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Edited Transcript of AUE.L earnings conference call or presentation 8-Aug-19 12:00pm GMT

Half Year 2019 Avesoro Resources Inc Earnings Call

British Columbia Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Avesoro Resources Inc earnings conference call or presentation Thursday, August 8, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Geoffrey Peter Eyre

Avesoro Resources Inc. - CFO & Director

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Conference Call Participants

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* Brock Salier

Sprott Capital Partners, Research Division - Analyst

* Laurent Kimman

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Avesoro Resources Q2 2019 Operational and Financial Results. (Operator Instructions)

Today, I'm pleased to hand over to Geoff Eyre, CFO. Please go ahead with your meeting.

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Geoffrey Peter Eyre, Avesoro Resources Inc. - CFO & Director [2]

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Thank you. Thanks for the introduction. Thank you, everybody, for joining the Avesoro call today. You will have obviously seen the announcement that we put out this morning.

So first thing to say, Serhan Umurhan sends his apologies. He's going to be unable to join the call today. He's dealing with some urgent matters that have arisen this morning. So he passes on his apologies, and I'll do my best to cover the topics at hand, and obviously answer questions at the end of the relatively short presentation that I'll be giving.

We've also put on the website, and presumably people have it in front of them, the presentation deck that accompanies the announcement that we put out this morning.

I think I'd like to start by addressing the flooding situation at the New Liberty mine, just before we dive into the details of the presentation. I'm sure that's on investors' minds and analysts' minds.

So the current situation is -- expectation is that all production will be suspended for around 10 days. Then the mining equipment is continuing to focus on waste stripping. I've looked at the numbers in terms of the rainfall event. The last 24 hours that gave rise to the flooding was in the top 10 24-hour rainfall events over the last 4 years, just to put it in context. So it was quite exceptional.

We're assessing the impact on the company's cash flow needs, and obviously reviewing guidance at the moment. I think, broadly speaking, the impact of 10 days production loss would be around $2 million of margin. So just to sort of put some broad parameters around that. And the mill is not running at full capacity at the moment and it hasn't done so far this year.

So there's a view that provided that we continue with the waste stripping, we'll be able to access the ore later in the year and with the surplus capacity that we've got within the mill, potentially catch that up. But that's one of the things that we are assessing at the moment.

So -- but that's the -- that is the current situation. And obviously, I think we'll be advising that the market in due course as we sort of update the situation and sort of refine our views and then come to a sort of firm view on that.

I think the other thing that I wanted to cover off, that was flagged in the announcement was the events of default by Avesoro Resources Inc.'s parent company, which is called Avesoro Holdings, which is privately held by Murathan Gunal, who's the eldest son of the Chairman. So 2 technical defaults under the guarantee, the parent company guarantee documents that are in place. One relates to the late filing of the audited accounts of the Avesoro Holdings, the private group. And the other relates to a reduction in the total equity of Avesoro Holdings Limited, which -- there was a significant reduction in the equity on the balance sheet as a result of an impairment of an asset that sits outside of the public company. And there's also an accounting loss at the group level as a whole.

So although there's cash generation because of the depreciation charge in addition to this impairment, there's an overall P&L loss which feeds into the equity number. So it is -- we consider it to be a sort of technical accounting event. We believe that it's nonconsequential in nature, and we're having a positive dialogue with the lenders about either obtaining a waiver to those breaches. Obviously, one of them is being remedied now anyway in the sense because the accounts have now been provided to the banks, or alternatively agreeing a more suitable financial covenant to replace the total equity test, which I think is principally designed to ensure value isn't taken out of the business. That's the primary reason of this step. But given that we've fallen below -- or AHL has fallen below that number because of accounting events is something that obviously is being discussed with the banks. So we don't believe there's a significant risk if the banks are accelerating repayments of those debts, and their conversations are positive and ongoing.

So I think having covered off those 2 points, we sort of move into the body of the presentation itself and sort of counter through this quite quickly.

So I think turning straight to Page 5 of the presentation, you can see the group operating highlights for the second quarter. There was a 23% reduction in ore mined, that's partly a function of the mining equipment at both New Liberty and Youga mines, focusing more on waste removal to access the ore body. And you can see that the total material movement reduced in the quarter by 7%, which is primarily a result of the transition to contractor mining, which is being undertaken at both locations. Obviously, there was a previous announcement about a labor dispute and a strike at Youga, which has now been resolved. And there were some transitional disruption at New Liberty when a number of the mining maintenance staff left the organization because they were not willing to accept the alternative terms that the mining contractor was offering. So that caused a degree of disruption.

