Aris Mining Corporation (ARIS) Q1 2020 Earnings Report, Transcript and Summary

Welcome to the Gran Colombia Gold Q1 2020 Results Conference Call. My name is John and I will 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 the conference is being recorded. Now I will now turn the call over to Mr. Mike Davies.

Great. Thank you, John. Good morning, and thank you for joining us today for the Gran Colombia and Caldas Gold first quarter 2020 results webcast. With me on the webcast this morning is our CEO, Lombardo Paredes. And as is customary, I will first go through our prepared remarks regarding our performance in 2020 and then Lombardo will be available as we open things up for the Q&A session. Before we proceed with the presentation, I would first like to draw your attention to our legal disclaimer regarding forward-looking statements that may be made by us during the webcast this morning. And as we get started, let me first introduce you to Caldas Gold, our new publicly listed subsidiary. We completed the RTO transaction with Bluenose at the end of February and commenced trading on the TSX Venture Exchange on February 28th. Caldas currently has a market cap of $93 million, $14 million of cash in the bank at the end of March and no debt. The PFS is on track and we are working behind the scenes on our financing options to build Colombia’s next major goldmine. Drilling is continuing in 2020, setting us up for a solid reserve for the PFS and has recently discovered a new zone which opens the possibility for further resource expansion. We are also proud to say that Caldas Gold, much like Gran Colombia, will have a sincere focus on health, education, community and the environment and we have already commenced our early-stage ESG programs in this regard. As we all know, the world has been dealing with unprecedented times since we had our 2019 year end webcast at the end of March. At Gran Colombia and Caldas Gold, we implemented our business continuity plan in March in response to the national quarantine, which went into effect in Colombia on March 25th and remains in effect. We have been successful in keeping our operations going at Segovia and Marmato, albeit with fewer workers in the first half of April at Segovia and most of April at Marmato, as restrictions on the movement of people from the surrounding communities to the mine sites has been a challenge. Our people have been very engaged at the municipal level throughout and our procedures at the mine sites checking temperatures, sanitizing, training miners and mining operations personnel about the proper social distancing and other measures, have all helped to keep our workers safe and keep our operations going. Equally important has been our support for the communities in which our people live and we operated. Both companies have made donations to local hospitals to create critical care units and provide essential medical equipment and supplies; partnering with our local foundation and Angelito de Luz. We have provided over 24,000 meal kits to economically affected families in Segovia-Remedios, Marmato, Supia and Rio Sucio. In Segovia, we have also provided clean water to the community. All in all, we are very proud of the manner in which our people have risen to the occasion and responded during COVID-19. Last Friday, we were pleased to report another solid quarter of operating and financial results. In the first quarter, Gran Colombia reported new highs for quarterly revenue and adjusted EBITDA, which led to adjusted net income of $21 million, up 60% over the first quarter last year. Gran Colombia’s cash flow metrics all showed a significant improvement over the first quarter of last year. Caldas Gold’s first quarterly results as a public company were muddied by the RTO accounting, the recognition of share-based compensation expense for the initial granted long-term incentive plan awards to management and employees and cost incurred to commence the optimization program in the existing upper mining operation. But most importantly though, Caldas Gold is now in operation and the actions required to achieve the longer-term strategic goals to create shareholder value at Marmato are all underway. Financial results at Caldas Gold are expected to improve as the financial year progresses. Over the next few slides, we’ll take a closer look at the results we reported last Friday. For the most part, our production in the first quarter of 2020 was solid with Segovia remaining above the 50,000 ounce level for the fifth consecutive quarter and Marmato came in just under 6,000 ounces for its first quarter. As we announced on April 14, the National Quarantine adversely affected our workforce through the first half of the month and by mid-April, Segovia was back to about 95% of its complement and produced 11,400 ounces of gold in April. At Marmato, getting access to workers was more of a challenge, since the majority of our workers come from outside the municipality of Marmato. As such the Marmato Mine was limited to about 533 tons per day of material, about 50% of normal in April resulting in 1202 ounces for the month. The situation is improving as we speak and we are expecting to see improvement in Marmato in May. At Segovia, we processed an average of 1284 tons per day in the first quarter of 2020 with an average head grade of 14.9 grams per ton. El Silencio’s production was down in the first quarter of this year as head grades in the contract miner areas were lower than the first quarter of last year. Sandra K on the other hand has been making a bigger contribution since the middle of last year. The implementation of the national quarantine did place some limitations on our workforce in the final week of the quarter, but we maintained our mill throughput with lower grade stockpiles available to us onsite. At Marmato, production in Q1 was hampered by a temporary shortfall in explosives in January and also the national quarantine in the final week of March. In February, we had provided guidance for both operations for 2020 and given that the national quarantine at Colombia still continuing and although we are in operation, we are waiting until we get more confidence that operations have resumed to full normal before providing an update on this year’s annual guidance. Our quarterly revenue surpassed the $100 million mark for the first time this quarter. A continuing rise in spot gold prices boosted our realized revenue to an average of $1570 per ounce of gold. We also saw our gold sales volumes in the first quarter pick up the unsold inventory from ended 2019 from the holiday shutdown period at the refinery. With gold prices generally near or above $1700 per ounce so far in the second quarter, this will help to offset some of the cash flow impact of April’s lower production. Overall, our consolidated total cash cost was $667 per ounce in the first quarter of this year, down from $685 in the fourth quarter of 2019, but up from the first