Pretium Resources Inc.
Q3 2018 Earnings Call Transcript

Published: 9 Nov 2018

[Operator:]

All participants please standby, your conference is ready to begin. Thank you all for joining us this morning and welcome to the Pretium Resources Third Quarter 2018 Conference Call. As a reminder all participants are in a 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 pretivm.com. I will now turn the call over to Mr. Joseph Ovsenek, Pretium's President and CEO. Thank you. You may begin.

[Joseph Ovsenek:]

Good morning everyone. Welcome to our third 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 all dollar amounts mentioned on this call are in U.S. dollars, unless otherwise noted. First and foremost, I again want to thank everyone at Brucejack, Smithers and here in Vancouver for their hard work that has allowed us to bank another strong and profitable quarter. The Brucejack Mine produced 92,641 ounces of gold in the third quarter of 2018. With 94,458 ounces sold, we generated $110 million in revenue for the quarter. Our all-in sustaining cost per ounce of gold sold has come in at $709 per ounce sold, resulting in $26.3 million in adjusted earnings equivalent to $0.14 per share. We continue to operate profitably and build our cash position, despite the declining gold price environment. Cash increased by $47.8 million and we ended the quarter with a cash balance of $190.3 million. Our ability to generate a significant amount of cash in our first full year production has put us in position to refinance our construction credit facility and repurchase our precious metal stream by year-end without issuing equity. I'd like to emphasize this point. We have no plans to issue any equity period. On today's call, I will update you on production of the mine and we'll then turn the call over to Tom, who will comment on our third quarter 2018 financial performance. I will close off with a look ahead before opening up the call to your questions. Turning to Slide 5, a look at gold production at Brucejack over the first five quarters of production, third quarter 2017 when we first declared commercial production to the current quarter, third quarter 2018. Our primary focus during Q3 and Q4 2017 was ramping up production at Brucejack as we advanced our grade control program. Our production profile improved from Q1 through to Q3 2018 with the successful implementation and integration of the grade control program into our short-term mine planning. That said, the defining hallmark of the Valley of the Kings is the extreme variability of the gold mineralization throughout the entire deposit. So even with the implementation of the grade control program, gold production will always be constrained by the sequence of the mine plan and the availability of stopes for optimal grade blending. We expect to narrow the range of grade variability over time as development advances. With over 92,000 ounces of gold produced in the third quarter, we are working towards our second half 2018 production guidance range of 200,000 to 220,000 ounces of gold for a total of 387,000 to 407,000 ounces of gold in 2018. At an all-in sustaining cost of $709 per ounce sold this quarter, we expect to end the second half within our cost guidance range of $710 to $770 per ounce of gold sold. As I mentioned, Brucejack delivered another profitable quarter even with variable production and in the declining gold price environment. This speaks to the robust economics of the mine. Since the beginning of the year, our cash balance has increased 240% to $190.3 million, adding another $48 million in the third quarter. This build up in our cash balance positions us to clean up our balance sheet this year. In respect of our balance sheet, on September 24, we announced that we given notice to the holders of our 8% precious metal stream that we intend to repurchase the stream on or before December 31, 2018. On October 4, we announced the signing of a commitment letter for a fully underwritten $480 million bank debt facility to be drawn to refinance existing construction credit facility of approximately $423 million due on December 31, 2018. The debt facility will be available by way of a $250 million secured, amortizing, non-revolving credit facility and a $230 million senior secured revolving credit facility. Funds from the revolving facility will also be available for general corporate purposes, including, if necessary, to support the repurchase of a 100% of the precious metal stream. This precludes the need to issue any equity. Now I'll turn the call over to Tom to review our financial performance for the third quarter and first nine months of the year.

[Tom Yip:]

