joining us this morning, and welcome to the Pretium Resources Second Quarter 2018 Conference Call. As a reminder, all participants are in listen-only mode. And the conference is being recorded. After the presentation, there will 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 pretium.com. I'll now turn the call over to Mr. Joseph Ovsenek, Pretium's President and CEO. Please go ahead.

[Joseph Ovsenek:]

Good morning, everyone. Welcome to our second quarter 2018 earnings call. Participating on the call with me today is our CFO, Tom Yip. Before we begin, I refer you to the cautionary language included in our news release issued yesterday as well as the management's discussion and analysis for the same periods. These are available on our website and have been filed on SEDAR. Please note that all dollar amounts mentioned on this call are in U.S. dollars unless otherwise noted. First and foremost, I want to acknowledge our experience and dedicated team. The very strong quarter we reported yesterday is thanks to the hard work of everyone at Brucejack, in Smithers and here in Vancouver. The Brucejack mine produced more than 111,000 ounces of gold in the second quarter of 2018, with 115,000 ounces sold, we generated a $146.5 million in revenue for the quarter. Cost in production improved and are all-in sustaining costs per ounce sold has come in at $648, resulting in $47 million in adjusted earnings equivalent to $0.26 per share. Cash increased by more than $72 million and we ended the quarter with a cash balance of a $142.5 million. This cash position provides a strong foundation as we continue to evaluate our options to repurchase our precious metal stream and refinance our credit facility. On a side note, last year, the end of Q2, we had negative working capital $12.9 million, jumping ahead to the end of Q2 2018, we had working capital of a $132 million excluding the current portion of our debt, an increase of a $146 million. An achievement everyone at Pretium should be proud of. Particularly during our production ramp up. On today’s call, I will update you on the execution and production ramp up of the mine, and will then turn the call over to Tom, who will comment on our second quarter 2018 financial performance, and our balance sheet strategy. I will close off with a look ahead before opening the call to your questions. Turning to slide five. Look at the gold production ramp up at Bluejack, during the first half of 2018. Our primary focus for the first half of the year, during the production ramp up, has been to implement our great control program and integrated into the production cycle at the mine. I am pleased to say that we have achieve this goal. You can clearly see the production profile improvement from January to June, as a result of the great control program. With great control fully integrated into our short term mine planning, in March, the positive production trend developed, we’ve continued through the second quarter will consistently improving results. The great control program is now a standardized component of the mining process and we have sufficient access to a variety of stokes that allow for optimization of odd rates feeding the mill. We now confidently consider production at Bluejack to have achieved steady state, which we can consistently deliver. With over 187,000 ounces of gold produced in total for the first half of 2018, we have delivered on our first half product guidance of a 150,000 to 200,000 ounces of gold. At in all-in sustaining cost to $783 per ounce sold, we have also delivered on our first half cost guidance of $700 to $900 per ounce of gold sold. In the second quarter, the all-in sustaining cost came in well below guidance, at $648 per ounce of gold sold. The improved production has had a significant impact on our cash balance as seen on slide seven. Since the beginning of the year, our cash balance has increased more than 150% to a $146.5 million, adding $72 million in the second quarter. This build up in our cash balance, positions us to advance our balance sheet strategy for 2018 in consideration of our construction financing facilities, which Tom will speak too. I’ll now turn the call over to Tom, to review our financial performance for the second quarter and first half of the year.

[Tom Yip:]

