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Edited Transcript of GCM.TO earnings conference call or presentation 28-Mar-19 1:30pm GMT

Q4 2018 Gran Colombia Gold Corp Earnings Call

TORONTO Apr 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Gran Colombia Gold Corp earnings conference call or presentation Thursday, March 28, 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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Presentation

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Operator [1]

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Welcome to the Gran Colombia Gold Q4 2018 Results Webcast. My name is Richard, and I'll 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. Mike, you may begin.

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

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Thank you, Richard. Good morning and thank you for joining us today for our 2018 fourth quarter and full year 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 2018, 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 will be made by us during the webcast this morning.

I have been characterizing 2018 as the watershed year for Gran Colombia. Everything that we've been working on since early 2016 to turn around the company came together. We established a number of new highs this year, including gold production, EBITDA, operating cash flow and free cash flow. We completed the notes financing a year ago that completed the initiatives to strengthen our balance sheet and simplify our capital structure. And that brought us to a total issued and outstanding share count of 48.3 million and a market cap of $185 million at yesterday's close. Adding in warrants and stock options, our fully diluted share count to 63 million shares.

We have seen significant improvement in our share price over the last year, and our stock has outperformed the TSX Global Gold Index. In 2019, analysts at GMP and Fundamental Research initiated coverage with target prices of $6 and $5.62, respectively. We expect to have additional analyst coverage commence this year. 3 years ago when we started the turnaround, we had about $3 million of cash and $179 million of debt. At the end of 2018, our cash position has risen to almost $36 million and our debt is now down to $83 million, less than half of where we started.

Our working capital has also turned positive in 2018, reflecting a $10 million improvement since the end of 2017. One of the initiatives that made this possible was the cancellation of some old contracts entered into several years ago when the plan from Marmato was still linked to the open pit strategy. Eliminating these contracts in 2018 took $8 million off our current liabilities. We now have a solid foundation on our balance sheet as we move ahead with our growth strategy.

Last night, we released our operating and financial results for the fourth quarter and full year of 2018. We're pleased to be able to report another positive quarter of continued improvement as we execute our strategy. In our fourth quarter and full year results, we saw improvement in gold production and sales, revenue, adjusted EBITDA, adjusted net income and cash flow metrics compared to the same periods last year. In addition, we continue to maintain our cash costs and all-in sustaining costs below our expectations for the year. Over the next few slides, we'll take a look -- closer look at our results reported last night.

This was our fifth consecutive quarter reporting more than 50,000 ounces of gold production and our first year with more than 200,000 ounces. Segovia has been our growth catalyst as we have doubled our production over the last 5 years. In 2019, we have already reported close to 40,000 ounces of production for the first 2 months of the year, including a new monthly record in February as a result of some very high-grade material in our Providencia mine at Segovia. We expect to have another solid year in 2019, and we're already off to a terrific start.

With almost 49,000 ounces of production in the fourth quarter, Segovia produced 193,000 ounces in 2018, up 30% over 2017. The key driver was the Providencia mine, where the mine development program and capital investment in the high-grade company operated areas of the mine resulted in a 70% increase in Providencia's production in 2018.

The El Silencio mine, which is the oldest of the mines, continues to run strong and will be the subject of a deep exploration drilling program that started in February to test extensions of the 3 main ore shoots, another 200 meters below the current mineral resource. Development of the Sandra K mine allowed us to double its production in 2018, and we expect to see some additional growth in 2019 from this mine. At Marmato, production overall continued to be steady with 25,000 ounces of gold produced in 2018. And for 2019, we expect a total of 24,000 to 26,000 ounces for the year.

We've shown this chart before in respect of rankings of the top 5 highest grade underground gold operations. In the 2017 study published by Mining Intelligence, our Segovia operations made the list in the #3 spot. We decided to see how things have shaped up in 2018 based on reported production data for the last -- like last year's top 5, and we're pleased to report that Segovia remained in the top 5 and appears to have moved up a notch.