Thank you, Joe, and good morning everybody. Turning to Slide 9, as we continue to optimize operations during the quarter, we sold 94,458 ounces of gold, approximately 1,800 ounces more than 90,641 ounces produced. Total revenues were $110 million, and the average realized price for the quarter was $1,169 per ounce. Included in our revenues were TC/RCs related to our concentrate sales, which totaled $4.3 million, impacting our revenues by $45 per ounce. Otherwise, we would have realized $1,214 per ounce, which was the average spot price for the quarter. The total cash cost averaged $568 per ounce sold for the quarter. This is slightly higher than the second quarter, but significantly better than last year. Our continued focus on operating efficiencies has resulted in cost savings during the year, and the variability in grade and resultant production has a significant impact on a reported cost per ounce. Our cost of sales, which includes production cost, depreciation and depletion, royalties and selling costs, averaged $767 per ounce for the quarter. This yields an earning from mine operations of $37.6 million for the third quarter. We continue to show robust earnings from mining operations this year. Deducting our corporate G&A cost of $3.1 million, we generated operating earnings for the quarter of $34.5 million. Two significant nonoperating items on our P&L relate to our project financing. The first is accrued interest of $16 million for the quarter, which should begin to be expensed in the third quarter of last year. The second item is a loss on financial estimates of fair value. The fair value of these items is based on the future gold and silver prices, interest rates and production profiles. That adjustment was a loss of $7.3 million for the quarter. This mark to market adjustment has been significant since September of 2015, and this may continue to cause significant volatility in our reported results, while the offtake and stream obligations are outstanding. With the announced repurchase of the stream obligation at the end of the year, the mark-to-market adjustment associated with the stream will cease to impact our earnings. Lastly, we had 8,000 – $800,000 of net taxes during the quarter or an effective tax rate of 7%. This consisted of $1.1 million for the current BC Mineral Tax payable and $275,000 related to deferred taxes. The low effective tax rate was primarily due to the foreign exchange adjustment on the BC Mineral Tax pools. During the quarter, this was a foreign gain, which offset the otherwise deferred tax expense on our earnings. Excluding the foreign exchange gain, our effective tax rate was 26%. This is still lower than the full 36.5% statutory rigs as we recognize loss carryforwards previously accumulated. This Canadian to U.S. dollar foreign exchange effect will continue in future periods until these BC Mineral Tax pools are fully utilized. More importantly, we only paid BC Mineral Taxes at the minimal rate of 2%, not the 13% until we can fully draw down on our significant tax pools. Also with our tax pools, we'll defer paying any cash taxes for federal and provincial income tax purposes for the next several years. Net earnings for the quarter were $10.7 million or $0.06 per share. We adjusted earnings for income or items that we believe are not reflective of the underlying operations of the company. These are noncash items such as loss from financial instruments at fair value, amortization of the discount on the credit facility and the convertible notes accretion. The adjusted earnings were $26.3 million or $0.14 per share for the quarter. Our all-in sustaining cost, which includes sustaining capital, TC/RCs, corporate G&A and reclamation accretion, including – plus share based compensation, totaled $709 per ounce sold for the quarter. We are still on track to meet our production cost guidance for the second half of the year. Our all-in sustaining cost guidance for the second half of 2018 is $710 million to $770 per ounce sold or $154 million to $156 million and the third quarter cost of $67 million is less than the halfway point. Turning to Slide 14 in terms of liquidity and cash flow. During the quarter, we generated $52.4 million of operating cash flow, spent a total of $10.8 million on CapEx and exploration, received $6.2 million on investing in financing activities and ended September with $190.3 million in cash, a net build of $48 million during the quarter. As Joe has mentioned, in early October, we signed a commitment letter for our fully underwritten $480 million four year facility. We will use this facility to refinance the construction credit facility which will be approximately $423 million due at the end of the year. With a current cash balance of $190 million and the anticipated cash build in the fourth quarter plus excess availability for the new credit facility, we will repurchase the 8% precious metal stream for $237 million. With the completion of these items, we will simplify our balance sheet by year’s end. Now back to you Joe.

[Joseph Ovsenek:]

Thanks, Tom. Now I would like to provide a brief update on our mill upgrade. At the end of last year, we announced that we have submitted an application to potential regulators to increase our production rate at Brucejack to 3,800 tons per day from the current permitted rate of 2,700 tons per day. We began the application process earlier last year prior to commissioning when we saw an opportunity to leverage the capacity of our conservatively designed mill. For a nominal investment estimated at less than $25 million, we can increase the run rate by 40%, increasing production and reducing all-in sustaining costs, a prudent move. We are still expecting to receive that amended permit this year and we will keep you apprised of progress. Looking at exploration. The 2018 regional grassroots exploration program was recently completed. The program was 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, located 20 to 25 kilometers east of the Brucejack Mine that has the potential to host mineralized zones similar to the Valley of the Kings and Eskay Creek deposits. The 2008 program included geophysical studies, continued regional prospecting and mapping and diamond drilling on several high-priority gold targets shown on Slide 17. Drilling was completed on the American Creek and bluffy zone down to the South as well as the Koopa Zones after these. Assay results are slowly trickling in, and we anticipate announcing results later this month. Finally, on Slide 18, we've plotted our year-to-date nine months 2018 gold production versus our all-in sustaining cost per ounce of gold sold as well as the same metrics for some of our intermediate gold producing peers. As you can see, Pretium stacks up well in comparison, doing well on cost, particularly in light of the fact that this is our first full year of operations compared to our more established peers and moving ahead on gold production. We've made significant progress in 2018. Brucejack is now securely established as a profitable, low-cost, mid-tier gold producer. We continue to build a significant cash balance, and we are on track to simplify our balance sheet by years end with a refinancing of our credit facility and repurchasing of our precious metal stream. In summary, we remain fully focused on execution of Brucejack in order to deliver profitable gold production and meet our full year 2018 guidance. Thank you. That concludes the formal presentation. I will turn the call over to the operator, who will open the lines for your questions. Operator?

