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Edited Transcript of MND.TO earnings conference call or presentation 13-Aug-20 12:00pm GMT

Q2 2020 Mandalay Resources Corp Earnings Call

TORONTO Sep 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Mandalay Resources Corp earnings conference call or presentation Thursday, August 13, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dominic Duffy

Mandalay Resources Corporation - President, CEO & Non-Independent Director

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Conference Call Participants

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* Kevin Tracey

Oberon Asset Management LLC - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Michelle, and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to Mandalay Resources Corporation Second Quarter 2020 Financial Results Conference Call. Joining us on the call is Dominic Duffy, President, Chief Executive Officer and Director of Mandalay Resources. (Operator Instructions)

This call contains forward-looking statements, which reflect the current expectations or beliefs of the company based on information currently available to the company. Forward-looking statements are subject to a number of risks and uncertainties that may cause the actual results of the company to differ materially from those discussed in the forward-looking statements. Factors that could cause actual results or events to differ materially from the current expectations are disclosed under heading Risk Factors and elsewhere in the company's annual information form dated March 31, 2020, available on the SEDAR and the company's website.

At this time, I'd like to turn the call over to Mr. Duffy. The floor is yours.

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [2]

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Thank you, Michelle. And thank you, everybody, for joining us today for our second quarter 2020 financial results call. Today, I'm joined by Nick Dwyer, Mandalay's CFO, and he will help there to help us out if we have any financial questions at the end of this call.

The second quarter, it has continued with our excellent operational performance for the year, even with the continuing challenges the industry has faced as a result of COVID-19. We have been able to maintain the health and safety of all of our employees, while continuing the operations with impressive results, especially up from our Costerfield operation.

In relation to Costerfield, the second quarter was definitely a continuation of the excellent results from the first quarter as development continued along the high-grade Youle vein, resulting in continual grades over the quarter of 10 grams per tonne gold. We finished the quarter with 10,353 ounces of salable gold and 946 tonnes of salable antimony.

The grades from the Youle vein continued to be excellent, and we increased tonnages from the Youle vein compared to the previous quarter. However, several of the levels have moved into the low-grade extents of the deposit, lowering the grade slightly. We expect similar gold and antimony production over the course of the third quarter and a further lift in the fourth quarter as a ramp-up in stoping in Youle begins to take effect.

Production from the Brunswick lode decreased during the quarter, and we expect it to be completely mined out by the end of the third quarter, after which, nearly all of our production will be from the Youle vein. Capital development also proceeded at a faster rate than was actually forecast, and this will allow for further flexibility in the mining of the Youle vein going forward.

During the quarter, we also began the process of building a cavitation tube flotation column, which we expect to improve the overall recoveries in processing plant by at least 3% when commissioning is carried out in the fourth quarter of 2020.

On June 22, we also gave an update on exploration for the company. This highlighted the success we have been having in extending the Youle lode. It also outlined some very promising early drilling results at the Brown's area. We will continue drilling at the multiple targets at Costerfield for the remainder of 2020, and we expect to give an update on these results later in the year.

Financially for -- financially, Costerfield performed exceptionally well during the quarter. It was producing a cost -- cash cost of $662 per ounce and all-in sustaining cost of $1,025 per ounce.

Moving on to Björkdal, we saw a slight improvement in production at the operation. However, we're still producing below our expected rates. The good news being that May and June were the highest production months for the first half year-to-date, showing that the production is lifting the operation, and we expect continue of further lift for the remainder of the year as production from the Aurora zone is ramped up.

During the quarter, stoping from the Aurora zone was minimal. However, we now develop only 6 active levels of that zone. The operation produced a total of 11,250 ounces of salable gold for the quarter. Our -- and for the remainder of the year, our focus will be developing deeper into the Aurora zone, where drilling has definitely indicated that we do see increase in gold grades in the deposit the deeper it goes.

