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Edited Transcript of SMF.TO earnings conference call or presentation 6-Mar-19 3:00pm GMT

Q4 2018 Semafo Inc Earnings Call

Saint-Laurent Mar 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Semafo Inc earnings conference call or presentation Wednesday, March 6, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Benoit Desormeaux

SEMAFO Inc. - President, CEO & Director

* John W. Jentz

SEMAFO Inc. - VP of Corporate Development & IR

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Conference Call Participants

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* Bryce Adams

CIBC Capital Markets, Research Division - Analyst

* Kerry Smith

Haywood Securities Inc., Research Division - VP & Senior Mining Analyst

* Lawson Winder

BofA Merrill Lynch, Research Division - Vice President and Research Analyst, Metals and Mining, CFA

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the SEMAFO's Fourth Quarter and Year-End 2018 Operational and Financial Results Conference Call. (Operator Instructions) Please note that this call is being recorded today, March 6, 2019, at 10:00 a.m. Eastern Time.

I'd now like turn the meeting over to Mr. John Jentz, Vice President, Corporate Development and Investor Relations. Please go ahead, Mr. Jentz.

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John W. Jentz, SEMAFO Inc. - VP of Corporate Development & IR [2]

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Thank you, Jessa. Good morning. Members of SEMAFO management team joining me today for the call are Benoit Desormeaux, President and Chief Executive Officer; Martin Milette, Chief Financial Officer; Sylvain Duchesne, Vice President, Engineering and Construction; and Patrick Moryoussef, Vice President, Mining Operations.

I would like to remind listeners that some of the matters to be discussed during today's call may contain forward-looking statements. Forward-looking statements include, but are not limited to, items such as our expectations regarding the market price of gold, timetables, mining operation expenses, capital expenditures, guidance and reserves and resources estimates. Such statements are given as of the date of this conference call and involve risks and uncertainties. A number of factors and assumptions were made in preparing such statements, and actual results could differ materially. Accordingly, you should not place undue reliance on forward-looking statements.

For additional information with respect to forward-looking statements, risks and assumptions, please consult our 2018 annual MD&A as updated and other filings made with the Canadian securities regulatory authorities and available on our website at semafo.com. SEMAFO disclaims any obligation to update or revise any forward-looking statements, except as required by law. I make this cautionary statement on behalf of all SEMAFO spokespeople who may address you during this call today. All dollar amounts are in U.S. dollars unless otherwise stated.

With that said, I'll now turn the call over to Benoit Desormeaux for the presentation portion of the call, followed by Q&A. Benoit?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [3]

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Thank you, John, and good morning, everyone. Thank you for joining SEMAFO's 2018 Year-End Conference Call.

2018 was a milestone year for SEMAFO that set the scene for a strong 2019. The driving force behind the successful year is the construction, commissioning and ramp-up of commercial production at the Boungou Mine on time and on budget. Boungou's contribution outdelivered 2018 gold production of 244,000 ounces of gold at an all-in sustaining cost of $951 per ounce and will be key to increasing 2019 production by 68% and lowering cost by over 25%.

In 2018, gold sales reached $297 million, generating $110 million in operating cash flow. Although we recorded a net loss of $6.8 million, if we had adjusted for the $10 million in noncash deferred taxes, we would have generated a net income.

Other major accomplishment in 2018 include our 2 development assets, Bantou and Nabanga. At Bantou, we released maiden inferred resources of 361,000 ounces at a very attractive grade of 5.35 gram per tonne. Additionally, at Bantou, we announced the proposed acquisition of our neighbor, the Karankasso Project, owned by Savary Gold.

Together, Bantou-Savary property package represents 1,250 square kilometers of district-scale, target-rich land package. When the Bantou-Savary transaction is completed in late April, our focus will be to increase the inferred resources of 805,000 ounces at Karankasso and 361,000 ounces at Bantou.

The Houndé Greenstone Belt is the most prolific in the country and hosts many producing goldmine, including our Mana Mine. We are confident that the Bantou-Savary property package has the potential to be a significant high-grade mining camp for many years to come.

At Nabanga, in 2018, we increased inferred resources by 42% to 840,000 ounces at a grade of 7.7 gram per tonne. We will complete the PEA in Q3 of 2019 to assess preliminary economics and potential path forward. At Mana, underground development started in Q3 2018 and continues on time and on budget. We had completed over 1,000 meters of underground development at year-end and had reached over 1,700 meters in February this year.