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Heiko Ihle with H.C. Wainwright. Please proceed with your question.

[Heiko Ihle:]

Hey, guys. Thanks for taking my questions.

[Joseph Ovsenek:]

Hey, Heiko.

[Heiko Ihle:]

Hey, Tom, with current expectations and the current gold price where you were sitting, with the best facility and the $190 million of cash, can you sort of walk us through as much detail as you are willing to provide, the amount of cash on your balance sheet month-by-month to the rest of the year? And what's the minimum you expect to have? And what's – more importantly, what's the minimum you feel comfortable with? And I think this question is especially pertinent given – I think, you mentioned on this call you don't need to raise funds, I'm certain you don't. This is not a trick question. I'm just curious what the minimum you feel comfortable is, and what the minimum you would think about?

[Tom Yip:]

Well, good morning, Heiko. Thanks for the question. You were breaking up a little bit, but I think the gist of your question, if I understand it was, what kind of cash balance do we feel comfortable with in terms of working capital on a go-forward basis? Is that what I'm hearing?

[Heiko Ihle:]

Yeah, correct, and as much granularity as you're comfortable providing? And not just what you feel comfortable with, but also what the minimum that you expect to have?

[Tom Yip:]

Well, generally, we have been running at approximately, as you can tell from our production costs, you know in the order of about $16 million of spending during the quarter, right? And generally, what we like to see is about a month or so or two of cash flow on the books. And going forward, you'll see that we will continue to build post the two transactions that we're contemplating at the end of the year. Whereby, we will pay out the precious metal stream with the current 190-plus what we believe we can build in the fourth quarter. And then, going forward, we will then build on top of that.

[Heiko Ihle:]

Fair answer, fair answer, okay. And pretty sure the answer is no, but the $400 million debt facility has no requirements in any way shape or form to force some sort of gold price hedging, does it?

[Tom Yip:]

That is correct. There is no hedging requirement.

[Heiko Ihle:]

Okay. And any other terms in that facility that are different from standard stuff we would expect to see? Anything we should know about?

[Tom Yip:]

No, from my point of view, it's a fairly standard bank facility.

[Heiko Ihle:]

Terrific, thank you very much. I will get back in queue.

[Joseph Ovsenek:]

Thanks, Heiko.

[Tom Yip:]

Thanks, Heiko.

[Operator:]

Thank you. Our next question comes from the line of Justin Chan with Numis Securities. Please proceed with your question.

[Justin Chan:]

Good morning, guys. Thanks for hosting the call. My first question is just on unit costs. You did much better this quarter at around 230 a ton. And I was wondering – I guess are most of the savings would you say they are structural and we should expect similar levels from here? Or what are the thoughts there? And I guess, part two of that would be all-in sustaining was at the bottom end of your guidance, and you're guiding for more production in Q4. So is guidance just conservative at this point?

[Joseph Ovsenek:]

Well, hi, Justin. Thanks for the question. Well, in terms of the cost per unit, we are seeing some good cost savings, and we will continue to see those types of savings going forward. The guys are working fairly diligently identifying as many things as they can. Just in terms of – and your second part of the question was?

[Justin Chan:]

I was – just an all-in sustaining being already at the bottom end of guidance. And Q4 – well, guidance at Q4 will be stronger than Q3. So is all-in sustaining cost guidance conservative at this point give that?

[Joseph Ovsenek:]

Well, I tell you that we talked a little bit already about the cost of production. The variability will come basically on our CapEx, if you will, because that's pretty much a focus on getting projects done in the wintertime. Sometimes, you can done, sometimes you don't. So – but we believe that we'll be well within the guidance.

[Justin Chan:]

Okay, thanks. And just one last one, on CapEx what are your expectations or hopes? Or I guess, what is guidance for CapEx for the rest of the year? And beyond the $25 million expansion, are there any other projects or notable CapEx for next year that we should be forecasting?

