Eldorado Gold Corporation (EGO) Q2 2018 Earnings Report, Transcript and Summary

Good morning, my name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to Eldorado Gold Corporation 2018 Q2 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Peter Lekich, you may begin your call.

Thank you, Operator, and thank you ladies and gentlemen, for taking the time to dial into our Q2 2018 financial and operating results conference call. With me in Vancouver this morning are: George Burns, President and CEO; Paul Skayman, COO; Charlie Parker, Acting CFO; and Jason Cho, Executive VP, Strategy and Corporate Development. Again, this quarter, we will be speaking to the slides that accompany this webcast. You can also find a copy of these slides on our Web site. Before we begin, I would like to remind you that any projections included in our discussion today are likely to involve risks, which are detailed in our 2017 AIF and in the cautionary note on slide one. The news release that went out yesterday detailing our Q2 operating and financial results should be read in conjunction with our Q2 financial statements and management's discussion and analysis, which are both available on our Web site and have been filed on SEDAR and EDGAR. Lastly, all dollar figures discussed today are in U.S. dollars unless otherwise stated. I will now turn the call over to George.

Thanks, Peter, and good morning everyone. Starting with the highlights on slide three, I'm proud to be reporting an excellent quarter for Eldorado. Production exceeded expectations, costs were in line with budget, and our teams continue to make good progress at Lamaque and on the Kişladağ mill project. We also had some solid exploration success at Lamaque. During the quarter, we held our first international safety week where each of our sites organized safety talks and activities to emphasize the importance of working safely. The pictures here show some of the events held at Efemcukuru during that week. A key highlight of the week was rolling out our Golden Rules handbook which sets out our safety procedures for high-risk tasks. This is now a part of everyone's personal protective equipment and must be carried by every employee and contractor while at site. With our positive performance in the first half of 2018, we revised our 2018 guidance upwards to 330,000 to 340,000 ounces of gold from previous guidance of 290,000 to 330,000 ounces. We forecast our cash cost to remain in the previously disclosed range of $580 to $630 per ounce. Turning to our business plan on slide four, we remain focused on delivering our core asset portfolio and reaching annual low cost gold production of 600,000 ounces by 2021. As you can see from the graph, the Lamaque and Kişladağ mill projects are expected to deliver significant production growth over the next two-and-a-half years. These high return projects should deliver significant value in jurisdictions we are very comfortable and experienced. On the next slide, where our efforts remain on executing on three strategic pillars, maintaining a core base of operations, developing our high return projects, and deploying our capital prudently. I will mention a few words on operations and results from our AGM. Paul will provide more detail on development projects and Jason will talk to capital considerations. Our current operations performed better than planned driven by better than expected production from the Kişladağ heap leach pad, good performance at Efemcukuru, and continued ramp-up of production at Olympias. At our AGM, Eldorado received shareholder approval to amend the company's articles to allow for a share consolidation with the ratio of five for one. The board continues to evaluate the merits of a share consolidation taking into account the best interest of the company, its trading price, and the requirements in the New York Stock Exchange. The board has till the end of this year to effect the share consolidation. Over to permitting on slide six. We received three positive notices during the quarter. First, in Turkey, we received confirmation from the Turkish Ministry of Environment and Urbanization that construction of the proposed Kişladağ mill is permissible under the existing EIA approved by the ministry in 2014. Second, in Brazil, we received a mining concession from the federal branch of Brazilian Ministry of Mines. This permit allows mining and commercial production at our Tocantinzinho project. Third, in Canada, we received a certificate of authorization for modifications required at the Sigma mill. Unfortunately, we have no updates on the outstanding permits at Skouries in Greece. We have been in active and ongoing talks with the Greek government since the arbitration decision was issued in early April but have been disappointed by the government's failure to act on earlier assurances to address the Skouries permitting issue following the conclusion of the arbitration. We remain open to a continued dialog on the steps required to allow the Skouries development to continue, but we'll, if need be, take the necessary steps to protect our investments in Greece. Skouries remains a compelling project providing additional long-term growth, but requires collaborative government dialog and a clear line of sight to free cash flow in order for us to allocate further capital for development. I'll leave it there for the moment and will hand it over to Charlie to go through the financials.