We also updated the market on Björkdal expression results in June. They showed a continuation of growth of the Aurora zone, and also some very promising preliminary results in the drilling up to 500 meters north of Aurora. The production at Björkdal for Q2 was produced at cash cost of $1,078 per ounce and all-in sustaining cost of $1,490 per ounce, making the operation profitable even with this slow first half of the year.

We were very close and pleased to close out all of the requirements for the syndicated refinancing of the company during the second quarter and completed the conversion of the remaining gold bonds. This now leaves the company in a very stable ground as our period of growth continues.

I'd now like to move on to our earnings for the second quarter. We were helped out by better-than-expected gold prices and exchange rates, which were slightly counted by the lower antimony prices.

The financial results were excellent with revenues of $42 million when compared to the $26 million of revenue in the second quarter of 2020. The significant growth over the prior 12 months is evident. Our cost of sales were $20 million. Our adjusted EBITDA was $21 million. Adjusted net income for the quarter was $8 million, which -- this does exclude the $6 million -- $16 million fair value loss related to the gold hedges.

We expect to continue to see fluctuations in fair value gains and losses going forward as the valuation is directly linked to the gold price at the close of each quarter, and takes into account the 3-year period of the hedges that we currently hold.

Taking this into account, the company had a consolidated net loss of USD 3 million. The capital spend for the quarter was $10 million, with the 3 biggest items being on capital development, exploration and the tailings expenses of Björkdal.

We will say that 2020 and 2021 are high-capital use for Mandalay, with the $10 million expected to be spent in both years on the expansion of the Björkdal tailings facility. Although this $20 million total of work will provide the mine with 10 years of tailing capacities going forward.

Mandalay finished the quarter with $21 million in cash and cash equivalents. This is very similar to the Q1 closing cash balance. However, during Q2, we did incur a net $5 million outlay for the final repayment of the gold bonds. And also there was a $3.4 million shipment of monthly concentrate from Costerfield that was delayed at the port, pushing the payment into the third quarter.

In summary, even with the negative impacts from COVID-19, the company put together a very strong first half of the year, mainly due to the continuing great results from Youle lode. We expect improvements from Björkdal for the remaining 2 quarters and a further lift also for Costerfield in the final quarter of the year.

The $42 million adjusted EBITDA generated year-to-date is more than 4x an amount generated in the comparative 2019 period, showing we are doing very well operationally, with more upside expected in the quarters to come as we take advantage of the current exciting gold environment.

At the current time, we are not adjusting our guidance. However, with the COVID-19 situation, it creates potential significant uncertainties and difficulties for everyone. So we will continue to monitor the situation closely and make adjustments if we deem they're necessary.

That is all I have for today, and I'll turn it back to the moderator for any questions.

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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 Kevin Tracey with Oberon Asset Management.

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Kevin Tracey, Oberon Asset Management LLC - Analyst [2]

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So just taking the midpoint of your cost and production guidance for the year, it looks like in the second half, you'll do about USD 60 million of cash flow before your hedging agreement, which is, I think, about USD 0.50 per share. Does that sound about right to you? And is the plan to use this cash flow to pay down debt?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [3]

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Yes. The exact numbers, I would have to check on that. But you said $60 million for the second half year, did you say? Cash flow?

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Kevin Tracey, Oberon Asset Management LLC - Analyst [4]

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Yes.

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [5]

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No. Our cash flow isn't $60 million for the second half of the year. It will be lower than that. However, we do begin tying down our financing facility from the end of Q3. So for the next 12 months period, we'll be paying down $3 million a quarter at the end of each quarter, and then the repayment schedule will be lifting after that 12-month period. However, we will be looking at the option of paying down the debt facility faster. Obviously, we had -- $65 million is a lot of debt for a small company of our size. So yes, we definitely would like to take advantage possibly to lower our interest payments going forward. However, that being said, our interest payments will be below 5% going forward with the way it is currently calculated.

