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Edited Transcript of GCM.TO earnings conference call or presentation 15-Aug-19 1:30pm GMT

Q2 2019 Gran Colombia Gold Corp Earnings Call

TORONTO Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Gran Colombia Gold Corp earnings conference call or presentation Thursday, August 15, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lombardo Paredes Arenas

Gran Colombia Gold Corp. - CEO

* Michael Monier Davies

Gran Colombia Gold Corp. - CFO

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Conference Call Participants

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* Derek Macpherson

Red Cloud Klondike Strike Inc., Research Division - VP of Research

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Presentation

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Operator [1]

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Welcome to the Gran Colombia Gold Second Quarter 2019 Results Webcast. My name is Paulette, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Mike Davies, Chief Financial Officer. You may begin.

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [2]

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Thanks, Paulette. Good morning, and thank you for joining us today for our 2019 second quarter results webcast. With me on the webcast this morning is our CEO, Lombardo Paredes. I will first go through our prepared remarks regarding our performance in the second quarter and first half, and then Lombardo will be available as we open things up for the Q&A session. Before we proceed with the presentation, I would first like to draw your attention to our legal disclaimer regarding forward-looking statements that may be made by us during the webcast this morning.

Last night, we released our operating and financial results for the second quarter and first half of 2019. We're very pleased to be able to report another solid quarter consistent with our expectations. In the second quarter, almost all of our operating and financial metrics, as highlighted on this slide, showed improvement compared to the second quarter last year. For the first half of this year, production growth and lower cash costs have been catalysts to improved adjusted EBITDA, earnings and cash flow results, which, in turn, are helping us to keep our balance sheet in a solid position. Over the next few slides, we'll take a closer look at the results we reported last night.

Our second quarter gold production was up 9% over the second quarter last year. Combined with the record gold production we reported in the first quarter, our first half total is up 12% over the first half last year. That brings our trailing 12 months total gold production at the end of June 2019 to about 231,000 ounces, up almost 6% over 2018's annual gold production. Based on our first half operating performance and July's production of another 18,166 ounces, we are now comfortable enough to raise our guidance to a range of 225,000 to 240,000 ounces of gold this year.

Our development and mechanization investments in the company-operated areas at our Segovia operations, Providencia and El Silencio in particular, have continued to fuel our production growth at Segovia this year. At Providencia, we've seen an increase in the first half this year in both tonnes mined as well as the head grades. At El Silencio, growth has been a function of an increase in tonnes mined. In total, material processed at Segovia in the first half of 2019 increased to over 1,100 tonnes per day, up 18% over the first half last year, and head grades increased to an average of 17.8 grams per tonne compared with 16.7 grams per tonne in the first half last year. The mill expansion to 1,500 tonnes per day is now complete, and we've raised our production guidance for Segovia to a range between 201,000 and 214,000 ounces of gold this year.

At Marmato, quarterly production continues to be steady, but the real focus continues to be the evaluation with respect to the underground expansion opportunity to incorporate the Deeps mineralization. We've been making good progress on the PEA, which we expect to be ready in the second half of this year, and we are encouraged by what we are seeing.

Revenue reached a total of $77.6 million in the second quarter of 2019, pretty much the same as our first quarter and up 13% over the second quarter last year. Gold sales volume was up 12% in the second quarter driven by our production growth, and that brought our first half 2019 revenue to a total of $155 million, up 16% over the first half last year. And our trailing 12 months total revenue has now increased to $290 million, up about 8% over last year.

Spot gold prices fell about 1% from the first half of last year to an average of $1,307 per ounce in the first half this year. However, our realized gold prices actually went up from $1,290 per ounce last year to $1,296 per ounce this year. The catalyst for this improvement, which equated to about $20 per ounce in additional revenue this year, was savings in refining charges from the new refining agreement we mentioned last quarter. However, what's really exciting for gold miners these days is the recent run-up in gold prices to levels over $1,500 per ounce. With our leverage to gold, the extra $200 per ounce, if prices stay at this current level, will have a significant positive impact on our second half revenues compared with the first half of this year.

Overall, our cash cost was $655 per ounce in the second quarter this year, bringing the first half average to $638 per ounce, down from $683 per ounce in the first half last year. Segovia, which represents about 90% of our gold sales, has been the primary driver to the decrease in this year's cash cost. With the improved efficiency and the increased head grades in the company-operated areas of our mines, Segovia's cash cost for the first half has decreased by almost 6% from the first half last year to $585 per ounce. Marmato's cash cost this year has also shown improvement, down to the $1,100 per ounce level, and we continue to foresee much lower costs in the future once we implement the mine expansion strategy incorporating the Deeps mineralization.