Thank you, George, and good morning everyone. I'll start by highlighting our strong cash position which you can see here on slide seven. We ended the quarter with cash, cash equivalents, and term deposits of $430 million compared to $485 million at the end of 2017. During the quarter, we generated $37 million in cash flows from operations, $4 million in proceeds from pre-commercial production sales at Lamaque, and $8 million in proceeds from the sale of surplus crushing equipment at Kişladağ while capital expenditures for the quarter totaled $74 million. Turning to slide eight, here's a summary of our Q2 financial results. During the quarter, we generated metal sales revenues of $153 million compared to $83 million in the second quarter of 2017. Included in metal sales this quarter were $121 million in revenues from the sale of 94,224 ounces of gold, contained in dore and pyrite concentrates at an average realized price of $1,287 per ounce. This represented a 65% increase in gold ounces sold year-over-year driven primarily by the start of commercial production at Olympias in January of this year, as well as a 45% increase in the production from Kişladağ year-over-year. Higher production from Kişladağ was attributed to improved leach kinetics. Excluding revenues from Stratoni, metal sales from byproducts during the quarter were $15 million compared to $1 million for the comparable quarter in 2017, mainly as a result of the contribution of Olympias production. Gross profit from gold mining operations of $30 million was relatively flat year-over-year due to higher production costs at Kişladağ and higher depreciation, depletion, and amortization expense at Kişladağ and Olympias. Production costs at Kişladağ included $29 million and non-cash charges related to inventory drawdown as recoverable ounces in the leach pad are being depleted following suspension of mining operations during the quarter. Net loss was $24 million or $0.03 loss per share for the quarter compared to a profit of $11 million or $0.02 earnings per share in 2017. The adjusted loss of $2 million during the quarter compared to an adjusted earnings of $6 million in Q2 2017. The weakening Turkish and Brazilian currencies in relation to the U.S. dollar during the quarter had a negative impact on deferred income tax expenses. Total income tax expense for the quarter was $22 million, including a $19 million non-cash charge related to unrealized losses on deferred tax assets resulting from these adverse currency movements. We anticipate currency volatility will continue to affect our quarterly income tax expense. Other factors contributing to the net loss in the quarter compared to profit in 2017 included higher mine standby costs due to suspension of ore mining, crushing, and conveying operations at Kisladag and foreign exchange losses related to monetary accounts denominated in Turkish and Brazilian currencies. Those are my comments on the financial statements; over to you, Paul.