quarter of 2019. Two things to note, first, at Segovia, the first quarter 2019 cash cost per ounce was lower than typical as a result of the very high grade material we processed for several weeks at the Providencia Mine. Segovia’s $607 per ounce cash cost in the first quarter of 2020 was actually an improvement on the cash cost for the final three quarters of 2019 and is expected to see further improvement as the Colombian peso continues to hover around the $3900 level and above relative to the U.S. dollar so far this quarter. The second thing to notice that Marmato’s cash cost in the first quarter of 2020 includes about $70 per ounce related to the implementation of the mine optimization as envisioned in the PEA with additional short-term spending on mine design, mine planning and training, as well as incremental operating development to open up areas for production in the transitional zone. The explosive shortfall which impacted January’s production also increased January’s fixed costs on a per ounce basis affecting the average for the quarter. Our all-in sustaining cost decreased to $890 per ounce in the first quarter of this year, and our all-in cost were $978 per ounce. Our all-in cost included an investment in non-sustaining CapEx of $3 million equivalent to about $47 per ounce to acquire an agricultural operation that resides within our Segovia-Remedios title and comprises several farms including a fruit and ornamental tree nursery, a cocoa plantation and a pig farm all of which Gran Colombia is incorporating in its development to sustainable community programs in a ZSG strategy at Segovia. At Marmato, non-sustaining CapEx included $2.6 million to carry our additional drilling at Marmato along with the PFS work. With gold prices rising further in 2020, you can see that the gap between revenues and all-in cost per ounce widened in the first quarter, a key driver behind our free cash growth. And with the new high in quarterly revenue in the first quarter of 2020, we also reached a new high in quarterly adjusted EBITDA of $50 million. Our trailing 12 months adjusted EBITDA now stands at about $162 million, about 10% higher than last year. That means, we are currently trading at about 1.7 times EBITDA in the current market. Cash flow metrics in the first quarter of 2020 also benefited from the higher gold prices and gold ounces sold. As of the end of the quarter, our trailing 12 months operating cash flow was up about 12% over last year to $115 million and our trailing 12 months free cash flow of $67 million, up about 11% over last year. In February, we completed a private placement for about $30 million U.S. and on March 31, we used $22 million of the proceeds to redeem 30% of the gold notes bringing their principal outstanding down to about $45 million at the end of the first quarter. Depending on the gold price, we expect to save more than $4 million in debt service over the balance of this year alone with the early redemption. Gran Colombia’s cash position improved $86 million at the end of March and together with Caldas Gold’s cash of $14 million, our consolidated cash position stood at about $100 million at the end of March. Caldas Gold has no debt and the quarterly amortizing payment at the end of April has further reduced Gran Colombia’s gold notes to approximately $41 million outstanding as of today. With the private placement in February and some warrant conversions, our issued and outstanding common shares now stands at $61.3 million, the warrants options in the convertible debentures are fully diluted total is about $89.4 million. Like most issuers, we’ve seen our share price rebound following the mid-March collapse due to the COVID-19 pandemic announcement and our market cap is currently about $380 million. Last week, we made a bold move and announced that we have signed an agreement to acquire Gold X and we were making a proposal to acquire Guyana Goldfields. I would like to cover some high-level comments over the next few slides as a backdrop is to why we put this M&A transaction into play. We felt we were uniquely positioned to create a high growth, LATAM-focused intermediate gold producer where value will be created for shareholders of all parties involved. With our proven operating and mine building experience in Latin America and access to one of the largest undeveloped gold deposits in the Americas through Gold X, we saw an opportunity to unlock tremendous synergies by connecting Toroparu with Guyana Goldfields Aurora project. The vision was the creation of a high growth intermediate gold producer with several producing mines at three major growth projects, significant reserves and resources and a platform to rapidly double our annual production. Our premise was to unlock immediate and substantial synergies by combining Toroparu’s substantial mineral resources with the processing capability at Aurora and be in production within six months, more than two years ahead of a Toroparu’s standalone operating scenario. Given our team’s prior exploration and mine building experience in the Venezuelan side of the Guyana Greenstone Shields, we felt this path would give us time required to study the underground mine at Aurora and develop an appropriate plan to bring it into production and profitability. The payoff with this proposal was a clear pathway to 500,000 ounces of gold a year with the initial increase coming from Toroparu, followed by Aurora Underground and later on Marmato. The proposed transaction was expected to be highly accretive to our combined net asset value based on analyst consensus values, possibly higher when you factor in where is gold is today and would have set us up nicely if gold goes on a run. And overall, we saw the proposal is a compelling relay opportunity where shareholders of all three companies were poised to benefit and the appreciation in Gran Colombia’s stock price. Now I say all this in the past tenses, we’ve all seen Silvercorp’s increased bid over the weekend, along with the news of a secret all-cash bid from another party. We are currently digesting the latest development and we still believe wholeheartedly the Gran Colombia’s proposal as presented to the shareholders of Guyana Goldfields represents the best opportunity to position themselves as part of gold-focused intermediate producer with a proven track record. The Board of Guyana Goldfields has spoken and now it rests with the hands of the shareholders of Guyana Goldfields determine what comes next. We recognize that there may be many questions awaiting us in the Q&A portion of this morning’s webcast regarding this proposal. However, let me say upfront that we aren’t in a position to say much more at this time at a respect for the rules surrounding these types of processes and not wanting to conjecture on any matters that are not already in the public realm nor already within our scope of knowledge. So with that being said, John, we’d like to now open the Q&A session.

