U.S. Markets open in 8 hrs 13 mins

Edited Transcript of ROXG earnings conference call or presentation 14-Aug-19 3:00pm GMT

Q2 2019 Roxgold Inc Earnings Call

VANCOUVER Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Roxgold Inc earnings conference call or presentation Wednesday, August 14, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* John Andrew Dorward

Roxgold Inc. - President, CEO & Director

* Kelley Stamm

Roxgold Inc. - Manager of IR & Communications

* Paul Criddle

Roxgold Inc. - Chief Development Officer

* Paul Weedon

Roxgold Inc. - Vice-President of Exploration

================================================================================

Conference Call Participants

================================================================================

* Geordie Mark

Haywood Securities Inc., Research Division - Co-Head Mining Research

* Ryan Walker

Echelon Wealth Partners Inc., Research Division - Analyst

* Wayne Lam

RBC Capital Markets, LLC, Research Division - Senior Associate

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to Roxgold's 2019 Second Quarter Results Conference Call. My name is Michelle, and I will be your conference operator today. (Operator Instructions) As a reminder, this conference is being recorded today for replay purposes.

I will now turn the call over to Kelley Stamm, Manager, Investor Relations. Please go ahead.

--------------------------------------------------------------------------------

Kelley Stamm, Roxgold Inc. - Manager of IR & Communications [2]

--------------------------------------------------------------------------------

Thank you, operator. Good morning, everyone, and welcome to Roxgold's 2019 Second Quarter Results Conference Call.

Please note that certain statements made on today's call may contain forward-looking information subject to known and unknown risks, uncertainties and other factors. For more information, we refer you to our detailed cautionary note within last night's press release. Please note that all amounts are in U.S. dollars unless otherwise stated. With us today, we have John Dorward, President and CEO; Vince Sapuppo, Chief Financial Officer; Paul Criddle, Chief Development Officer; and Paul Weedon, Vice President, Exploration, all of whom will be available for questions following the presentation.

I'll now turn the call over to John.

--------------------------------------------------------------------------------

John Andrew Dorward, Roxgold Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Kelley, and good morning, everyone. Thank you for joining our 2019 second quarter results conference call today. The Yaramoko continued to perform well during the quarter, achieving record mines and throughput tonnage during the quarter. Cash operating cost was $518 per ounce produced and all-in sustaining cost came in at $836 per ounce sold, generating cash flow from mining operations of $21.8 million or USD 0.06 per share. I'm pleased to report our strong safety performance continued at site with no lost time injuries reported during the quarter.

Gold production for the quarter totaled 34,354 ounces compared to 35,828 ounces produced in Q2 2018. The decrease in gold production was primarily due to lower head grade as a result of the continuing ramp-up at Bagassi South, which delivered lower-grade development ore during the quarter. This was largely offset, however, by an increase in tonnes processed during the quarter. Ore mined was a record 109,840 tonnes, representing an increase of approximately 27% due to the expansion.

At the 55 Zone, 83,829 tonnes of ore were mined with approximately 76% coming from stoping activities with 5 open stopes available at the end of the quarter compared to 80% of ore from stoping and 4 open stopes in the comparable quarter of last year. At Bagassi South, 26,011 tonnes of ore were mined with 1,417 meters of development completed. Ramp-up activities at Bagassi South are continuing where we have established the first production stopes during the quarter and expect to achieve commercial production at the end of the month.

Slight delays in equipment deliveries earlier in the year impacted stoping tonnes at Bagassi South. However, this is expected to be picked up in the coming months with improving production rates observed over recent months. Average head grade for the quarter was 9 grams of gold per tonne. Going forward, we anticipate grades and tonnes to increase during the second half of 2019 as a result of Bagassi South stoping operations ramping up.

As mentioned earlier, as a result of the Bagassi South expansion, we achieved a record 113,866 tonnes processed averaging approximately 1,250 tonnes per day, which is 14% above nameplate capacity of 1,100 tonnes per day. During the quarter, plant availability was 97.6%, and we maintained a high gold recovery rate of 98.2%.