Thanks, Charlie. On slide nine, we outline our production and cost for the quarter. Total production in Q2 is 99,105 ounces which is 56% higher than production in Q2 2017. This was largely a result of late at Kisladag performing better than expected for the year-to-date of the higher cyanide concentrations boosted leach kinetics and lower liptide associated with an interloop line of accelerated solution return to the IDR plant. Kisladag produced 55,930 ounces during the quarter up 45% year-on-year. At Efemcukuru, production was also slightly higher than expectations. MPS the resolution of mill and filter press bottlenecks resulted in a 41% improvement in operating costs from $699 per ounce in Q1 to $412 per ounce in Q2. Gold recovery in gold concentrate specifications were in line with expectations, by-product metro recoveries and concentrate specification to silver, lead and to a lesser extent zinc continue to have significant variability, the average recoveries below feasibility study target levels. We are focused on the opportunity to improve results on by-product recoveries which would further reduce cash costs and all-in sustaining costs. Moving to slide 10, as a result of the Kisladag leach pad exceeding expectations we've revised out 2018 guidance for Kisladag upwards to 140,000 to 150,000 ounces of Gold from previous guidance of 120,000 to 130,000 ounces. Cost for this year is slightly higher but now expected to be lower in 2019 due to a change in allocation of inventory costs which is made to better align cost with production now that we are in an inventory harvest mode of operations. You'll also note that we've added 20,000 to 25,000 ounces to production guidance for 2020 at Kisladag. Overall, we've increased our leach pad production for the period 2018 to 2020 by 40,000 to 45,000 ounces or 25%. Slide 11 and 12 provide some color on our debit to improved Kisladag leach kinetics and maximize recovery from material already placed on the pad. What we have seen in the first half of this year are increasing copper solution grades in line with high cyanide concentrations. This is shown in the chart on the left. The data shows that leach kinetics have improved significantly since the beginning of the year which should future gold recovery. We have also commenced injecting cyanide into the pad and concentrating on slide leaching both of which have shown promising results. Some drilling at the pad featured here on slide 12 has been ongoing since the end of last year with some recent results shown on the right. Drilling indicates that the lower levels of the pad have already been successfully led while the upper levels still yield solid results in the range of 0.15 to greater than 0.25 grams per ton full material. Additionally, recent metallurgical test work has indicated the gold recovery has increased in gold samples that are over one year old in the range of 3% to 5% on top of current column recoveries. This suggests the higher ultimate recovery on the pad could be possible over the last project assuming that solution chemistry can be maintained at profitable level. These efforts have resulted in our increase 3E guidance for Kisladag we'll continue to study this over the remainder of the year. The main material is ultimately to pad recovery is looking promising based on our efforts and test works but their optimizing sulfide leach pad remains a highly complex process. I must caveat that they can be no insurance of days recovery alternatives were result an increase recoveries in the pad behind our revised guidance. On the slide 13, for a few words on the Kisladag mill project. We are working with an engineering firm to progress the feasibility study, which is on track to be completed in Q3 this year. We've gone to tender and received bodes on major equipment and we also continue to examine efficiencies in the crushing circuit. Approximately 30% of our capital cost are in Turkish Lira, which means the currency exchange rate is working in our favor. Our pre-feasibility study outlined an average rate of 3.8TL to the U.S. dollar, versus the current rate of 4.7. A final investment decision on mill construction is expected from your board in October this year. Over to development of the Lamaque on slide 14, the team in Quebec continues to work extremely hard in progressing this project, which is slightly ahead of plan and on budget. Underground development progressed well during the quarter and is slightly ahead of plan. The main decline development is now at approximately 250 meters below surface and level 202 is already for production mining to begin. Tonnage in grader material mine today from Triangle is on target and results from total milling are reconciling well the reserved block model, refurbishment activities at the Sigma mill are also progressing on schedule with worth this quarter focused on replacement of tanks and restoration of the main mill. The picture on the left here shows one of our team deconstructing an oil tank. We expect to begin commissioning equipment in Q4 in advance of first production in early 2019. Slide 15, shows some of the positive drill results reported during Q2, 10,500 meters of drilling we complete during the quarter with 5 rigs exactly of the Triangle and the nearby parallel deposit area. A Triangle drilling target to lower parts of the deposit, resulting in the lineation of several new mineralized shear zones shown on the plan of C6, C8, C9 and C10, as well as subsidiary secondary share volumes and extension buying cluster. Our parallel drilling confirmed down deep and long straight expansions of the mineralized shear zones and established continuity of these mineralized zones previously exported shear zones at the Lamaque and Plug 5 deposits. As we have mentioned previously, the big upside we see at Lamaque is the conversion of our existing resources, the project exploration potential and the opportunity to supplement phase to the Sigma mill from other exploration targets. Results from Q2 exploration confirmed that these targets are realistic and we look forward providing to our resource and reserves at Lamaque in the future. That's it from me; over to you Jason.