[Operator Instructions] And our first question is from Sid Rajeev from Fundamental Research. Your line is open. Go ahead with your question.

Hello.

Hello.

Hello, Sid, your line is open. Go ahead with your question.

Congratulations to you gentlemen. Mike, since you mentioned that you don’t want to talk too much about the transaction, do you mind giving us more color on the current capacity of – I mean, operating capacity of Segovia and Marmato? What they currently operating at?

The capacity at Segovia is 1500 tons a day. Marmato is at 1200 tons a day. Lombardo, did you want to mention sort of where we are in terms of production at this point with both projects given that the quarantine in Colombia?

Segovia, the capacity of the mill after its expansion is 1500 tons per day. At Marmato, it’s around 1200 tons per day. And with that, we are planning to produce Segovia this year around 220,000 ounces of gold and in Marmato, we are planning to produce 35,000 ounces of gold. Of course, the pandemic situation maybe will change that a little bit, but we do not expect that the changes are going to be very great. In – as you know, we are doing a lot of exploration, a lot of exploration in Segovia and that will put us in a much better position during next year to increase the production. In Marmato, we have the projects which are above 200 million, 300 million in that expansion of the upper mine, a new mine in deep Marmato. And the intention is for 2023, we will have that in place of 150,000 ounces of gold. That is our plan for Segovia – for Segovia and Marmato.

Okay. Thanks. Pretty much every parameter looked good in Q1 except that plays to be this.

Sorry. Sid, you blanked out for a second, everything looked good except for?

Except for the head grades at Segovia. And - go ahead.

Yes, when we gave our initial guidance this year, we said that the grades for Segovia given the mix of materials coming and adding in some additional workplace is we guided this year that Segovia’s grade was going to be about 13 to 15 grams per ton. Certainly, where we’ve committed the first quarter at about 14.9, it’s in the upper end of that and we are still holding to our grade expectation for the year.

Sounds good. Thank you so much, Mike,

All right.

Our next question…

Go ahead.

Is with - from Derek Macpherson from Red Cloud Securities.