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Kevin Tracey, Oberon Asset Management LLC - Analyst [6]

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Okay. And previously, when you issued 3-year guidance, the expectation was for roughly 50% production growth in Australia in 2021. Is there -- at this point, is there any reason to expect something different?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [7]

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We -- the reason we took this step doing our 3-year guidance because we were -- we had indications from our regional reserves and resources to give what we felt was a pretty good guidance of what we were going to find at the deposit going forward. When we originally hit the Youle lode at the end of last year, the first level was on the performance. And then the subsequent levels did appear to be overperformances on average. So as we were in that lode early -- towards the end of last year, we thought that there wasn't enough certainty to give a 3-year guidance going forward. So that's why we did change back to 1-year guidance because we were a little uncertain about what Youle was going to give us. In relation to the prior 3-year guidance that we gave last -- the year before, as that is really guiding guidance we have given for 2021 at the current time, I think you'd be able to use that as a current guide for where we expect we'll be, and will be trying to get the guidance out as -- over the course of the fourth quarter as we continue to update our plot model. But yes, we definitely do expect to see further less from Costerfield in 2021.

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Kevin Tracey, Oberon Asset Management LLC - Analyst [8]

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Okay. And you seem to be penalized by a relatively short mine life at Costerfield. You have a long track record of continuing to extend that mine life. And I'm just wondering what the, I guess, early results from some of these new targets. Are you confident that the next 5 years can look like the last 5 years in terms of continually extending the mine life in Australia?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [9]

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Yes. Yes. So currently, we anticipate with the Youle vein. We have approximately 3 years of production in front of us, so in '21, '22, '23. And then after that, we don't -- yes, we don't have a deposit to move on to. However, 3 years is probably the largest reserves we have had at this deposit. And we have been operating for 10 years now. So we are very actively drilling to find the next lode that we will move on to. We are drilling more heavily than historically Costerfield has. So what I would like to have, ideally, is at least 6 years mine life in front of us. So -- and we have been -- this year, our drilling has been a little different for the first half of the year. We have been drilling a lot more targets in generally, so that we can select which one will be the most likely that would turn into the next reserve for the deposits. So we've been drilling through Blue, Damper Gully, MacDonald's, Robinson's, Brown's. We go to the exploration release last quarter, some very good early indications from the Brown's lode, which is a couple of kilometers to the east of the current workings. And that is a completely new corridor that Mandalay has not drilled previously. And there are old workings above the old Brown's and Robinson's mines. And I don't know if you know but all of our price success has been related to drilling under old time workings from the 1800s, early 1900s. So yes, I am confident that we'll be able to find the next deposit to move on to. And ideally, we'd like to get 6 years reserves under our belt.

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Operator [10]

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(Operator Instructions) Our next question comes from the line of Lawrence Clooney, a private investor.

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Unidentified Participant, [11]

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Dominic, I have a few questions. First one is, could you explain the gold hedge that's currently in place with the refinancing of the debt?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [12]

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Yes. Yes. Definitely, Lawrence. So yes, obviously, we -- so that we were able to refinance the company, with the position we were in when we were looking to refinance, it did take us a long time to actually find the banks willing to go into this syndicated facility because of the history over the prior 2 years of our operational performance. So what they required as a result of our performance had been going the prior years, we did have to take out that hedge facility. So we were able to negotiate that it was only for the 50,000 ounces, however, did -- 50,000 ounces per year, however, did have to be over a 3-year period, the whole period of the financial facility -- financing facility. So it -- the hedge is broken into 2 facilities, so both of them 25,000 ounces per annum for 3 years. So one is a U.S. dollar gold hedge with a ceiling at 18, 16 -- $1,618. And the second is a 25,000-ounce facility over the 3 years around...

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Unidentified Participant, [13]

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But Dominic, let me ask, based on the current terms of the hedge, how does it work if the gold is $400 above the price of the hedge? I think the hedging price is like $1,625 an ounce.

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [14]

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So no. The hedging price stays the same at 16 -- $1,619.