As originally planned, ore from Siou Underground will be processed in Q1 of 2020 and will contribute to our consolidated 5 years 400,000 ounces of production profile at an all-in sustaining cost in the low $700.

In summary, the 2018 exploration, development, construction and operational achievements at Boungou, Mana, Bantou and Nabanga provide a strong foundation for 2019. The combination of the Bantou-Savary properties is underway to produce 1,250 square kilometers district-scale land package on the prolific Houndé Greenstone Belt. Achievement of our 2019 guidance of between 390,000 to 430,000 ounces of gold at an all-in sustaining cost of between $685 to $735 per ounce will make for the strongest performance in SEMAFO's history.

Strategic goal for 2019 include extending and improving the Boungou and Mana Mine life and advancing our 2 development projects, Bantou-Savary and Nabanga.

Operator, I would now like to open up the lines for Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Bryce Adams from CIBC.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [2]

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The first question is on deferred taxes. A lot was pre-reported, but the financials missed our EPS on deferred taxes. First question, is this largely coming from Boungou?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [3]

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Definitely. Boungou is a very good cash flow machine. And just in the fourth quarter of 2018, we generated $22 million in profit, and we have a tax rate of 27.5%. And even if we don't pay tax, we're not expecting to pay taxes for Boungou before 2020, we have to account for these taxes, so that's the reason why they are deferred. But yes, Boungou is a very profitable operation, as you can imagine, and this is what led to what you've seen.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [4]

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So going forward into 2019, Q1, Q2, Q3, will we expect to see the deferred tax expense in those quarters? Or would it be more of a Q4 true-up at the year-end?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [5]

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No. You will see that every quarter because every quarter we will have to account it for the taxes for Boungou as well as what we -- as well as we do it for Mana as well. But yes, you will see it in every quarter. Boungou, it will be deferred all year long because we won't pay any, but we have to account based on IFRS.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [6]

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And you would then expect to pay cash taxes in 2020 or '21?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [7]

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2021.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [8]

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Okay. So you said 2020 before and now 2021, is...

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [9]

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Yes, yes. Correct. 2021.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [10]

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Okay. Secondly, on 29 optimizations at Boungou. Just wondered if you could add a little bit of color to what those optimizations are and what we can expect this year.

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [11]

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We have different projects we work on. Of course, we are continually working on throughput. We're very close to the design. We're changing the liners somewhere in May this year that will help on the throughput side. We work mostly around the grinding circuit. We will be optimizing as well reagent consumption. Today, they are still a bit higher, but as well we have more -- we have 2% more recovery. So we don't want to affect the recovery. So it's going to be an optimization trying to reduce reagent consumption but not losing any percentage of recovery. So different project around this -- these 2 items mostly.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [12]

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Okay. But you would classify them as fine-tuning for Mana?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [13]

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Yes. It's fine-tuning for Boungou.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [14]

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Yes, okay. Just...

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [15]

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Mana, it's -- yes, go ahead.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [16]

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Sorry, jumping over to Mana. So slightly lower throughput in 2018 due to the ore hardness. We've already got detailed guidance for 2019, but is that hardness expected to continue this year?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [17]

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Yes. Most of the ore is coming from Wona. As we said, we still have this year about 350,000 ounce -- tonnes coming from Siou. We will still have some Siou for next year. But because of that, of course, most of the ore is coming from Wona, and Wona is all bedrock. Yes, so that's the reason why -- we're still targeting something like 2.4 million tonnes at the mill, which will be consistent, I would say, over the next coming years because still Siou is very hard as well. It's a quartz vein. So even when we will bring this from underground, I think, that's probably going to be the type of throughput we will have.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [18]

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So it's factored within the 2019 guidance?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [19]

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Yes, correct.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [20]

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My last question is on Siou Underground. You mentioned in the opening remarks, production tonnes are expected in Q1 next year. With that development ore that would be available in 2019, if there is any, is there any plan for that development ore? I assume that it would be processed.

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [21]

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There is some development ore. And in fact, we are expecting to finish the development underground somewhere in Q4, but we remain conservative. And in our guidance, everything we have announced does not include any tonnes of underground. So if we have -- if we decide to process some tonnes and if we finish earlier in the year, that's going to be a bonus.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [22]

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Yes. It will be incremental, but it would be pretty small incremental?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [23]

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Yes because -- it cannot be incremental in terms of tonne. It's just that we will push back the lower grade to be replaced by higher grade from underground, if it's the case.

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Operator [24]

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Your next question comes from the line of Lawson Winder from Bank of America Merrill Lynch.