Thank you, Joe, and good morning, everyone. Turning to slide nine. We had a terrific quarter, as we sold 115,309 ounces of gold. Approximately 4,000 ounces more than the 111,340 ounces produced. Total revenues were $146.5 million, and the average realized price for the quarter was $1278 per ounce. Our average realized price was impacted by TC/RCs related to our concentrated sales which are netted within concentrated revenues. To grow that back, the $4.3 million of TC/RCs we realized $1315 per ounce, which was slightly better than the average spot price for the quarter. The total cash cost per ounce sold averaged $548 for the quarter. This contrast with $841 per ounce for the first quarter. The sequential improvement reflects the significant increase in great process and the results in ounce production in sales in the second quarter. Our cost of sales which includes production cost, depreciation and depletion, royalties and selling costs average $729 per ounce for the quarter, versus a $1,057 per ounce sold in the first quarter. This yielded earnings from mine operations of $60.1 million for the second quarter, for an increase of $43.3 million over the first quarter, reflective of the 46,658 more gold ounces sold in the second quarter. Our corporate G&A costs for the quarter were $3.4 million, as shown on slide 10. Operating earnings were $56.7 million. Two significant non-operating items on our P&L related to our project financing. The first is accrued interest of $16 million for the quarter, which will begin to the expense in the third quarter of last year. The second item is the gain on financial estimates our fair value. The fair value of these items is based on future gold and silver prices, interest rates, production profiles and these adjustments was a gain of $3.6 million for the quarter. This mark-to-market adjustment has been significant since September of 2015. We expect that this may continue to cause volatility in our reported results as long as the offtake and stream obligations are outstanding. Lastly, we have $13.2 million related to taxes. $1.7 million relates to the current BC Mineral Tax payable and $11.5 million are deferred taxes. Net earnings for the quarter, was $31.1 million or $0.17 per share. The adjusted earnings for item we believe are non-reflective of the underlying operations of the company. These are non-cash items such as gain our financial estimates are fair value. Amortization of discount on a credit facility, convertible notes accretion and differed taxes. The adjusted earnings were $47 million or $0.26 per share for the quarter. Our all-in sustaining costs, which include sustaining capital, TC/RCs, corporate G&A, restoration accruals and share-based compensation, totaled $648 per ounce for the quarter, coupled with the first quarter results, our AISC for the first half of 2018, totaled $783 per ounce sold, which is within the guidance of $700 to $900 per ounce. This worth noting that our production cost profile at the mine for the first half of the year was on target in terms of spending. Our all-in sustaining costs totaled a $144 million which is in line with the previously announced a $140 million spending guidance. For the second half of 2018, our production guidance is 200, to 220,000 ounces at a cost of a $154 to $156 million or 710 to 707 per ounce sold. This trending forecast includes 8 million higher sustaining CapEx for the second half of the year which includes projects differ from the first half of the year as well as completing outdoor projects planned during the summer months. Turning to slide 12, in terms of the credit and cash flow. the production in sales in the second quarter we generated $77.3 million of operating cash flow, spend a total of $5.8 million on CapEx and ended the quarter with a $142.5 million in cash, our net bill of $72 million over the quarter. Turning out to our balance sheet strategy on slide 13. As Joe mentioned, the focus is on building our cash balance through the second half of 2018, to enable us to repurchase the precious metal stream. We have two opportunities to take out the stream, once at the end of 2018 for $237 million and again at the end of 2019 for $270 million. We’ll also look to refinance the 7 – 5% growth facility by the end of 2018. Or we have an option to extend the due date one year through December 2019 by paying a 2.5% extender fee on the principle and accumulated interest at December 31, 2018. So, as we continue to optimize mine operations, and build our cash balance through the second half of 2018, we expect to be on track to refinance the project debt by year end. Now back to you, Joe.

[Joseph Ovsenek:]

Thanks, Tom. I’d like to provide a brief update on our mill upgrade. We announced at the end of last year, that we had submitted an application to prudential regulators to increase our production rate at Brucejack, to 3800 tons per day, from the current rate of 2700 tons per day. We began the application process earlier last year during commissioning, when we saw an opportunity to leverage the capacity of our conservatively designed mill. For a nominal investment, estimated of less than $25 million, we can increase the run-rate by 40%. Increasing production and reducing all-in sustaining cost. We expect the approval process to be completed by year-end and we will keep you priced of our progress. Turning to growth opportunities on slide 16. We successfully completed the underground exploration program conducted to evaluate the potential extension of the Valley of the Kings to the east and the potential for core resource depth. The program includes the two holes both over 1500 meters in length drilled east from the Valley of the Kings. Both intersected alteration, veining and mineralization through up. These results confirmed the presence of Brucejack's mineralization from the Eastern edge of the Valley of the Kings to beneath the floating [ph] zone. As well, anomalous copper and molybdenum mineralization was intersected at depth in both holes, indicating proximity to port freestyle [ph] mineralization at depth. These drilled results along with the follow-up surface geophysical program and mineral chemistry evaluation will be used for planning of future underground drill program focused on resource expansion of the Valley of the Kings to the east. The 2018 regional grassroots exploration program is currently underway. The program includes geophysical studies, continued regional prospecting and mapping and diamond drilling on several high priority gold targets as shown on slide 17, following up on the comprehensive regional exploration that has previously been completed. To-date, the program has resulted in the identification of several distinct areas 20 to 25 kilometers East of the Brucejack mine that have the potential to host mineralized zones similar to the Valley of the Kings or SK Creek deposits. We will provide an update on the program when assays have been received. Finally, on slide 18, here is our production and all-in sustaining cash cost guidance through the second half of 2018. Gold production at Brucejack for the second half of 2018 expected in the range of 200,000 ounces to 220,000 ounces for a total 2018 gold production of 387,000 ounces to 407,000 ounces. All-in sustaining costs for the second half of 2018 are expected to range from $710 to $770 per ounces gold sold. As operations have now reached steady stated the Brucejack mine, we have increased our focus on operational efficiency to reduce cost. We expect to provide guidance for 2019 in the first quarter of 2019. We've already achieved some notable success and made significant progress in 2018. We planned to continue this trend. We remain fully focused on execution of Brucejack consistently delivering steady state gold production, driving operational efficiencies and delivering on our full year 2018 guidance. As we continue to optimize mine operations and build our cash balance through the second half of 2018, we expect to be on track to repurchase our precious metal stream and refinance our credit facility. Through disciplined execution and consistent delivery, we aimed to become a premier intermediate gold producer by the end of 2019. Thank you. That concludes the formal presentation. I will now turn the call back over to the operator, who will open the line to your questions. Operator?