With the exception of the issue with the water that I mentioned earlier at New Liberty, that very quickly returned to sort of near planned material movement levels, and Youga is progressing. But we have a reduction as well in the quarter in the feed grade at both -- again, at both mines, which is the combination of those factors has resulted in the 24% reduction in gold production in the second quarter compared with the first quarter. So in a bit of a way, it's been a perfect storm with a reduction in material movement and lower grades at both mines, which has resulted in the lower gold production.

So turning over to page -- to Page 6, you can see a little bit more detail there in terms of the development of the gold production and the cash cost per ounce and the AISC per ounce. You can also see the note under New Liberty. So the plant feed grade specifically reduced by 21% quarter-on-quarter to 2.36 grams per tonne, and we also had the reduction in feed grade of 23% to only 1.6 grams a tonne at Youga.

So the next slide summarizes where we stand currently at the end of the first half of the year relative to the revised guidance of 180,000 to 200,000 ounces. We have quite a bit of work to do in Q3 and Q4. We need to achieve around 50,000 ounces in each of those subsequent quarters to meet the bottom end of guidance. And that's something that's being reviewed currently in the context of the New Liberty pit flooding and other factors. So we'll be forming a view on that shortly.

I think in terms of the operating cash cost in the AISC. If the gold production performance increases, then a function of that would be to bring those costs down into line with the guidance range. So it really all revolves around the gold production levels, which is something that's being reviewed at the moment.

I think it's probably worth saying Serhan's view at the moment, or at least until the event with the New Liberty flooding, was that there was a good degree of confidence that he had that we would achieve the currently stated guidance range. But obviously, given the events of the last sort of day or 2, that's now just being looked at again.

So turning to Page 9 and the financial performance. You can see the average realized gold price in Q2 was $1,313 per ounce as compared to an operating cash cost of $1,125 an ounce, and an AISC of $1,469. So obviously, an AISC level that the business was loss-making as a whole. It's worth noting, however, that the AISC number includes around $2.5 million of costs associated with retrenchment as we transition to contractor mining in Q2 at both of those locations. Obviously, it won't be an ongoing cost.

Turning to Slide 10, the treasury. So the cash generated and the use of that cash during the half. So you can see cash, the EBITDA number of almost $12 million, including exploration and evaluation costs, income tax payments and then most significantly I think the $13.5 million of investing activity. And you can see the breakdown there, around $10 million of that $13.5 million is associated with capitalized waste stripping at new Liberty as we continue to incur that cost, running at about 30:1 strip ratio at New Liberty currently. And then we have TSF expansion at Youga and New Liberty and then some additional exploration at Ouaré and Ndablama. The net debt movement, $4.5 million, which includes a $10 million drawdown, previously announced in March, from the major shareholder of Avesoro Resources Inc. of $10 million, offset by finance charges of just under $5 million.

So turning to Page 11 of the presentation, the EBITDA bridge. You can see the primary challenge that the business continues to have at Youga and with the additional sort of drop-off in grade, which is planned actually at New Liberty; but nevertheless, it really is grade that is sort of underlying the reduction in financial performance of the operation. And then the majority of that is attributed to Youga. So that's something that's being looked at, obviously, with some urgency. As previously announced that we've had CSA to come out and conduct a review, and they made a number of recommendations. And we've hired some additional technical staff into the Youga operation with a view to addressing the difference in the mill feed grade, that we're seeing as compared to the reserve grade in the 43-101.

So just turning to a little bit more detail, and I don't propose to go through all of these, but a little bit more detail on the individual business units. So as mentioned previously, on Page 13, there's a significant focus currently on waste stripping at New Liberty. So 29.52:1 in the current quarter, which is a further 15% increase in waste stripping -- of the waste stripping ratio quarter-on-quarter. And that focus of mining equipment effort sort of coincided with a reduction in grade with just the area of the ore body that we're mining in the current quarter so that the feed grade reduced from 3 grams a tonne to 2.36 grams a tonne.