Turning now to our financial results. EBITDA was $12 million for the quarter. EBITDA was impacted by the change in fair value of our gold hedging contracts in the amount of $3 million, foreign exchange movements and an increase in exploration expenditures associated with the Séguéla acquisition. Adjusted EBITDA was approximately $16 million for the quarter with an adjusted EBITDA margin of 37%. Cash flow from mining operations was $21.8 million or USD 0.06 per share. Adjusted basic earnings was USD 0.01 per share for the quarter. Our cash operating cost of $518 per ounce produced and all-in sustaining cost of $836 per ounce sold were outside our annual cost guidance mainly due to the lower-grade development ore delivered from Bagassi South.

We continue our focus on operating cost control at Yaramoko. In Q2, we reduced our cash operating cost per tonne processed by 22% from $201 per tonne in Q2 2018 to $156 for this quarter. We continue to focus on opportunities to improve mine productivity as well as identifying sustainable cost reductions across our business. As we mentioned last quarter, we are pursuing several further cost-reduction initiatives such as the potential to supplement Yaramoko's grid power supply with additional low-cost solar generation and a debottlenecking review of the processing plant.

Despite the lower grade, we were able to maintain strong operating margins, achieving an operating margin of $724 during the quarter. Our cash on hand balance was reduced to $19 million due to the increase in value-accretive investment spend totaling $26 million during the quarter. This spend related to the Séguéla acquisition with $19 million spend and development spend at Bagassi South totaling $7 million. In addition, we repaid $3 million from our debt facility during the quarter.

The recent release of the updated December 2018 reserves and resource statement has highlighted the conversion rates of the previous inferred to indicated resource as a result of the extensive infill program in 2018, which was drilled from surface. In addition to confirming key structural controls on the high-grade mineralized zones within the 55 ore shoot, deep drilling to approximately 1,100 meters below surface continued to intersect the shear zone and mineralization where the orebody remains open. Modeling, in conjunction with the growing data set from drilling and mapping of the development drives, is highlighting the structural repetition of the high-grade shoots down the 55 Zone orebody while also identifying a slightly flatter plunge orientation to these shoots, which remain open at depth.

Planning is underway for a dedicated underground drill platform at approximately the 4,700 level or around 600 meters below surface to be available by August 2020 for further drilling to continue to convert the inferred at depth and to extend the limits of the 55 Zone beyond the current 1,100 meters depth and where it remains open.

Bagassi South also saw an increase in measured and indicated resources in the December 2018 reserve and resource update. Subsequent to the release, a small infill program to provide further definition of the upper areas of the Western Shoot was completed in June. The program was successful in further refining the margins of the high-grade zones and their associated structural controls. High-grade results included 191 grams per tonne of gold over 0.5 meter from YRM 465 and 32.5 grams per tonne over 1.4 meters from YRM 460-A.

Turning to regional exploration at Yaramoko. Work during the quarter focused mainly on extending the soil auger grids to the south along the Yaramoko structure and in the northeast at San and Zone 300. In addition, scout RC and diamond drilling were carried out at several prospects testing coincident soil and geophysical anomalies, returning numerous intervals of shearing and associated quartz veining, alteration and associated pyrite and supporting the regional structural interpretation. Work has also commenced on reviewing and refining the regional lithogeochemical model using the large amounts of data generated in this season's exploration programs. The results of this review will be used to prioritize targets for the 2019/2020 exploration season.

At the Séguéla gold project, the maiden indicated resource of 496,000 ounces at 2.4 grams per tonne and 34,000 ounces of inferred at 2.4 grams per tonne was declared, significantly advancing the project. Furthermore, additional drilling since the data cutoff the resource estimate has continued to confirm the broad and continuous nature of the Antenna mineralization as well as extending mineralized zones further along strike. Notable results included 5.4 grams per tonne over 21 meters from 50 meters in hole SGRC222 and 5.2 grams per tonne over 37 meters from 29 meters in hole SGRC223. All the recent results will be incorporated into the forthcoming PEA and an upgraded resource estimate anticipated for release in the fourth quarter.