Thanks, Paul. On slide 16, when we are operating international performance in the first half of this year, we continue to refine our views on capital and potential funding requirements to meet the medium to long-term needs of the organization as we see to re-establish annual production levels to 600,000 ounces by June 2021. Some general comments on activity in the quarter, we continue to focus on eliminating non-essential spending with the aim of reducing global G&A and cutting discretionary capital at our non-core projects. Further, we are progressing on optimizing our business plans with operating and side initiatives underway to improve near-term operating cash flow. And lastly, we are actively evaluating strategic and funding options and are engaged in discussions with various third parties. With year-to-date net change in cash is $55 million, a strong cash balance of $430 million versus $485 million at the end of 2017 plus access to $250 million in a non-drawing revolver. We have more than sufficient fundings for the remainder of this year at all of 2019. As mentioned last quarter and consistent with what we've observed actually in Q2 for cash on balance sheet combined with internally generated capital fully supports the development of Lamaque, and provides ample runway to substantially advance construction at Kisladag, without drawing on the revolver. We continue to believe that our plan, quality of our assets and market conditions will allow us to be opportunistic in evaluating and executing funding alternatives to address these needs over the medium to long-term. We look forward to updating both equity and debt holders on our progress as appropriate as we execute on our long-term for creating values. Now back to George.

Thanks, Jason. Just a few more words before we take questions. One of the drivers of our operational and development success so far this year is our revitalized leadership team. The team structure is shown on Slide 17 and includes our Board of Directors and senior executives including nine General Managers. Yellow denotes new hires in 2017 or '18; blue shows members of the leadership team with new responsibilities, and grey shows members that continue in their current positions. We have now enhanced capacity in our key positions in order to strengthen our leadership skill set, and ability to deliver value for our stakeholders. At the mine general manager level, Matt [indiscernible] and Peter Stregas have transferred their skills from previous MGM roles with Eldorado in China to their current roles as MGM Kisladag and MGM Olympias respectively. I'm also very excited about Phil Yee who will be joining us as EVP and CFO in September and Lisa Ower who will be joining us as VP HR, Human Resources, in August. Both are value additions to our leadership team. I wish to thank Charlie Parker for his ongoing hard work as acting CFO during the transition. Charlie has done an excellent job of managing Eldorado's finance department in recent months. He will resume the position of Corporate Controller post handover with Phil. So to wrap it up, I wish to thank all of our stakeholders, our shareholders, host governments, neighboring communities, and our employees for their continued support of our business. This is an exciting time for us, with our current mines performing to plan and our development projects on track. As shown on slide 18, we are delivering what we have said and we are going to do. And we will continue to focus on delivering to our plan to produce 600,000 ounces of gold in 2021. Thank you. We will now take questions.

[Operator Instructions] Your first question comes from the line of Cosmos Chiu from CIBC. Your line is open.

Hi, thanks George and team. It's Cosmos from CIBC here. Maybe first off, can I ask a question on 2018 guidance, it looks like you've increased it by about 40,000 ounces, I guess you've accounted for 20,000 ounces with Kisladag. Where is the remaining 20,000 ounces coming from?

It's actually all coming from Kisladag.

Is it?

Yes.

Okay. I guess, I’ve got to work on my math.

Cosmos, just to comment on that, that extra 40,000 ounces is coming over that three-year window at Kisladag, so it's about 20,000 at Kisladag, and we've raised guidance by about 20,000 overall.

Okay, I see it. I was looking at the bottom end.

Yes. So we've pushed Kisladag by about 20,000 ounces in 2018, and we've also put 20,000 to 25,000 into 2020. So '18 guidance has only gone up by the same amount as Kisladag has been achieving.

Now I see. The top end only went up by 10,000 ounces. I got it.

Yes, maintaining guidance on everything else for '18 at this point.

Okay. Hope I do better on this next question here. You're looking for 600,000 ounces in year 2021. What have you included in that assumption, is it -- have you included potential for Kisladag Mill? And what else have you included?

Yes, the key growth drivers to get to that 600,000 ounces is bringing Lamaque into production next year, and then getting the Kisladag Mill up and running at the end of 2020. You can see that on one of the slides. Slide number four.

Slide four.

Okay. And then maybe digging deeper into Kisladag here. Certainly positive news to hear that permitting can now go under the existing EIA that was approved in 2014. What else do you need to do? What other permits would you need if you do give the go-ahead for the mill?

Really, we have all the permits we need to get the construction completed. There'll be some normal operating permits as we bring it into production, but we're really set from a permitting perspective to be able to initiate and complete construction.

