Aris Mining Corporation (ARIS) Q3 2019 Earnings Report, Transcript and Summary

Welcome to the Gran Colombia Gold Third Quarter 2019 Results Webcast. My name is Sylvia, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mike Davies. Mr. Davies you may begin.

Yeah, thank you. And good morning and I thank all of you for joining us today for our 2019 third quarter results webcast. With me on the webcast this morning is our CEO Lombardo Paredes. I will first go through our prepared remarks regarding our performance in the third quarter and the first nine months, and then Lombardo will be available as we open things up for the Q&A session. Before we proceed, I would first like to draw your attention to our legal disclaimer regarding forward-looking statements that may be made by us this morning during the webcast. Last night, we released our operating and financial results for the third quarter and first nine months of 2019. We're very pleased to be able to report another solid quarter consistent with our expectations. In the third quarter, almost all of our operating and financial metrics as highlighted on this slide showed improvement compared with the third quarter last year. For the first nine months of this year production growth, the higher spot gold prices in the third quarter and lower cash costs have all been catalysts to our improved adjusted EBITDA earnings and cash flow results, which in turn are helping us to strengthen our balance sheet. Over the next few slides, we'll take a closer look at the results we reported last night. We had another solid quarter at Segovia in Q3 bringing our total gold production for the first nine months of 2019 to about 175,000 ounces, up 7% from the first nine months last year. We followed it up with another 21,000 ounces of gold production in October, bringing our trailing 12 months total gold production at the end of October to about 233,000 ounces, up almost 7% over 2018's annual gold production. Based on our performance through the first 10 months of 2019 and our expectations for the next two months, we're confident that we will meet our production guidance for the year of between 225,000 and 240,000 ounces of gold. In July, we completed the expansion of the Maria Dama plant at Segovia to 1,500 tonnes per day. Initially, we used lower-grade stockpile to feed the expanded plant while we prepared additional areas in the mines to feed the plant going forward. In Q3, we processed an average of 1,300 tonnes per day and Segovia's head grades averaged 14.3 grams per tonne. Although, we expect that with the new mining areas now in production Segovia's head grades will continue to average between 14 and 15 grams per tonne over the balance of the year, we did see better head grades in October averaging 15.6 grams per tonne and Segovia produced 18,600 ounces in October, a good start to Q4. That brings Segovia's trailing 12 months production at the end of October to just over 207,000 ounces, about 7% higher than last year, and we're confident we will finish the year with our production guidance range of between 201,000 and 214,000 ounces at Segovia. At Marmato quarterly production through the first nine months of 2019 continued to be steady. In October, we released the results of a PEA study, we've been working on and one of the key components is the need to implement an optimized mine plan in the current operating mine, much like we did at Segovia a few years ago. SRK believes that with better control of dilution, the operation should be able to mine material with grades closer to four grams per tonne than the 2.4 grams per tonne average we've seen through the first nine months of this year. We started the process and in October, we began to see some improvement with grades reaching 2.8 grams per tonne and monthly production of 2,400 ounces our best month at Marmato this year. With another two months to go, if they come in much like this that would put Marmato's production at the top end of our guidance range close to 26,000 ounces for 2019. Revenue reached a total of $83 million in the third quarter of 2019, as spot gold prices soar to new heights. Our average gold price realized increased to $1,458 per ounce in Q3 from an average of $1,296 per ounce in the first half of this year. That brought our first nine months 2019 revenue to a total of $238 million, up 19% over the first nine months last year. And our trailing 12 months, total revenue at the end of Q3 has now surpassed the $300 million level, up about 14% over 2018. Overall, our total cash cost was $684 per ounce for the company in the third quarter this year up from the first half of the year due to timing of certain operating expenses, the impact of lower grades at both mines in Q3 compared to the first half of the year, and a $7 per ounce increase in production taxes in Q3, corresponding with the increase in gold prices in the third quarter. This brought the average total cash cost for the first nine months of 2019 to $653 per ounce down from $674 per ounce in the first nine months last year. For the full year, we continue to expect that our total cash cost per ounce will average less than 2018's average of $680 per ounce. From this chart, you can see that Segovia's cash cost continues to hover around $600 per ounce, while Marmato at just over $1,100 per ounce is expected to see some significant improvement in 2020 as we implement the optimized mine plan, improving production and identifying