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Justin Chan with Numis Securities [ph]. Please go ahead.

[Unidentified Analyst:]

Good morning, Joe and Tom, thanks for taking the call. My first question is on your timeline for the CapEx for 3,800 tons a day. Is it fair to say that once you have the permits you'd like to put in the changes as soon as possible? And then on the ramp up for that, what's a good timeline to assume that?

[Joseph Ovsenek:]

Well, first on the -- thanks, Justin. Good morning. First, on the CapEx for the 3,810 ton per day, we'll look at that in context of our plans for paying back repurchasing the stream and refinancing our credit facility. So that will firm up as we go through the year and as we continue to build our cash position. So, we'll keep you posted on that. Ideally, we have our permit in-hand in Q4 and we're in a position to start ramping up production as of January 1, and again we'll keep you posted on that as we build up our cash balance through the rest of this year.

[Unidentified Analyst:]

I say so that would imply that some of the CapEx would happen this year if you have permits in place or is that something you got?

[Joseph Ovsenek:]

I think some well happened this year, plans are to put some in. As we've mentioned the banking system is going to be replaced and we'll look to get that replaced this year. Beyond that we'll see what we have opportunity to do.

[Unidentified Analyst:]

Okay. Thanks very much. And then my second question is just on your tax losses maybe this is more one for Tom but, could you remind me what your tax loss situation is and when you expect and of course it depends on production and profits but what your timeline on paying income taxes?

[Tom Yip:]

So, we have a very sizable tax loss in attributes. Basically, we're not going to be tax payable, cash tax payable for about three years, more or less. We're currently paying BC Mineral Tax which is basically 2% of operating non-operations earnings. So that's helpful.

[Unidentified Analyst:]

Okay. Thanks. That's it for me for now. Thanks very much and congrats on good quarter.

[Operator:]

The next question comes from Ovais Habib with Scotiabank. Please go ahead.

[Ovais Habib:]

Good morning everyone and congrats on the good quarter. Just a couple of questions from my end. Just starting off with, how we are looking at the second half in terms of guidance. You guys have given the guidance of 220,000 ounces. Joe are we looking at production kind of split in half, in terms of how we look at Q3 and Q4. Are you seeing any kind of variation between those 2 quarters that could say, one quarter is going to be better than next?

[Joseph Ovsenek:]

At this point Ovais, good morning. We’re just looking at it roughly split 50-50 between the two wells.

[Ovais Habib:]

Okay, perfect. And just in terms of, just going into the throughput side. Now, you guys took the throughput down from 2,900 tons per day, 2,600 tons per day from Q1 to Q2. Are you looking to keep the same throughput throughout the year or remaining of the year or are you looking at keep it that take it higher based on expectations of permits or anything like that?

[Joseph Ovsenek:]

Well, we don’t want to jump again on expectations of permit. So, we’ll look to keep it down until we know, we are getting the permit and once we have the permit in-hand, we’ll see what we can do to ramp up production, if we’re lucky enough to get it before year-end.