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Lawson Winder, BofA Merrill Lynch, Research Division - Vice President and Research Analyst, Metals and Mining, CFA [25]

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Just on the Savary acquisition. Am I right that a definitive agreement has not yet been reached?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [26]

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You're right. John, can you comment?

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John W. Jentz, SEMAFO Inc. - VP of Corporate Development & IR [27]

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Yes, I can. Lawson, it's -- the definitive agreement was originally scheduled for March 11, which is Monday, and we're still in that time period. So you can expect the definitive agreement Monday, upcoming March 11.

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Lawson Winder, BofA Merrill Lynch, Research Division - Vice President and Research Analyst, Metals and Mining, CFA [28]

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Okay. That's great. And then -- so in that light, I mean, assuming that agreement does become definitive and then closes, when you think about Nabanga and you think about Bantou combined with the Savary asset, what would be sort of the priority in terms of next likely development projects?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [29]

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I think based on the potential we see, of course, Bantou-Savary is a much larger properties -- group of properties. And there is way more potential, not that there is none at Nabanga. There is potential still at Nabanga, but we see way more potential at the Bantou-Savary. So to be honest, we think these 2 permits together will probably pass before Nabanga. That would be our plan for now.

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Operator [30]

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(Operator Instructions) Your next question comes from the line of Kerry Smith from Haywood Securities.

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Kerry Smith, Haywood Securities Inc., Research Division - VP & Senior Mining Analyst [31]

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Ben, is there anything you can do tax-wise in Burkina to try and defer the cash taxes payable at Boungou? Like, can you use -- can you somehow use a write-off from the acquisition, say, of some costs that are spent, say, at Savary or money you spent somewhere else in country? Or are you really going to have to pay cash tax in 2021?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [32]

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Yes. We -- based on our -- today's plan, Kerry, yes. This is the plan. We cannot really use the losses here and there because to -- in country, if you want to deduct any expense, it has to be within the same company, so within the same subsidiary. So the only asset we have in that company is the Boungou Mine. That's the way it works. So you cannot use something like from Mana or from Savory to deduct in the SEMAFO Boungou company. But if there is thing -- I think we're fairly good in optimizing the taxation. If there's things we can do, you can count on us that that's going to be done. But based on today, Boungou is so great. It's generating lots of cash, but as well it generates lots of profit. It's a good thing. I love paying tax when we make huge profits, but if we can still optimize this, count on us to do it.

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Kerry Smith, Haywood Securities Inc., Research Division - VP & Senior Mining Analyst [33]

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Sure. Okay. Great. And have your plans on the debt retirement changed at all? I know you talked about maybe accelerating some of the debt repayment. Or are you kind of thinking you'll just stick to the schedule which is quarterly starting end of March?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [34]

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For now, we're sticking with the schedule we have. The decision to pay this quicker will probably be taken somewhere in the fourth quarter or first quarter next year. That's not something for the next 2 quarters for sure.

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Kerry Smith, Haywood Securities Inc., Research Division - VP & Senior Mining Analyst [35]

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Okay, okay. And could you give us an update on just the security situation in Burkina and how you're making out with the airstrip site you've been building and that sort of stuff?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [36]

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Yes. So as we said previously, we have increased security by a lot in -- on our 2 operations. I think things will improve. It's not going to improve overnight. But I think slowly, it will improve. Recently, they signed some sort of agreement with the French to help them on that side. So we're expecting things to improve. But on our side, we have to make sure that we're well equipped and we do everything. As you said, we are building airstrip on both sites. That's part of that plan just to avoid traveling by helicopter, which by plane will be way cheaper. So we're -- we believe -- we strongly believe it's going to improve, but it's not going to be overnight. But as well, keep in mind, Kerry, yes, we had some events in the past, but our 2 operations are still running. There was not even 1 day of downtime because of that. So we've managed things, and we are taking everything seriously. So we are putting all efforts to make sure that our operations are not affected by that.

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Operator [37]

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There are no further questions at this time. Mr. Desormeaux, I'll turn the call back over to you.

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [38]

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I would like to take this opportunity to remind listeners that our fourth quarter and year-end 2018 MD&A and financial statements are available on our website or on SEDAR at www.sedar.com. The audio webcast of this conference call will also be available for replay for -- on our website for a period of 30 days.

I would also like to mention that our Q1 2019 annual financial and operating results are currently scheduled for publication on or around May 7, 2019. Thank you, and have a nice day.

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Operator [39]

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This concludes today's conference call. You may now disconnect.