cost savings opportunities. Our all-in sustaining costs increased to $951 per ounce in the third quarter this year, up from $855 per ounce in the first half of this year. In addition to the increase in cash costs in the third quarter, we increased our spending on sustaining CapEx in Q3 by about $23 per ounce, primarily at Segovia where we stepped up our investment in the infrastructure to support the deep development at El Silencio, and we acquired some additional mining equipment. And our G&A increased in Q3 by about $31 per ounce, mainly associated with a temporary period of far heavier volume of legal work required this quarter related to our free trade arbitration claim with the government of Colombia. That brought our all-in sustaining costs for the first nine months of 2019 to an average of $886 per ounce. We expect our G&A in Q4 will go back to a more typical quarterly rate and given our expected sustaining CapEx in Q4, our annual all-in sustaining costs should finish the year below $925 per ounce. We incurred $40 per ounce of non-sustaining CapEx in Q3, primarily on the drilling and the PEA work at Marmato, resulting in an all-in cost for Q3 of $991 per ounce. That brought, our all-in cost for the first nine months of the year to an average of $911 per ounce, and we expect that our full year average for 2019 will remain below $950 per ounce as guided. With the boost in revenue from the increase in gold prices in Q3 combined with this year's production and lower cash cost, our adjusted EBITDA reached a total of $106 million in the first nine months of 2019, up 35% over the first nine months last year. That brings our trailing 12 months adjusted EBITDA at the end of September to a total of $130 million, up 27% over 2018's annual adjusted EBITDA. Cash flow metrics in the first nine months of 2019 also benefited from the higher gold prices in Q3 and our continuing strong operating performance. Consequently, operating cash flow in the first nine months of 2019 was $69 million, this after paying $33 million in income taxes this year and was up 22% over the first nine months last year. After $30 million spent on CapEx in the first nine months of this year, most of which related to Segovia, our first nine months 2019 free cash flow was $39 million, up 31% over the first nine months last year. And this brought our trailing 12 months free cash flow to $53 million, up 20% over 2018. With about $20 million in free cash flow in Q3, after debt service, our cash position increased $12 million to $63 million at the end of September. Meanwhile, we reduced the principal amount of the gold notes by another $5 million in July, bringing them down to $73.6 million at the end of September. And including the convertible debentures, the total principal amount of debt outstanding at the end of Q3 was about $89 million. In November, we added CAD 15 million in cash in the private placement we completed with Eric Sprott and we reduced the gold notes by another $5 million at the end of October to $68.8 million. Also, at the end of October, Fitch affirmed our B rating with a stable outlook in their annual review published on their website. Our issued and outstanding common shares currently stand at 53.3 million. The increase since the middle of August principally includes the 3.26 million shares we issued in the private placement as part of the strategic investment by Eric Sprott in early November. We see the investment by Mr. Sprott, a well-known gold investor, a solid endorsement of the potential for further appreciation of our share price, which has continued to outperform the TSX Global Index over the past year and remains below analyst targets. Over the next few slides, I'd like to take a few minutes and go over our latest corporate development initiative, the spinout of our Marmato mining assets into new separately listed vehicle. In October, in conjunction with SRK, we completed the long-awaited PEA study for the underground mine expansion of Marmato and announced an updated mineral resource estimate. We believe this is a world-class deposit and now is the time to proceed with its development. Our challenge however was doing so in Gran Colombia given the investor concerns about massive share dilution or putting significant project debt directly back on to Gran Colombia's balance sheet. We believe the spinout addresses the concerns and gives our shareholders the opportunity to participate in the value created, through the expansion of the Marmato mining operations by keeping a controlling position in the new company. We're currently working through the RTO process with Bluenose to create the new company Caldas Gold Corp., something we think can be completed before end of this year. We've also engaged a syndicate of agents led by Scotia to complete a private placement. And together with the capital contribution from Gran Colombia, Caldas Gold will be well capitalized at its outset to implement, the new mine plan outlined in the PEA study. We're also evaluating alternatives to finance the construction of the mining operation and the Deeps Zone and hope to have some news on this front in the near term. Marmato is literally a mountain of gold. The spinout transaction with Bluenose involves the mining assets in the two areas marked here as Zona Baja. This is one concession license. And in the upper zone of Zona Baja, in the middle of the mountain, sits the current Marmato underground mining operation, which