Our all-in sustaining costs fell to $855 per ounce in the first half this year, down from $925 per ounce in the first half last year. The $45 per ounce reduction in cash costs in the first half versus a year ago was a big driver. Our sustaining cash -- CapEx in the first half of this year was about $700,000 lower than the first half last year. And with our production growth, sustaining CapEx in the first half of 2019 on a per ounce basis was down about $28. In the first half of 2019, we also spent about $2 million on nonsustaining CapEx, mainly the drilling program at Marmato. This equated to about $18 per ounce, bringing our all-in costs in the first half of 2019 to $873 per ounce, down from $929 in the first half last year.

You can see from this chart that our trailing 12 months all-in cost is $900, of which the all-in sustaining component is about $883 and the cash cost component is about $657 per ounce. We have refined our cost guidance for the year, maintaining our expectation that our all-in costs will remain below $950 per ounce, our all-in sustaining cost will remain below $925 per ounce, and our cash cost will remain below $680 per ounce. With our expected cash flows in the second half of the year and the funds we have available from the convertible debt offering, the financed exploration at Segovia, we are evaluating some additional exploration and development programs at Segovia and further infill drilling at Marmato in the second half, which may increase our all-in sustaining cost and our all-in cost compared with the first half of this year. That being said, cost control and positive free cash flow are key drivers for us, so we will be careful in how much extra we decide to spend this year.

With the boost in revenue from the production increase in the first half of 2019 and the lower cash cost per ounce, our adjusted EBITDA reached a total of $68.5 million, up 27% over the first half last year. That brings the trailing 12 months adjusted EBITDA at the end of June to a total of $117 million, up 14% over 2018's annual adjusted EBITDA.

Cash flow metrics in the first half of 2019 were also better than the first half last year. Operating cash flow in the first half was $38 million, this after paying $30 million in income taxes this year and up 7% over the first half last year. After $19 million spent on CapEx in the first half this year, most of which related to Segovia, our first half 2019 free cash flow was $19 million, up 3% over the first half last year. And after meeting our debt service obligations and spending $2 million to increase our equity position in Sandspring to about 20%, we still had $2 million for our first half free cash flow to add to our midyear cash position. And with that $2 million from the first year -- first half cash flow and approximately $13.7 million of the net proceeds from the convertible debentures financing we completed in early April, our cash position increased from $35.6 million at the end of 2018 to $51.3 million at the end of June.

Meanwhile, we reduced the principal amount of the Gold Notes by almost $10 million in the first half of 2019, bringing them down to $78.5 million by midyear, and we added $14.9 million of principal from the convertible debentures. At the end of June, our net debt stood at $40 million, down from almost $53 million at the end of 2018. And with the growth in our adjusted EBITDA this year, our mid-2019 net debt is only 35% of our trailing 12 months adjusted EBITDA, down from 52% at the end of 2018. Needless to say, we are very pleased to see the ongoing improvement in our financial liquidity.

In the second quarter, with further increases in our share price, we started to see the exercise of some stock options granted back in 2016 that increased our issued and outstanding shares to 49 million. We instituted Normal Course Issuer Bids for both our shares and the 2024 warrants starting in June. And since then, we have repurchased and canceled 137,000 warrants, bringing our fully diluted share count down to 67.9 million at the present time. We have seen some solid improvement in our share price, which began the year at $2.82 and recently hit a new 52-week high of $5.80. Yesterday, we closed at $5.45, giving us a market capitalization of $267 million.

So on this last slide before we open up the Q&A session, as we hit the middle of the year, I'd like to comment on where we are relative to our guidance and our action plans for 2019. As I mentioned earlier, we've raised our guidance on production, and we've refined our cost guidance for which we are on track to meet. Our capital programs at Segovia are progressing well, and we are seeing the expected improvements in our operating results.

Earlier this week, we released some very encouraging high-grade results for our drilling program at Segovia, which increases our confidence in being able to add further reserves and extend our mine life in our flagship operation. We are in the midst of the technical and AI studies that aim to help us identify and prioritize step-out and brownfield drilling targets, so we can expand our exploration program at Segovia later this year financed by the net proceeds from the convertible debt offering.

The work at Marmato on the evaluation of the underground expansion to incorporate the Deeps mineralization is proceeding nicely, and we remain on track to have a PEA completed in the second half. In preparation for the prefeasibility phase that will come immediately after the PEA, we will be adding another 9,000 meters of infill drilling in the second half to convert resources to reserves for the prefeasibility study.

At Sandspring, they have now filed a PEA for Toroparu, and they're ready to proceed with a feasibility study. They recently announced a private placement to fund the feasibility study, and we've elected to subscribe for CAD 1 million to maintain our equity interest at the 20% level.