[Ovais Habib:]

Okay. So, in terms of modeling wise, I mean should we just kind of keep it constant at the 2,700 tons per day just to be on the safe side right now?

[Joseph Ovsenek:]

Absolutely. Our permit, at this point in time, our permit is 990,000 tons per year, so roughly 2,700 tons per day.

[Ovais Habib:]

Perfect. And just switching on, gears on to great controlling drilling, obviously great control drilling helped you guys quite significantly going into Q2. How do you, are you, can you give any sort of indication how things are moving along in Q3 and in terms of looking at even additional scopes coming online or additional levels coming online or anything like that?

[Joseph Ovsenek:]

Well, we’re mining from the 1,200 level up to the right now the 1,380-meter level. And mining at all levels, what you saw your other site tour. So, we’ll continue with that. Drilling is going fine and mining is going fine. We will look through the second half of the year, if we can bring some great forward to help augment our cash resources, but as of now just to going forward as plan 2700 tons per day, and that 200,000 to 220,000-ounce guidance.

[Ovais Habib:]

Okay. And when you're saying bring it forward, I mean are there any specific stokes that you guys have already gotten developed that you can bring forward or is this more towards the end of the year.

[Joseph Ovsenek:]

We’re looking at all opportunities for stokes that are near development work, close to existing development that we can bring online. We’ll update further as we go through the second half of the year.

[Ovais Habib:]

Okay, sounds good. That’s it for me Joe. Thanks so much.

[Joseph Ovsenek:]

Thanks, Ovais.

[Operator:]

[Operator instructions]. And our next question comes from Joseph Reagor, with Roth Capital Partner. Please go ahead.

[Joseph Reagor:]

Good morning, guys. Thanks for taking the questions and congrats on a great quarter and it sounds like everything is moving in the right direction here. So, just some kind of fine tuning questions on the production. With the potential to increase production rate to the higher throughput levels already 100 tons per day. Do you see any changes you’re need to make in the underground, do you think ultimately even if you go to that rate that you might not operate at it every quarter, just based on stoke development? And then what size stockpile do you guys plan on keeping, trying to add surface level. currently and what’s the upgrade.

[Joseph Reagor:]

Okay, so answer -- and good morning Joe. So, second question, first. No plans to having a stock pile on surface or underground, the plan is to be able to mine or from the various stokes and get them into the crusher is efficiently as possible and blending ore from the various stoke that try to get our average reserve grade of 14.5 grams per ton. On the production – on the mining rate. As we get up to 3800 tons per day, we will look to increase our mining rate. At this point in time, we are sticking with the 2700 tons per day, so we will just see when we do have a better timeline. We believe we're going to get our permit for the 3800 tons per day expansion before the end of this year and as that firms up on timing we’ll then be able to decide how quickly do we want to ramp up our underground production be able to feed the consistent 3800 tons per day.

[Joseph Reagor:]

It sounds – it’s fair to say you guys aren’t concern that there be any issue with getting to that mining rate underground if you – once you have the permit and you’re ready to do so.

[Joseph Ovsenek:]

Yes, we are not concerned about getting there, it’s just fairly straight forward, just allocating the resources to get there.

[Joseph Reagor:]

Okay, thanks. I’ll turn it over.

[Joseph Ovsenek:]

Thanks Joe.

[Operator:]

The next question comes from Matthew McPhail [ph] with Canaccord Genuity. Please go ahead.

[Unidentified Analyst:]

Hi team and thanks for taking my questions. Just something -- a question regarding the development rates, I know you guys have been eluding to your increasing development rates, underground to increase your availability, stoke inventory kind of free-up the higher grade to stokes lower grade stokes to help to smoothing of the grade. Do you have any indications of how that’s going to affect your cost longer-term, is that going to hit, all-in sustaining costs, or are you guys capitalizing all of the kind of vertical and like level development?

[Joseph Ovsenek:]

We are capitalizing vertical development, we're expensing level development. So, anything on that level is expensed. As far as the increase production rate, that’s worked into our all-in sustaining costs with the current time, it will continue to be looked in there through going forward.

[Unidentified Analyst:]

Okay, great. And then just one more question, on the resource and reserve. Earlier in the year you were mentioning that you are working on or you were planning on initiating an updated resource and reserve in Q3. Is that still the plan and that’s ongoing and is there any timing on when we can see the outcome of that.