includes a 1,200 tonne per day mineral processing land. Mining in this area is primarily cut and fill and focuses on the veins. The Deeps Zone below was discovered in late 2012 and drilling has since outlined a significant mineral resource, which is more porphyry in style and amenable to mechanized mining using long-hole stoping. Accessing this mineralization can be accomplished with a separate portal from the side of mountain and then a decline that descends into the ore body. The PEA envisions a new cyanidation plant located near the portal, processing about 4,000 tonnes a day. A new dry stack tailing storage facilities will be constructed to receive about half of the material from the new plant, the other half going back into the mine as cemented backfill. The upper Zona Alta area at Marmato is being retained by Gran Colombia, where currently we get no production from the area. There are numerous small artisanal mines located in Zona Alta and we believe there is an opportunity for us to establish operations on our titles in Zona Alta that incorporate these miners, much like we did in Segovia that will benefit both the community and Gran Colombia. In mid-October, we announced an updated mineral resource estimate for the Marmato project prepared by SRK. The full 43-101 technical report supporting this information is being finalized and will be available on SEDAR by the end of this month. In Zona Alta, there is approximately 1.9 million ounces of gold. In Zona Baja, the upper mining zone contains an estimated two million ounces of gold from which SRK estimates in the PEA that about 600,000 ounces can be recovered over a 16-year mine life starting next year. In Zona Baja, the Deeps Zone contains an estimated 3.3 million ounces of gold from which SRK estimates in the PEA that about 1.6 million ounces of gold can be recovered over a 16-year mine life starting in 2023. The PFS study is already underway and expected to be completed by mid-2020. A key facet of the PFS is the drilling, which is now in process, to upgrade the inferred material in the Deeps Zone, to indicate it to qualify as reserves in the PFS. We also announced the economic results of a PEA study in mid-October and the key takeaways from this slide are as follows. The upper mine does not require a significant amount of capital to get going. It requires the implementation of an optimized mine plan, improving mining operations to take the mine from the current run rate of about 25,000 ounces per year to 35,000 to 40,000 ounces per year starting next year. This will also reduce cash cost and life of mine all-in sustaining costs will average just under $900 per ounce. The Deeps Zone will require a large amount of upfront capital, currently estimated to total about CAD 269 million, including a sizable contingency. This will be spent between late 2020 and the end of 2022. Once the Deeps Zone comes into production in 2023, the operation will be producing more than 120,000 ounces per year for at least 10 years, peaking at over 160,000 ounces per year between 2024 and 2026. The overall life of mine all-in sustaining cost averages $882 per ounce. And at a $1,300 gold price, the project has an attractive 20% IRR and pays back by 2026. The exciting part about this project is production plan and the economics are based on the current resource estimate. We believe there is upside potential to be confirmed by future drilling campaigns that can improve upon this plan. And as the drill intercepts like those that we announced on November 5, which fuel our enthusiasm for what might exist in the Deeps Zone at Marmato. The Phase 2 drill campaign which commenced after the July 31 mineral resource estimate continues to demonstrate an improvement in grades in the Deeps versus the resource block model incorporated in the PEA. Holes like number 41 with 74 meters of 5.7 grams per tonne gold, hole number 36 with 65 meters at 4.7 grams per tonne gold and hole number 45 with 72 meters at 3.9 grams per tonne of gold are all examples of some very promising drilling results that bode well for the future of this deposit, which remains open below and to the east. So that brings us to our last slide before the -- we open up for the Q&A session. And I'd like to comment on where we are relative to our guidance and action plans for 2019. As I mentioned earlier, we're on track to meet both our annual production and our cost guidance for this year. Our capital programs at Segovia are progressing well and we are seeing the expected improvements in our operating results. We've drilled about 25,000 meters at Segovia so far this year, and we're finalizing our work with gold spot discoveries, which will help guide us as we launch about 70,000 meters of drilling over the next 18 months. I've taken you through the work we've been doing at Marmato and the spinout and PFS are both in process. Sandspring shareholders recently approved Gran Colombia becoming a controlled person, and with our subscription receipts now converted to additional shares and warrants, we hold approximately a 21% equity interest in Sandspring. In October, we completed our 19.9% equity investment in Western Atlas to incubate the potential for the future project in Venezuela. In summary, the third quarter has been very positive for Gran Colombia and we feel poised to continue the momentum into the fourth quarter of this year and into 2020. So, with that, Sylvia, I'd like to open this up for the Q&A session.