Okay. And then, again, good news coming out of the Leach Pad here in terms of those additional ounces, 40,000 to 45,000 ounces for the years 2018 to year 2020, I would imagine the bulk of the cost has already been expensed. And the cash, there isn't a lot of cash expenses associated with those additional ounces. So it's almost like pure profit. But could you maybe still tell me how much the sonic drilling is costing, the re-grading is costing, and some of those other activities that you're working on?

They're relatively minor, Cosmos. I mean, there is an inventory cost associated with remaining inventory, and we'll work that through over the rest of '18 and early '19. But those costs are very minimal, they're not material.

Yes. And Paul, those -- the inventory costs, that's all noncash, right?

That's correct.

It's actually money that you spend in the past; you're just kind of allocating the expense now?

That's correct, yes.

Okay. And maybe switching gears a little bit on Olympias. You know, it's good to see that production is ramping up. But I think you also made a comment in the MD&A that the specs to your base metal production is still not up to where you want it to be. Could you, number one, remind us -- when I was onsite last year I saw that there was a pyrite gold concentrate that was getting produced. What other concentrates do you produce? And what is it impacting right now? Is it on the base metal size impacting payability, is it -- sort of what's happening?

Yes. So we produce a lead silver concentrate, a zinc concentrate, and the pyrite concentrate that you referred to. Gold recoveries are pretty well exactly in line, and we're doing well both recovery and payability on the gold con, and zinc is pretty well where we want it. We're a percent or two behind on recovery, but payabilities are similar. Lead concentrate, we're not quite getting the recovery that we want, so we're recovering less material, but still equivalent in terms of payability on that material.

Yes. So what are you doing right now? And what sort of timeline are you looking at in terms of optimizing that concentrate or that recovery?

Yes, so we've got a team onsite at the moment focused on that lead recovery. We've got a group from SGS focused on sort of metallurgical test work and assessment, and then a couple of consultants also helping us with that. It's a little bit of a combination of ability to sort of blend material from underground, getting enough flexibility there. I think the mineralogy is a little more complex on some of the lead minerals than we anticipated. But we've done a fair bit of metallurgical work in the laboratory prior, and that's still the target long-term. Similar recoveries to what we've achieved in the lab.

Okay. And then maybe, again, switching gears a little bit on Lamaque here. You did about 2,100 meters underground development in Q2. Is that sort of where you're targeting on a quarterly basis?

It will ramp up somewhat as we get through the rest of this year, and then get into the normal production in 2019.

So what are you looking at, like 3,000 meters or more?

Yes, I think we've got four crews at the moment, and we're looking at brining in a fifth crew. So you'd see another sort of 25% to 30% improvement I guess, so getting up over 3,000 meters…

Yes. And then I guess when I was onsite, back in June, I saw that as you talked about some of the leach tanks are getting changed over. I saw that some of the motors are getting renewed or replaced. What are some of the key drivers here? What are some of the key developments that you need to do to make sure that the Sigma mill is up and running by the end of 2018?

Yes, you've talked about sort of replacement of CIP tanks, I guess, getting mill motors refurbished. And then electrical and control circuits. Yes, we've also got to do a little bit of work on the existing tailings facility. You saw a photo of that in one of the slides in the deck there. We have to do some buttressing to bring that up to current spec for the placement of more material. So that work is ongoing at the moment.

Great. That's all I have. Congrats on a good quarter. And certainly I would say the positive news is welcome after a pretty tough 2017.

Thank you.

Your next question comes from the line of Steven Butler from GMP Securities. Your line is open.

Thanks, Operator. Good morning guys. The sonic drilling program at Kişladağ, how much of the leach pad have you sonically drilled today to -- Paul, or is there more work to be done?

There is definitely more work to be done and that was one of the main reasons for -- we did some drilling like last year with the contractor. And it just wasn't working out with the efficiencies and productivity that we wanted, hence our purchase of a rig. So now we are running that rig around the clock. We are -- probably around sort of 25% of the pad has been drilled. And we've done that on a fairly tight spacing. In think in terms of generating information, we could open that up and drill a wider space set. And then go back in concentrate on area. So that's what we are looking at the moment.