Drilling at the nearby Boulder prospect has highlighted the strong structural and lithological controls on the mineralization, with results including 3.03 grams per tonne of gold over 11 meters from 91 meters in SGRC207. First-pass RC drilling has been completed at Agouti, 1.5 kilometers along strike to the north of Boulder, testing previous Newcrest aircore results along a 400 meter structural trend. Results are pending.

Similarly, scout RC drilling has been completed at Gabbro with the rig now moving to P3. Aircore drilling at Kwenko West has concluded with results outlining a broad anomalous zone approximately 800 meters by 150 meters to the north of historic artisanal workings. The aircore rig has now moved to infill the 1.2 kilometer untested zone between Boulder and Agouti.

Scout RC drilling has started at P3 with the RC rig moving there after completing first-pass drilling at the Gabbro prospect. An airborne geophysics program is planned for mid-September on 5 of the permits, including Séguéla, to improve the understanding of the key controlling structures and geology and to assist with refining target generation. Previous early-stage reconnaissance work by Newcrest on these regional targets highlighted several broad stream sediment and termite mound anomalies extending over several kilometers at Dianra, 14 kilometers strike length, and Bouake, 9.5 kilometers strike length. And the program has been extended to cover the recently granted Kadyoha permits.

With our gold production of approximately 68,000 ounces in the first half of the year, we continue to remain on track to meet our annual production guidance to be between the range of 145,000 to 155,000 ounces for the year. Yaramoko's production is weighted towards the second half of the year with the ramp-up of stoping at Bagassi South. We continue to be focused on costs and reiterate our guidance on cash operating cost to be within the range of $440 to $470 per ounce produced and all-in sustaining cost between the range of $765 to $795 per ounce sold as we anticipate grades to pick up in the second half of the year. Our exploration budget for the year is expected to be within the range of $10 million to $12 million for both Yaramoko and Séguéla.

In closing, the first half of 2019 saw solid operating performance at Yaramoko where we are continuing to pursue both operational efficiencies and cost control measures. With production weighted towards the second half of the year, we are on track to meet our stated annual production and cost guidance.

On the growth front, we are continuing our exploration activities regionally at Yaramoko as well as advancing the progression of the Séguéla gold project, our second development project, where we expect to deliver a PEA with an upgraded resource estimate in the fourth quarter of this year. Thank you for your time this morning.

And we would now like to welcome any questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question will come from Geordie Mark from Haywood Securities.

--------------------------------------------------------------------------------

Geordie Mark, Haywood Securities Inc., Research Division - Co-Head Mining Research [2]

--------------------------------------------------------------------------------

Just a couple of questions to follow on. Just mentioning Bagassi South there on the first stope development. Just wondering how you're going there for current dilution sort of metrics at 55 versus expectations and at Bagassi South and where you expect to be certainly for Bagassi South by the end of the year.

--------------------------------------------------------------------------------

John Andrew Dorward, Roxgold Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Geordie, thanks for the question. So it's pretty early days at Bagassi South in terms of stoping and even development mining, but I think we've been pretty pleased with what we're seeing from dilution -- from a dilution perspective. The areas that we have been mining are sort of some of the narrower portions of the orebody, and as expected, we're seeing higher rates of dilution, but that's very much in line with what we expected to see.

At the 55 Zone, which we've got over 3 years of experience mining now, we've actually seen some improvements in our dilution management there, so that's been going well for us. So overall, I think it's early days at Bagassi South but very much in line with expectations. And then there's been a little bit of upside at the 55 Zone.