While this isn't an official study in the sense that we didn't look more broadly to see if anybody else made it into the top 5 this year, it does speak to the high quality of the Segovia project based on its gold grades, and it is one of the reasons we want to accelerate our exploration at Segovia starting this year.

Earlier this month, we reported the 2018 update to Segovia's reserves and resources after completing the 2018 drilling program, which comprised almost 26,800 meters. We're pleased with the results, adding over 300,000 ounces to our mineral resources, more than replacing what we mined. The results also reaffirmed our confidence in the high-grade nature of our Segovia gold project with an increase in the measured and indicated grades to 11.8 grams per tonne and an average of 11 grams per tonne in our proven and probable gold reserves. Total measured indicated resources increased 7% to 1.3 million ounces, and inferred resources increased 4% to almost 1.2 million ounces. Our 2P reserves increased 4% to 688,000 ounces.

With the proceeds from the bought deal we expect to close next week, we will accelerate our drilling in Segovia, carrying out over the next 2 years what we would have taken 5 years to do just from operating cash flow. The motivation is to increase significantly the reserves of Segovia for future production growth and to extend its mine life.

Overall, our 2018 cash cost averaged $680 per ounce, down from $720 per ounce in 2017. With the production growth all coming from Segovia, our company average cash cost benefited from an increase in the proportion of our total gold sales that came from the lower-cost Segovia operations. Segovia's cash cost also came down 6% to $623 per ounce in 2018, as the production increase helped to reduce fixed production costs on a per ounce basis.

Marmato's cost crept up in 2018 to an average of $1,132 per ounce, but we expect it will come back down in 2019 to less than $1,100 per ounce. The real improvement in Marmato's cost will come later on with the optimization of its cost in the underground expansion. Overall, for 2019, we expect our company average total cash cost will increase -- sorry, will remain below $720 per ounce.

Our all-in sustaining cost in 2018 averaged $907 per ounce, slightly better than the 2017 numbers, reflecting the cash cost reduction and including an increased level of CapEx spending for 2018. For 2019, we expect our all-in sustaining cost will remain below $950 an ounce.

In 2017, we had spent $26 million on capital programs, equivalent to about $150 per ounce sold. In 2018, backed by the strength of our operating cash flow performance, we increased our capital spending to almost $36 million or $167 per ounce sold. The biggest year-over-year increases came at Segovia as we added an additional 7,000 meters of drilling in the fourth quarter, and our 2018 development plan included the expansion of mining activities at the Sandra K mine.

2018's capital program at Segovia also included the commencement of construction in the El Chocho tailings storage facility and the new filter press that will allow us to dry stack tailings. The 2018 capital program also included an additional $2 million at the Marmato project as we carried out an 8,200-meter drilling program in the deep zone as part of the mine expansion study.

In 2019, excluding exploration, we expect that we will spend about $25 million to $30 million in capital at Segovia and about $1.5 million at the Marmato mine. We also have about $2 million in our capital plan at Marmato to wrap up the technical studies and drilling on the mine expansion.

With everyone's results out, we thought it would be useful to benchmark our AISC for 2018 against peers, and we're pleased to see that we're still near the top of the list.

2018 was also the first year our annual adjusted EBITDA reached the $100 million mark, finishing at $102.4 million. You can see the dramatic growth that has taken place over the last 5 years, most recently driven by our focus on growing production from the lower-cost, high-grade Segovia operations.

And this growth in adjusted EBITDA has directly benefited our operating cash flow and our free cash flow over the last 3 years, reaching new highs in 2018 with almost $80 million of operating cash flow and $44 million of free cash flow. Free cash flow is defined as operating cash flow minus CapEx and demonstrates our ability to service our debt, which will cost us about $27 million in 2019 for principal and interest payments and to put cash on our balance sheet.