Right. It looks like on that Slide 12, if I look at the legend, are you talking 35 to 50 meter spacing, is that sort of right?

It's about 40 meters. I think [indiscernible] 85 meters are crossing this two lines through that, so you are about right there, yes.

Okay. And then how big are these holes and do they achieve if you will that's not quite fracing. But are you looking -- and then you put the cyanide down this sonic hole. How big are holes and maybe just bit more elaboration there?

Yes. I think they are about 8 inches across. It's effectively a triple 2 rig. And we are extracting that core out of the pad. And then we are able to test that for obviously gold content -- leachable gold content pH through a whole raft of soda test on that material. We also case that core and -- case that hole and then we can use that for injection of cyanide or as-needed sort of thing. And we are now contemplating whether we can sort of place packers in there and actually inject only to areas of interest rather than putting it in the hole itself, so…

Okay, interesting. And then, one question perhaps for you guys on disclosure whether you may consider Olympias giving us maybe a bit more stats on -- in mine production in terms of head grades for the other metals as we go forward in recovery, just a thing for you to maybe consider. That's it guys. Thanks.

All right, thank you.

Thank you.

[Operator Instructions] Your next question comes from the line of Anita Soni, Credit Suisse. Your line is open.

My question is with regards to Kişladağ. And I was just wondering how much inventory was on the leach pads at the end of Q1?

You are right. We are coming through very quite, so you are interested in inventory at the end of Q1?

Yes. Sorry. Yes. So I was just trying to understand how much inventory was built up into the leach pads at the end of Q1 and how much as come out in Q2? And how much really we will see sort of coming out over the next few years? There is no more stocking going in the pad, right, until this mill decision is made?

Yes, we expect some material in April, but only sort of fairly modest amount. So it was in the order of 350,000 tons placed in April. And that was the end of the material let around the ground. I don't know if you have the numbers to the end of Q1?

End of Q2 is 61,000.

Yes, end of Q2 is 61,000 ounces. And we are obviously working on extracting that, based on guidance for the rest of the year that will be exhausted in the first couple of quarters of 2019. So, most of the ounces that came out in Q2 would have been coming out of inventory.

Right. And then the second question again with Kişladağ is in 2020, did you say on the call that you've added an additional 25? Or is that the sum total what's coming on out in 2025?

We've added another 20 to 25 in 2020 as guidance.

And that's all that –- sorry I know. Is that all that will be coming out of Kişladağ in 2020, right? The 20 to 25?

That's our sort of best information at the moment. So, yes, and then the plan would be to the mill would start up end of 2020 early 21. And then we would -- depending on how well the pad goes, we will be looking to continue leaching but don't have a feel for where that goes, but obviously at that point producing from the mill as well.

Okay. And this quarter, you didn't give any guidance on Olympias in terms of the grades that we are seeing in terms of base metals. Is that -- and you did comment that the recovery rates were highly variable there. Can you provide a little bit additional color on that?

In terms of sort of head grades for the base metal?

Yes. I guess I mean what's going on there and what really should we expect in terms of base metals coming of the Olympias this year and maybe into next year?

Yes, I would probably need to get back to you with some numbers as there is a fair bit of information there as you can imagine. I mean just on a high level, we are sort of running around a bit 8 grams of gold. And we're in the order of sort of 2.5% to 3% of both lead and zinc. But you know, taking yours and Steve's comments we can provide some information on that on lead and zinc levels.

Yes, I guess what I am trying to drive out is -- sorry what should we be using for Olympias cash cost now going -- turning back into your overall company guidance of Olympias' component on the…

I think you could -- we have got it to both ounces and cash cost at the beginning of the year. I think you could use that as a -- that's still reasonably guidance for the year. And so we have done a little better in Q2 and obviously improved things. But I think I would stick with the memory sort of 550 to 600 or something like that for the year at this point.

All right. Thank you.

There are no further questions at this point. I will turn the call back over to the presenters.

All right. Thank you everybody for joining us for our Q2 call. We look forward to giving you further update in the third quarter. Have a good day.

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