In terms of the outlook for the remainder of the year. We anticipate with the support of the new mining contractor and additional mining equipment that's now arriving on-site as part of that arrangement, the expectation is that mining rates will increase to 3.2 million tonnes per month, which is around 9.6 million tonnes a quarter compared with the -- we're doing just under 8 million tonnes at the moment. So there is a significant percentage increase in the material movement that's anticipated later this year as we continue to address the stripping. And the expectation underlying the guidance at the moment is that, that increase -- our planned increase in material movement will enable more ore to be mined and the mill utilization to increase to achieve the guidance range that's there. But as I said, that's something that's being reviewed currently.

Just turning the page to Slide 14. Obviously, you now Avesoro has a significant focus on mining unit costs. And you can see that there continues to be a solid trend and performance in terms of mining cost per tonne. We achieved $1.84 in the current quarter, which was a slight increase, but still substantially below $2 a tonne, which is one of the areas that we focus on.

There's some detail in the presentation on the performance on a quarterly basis. Historically, so Page 15, I think the only couple of things to highlight here. You can see in the top left graph the sort of continued increase in the strip ratio, as we've sort of progressed over the last few quarters, which was something that the New Liberty mine always required. So that is being taken care of. It's just unfortunate with the fact that, that's coincided in this quarter with a reduction in grade, as you can see with the graph on the top right.

Turning to Youga on Page 16. I think that the challenge there very much continues to be the mill feed grade. So you can see that there was a decline in the table below from 2.07 grams in Q1 to 1.59 grams in Q2. And I mentioned earlier on the call that there are steps that are being taken to address that.

The next slide, Page 17, again, sort of similar format to the New Liberty one, you can see the mining cost per tonne. So $1.64 per tonne achieved in Q2. So a good performance on the mining cost. It really is around the grade. And -- it really is around the grade actually for getting the Youga performance to where it needs to be.

So just wrapping up. I'm on Slide 20 now. But just restating the guidance that's currently been put in the market. And to say that, that's obviously under review. As I mentioned earlier, so we are expecting significant increases in material movements with the mining contractors, both at the mines, and as we sort of put some distance between the sort of the impacts of this transition to those mining contractors and sort of settle into our stride for the second half of the year.

So that concludes the formal part of the presentation from my perspective.

I'll hand it back to the moderator for any questions that we might have from the audience. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Brock Salier.

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Brock Salier, Sprott Capital Partners, Research Division - Analyst [2]

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The first question was around your CapEx, let's call it, the next 12 to 24 months, how much of that is growth CapEx that can be deferred? Either to take advantage of the strong gold price to build up a bit more cash or to look after the balance sheet? And in particular, reference on the sort of the Liberian operations, I guess?

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Geoffrey Peter Eyre, Avesoro Resources Inc. - CFO & Director [3]

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Yes. Thanks, Paul. A significant proportion of the CapEx relates to waste stripping. As sort of noted earlier, the sort of $10 million incurred in the first half of the year. So -- and that's expected to increase as we progress through the second half of the year. So that aspect isn't something that we can easily defer. We're sort of looking at options from a sort of financing point of view in terms -- as we sort of start to look at the underground scenarios as to what can be done there to defer the actual cash flows associated with those development activities. And there is some sort of smaller CapEx elements, which have already been deferred anyway. So I think you can see in the numbers actually reported. Although we're sort of higher on an operating cash cost basis, away from guidance, but sort of closer -- we're closer to the number on an AISC basis, which is reflecting the fact that certain CapEx costs have been deferred already.

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Brock Salier, Sprott Capital Partners, Research Division - Analyst [4]

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Understood. And tell me with the senior debt, what are the -- could you talk us through some of the options you have there or may have in terms of what an accelerated repayment would look like or perhaps, if it was refinanced with the existing lenders, what shape that may take? I understand that it's still sort of up for discussion at the moment?

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Geoffrey Peter Eyre, Avesoro Resources Inc. - CFO & Director [5]

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Yes. I don't think there's any merit in speculating on what that might look like. We really do believe that the late filing of the set of accounts at the parent holding company, and the fact that there's been an impairment of an asset that, as an accounting consequence, has reduced the sort of total equity of the private parent company. We think it's completely inconsequential. And we don't get the sense from the conversations so far that we're having with the banks that there's any sort of meaningful concern around that. It's really a question of just having the dialogue and going through the process. So I don't -- I really don't see it being an issue. So I don't think -- there's no point really in terms of talking about refinancing or what accelerated payments might look like because I just don't think it's going to happen.