--------------------------------------------------------------------------------

Geordie Mark, Haywood Securities Inc., Research Division - Co-Head Mining Research [4]

--------------------------------------------------------------------------------

Right. Okay. And in terms of just going -- following on some of the comments you had on the call there in terms of expecting grade and tonnes to increase on a mining sense, do you expect those to obviously go beyond the effectively 110,000 tonnes that you delivered in Q2? Would that then, you think, deliver into -- adding to the stockpile? Or do you think there's capacity there to go beyond your process rates that you witnessed in Q2?

--------------------------------------------------------------------------------

John Andrew Dorward, Roxgold Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Look, I do -- we do expect that the mining rates will pick up, and that's largely driven by Bagassi South and the stoping that we've discussed. I think in terms of the plant, I think that is a pretty interesting area for us. We have hit really 1,250 tonnes on a sustained basis now for quite a few months, which has been very encouraging. We have initiated a debottlenecking process where we're looking at getting an outside group to come in and really just sort of go back to first principles and work out where the bottlenecks are. I mean the comminution circuit has -- definitely has excess capacity in it, and I think we're now starting to work through the -- where the pressure points are. And we've sort of -- we have initiated a program. We've set ourselves, I think, a decent target of what we think that might look like. And we'll be out with a report on that, I think, in the coming quarters. But I think there's definitely potential for us to put more tonnes through the processing plant, and that's very much a work in progress.

--------------------------------------------------------------------------------

Geordie Mark, Haywood Securities Inc., Research Division - Co-Head Mining Research [6]

--------------------------------------------------------------------------------

Okay. Great. And maybe I'll just do one more and pop in the line. In terms of the intriguing sort of the high-grade, I guess, flatter zones within 55 that are unrecognized and -- on a repeated basis, any more language around that? I mean can you sort of predict where they would be going at depth? Do they show themselves or present themselves in more sort of changes in morphology of the overall orebody shape? Or anything there? And would you need to sort of increase or decrease your drill spacing to try and highlight those better in the resource/reserve model?

--------------------------------------------------------------------------------

John Andrew Dorward, Roxgold Inc. - President, CEO & Director [7]

--------------------------------------------------------------------------------

From a high-level perspective, I'll have a go at that, and then I'll hand over to Paul Weedon to give you the real answer. From our perspective, I think there is a degree of predictability to those high-grade shoots, and I think we saw that in the program earlier this year where a couple of the lighter holes towards the bottom of the 55 Zone were interpreted to have drilled beneath that structure. And that was really, I think, effect of the hole starting to veer a bit because they were significantly deep holes. So I think that's something that we'd like to revisit and get those holes exactly where we want to get them, and I think we will do that from the underground platform. But at the risk of sort of leading everyone astray, I might hand the microphone over to Paul Weedon.

--------------------------------------------------------------------------------

Paul Weedon, Roxgold Inc. - Vice-President of Exploration [8]

--------------------------------------------------------------------------------

Thanks, John. You're doing a good job there. Yes. Look, it's a good question and one that -- which we've spent a fair bit of time looking at over the last few months. When we say a slightly flatter orientation, it's not by much. It's about 10 to 12, 10 to 15 degrees. We are seeing a repetition emerging from the upper levels all the way down to the 1,100 that we've seen. We're seeing it on a reasonable degree of periodicity coming up, so. Can we predict the next one? I wouldn't say yes at the moment, but certainly we know to be aware of it coming up. When we superimpose the modified plunges to the high-grade shoots there, coupled with the fact that these holes are 1,100, 1,200 meters down hole and increasingly difficult to control, it's clear that we've probably undershot where the trajectory of these plunges -- the high-grade shoots are plunging.

And this has increasingly been reinforced by the mapping we're doing in the ore drives. And we're seeing that these controls emerging, which gave us comfort when the geo stats came back and said, look, we think this is a bit flatter. So we're trying to make sure that we have at least 2 sets of data to support the different interpretations that are starting to emerge now.