[Joseph Ovsenek:]

Yes, we previously guided on CapEx approximately $24 million for the whole year.

[Justin Chan:]

Okay. All right, thanks very much. That’s it for me.

[Joseph Ovsenek:]

Thanks, Justin.

[Tom Yip:]

Thanks, Justin.

[Operator:]

Thank you. Our next question comes from the line of Joseph Reagor with ROTH Capital Partners. Please proceed with your question.

[Joseph Reagor:]

Thanks for taking the questions guys and congrats on a great quarter. Kind of following onto Justin's line of questioning. As we look at the cost on a per ton basis going forward, I believe they're still significantly above what the study said, maybe 15%-ish or so. Do you think ultimately you can get it down to 190 to 175 range? Or is that probably unlikely given that there is extra grade control cost?

[Joseph Ovsenek:]

Good morning, Joe. Looking at our cost from the Feasibility Study, we're working to bring our cost down. One cost that's in there that wasn't in the Feasibility Study is we have a contract minor on-site, right. The Feasibility Study, we're working to bring our cost down. One cost that's in there that wasn't in the Feasibility Study as we have a contract minor on-site, right. The Feasibility Study called for self-performing on the mining site. So we will have those costs build in as long as we have Procon on-site doing the mining. Otherwise, our focus is bringing cost down at sites. So we'll continue to do, look at every opportunity we can. We've made good progress this year on the site surfaces work, and we'll continue to look at where we can bring some cost down on the mining site. So stay tuned. Can't really say where we're going to get to, but we do have a lot of focus on cost control.

[Joseph Reagor:]

Okay. And then on the drilling you guys conducted. Hypothetically, if it goes well, what are you guys thinking about as far as spend next year on exploration? And how you plan on going about funding that? Is it possible you'll do additional flow-through next year just for that purpose? Or is it going to be coming out of cash flow?

[Joseph Ovsenek:]

A couple of things there. First off, we will look at doing some reserve expansion in close to the Valley of the Kings. So we will drive out underground to the east probably a few hundred meters this coming year and start drilling off additional reserves. We like to bump up our reserves backup from depletion. And then, on the – so we will use cash flow from operations for that. At the grassroots side of things, we will see where our share price is and see whether it's worthwhile issuing flow-through or just use cash from operations to pay for our grassroots exploration.

[Joseph Reagor:]

And any idea on total dollars spent?

[Joseph Ovsenek:]

Won’t know the total dollars. We're just in the budgeting process right now. So we will have to firm things up on the reserve expansion numbers and not that long. On the grassroots exploration, it will come down to the success from this year's program whether it's worth hitting it hard or just keep on looking for the next deposit. So that one is still dependent upon results.

[Joseph Reagor:]

Okay, well I look forward to the results. Thanks for taking the questions.

[Joseph Ovsenek:]

Thanks, Joe.

[Operator:]

Thank you. Our next question comes from the line of Mark Magarian with UBS. Please proceed with your question.

[Mark Magarian:]

Hi, guys. Thanks for taking the question. Good job on a good quarter. So, just to put a fine point on guidance, it's unchanged, but towards the lower end. So we should be thinking about somewhere around 180,000 ounces at a minimum approximately for Q4, is that about right?

[Joseph Ovsenek:]

Well, that gets us into that low end right. So we're targeting 200 or better, but we're guiding down to the low end. So yes, that's not a bad number.

[Mark Magarian:]

Okay, second question is just in this environment companies which are able to generate this sort of free cash flow seem to be fairly sparse should we say. Has there been – and there has been a little bit of a M&A going on, has there been any informal increase at all regarding some sort of collaboration, joint ventures, mergers, or anything else that you perhaps may not be interested in, but has that someone's come knocking?

[Joseph Ovsenek:]

Well, people have knocked, and our response is, look, we're focused on ramping up, getting our 3,800 tons in a place and hitting the numbers on a sustainable basis. And so that's our focus right now and so we aren't really entertaining requests for site visits and things like that.

[Mark Magarian:]

Okay, fair enough. Alright, thank you very much guys. Good job.

[Joseph Ovsenek:]

Thanks, Mark.

[Operator:]

Thank you. Our next question comes from the line of Bhakti Pavani with Alliance Global Partners. Please proceed with your question.

[Bhakti Pavani:]

Good guys.

[Joseph Ovsenek:]

Good morning.

[Bhakti Pavani:]

Congrats on the quarter.

[Joseph Ovsenek:]

Thank you.

[Bhakti Pavani:]

Just wondering if you are comfortable providing this information, the production for Q3 came from how many mining stopes?