Thank you. We will now begin the question-and-answer session [Operator Instructions]. And the first question comes from Mike Shao [ph] from [indiscernible].

Good morning.

Good morning.

Now, Gran Colombia is the central service for the Sandspring. So can you estimate when Sandspring is able to complete its full finance for the construction? Looks it has a challenge for it to finance.

Lombardo, would you like to answer that?

Yeah. In Sandspring, we are just -- we'll start the feasibility study here for the whole for the company. So the -- and that feasibility study will be ready by mid next year. With that the result of that feasibility study is that we’ve been is -- producing good result with -- according with the PEA, the prefeasibility study we will produce good result. Segovia is already a partner which is committed to finance part of the capital investment of the project which is around $360 million subject to the result of the feasibility study. So to answer your question, we will start to raise capital for the project by mid of next year.

Okay. Thank you. Appreciate it.

Thanks.

And the next question comes from Sid Rajeev from Fundamental Research.

Hi. Congratulations gentlemen on the strong results. I have a question regarding the grades at Segovia. It was mentioned that the grades were affected as the company was preparing new mining areas. Could you please provide some color on this? Do you have a number on what was the average grade excluding the stockpile processed?

Okay, go ahead. Mike if you like.

No, go ahead Lombardo. You're on top of that.

Yeah. We are -- now we have three mines in operation and -- which is El Silencio, Providencia and Sandra K. And also we are in another mine which is Carla. And we have potential -- according with the preliminary result of operation we have potential for the two new mines which are Cristales and Vera. And in El Silencio for example in the deep Silencio in which part we are executing a project, we are expecting to have very good result in relation with the grade. For example, in the initial phase we are attracting only something like 70 tonnes per week. In that portion, we are developing that project and the grade is around 35. And the -- in Providencia also we have another -- we have -- are advancing a project exploration in which there is the possibilities are great possibilities that we find another ore short, which will increase the life of the mine for another five years. In other words, we are not expecting to have lower grades in Segovia. Probably the next year the average grades are going to be around from 13 grams per tonne to 16 gram per tonne more or less the same grade that we have this year.

Got it. And then so when the resource/reserve upgrade comes up bid comes up, do you expect the numbers be -- the average grades to be slightly lower than last year?

No. You know…

No. Go ahead Mike.

No go ahead.

Okay. The thing is the following we are launching a new -- a complete new exploration program in Segovia, which comprised 70,000 meters of exploration. And we are using -- also for that exploration campaign we are using GoldSpot. It's a company we've used neural networks artificial intelligence to improve accuracy of our exploration program. At Segovia, if you look for the average of the grade of Segovia from -- around 15.6 something like that. So I do not expect that this year we are going to have grade much different from the grade that we have -- that we have had in 2018 and 2019.

Okay. Thank you. Just one more question. Any guidance on the CapEx for next year? I know you've not disclosed it, but some ballpark numbers would be really good for modeling.

I would say at this point, we're still working through our budgets and plans. But I would say for the moment, I would consider it to be similar to this year with the only caveat that we will be stepping up the exploration portion. So we will have more information probably in early in 2020 once we've worked through the specifics of the exact amount of drilling that we'll do next year and the cost increase coming with that.

Thank you, Mike and Lombardo. Appreciate it.

Thanks, Sid.

Okay.

Our next question comes from Mike Neti [ph] from Neti Asset Management [ph].

Hey, guys, couple of questions, primarily on the Marmato spinout. What's the -- what percentage will we own of Marmato once this is done? And then what's the valuation, the dollar amount on Marmato that we're applying?

Yeah. So going a little bit reverse order. The valuation that we've agreed to on the transfer over of the mining assets as a development stage asset is CAD57.5 million roughly US$43.5 million. Based on the shares that we'll receive plus the -- which is at the same $2 unit level as the equity offerings that are on there and the range of equity offering, I'd say right now we're probably something in the mid-60% position when we complete everything before the end of the year.

Okay. And what's our cost on the portion of Marmato that we're getting -- we're selling 40% up or 35% up?

It's pretty close to the same. We're working through the -- Marmato has always been carried as a single property on our books. We've gone through the exercise and it's about the same as what we're selling it for.

Okay. And so it looks like on a per M&I ounce is about $15 per ounce for the reserves we're giving up that we know about and call it a quarter of the NPV at 1,300 roughly. What -- why -- just generally why -- what's the main driver for this? Where gold's been depressed. Our balance sheet is in a lot better shape now. Why do we want to sell off our 40% of our development asset now?