--------------------------------------------------------------------------------

Geordie Mark, Haywood Securities Inc., Research Division - Co-Head Mining Research [9]

--------------------------------------------------------------------------------

Right. I guess do we have some more information, I guess, or more detail coming out in that drilling for August, [September] next year or you'd be able to sort of flesh something out before then?

--------------------------------------------------------------------------------

Paul Weedon, Roxgold Inc. - Vice-President of Exploration [10]

--------------------------------------------------------------------------------

We'll be spending a fair bit of time on the -- bringing the underground mapping -- increasing the density of underground mapping and also doing a lot more wireframing, digital wireframing around that.

The next major drill campaign is up for the second half of next year, so we won't see a lot of that. But we might do some back analysis on the data that we've got and just continue to validate those models that are emerging now.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Your next question comes from Wayne Lam from RBC.

--------------------------------------------------------------------------------

Wayne Lam, RBC Capital Markets, LLC, Research Division - Senior Associate [12]

--------------------------------------------------------------------------------

First question for me, I just want to ask about the uptick in the cost per tonne this quarter versus Q1. Just wondering if that was on the mining or processing side and just give us a breakdown.

--------------------------------------------------------------------------------

John Andrew Dorward, Roxgold Inc. - President, CEO & Director [13]

--------------------------------------------------------------------------------

Sure, Wayne. The cash operating cost per tonne for Q2 was $156 versus Q1, which was $147. And really, the main difference there was an inventory adjustment, and that was $8 inventory adjustment added in Q2 versus only $2 in Q1. And then on a mining basis, we had -- it was $98 per tonne versus $94 in Q1. So not a wide difference. It just really comes down generally to the split of developments -- fixed cost apportionment to development versus ore versus stoping and development ore. So it moves around a little bit. But by and large, still very much in the same range. Processing was $32 per tonne in Q2 versus $31 in Q1. And then G&A was $19 in Q2 versus $20 in Q1. So hopefully, they should all add up.

--------------------------------------------------------------------------------

Wayne Lam, RBC Capital Markets, LLC, Research Division - Senior Associate [14]

--------------------------------------------------------------------------------

Okay. Sounds good. And then just on the processing front. You guys seem to have a good handle on the mill given the performance to date. Just wondering when you guys expect the debottlenecking evaluation to be completed? What should we think about in terms of a longer-term run rate in terms of throughput?

--------------------------------------------------------------------------------

John Andrew Dorward, Roxgold Inc. - President, CEO & Director [15]

--------------------------------------------------------------------------------

We've been doing quite a bit of work on that internally to sort of set the parameters. And I think it's fair to say that it's probably still in a bit of a negotiation between myself and key members of the team who know more about the process than I do, myself coming in with a higher number, as you'd imagine. I might let Paul talk a little bit about that because he's leading the charge on that one, Paul Criddle.

--------------------------------------------------------------------------------

Paul Criddle, Roxgold Inc. - Chief Development Officer [16]

--------------------------------------------------------------------------------

Thanks, John. Wayne, look, one it leads -- as John said before, we've sustainably been hitting 1,250 for some time now. And in recent weeks we've actually, we've been north of that on 1,300. What is interesting is that that's been the case with a lot of development ore out at Bagassi South. Now what we know is that once we get -- once we flatline or start getting established stoping confirmations in Bagassi, we know that the fracture rates of the ore we're putting through the mill is a lot better out of the stoping operations.

So in my mind, there's definitely some upside to how we're currently configured. So we'd actually like to see a bit of that first before we do all the various debottlenecking modeling. So long way around saying, I think we're a month or 2 away from really sort of seeing in real life a -- the upside of what we currently got and then we're going to do the modeling for what that actually should look like once we debottleneck it. So I do think we would -- we'll probably aim at numbers around sort of the mid-1,300s, call it 1,350 for argument's sake. But we would need to do the work to confirm that. But that's sort of where our minds are at and where we'd like to hit.