[Joseph Ovsenek:]

We yet to get going on and we’re still focused on refining our grade control model and moving along refining our great control program. So, we’ll look to try to get to with by the end of the quarter, so we can advance it through the fourth quarter but at this point in time I can’t really give you a firm timing on it.

[Unidentified Analyst:]

All right, thanks Joe. That’s all the questions I had.

[Joseph Ovsenek:]

Thank you.

[Operator:]

The next question comes from David Haughton with CIBC. please go ahead.

[David Haughton:]

Good morning, Joe and Tom. Thank you for the update. The first question is looking at sustaining CapEx, $3 million for the quarter look relatively low and I think I may heard Tom say in the discussions that there is some deferral of CapEx into the second half. Can you give us some idea as to what your capital expenditure would be for sustaining CapEx in the second half, please?

[Joseph Ovsenek:]

Well, we said that we’re going to increase our second half by about $8 million over what we had incurred in the first half of the year so basically, we’re probably in that sort of $60 million range for the second half of the year.

[David Haughton:]

Okay, that’s helpful. And facing up to sustain at the 700 to 750 meters month kind of level to get those stokes up?

[Joseph Ovsenek:]

Yeah, I think that’s right.

[David Haughton:]

Okay. Next question is looking at the split between door A and concentrate. The feasibility study had anticipated less than 50% going through Door A but it looks on my calculations that you’re in the order of 70% in the previous quarter. what should we be thinking about is going to Door A as opposed to concentrate?

[Joseph Ovsenek:]

That’s pretty good calculating. Yes, we’re in the 60% range so if you look at it say on average say 65% to Door A remainder of the floatation concentrate that’s pretty good. We’re sometimes we’re above that sometimes a little bit below but on average we’re in that 65% range.

[David Haughton:]

Yeah. And the reason for that question is that I noticed that whatever goes into the concentrate you’ve got to buy as gold on market to deliver into offtake, but it doesn’t look…

[Joseph Ovsenek:]

Yes, you’re correct.

[David Haughton:]

Okay. So, the next question is in relation to tax. Trying to catch the deferred tax adjustments you’ve got is pretty slippery I mean that was a pretty big number in the second quarter to counter to like $0.06 is there any way Tom that you can give us an indication here we should be forecasting that?

[Tom Yip:]

Well, the tax part I think we’ve told people that the tax rate is about 36.5% but during this year we’ve got some tax deferred tax attributes at this that we didn’t recognize in previous periods because they’re using accounting rules and said that you don’t recognize them that unless you have an expectation of continued the promise, so we didn’t recognize them. During the year, we basically recognized it is reducing that statutory rate down to the lower rates on about 27 at this percent year-to-date I believe so that’ll continue for the rest of the year then after that we’ll be bouncing back up to the statutory rates. But they’re all deferred taxes and so we do there’s all real cash cuts like as I said before until both two to three years old till now.

[David Haughton:]

All right got you. So, thank you. That’s it from me now.

[Joseph Ovsenek:]

Thanks, Dave.

[Operator:]

The next question is from Chen Lin with Lin Asset Management [ph]. Please go ahead.

[Unidentified Analyst:]

Yeah, thank you for taking my call. Congratulations Joe on great quarter. Actually, my question mostly been answered mostly is on the expansion into next year so can you give some color if once you get the permit supposedly at Q4 or early next year what kind of production can you estimate you know basically the high mark of that annual rate can be or your more, just give some idea of new production rate can be?

[Joseph Ovsenek:]

Well good morning Chen Lin been a while. So, we can’t ramp up to 3800 tons per day fairly fast it’s getting underground development to feed the mill that we’re going to need to do some work. The mill is already running at over 4400 tons per day and without major problem, so the plan is once we have that permit in hands to ramp up and we will do we have some CapEx to spend running on consistent basis, but we can’t ramp up right away and do that do the CapEx expenditures as we operate. So, all I can say is we’re waiting on that permit hope to get it later on in Q4 and then we’ll position ourselves to be able to take advantage of this as quickly as we can.

[Unidentified Analyst:]

Okay, great. Thank you, Joe. Congratulation.

[Joseph Ovsenek:]

Thanks again, Jim.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Ovsenek for any closing remarks.

[Joseph Ovsenek:]

Thanks everyone for joining us on the call this morning. We look forward to catching up with you again in mid-October when we have our Q3 production results. So, well thanks again and look forward to chatting in the future. Bye-bye.

[Operator:]

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