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Brock Salier, Sprott Capital Partners, Research Division - Analyst [6]

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Perfect. Understood. And the final one is from Burkina Faso. What is the -- can you give us a bit of color on what those CSA recommendations were and/or what the grade will look like coming out of the Youga open pit in the next couple of quarters? Is it something that you think you can materially address? Or is it the nature of the ore body?

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Geoffrey Peter Eyre, Avesoro Resources Inc. - CFO & Director [7]

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I think it'd be more appropriate for Serhan to go through the details of what the recommendations were, if he was on the call. But I think my understanding is that the recommendations were achievable. I think CSA were of the opinion that with changes in the mining method, that we could significantly reduce the dilution in the pit to a level in line with the 43-101 assumptions. So it wasn't -- there wasn't any concern about the fundamental sort of assessment of the ore body. And as I mentioned, I think there have been additional staff that have been hired and there's been a lot of work done to focus on the mining techniques that are being used in the pit to reduce the dilution levels and improve the feed grade. So I don't think it's insurmountable. And then I understand that a number of those changes have been implemented already. It's -- but it takes a little bit of time to see the results and make sure that the changes in practices are having a positive effect.

And I think the other thing that's probably worth commenting on in some of those -- perhaps to reduce the dilution, it may cause a reduction in the actual ore tonnes production because they may need to mine slower to ensure that there's not a dilution. But that's something that's being looked at, at the moment.

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Brock Salier, Sprott Capital Partners, Research Division - Analyst [8]

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Understood. And do you expect the mining costs to stay under that $2 mark under the new contracting regime?

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Geoffrey Peter Eyre, Avesoro Resources Inc. - CFO & Director [9]

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Yes, we do. Yes.

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Operator [10]

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(Operator Instructions) Our next question is from -- comes from the line of Laurie Kimman from Berenberg.

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Laurent Kimman, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [11]

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Just a quick couple of questions from me. Just a follow-on from Brock. Could you give us a quick time line on the response from lenders regarding the waivers?

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Geoffrey Peter Eyre, Avesoro Resources Inc. - CFO & Director [12]

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The conversations are current. We've had conversations as recently as today on that. So they need to obviously go through their internal processes. It's not something that they can just sort of turn around in 24 hours. But as I mentioned earlier, I think all of the feedback that we're getting and the sort of the tone of the discussions and the relationship is positive. And we don't anticipate this -- any sort of material adverse effects sort of flowing from this.

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Laurent Kimman, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [13]

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Okay. Perfect. And on the New Liberty underground, is the plan still to sort of get that up and running in Q -- H1 2020? Or is that being sort of delayed now?

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Geoffrey Peter Eyre, Avesoro Resources Inc. - CFO & Director [14]

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It's still the plan at the moment to actually start the development work. So nothing's changed in terms of the timing for the operational plan at the moment.

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Laurent Kimman, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [15]

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Yes. Perfect. And on the contractor transition, is that fully complete now? And you said the equipment is arriving on-site? And is that transition sort of going -- gone smoothly or has there been a few hiccups along the way?

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Geoffrey Peter Eyre, Avesoro Resources Inc. - CFO & Director [16]

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Yes, I think at New Liberty, I mean, to all intents and purposes, the transition is complete. There were some issues as I mentioned sort of back in April, when we had a good number of people leave in relatively short notice, but the contractor quickly addressed that by bringing in additional people to fill the gaps. And with regard to Youga, obviously, the contract's in place, it's been signed and that's operating. So it's -- I think that the transition associated with those 2 things is done.

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Operator [17]

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(Operator Instructions) It looks we do not have any further questions from the participants. I'll hand it over back to you, sir, for any closing comments.

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Geoffrey Peter Eyre, Avesoro Resources Inc. - CFO & Director [18]

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Okay. All that's left to say, I think, is thank you very much for participating in the call today. We continue to work hard at Avesoro to deliver the results that our shareholders expect, and I can assure you that, that is going on.

So thank you very much, and thank you for joining the call. Bye.

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Operator [19]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines. Thank you.