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Unidentified Participant, [15]

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Okay. So what's the impact if gold is trading at $2,000 to the company? How is that reflected on the book?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [16]

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Yes. So over the course of the year, so on a monthly basis, so it's 25,000. So it's approximately a little over 2,000 ounces by $400. That's the difference we do have to pay to the bank about -- around about $800,000 if we're trading at $2,000.

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Unidentified Participant, [17]

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So -- okay. So for the 2,000-ounce gold price, you're paying approximately USD 800,000 a month to the banks?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [18]

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Yes. Correct.

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Unidentified Participant, [19]

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Okay. It's not as bad as I thought it was going to be. Does the hedge disappear if you pay the debt off in an expeditious manner?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [20]

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It's not automatic. It would require negotiation with the bank, obviously, because of their separate departments within the banking entity. So -- but they all hope would -- it obviously depends where the gold price is at that time also. If gold was below $16,000, we would possibly consider not removing the hedge, but we do feel that we would be able to get out of hedge if we did pay-off the debt facility faster. So -- but it's worth noting also that it's around about 50% of our gold production is currently hedged. So we still do get a full upside on the other half.

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Unidentified Participant, [21]

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Yes. Different topic. I noticed you made some changes to the Costerfield mill to increase recovery to 3%. Do you see anything happening at Björkdal with regards to gold sorter -- or sorry, ore sorter?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [22]

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Yes, optical ore sorting. Yes. So we would be looking into the possible ore sorting in 2021. So that has to be something that we'd present to the Board during our budgeting process at the end of this year with the financial position of the company and where I expect our cash position to grow going forward. I would hope that we will be installing the optical ore sorting next year so.

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Unidentified Participant, [23]

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Does the temperatures have any effect on the mill during the wintertime -- or sorry, the ores...

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [24]

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Yes. Yes, it definitely does. So that's why the facility -- we estimate a cost of about $12 million in that because it has indoor facility. Ice is a big concern as we have to -- an optical ore sorter washes the material. And if it's immediately freezing, then yes, the whole system doesn't work. So it's not a cheap system for us because of our environment.

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Unidentified Participant, [25]

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Sounds like you've singled out a vendor for this particular expansion.

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [26]

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Yes. Yes, definitely. We have a full whole feasibility carried out on it as well. But because of our financial position privacy, we haven't been able to carry through with the project.

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Unidentified Participant, [27]

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Okay. What are the -- what's the drilling like underneath the Aurora zone as you go to depth?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [28]

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Yes, Lawrence. At the current time, it was so -- the deepest drilling we have drilled to date and/or released on does show that the grades are higher down deep. Unfortunately, the drilling angles that we're drilling up now just are not optimum. So we can't really go much deeper with -- from the last release -- exploration release we gave, we won't be going much deeper over the remainder of this year. So we are putting out an exploration drive, which will go above the vein so that gives us much better angle to drill down into it. So I think over the course of next year, we'll start to get a better feel for where -- what this deposit looks like deeper than we have currently drilled. We do want to get below the marble contact. We have hit it in one of the holes down there. So we do now know where the -- where virtually our last holes have just been above the marble. So our interest definitely is trying to understand what happens below the marble.

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Unidentified Participant, [29]

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Well it seems like there's expansion on both sides of that marble drift.

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [30]

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Yes.

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Unidentified Participant, [31]

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I've been reading in the presentations on that, so that's good news. Any thoughts of doing that deep hole drilling on the Björkdal property?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [32]

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Not at the moment. So these veins seem to peer out. And that's in -- and the mineralization disappears around about 80 meters below the marble. Of course, the Aurora zone is a completely different system. So we don't -- whether that could be the feeder for the whole or several kilometers going up above it with the continuation of the veining, we don't know. So that's why it's so important why we drill to understand why this area is so much better than everywhere else.

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Unidentified Participant, [33]

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Sounds like it could feed other areas of the permitted area there.

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [34]

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Yes. Definitely. I would hope so.

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Operator [35]

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There are no further questions at this time. And we've reached the conclusion of today's call. Thank you all for your participation. You may disconnect your lines at this time, and have a wonderful day.