And lastly, before we get to the Q&A portion of this morning's webcast, I would like to summarize our priorities and targets for 2019. Next week, we expect to close the bought deal private placement we announced on March 4. In 2019, we will continue the implementation of the optimized mine plan at Segovia, including expansion of the infrastructure to access the deep levels at Silencio and Providencia, continue some important ventilation improvement projects in our mines, expand the Maria Dama plant to 1,500 tonnes a day, continue the construction of the El Chocho tailings storage facility and the commissioning of the new filter press.

We've already commenced our planned 20,000 meters of drilling program for 2019 at Segovia. And after closing the bought deal financing, we'll complete several studies over the next few months to help us identify and prioritize the additional step-out and brownfield drilling targets and then we will bring in another 4 to 5 rigs to execute the drilling programs. At Marmato, we're working on the technical studies, and we'll supplement them with some additional drilling in 2019 to put us in a position to determine how we are going to proceed with the underground project later this year.

Finally, we're working with the Sandspring team, providing technical and other support as they move forward with both their Toroparu and Chicharron projects, and we are closely monitoring the situation in Venezuela to see if the opportunity to get back into our gold projects there will materialize. All in all, 2019 is shaping up to be a very exciting year for Gran Colombia.

Thank you for joining us this morning and at this time, we'd like to open things 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) And our first question online comes from [Harris Perlman].

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Unidentified Analyst [2]

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So historically, the company, I believe, has included the exploration cost as AISC numbers. Just curious, going forward, now that you're going to be spending more on brownfield and other exploratory drilling at Segovia, are you going to be breaking that out as a separate line item as a nonsustaining CapEx?

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

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Thanks, Harris. Actually, that's a very good question. It's something that we are in the midst of analyzing. The company has taken a very conservative approach to its all-in sustaining cost reporting since 2016, given that the industry -- and we feel it's a very important metric that investors are looking at for being able to fund our ongoing capital projects. I'd like to say, at the moment, I think that as we analyze the definitions under the latest update from the World Gold Council on all-in sustaining cost reporting, it's more likely than not that we will probably include all the exploration in the AISC numbers, even though some portion of that will be covered by the bought deal financing, but we haven't concluded yet on the best approach to handle that situation to meet our investor needs. But we will obviously have an answer by the time our Q1 comes out in the middle of May.

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Unidentified Analyst [4]

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But currently, your $950 guidance or cap to the guidance assumes that the entire exploration drilling is going to be included?

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

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Certainly, the entire exploration drilling that we planned for this year. It doesn't include the impact of the additional one. We do expect this -- we were at $907 last year, we do expect that we'll have some additional spending obviously this year coming from the bought deal placement. So we're analyzing it, and I think we'll be, as I said, trying to find the right balance between reporting AISC and giving people a good clear estimate of our projects.

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Operator [6]

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(Operator Instructions) We have a question online from [Michael Turk].

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Unidentified Analyst [7]

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This is [Michael] from [Dubai]. I have 3 questions. First question from me is about the report today, the annual report. The one that reads that the loss is something against the government from Colombia for Marmato gold project. Is this correct? And can you give me more information on this?

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [8]

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Sure. Lombardo, did you want to talk about the free-trade arbitration matter?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [9]

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Yes. Okay. Well, we are in the process. The -- we are in the stage where we are designated arbitrators. We already designated our arbitrator. The government of Colombia also designated an arbitrator, and then they are in the process of selecting president of tribunal. We already have a list. We are -- we have to establish a rank and then the 2 arbitrator will select the president of the tribunal. That will be -- that is going to be a long process, probably will take till 2021. We are confident that we have all the elements in our favor. We prepared a deep technical story about the damages and prejudices that we had in Segovia and in Marmato. And well, we have to wait until the tribunal. We like to hear the argument of each of the participants in the arbitration deal. Did you need more about that or no?