Overall, the first half of 2019 has been a very exciting year so far for Gran Colombia. And with gold on the run, the second half is shaping up to be even better.

So with that, Paulette, I think we're ready to open up for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We do have a question online from Derek Macpherson from Red Cloud.

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Derek Macpherson, Red Cloud Klondike Strike Inc., Research Division - VP of Research [2]

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Congratulations on a solid quarter. My question relates to sort of the cash cost guidance. Obviously, you guys have a very strong first half sort of bolstered by some higher grades at Providencia, and that has you sort of well below even your adjusted guidance. Is that -- based on the adjustment, are we expecting sort of grades to be down a bit and then costs to be correspondingly up a bit in the second half to reflect that?

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [3]

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Yes. Thanks, Derek. We -- Q1 was an abnormally, I would say, low cash cost, given the very high grades that we got, and I talked about with that record production. Q2's cash cost, which averaged $655, is probably more like what we expect to see over the next 2 quarters. So that should -- we should be in that range of sort of $655 or so, give or take a little bit over the next couple of quarters. I don't think you're going to see us have our cash cost jump up significantly, given the cost structure we have at Segovia.

Okay. There is one question I've got coming in through the webcast from [Nick Moss]. The gold production guidance for 2019 has been between 225,000 and 240,000 ounces. Is management expecting to sustain these higher levels of production? And if so, for how long?

Lombardo, maybe you'd like to respond to that?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [4]

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Yes. Well, in fact, in the last part of the past year, we started an exercise just to try to elevate the production in Segovia at a level of 240,000 to 250,000 ounces of gold. After second -- and we then -- we'd run an exercise with SRK just to identify potential issues that we have to solve to stay at that level. And then one of the main issues that outside of this exercise was exploration. So in order to maintain and to increase the level of production in Segovia, we have to do more explorations.

In our company, for example, we did not do explorations in the years 2013, '14 and '15. Then we designed an aggressive exploration program. We hired SRK to produce a structural geological model. And also, we hired GoldSpot, which is totally we used neural network and artificial intelligence applied to exploration data. So we combined those -- we are combining 2 (inaudible): the work done by SRK with the work that is running by GoldSpot. With that, we expect that we are going to have nice exploration program with more certainty than the normal exploration programs. And we have also the money for that. Remember that we realized some money that we have in cash just to fund that exploration program.

So based on that, we believe and we expect that we can increase the production in Segovia, if not to the level of 2,050 ounces of gold per year -- 250,000, at the level from 220,000 to 250,000. And well, in the next 6 to 9 months, we will realize if that program is going to be -- to perform as we expected or not. And in relation with Marmato, as you know, Marmato, we have a steady production of 25,000 ounces of gold but with the new project, which is producing fine, we expect to add for the year 2020, by the end of '22, '23 to add 150,000 ounces of gold.

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [5]

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Great. Thanks, Lombardo. Lombardo, I have 1 more question that's come in through the webcast that I'll read for you. It's from [Nick Picard]. Now that the mill is up to 1,500 tonnes per day, how much should we expect tonnage production to increase over the next couple of quarters, given we averaged 1,100 tonnes per day in the first half?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [6]

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Well, as we announced, we are increasing our processing capacity at Segovia to (inaudible). And the net effect is just -- we expect to maintain that level of processing capacity for the next 2 quarters, 3 quarters. Not only with that, we have enough mineral nowadays to maintain that production. But our expectation is to increase the Maria Dama, our processing plant capacity to 2,000 tonnes per day. And based on the exploration program that we are developing, we believe that we can fulfill that expectation.

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [7]

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Yes, so Lombardo, of the 1,500 in the next -- in Q3 and Q4, how much do we think we'll use of that 1,500 in Q3 and Q4 this year? Will we fully use 1,500? Or will it be something a little less?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [8]

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We are not. In the next 2 quarters, we are working with the 1,500. Now in fact, with the effect of this month, we are -- even with the adjustment that we did in the plan and the early problem that the plant presents when you have some modification -- heavy modification into the plant. I don't have -- I do not expect any problem to maintain 1,500 during the next 2 quarters.

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [9]

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Okay. Thanks. Paulette, do we have any other calls on the line?

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Operator [10]

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We're showing no further audio questions.

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [11]

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Okay. Well, with that, I'd like to thank everyone for joining us this morning. Look forward to keeping you updated as we progress both with the drilling and the operational programs as well as the Marmato studies. And if you have any questions, please feel free to reach out to us. So thank you for attending this morning.

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Operator [12]

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Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating, and you may now disconnect.