[Joseph Ovsenek:]

Jeez, I don't have that one off the top of my head. But we're mining our full spectrum at any one time, we're mining for four, five stopes as where we target it. So I don't have that exact number on the top of my head. But if you get in touch, I'll get back to you with that number.

[Bhakti Pavani:]

Sure, thank you. And also considering that you are developing about 700 meters of underground development, do you think you have enough – enough mining stopes in the inventory as of now to give you a better control over the grades for the fourth quarter? Do you think you need to increase that underground development.

[Joseph Ovsenek:]

No, look at I believe we have sufficient development. The issue for us is stope sequencing, some stopes you can't get to till you backfill the others and then you have to let the pace cure, so there is a sequencing involved as we mine on a long-haul basis throughout the deposit and that sort of guides what stopes are available at any given time, but as far as development goes we are comfortable with our development rate for the 2,700 tons per day. We will get our mine plan out probably early in the New Year for the 3,800 tons per day and at that point we will see what our development rate will be required to be in order to sustainably hit that 3,800 tons per day.

[Bhakti Pavani:]

Got it. And just kind of wondering once you get to 3,800 tons per day. How much of an increase on a percentage point should we expect to see in the production or mining cost?

[Joseph Ovsenek:]

Well, I don’t have that number for you right now, we have the mine plan, but I'd expect to see a reduction.

[Bhakti Pavani:]

Okay. Perfect. That’s it for side. Thank you very much.

[Joseph Ovsenek:]

Thank you.

[Operator:]

Thank you. Our next question comes from David Haughton with CIBC. Please proceed with your question.

[David Haughton:]

Tom, thank you very much for the update. When we were in site, in August, you were running at about 10 operating stopes. Wondering where you are sitting now because you did have a target for year end to be between 10 and 12?

[Tom Yip:]

Yeah, when we were at site, we were mining, I believe from four, five and then we had – the remainder were in inventory, we are about the same rate of inventory right now, maybe a bit more. Mining, off the top of my head, at this current time, I think we're at four or five, last I checked last night. So we're at the same pace or better than when you were at site.

[David Haughton:]

Okay. And thinking about the expansion plan, on site you sort of targeted the idea that you probably need about four or more stopes in the cycle to be able to sustain the [indiscernible] tons. Is that still a reasonable idea?

[Joseph Ovsenek:]

Yeah, I think so. We’re waiting on the mine plan, but I'd say that's a reasonable look at things.

[David Haughton:]

And although you are waiting on the mine plan, if you did get the go-ahead, and it just seems like an administrative process, how long do you think it would take for the mine to be able to get up to the 3,800 tons a day. Would it take all of 2019?

[Joseph Ovsenek:]

Good question. Without the mine plan in front of us, look, I expect it's going to take a minimum six months and it may take more, but don't really have that data in front of me at this point in time. The other thing I think we should look at and we're going to get the planners to look at is as opposed to just having five, or six, seven stopes that we mine from at any time in the rest in inventory, how does it look if we actually mine from a dozen or more stopes when it comes to smoothing out the grade variability. So we will look at things like that and then be able to give an update when we announce our 3,800 tons per day plan and production guidance.

[David Haughton:]

And that’s kind of where the question was going, because you made a statement in your MD&A that you are looking to know the range of grade variability. And I presume that part of that is having the inventory available to you at any one time, which could mean having more mining phases, is that part of the thinking?

[Joseph Ovsenek:]

Yeah, absolutely that’s a good way to look at it. More phases we have the better ability we have to blend and the quicker we can blend. So, yes, that is absolutely, correct.

[David Haughton:]

And as part of that your sampling procedure that you've got in place is very impressive how many tons you are actually running through in various stopes to get your grade consideration in place. Is that reconciliation working to your satisfaction? Are you finding it pretty much got a reasonable tracking area one way or the other?

[Joseph Ovsenek:]

In essence what we’re looking at we’re still refining that method, and as we go into the New Year one way we refining – we will refine it is actually we will start to use what – we're doing a test trial right now, but we will use an RC rig with an extra sample splitter on the end of the rig to get our samples for grade estimation from the long-haul as opposed to taking a sample off of off the ground. So we’re continuously refining that system and it's getting better and better, but still needs some work.

[David Haughton:]

All right, I will leave it there. Thank you, Joe.

[Joseph Ovsenek:]

Thanks, David.

[Operator:]

Thank you. 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:]

Well, thank you everyone for dialing in to our earnings call this morning. I appreciate all the comments and questions and have a good weekend everyone. So thank you very much. Bye-bye.

[Operator:]

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