The challenge that we've had in the market, we've got -- I've had a tremendous success story going with the turnaround over the last three years. Investors placing a high value on the high grade Segovia project. We have a lot of investors that also are attracted to the very high free cash flow yield that we've had in Gran Colombia. The concerns that we've been hearing and that we've reacted to and the way we structured this deal with the fact that holders do not want to see us and do an equity financing of any consequence inside Gran Colombia that would massively dilute the Gran Colombia shareholders in order to fund the $269 million of CapEx required to build Marmato. On the same token having cleaned up the balance sheet and having gotten out from underneath the debt that we have there was a strong sense of not wanting to overburden and over lever the financial balance sheet with $269 million of project debt. And the third thing we've been hearing is a concern about if we keep Marmato inside naturally all of our free cash flow is going to go towards the Marmato project and the work that needs to continue to be done as we've outlined at Segovia to expand resource and reserve life and bring on some more high grade will not get the attention. So by spinning it out, I think that probably the two biggest advantages we get is we compartmentalize the financing and project risk into a separate vehicle that Gran Colombia shareholders will be able to share in the value appreciation by us maintaining a control position and we can use the separate vehicle for financing the growth path there without impacting Gran Colombia's current situation.

Okay. So I look at Gran Colombia's balance sheet now and we're at 0.2 times debt-to-EBITDA, which is about the best in the sector I look at every company. And I'm showing free cash flow next year of US$70 million after all of our debt paydowns that we can make even if we allow a little bit of exploration let's say extra $5 million in Segovia. It seems to me like we'd have plenty of room to self finance this and take on a little bit of debt to do Marmato if we wanted to. What else are we going to do with their cash in the meantime, since we're not going to be spending it on Marmato? What are we going to do with that $60 million or $70 million of free cash flow?

Well, we do have an aggressive plan in Segovia. One of the things that keeping that cash in hand is going to help us do is potentially fund the expansion of any new mining areas that come that aren't currently in our capital program and we'll wait and see. Maybe there will be other opportunities for us to take a look at.

Excuse me, Mike in fact, if we will meet our expectation with the exploration programs, we are going to need money to make development in our infrastructure. That will consume a lot of money.

Yes. There's -- I guess, it's safe to say there's no harm in having cash. We just want to make sure that we do have it, so that the opportunities that come out of our programs we'll be able to fund without having to go. And either risk that we have to slow down or do something differently at Marmato, while at the same time trying to make sure that Segovia gets the attention it deserves.

Okay. And this broad investment that -- I think that helps with the company that looks fantastic. What are -- are they going to put anyone on the Board or any discussions on that?

No, they're less than 10% and there's been no discussions.

Okay. Well I think one issue Gran Colombia's had when I talk to other investors is there's -- we're one of the cheapest stocks in the market. And I think it'd be helpful to the extent we can add outsiders to the Board. Potentially if they were to recommend someone that might be helpful for the perception in the market. People that aren't affiliated with the current Board or the -- any of the individuals we do some of these deals with historically that'd be -- I think that'd be helpful. Just thinking out loud. Okay. Thanks very much.

Appreciate that. Thanks.

Thank you.

[Operator Instructions] And we have no more questions.

Okay.

All right. I've got quite a couple of questions that have come in on the web. From Nicholas [ph] he says good morning, congrats on the strong quarter. October production numbers were very strong which is encouraging. Was this due to anything in particular? And can we expect to continue at this rate for the rest of the quarter? I think as Lombardo said and as we've guided, we're expecting numbers between 14 and 15. We've come in a bit better and stronger than that in October. I think we'll continue to be in that range in around the 15 grams for the next couple of months. So we're happy with where we're at. The other two questions both from Paul Harris [ph] and from Nicholas deal with the funds we've now received from Sprott. What are we going to use them for? Will Sprott be investing in Marmato? And will we -- what we'll use the cash for? We are taking a look at potentially using a little bit more of the money that we've now received in Gran Colombia to potentially increase the Gran Colombia $5 million contribution using some of that extra money we've now got from Sprott, but we're waiting to see how things progress over the next few weeks. And the equity offering that Scotia is working on is going quite well right now. So we'll let the dust settle when we close the financing and we'll decide if Gran Colombia puts in a little extra to ensure that the company is strongly capitalized when it starts. All right. Are there any other questions on the line?

No questions on audio.

All right. Well we'd like to thank you all for joining us this morning. Appreciate the time that you spent with us. We have lots of exciting things we're working forward and we'll continue to have news releases coming out over the next few weeks on progress with Marmato and other matters so -- related to Segovia. So stay tuned and thank you.

Thank you, ladies and gentlemen.

Thank you.

This concludes today's conference. Thank you for participating. You may now disconnect.