--------------------------------------------------------------------------------

Wayne Lam, RBC Capital Markets, LLC, Research Division - Senior Associate [17]

--------------------------------------------------------------------------------

Okay. That's really helpful. And then just the last one for me. Just given the security issues that have kind of been highlighted again this past week within Burkina Faso, just wondering how you guys have been dealing with security and have there been any additional kind of measures put into place on the security front?

--------------------------------------------------------------------------------

John Andrew Dorward, Roxgold Inc. - President, CEO & Director [18]

--------------------------------------------------------------------------------

Sure, Wayne. So I think there has been some -- there has been additional issues in Burkina in the last week or so, and I think they're relatively isolated and have some sort of individual characteristics around that with historical aspects that have been challenging at that particular location. I think we have continued to engage with our host community and our workforce, including artisanal miners who are in the region, and that sort of continues very much on the same front as to how we've always progressed that. And that's been -- it continues to be very positive for us.

I think from a more general security position, we have enhanced our security, really, over the last 12 months or so. And one of the major initiatives we're looking at is we're in the process of permitting an airstrip for the project, which will reduce our reliance on road transport, which we sort of identify as our key vulnerability, is really our sort of the convoys that we have. I mean we're escorted by the Gendarmes when we do have the highway transport. But we think that if we could take that, remove that and fly our personnel, then that's just one less risk exposure that we have. So that's the main one. And we're hoping that, that will be permitted in the not-too-distant future, and we'll be constructing that next year.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from Ryan Walker from Echelon Wealth Partners.

--------------------------------------------------------------------------------

Ryan Walker, Echelon Wealth Partners Inc., Research Division - Analyst [20]

--------------------------------------------------------------------------------

Most of the questions have been answered, but you mentioned in passing potential for some solar power to lower cost. Could you maybe provide a little bit more color how far along that kind of work would be as far as the study on that?

--------------------------------------------------------------------------------

John Andrew Dorward, Roxgold Inc. - President, CEO & Director [21]

--------------------------------------------------------------------------------

It's another one that falls under the bailiwick of Paul Criddle, so I'll let Paul tackle that one.

--------------------------------------------------------------------------------

Paul Criddle, Roxgold Inc. - Chief Development Officer [22]

--------------------------------------------------------------------------------

Thanks, Ryan. We have a design completed for a 10-megawatt solar farm at Yaramoko. We have an agreement in place with the provider, and we're currently in the process of the permitting steps in Burkina Faso. To do such a project is -- there's the requirement to do a mini ESRA, if you will. And look, we're halfway through that. We hope to have that permitted and agreed in Burkina Faso by the end of this year with a view to look to implement that early next year. The plant that we've permitted speaks to a portion of our power requirement. That said, we've designed it such that it is scalable should that first phase prove successful.

--------------------------------------------------------------------------------

Ryan Walker, Echelon Wealth Partners Inc., Research Division - Analyst [23]

--------------------------------------------------------------------------------

And I mean how much do you think that, that would impact the unit cost? I mean are you looking -- targeting a 5%, 10% reduction, somewhere in that neighborhood?

--------------------------------------------------------------------------------

Paul Criddle, Roxgold Inc. - Chief Development Officer [24]

--------------------------------------------------------------------------------

It's going to be in that vicinity for the -- yes, it's going to be in that vicinity. It will probably be at the low end because of the processing cost -- as you go on it reduces the portion. So it will be at the lower end of that margin. Yes.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

I have no further questions at this time. I turn the call back over to John Dorward for closing remarks.

--------------------------------------------------------------------------------

John Andrew Dorward, Roxgold Inc. - President, CEO & Director [26]

--------------------------------------------------------------------------------

I'd like to thank everybody for joining the call today. Any follow-up questions can be addressed through myself or Kelley, and we look forward to speaking to you again when we report our third quarter results. I hope everyone has a pleasant day. Thank you very much.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Thank you, everyone. This will conclude today's conference call. You may now disconnect.