Morning, Mike, Lombardo. And congratulations on another solid quarter. Looking a little bit ahead and focus on Marmato, obviously, you guys have started to incur some of the costs of the optimization program associated with the PEA. When do you expect to see some of the benefits translate into the operations? I guess, including sort of the impact of COVID?

Well, in Marmato, right now we are dedicated to implement the PEA and for the recommendation made by SRK in relation with mine utilization. First thing is, we improve to develop the levels 21 of 22 of the so-called transition zone between the existing mine and the deep wall. We are now mechanizing that part of the mine, level 21 of 22, we have three on those 12 already in place and also in the upper part of the mine, the older mine levels 26 to 20, we are applying an optimization program in order to improve revolution and to get better results with the base. We are going to start to see real results about that optimization that we are doing probably around June. And in the month of May, for example have been very stormy because, you know the coronavirus situation has created a lot of problem because much of the mine is in middle of the three municipalities which is far 10 kilometer, 20 kilometer far from Marmato and that's created a lot of problem with the three of the measures you have to get to have transmitting of Coronavirus. So, we have to implement the strict – more than strict protocols to deal with that. So even up today, we have not been able to have the full labor force in place. Up to now, we have only about 25% of the labor force in place. This week - this week, we expect that we are going to incorporate around 75% of the labor force. Let's see. But to answer your question, we expect to see the result of our optimization plans in the open mine by June – June this year.

Okay. That's good. And then, my second question relates to, obviously, you guys have planned a fairly aggressive exploration program at Segovia this year. Maybe give us the timing – or has there been any impact on that because of the coronavirus? And also, when do you expect the next exploration update to commence?

Well, the Coronavirus, the effect of Coronavirus in Segovia was difficult to know in late March and the mid of April. Now in Segovia we have – the operation has about 92%, 94% complete. So 94% of the labor force is in place, we still have some problem with the supervisor of the mine. We have to fly them from Medellin to Segovia following on a strict bio protocol. But I can say that the operations in Segovia are in normal condition. Not up full 100%, because the inefficiencies that you have to introduce because of bio-security protocols like social distance, like temperatures, like cleaning, they avoid their operation, the people have to enter in the mine in a line, trying to each – you separate each one. So, that introduced some, let's say problem with the productivity. But for example, in this month, we are expecting to have the month of May, we are expecting to have closed all around 17,000 ounces of gold. Exploration, all the five rigs that we have in Segovia are operating. The exploration program did not suffer so much. So, a little bit in part of April, we have only three drilling rigs. But at the end of April, we were already in five rigs. So, we do not expect disruption in our operation program in Segovia.

Okay. Yes, I think the only thing to add to that, Derek, is we are not certain yet when the next drill results update will be. It depends on the ability of ourselves to get the assays through the labs which have been largely shutdown during the quarantine.

Okay. All right. That the – the program itself is only minor - only has a minor impact. That's great. That’s all the questions for me. Thanks guys.

Great. Okay. Thanks, Derek.

[Operator Instructions]

I have a couple of questions that have come in on the web portal. First one, how much cash we generated of all the outstanding debentures, options, warrants would be converted into stock, i.e. the outstanding base going from $61 million to fully diluted of $89 million. The convertible debentures would in effect turn into shares, no cash received on that. But on the options and warrants, depending on the exchange rate will probably be somewhere between US$60 million and US$65 million. The prices range from about CAD $2.21 up to CAD $6.50 across the board. So, pretty much everything is either in the money or post to the money at this point. There was a couple of questions related to the takeover bid, did we say that there was a secret all-cash bid from other company for Guyana Goldfields? The answer to that is, yes I did say that. We read in the press released on Sunday night that there was an all-cash bid that it come in from another party that hadn’t been spoken about previously. And then the follow-up to that was why we linked the success of the Guyana Goldfields takeover to the Gold X takeover and vice versa? The answer to that is, as we saw that the opportunity to generate the synergies between the companies was mutually exclusive and we did not want to push forward unless we had both parts of the puzzle to make our plans work. John, any other questions today?

No questions at this time.

All right. Well we’d like to thank you for joining us this morning. Our contact information is available if you would like to reach us separately after the meeting, that’s great. And we look forward to keeping up to date over the next few months as things unfold in our business and thank you for taking the time.

Thank you. Ladies and gentlemen that concludes today’s call. Thank you for participating and you may now disconnect.