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Unidentified Analyst [10]

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No, that's okay so far. That's the first question. The second question is about average grade which we are producing now. We have at the moment about 21.4 grams which we are producing. So it was a very good production, we saw it in February. But from the resource estimate, we should have about 11.8 grams in the average. So when we -- in the moment, mining the high grade means this -- that in future, we will have very low grades to come to the average of 11.8 grams? Or is this the reason why we are now make the financing for further exploration that we can hold these grades also in the next years so high?

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

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I think you saw that -- the answer to that is, on the first part of the question, the grades did come through much higher in the first -- certainly in February at Providencia. And as we said in the release, somewhat unexpectedly we hit an area where the grades were higher than we had in our resource model. So it was a very fortunate situation for us. It's not a question of us high-grading, but in the sequence of the mine in the areas where we're in, we are in the higher grades. That obviously does say that at the later stages of the mine, there will be some lower grades, as you say, to come out to 11.8. But the second part of your question is spot on, that the reason that we are taking on this bought deal private placement to accelerate our exploration is that our drilling results in 2018, again identified some new structures and extensions at Providencia that we want to get to faster so that we can have more runway for our -- doing our mine planning at the mine, looking a little further out and following up on what we've seen to determine just how much more of this high-grade area actually does exist for us.

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Unidentified Analyst [12]

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Okay. And last question for me is about the Pampa Verde project. Some years ago, there was plans for the 2,500 tonnes per day in Pampa Verde, then it was canceled. What I understand, of course, so it was meant for turn around. If we restart exploration, find now some new targets and very high-grade gold, for example, or we can increase the resource steadily, is there any chance to bring this back on track? And if yes, what will be the cost for this? Because we have already some equipment is my understanding, what we have bought some years ago.

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [13]

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Lombardo, do you want to speak to that?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [14]

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Yes. Mike, could you rephrase the question?

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [15]

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I think what he's asking is we had made investments in Pampa Verde. We've got the mill equipment in that sitting there. What do we see, I guess, is the -- are we going to use that equipment that's there? Or as you know, we're looking at the potential of using it elsewhere.

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [16]

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Okay. Nowadays, we are with the safety mine plan. In this year, for example, we are expanding our processing facility in Segovia to 1,500 tonnes per day. For 2021, we are expecting to have our existing processing plant up to 2,000 tonnes per day. That is because we need to process more mineral, we increase the production of mineral, probably that the grade will go a little bit down, that kind of sales. And the processing capacity of Pampa Verde is quite high. It's at 2,600 tonnes per day, and that plant can be expanded to, say, 3,500 tonnes per day. In our -- well, in our plans now, which are plans already, not reality. Probably, Pampa Verde, we have in our destination. For example, the Marmato Project, it's going to be probably our flag project in the near future. And in Marmato, the production probably is going to be around 5,000 tonnes per day. And then Pampa Verde will fit nicely into that project because we will combine Pampa Verde production with existing production in Marmato and we can have, at a very reasonable cost, a production of 5,000 tonnes per day.

Probably Maria Dama, probably Pampa Verde is not the solution for Segovia because Segovia is going to grow up to probably 3,000 tonnes per day at maximum with the new exploration resort. It's going to be a high-grade mine, and probably with 3,000 tonnes per day, you can do everything. So probably you have to add, probably in the future, 2020 -- 2024, probably you have to add some more facility -- more production facility like 1,000 tonnes per day, something like that. But the most probably -- the most likely destination of Pampa Verde is our flag project in Marmato, which is going to be a big project.

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Operator [17]

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(Operator Instructions)

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [18]

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All right. Well, Richard, if there's no other questions coming in, I think then we'd like to thank everybody for joining us this morning. Obviously, if you have follow-ups, you can certainly reach out to us, and we'd be happy to respond to your questions. So thanks again, and we look forward to talking to you again in another couple of months as we complete our first quarter webcast in the middle of May. Thanks.

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [19]

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Thank you.

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Operator [20]

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And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.