Vista Gold Corp. (VGZ) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to Vista Gold's 2013 Third Quarter Financial Results and update on recent activities. [Operator Instructions] As a reminder, this conference is being recorded. Today is Thursday, October 31, 2013. It is now my pleasure to introduce Vista's President and CEO, and your host, Mr. Fred Earnest. Please go ahead, sir.

Thank you, Sam. Good afternoon, ladies and gentlemen. Thank you for joining Vista Gold Corp.'s 2013 third quarter financial results and fourth quarter project update conference call. I am pleased to be joined on this call by Jack Engele, our Senior Vice President and CFO. Also present with us here in Denver is Connie Martinez, our Director of Investor Relations. Market reaction during the third quarter has been diametrically opposed to the efforts of the Vista management team. We continue to achieve corporate and project advancement goals and objectives, yet at the end of the quarter we experienced an unexpected shareholder change as Van Eck Associates made a decision to remove Vista Gold from both the Market Vectors Gold Miners ETF or GDX and the Market Vectors Junior Gold Miners ETF or GDXJ. Vista was one of the handful of companies removed from the ETFs. The associated selling and subsequent index fund rebalancing resulted in 27.5 million shares being traded in the 9 trading days starting September 17 and ending on September 27. During this period of time, our share price dropped from $0.83 to $0.45. It is our understanding that Van Eck's decision was based purely on market cap criteria for the ETF and no other considerations. Prior to its divestiture, Van Eck held 12.5 million shares of Vista Gold stock between the 2 ETFs or approximately 15.3% of our outstanding shares. On another important corporate topic, I would like to note that as previously discussed, effective the 1st of August, the senior management team in the corporate office in Denver and the Mt. Todd project office in Australia joined me and the Board of Directors in taking a voluntary 20% reduction in cash compensation. Furthermore we have eliminated the payment of the cash bonus for 2013. This is a direct manifestation of the commitment and sense of responsibility felt by the management team to share in these difficult times with our shareholders. In the course of this call, we will be making forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of Vista to be materially different from any future results, performance or achievements expressed or implied by such statements. Please refer to our Form 10-K for a detailed discussion of risks and other important factors that could cause actual results to differ materially from those in our forward-looking statements. I'll now turn the time over to Jack Engele. And following his discussion of the financial results, I will provide an update on the status of our core projects.

Thank you, Fred. Good afternoon, everyone. I'll start with our statement of income and loss for September 30, 2013. We reported a net loss of $3 million or $0.04 per share for the 3 months ended September 30, 2013. This includes operating expenses of $3.5 million and an impairment charge of $3.5 million on our mill equipment, which is held for sale. Offsetting these, we had an unrealized mark-to-market gain of about $4.5 million on our Midas shares. During the quarter, our operating expenses included $2.2 million for site management and maintenance work at Mt. Todd. This $2.2 million represents a dramatic reduction from Q1 and Q2 expenses which totaled $7.1 million and $5.9 million respectively. This is because we have completed several cash-intensive programs, including water treatment in the Batman Pit, the prefeasibility study and the environmental impact statement for the Mt. Todd project. In addition, the effect of some of our cost-cutting initiatives are becoming evident. During the quarter, we also incurred corporate general and administrative expenses of about $1.1 million. This is down from $1.9 million and $1.2 million for Q1 and Q2 respectively. Although some of this reduction is from timing differences, the effects of some of our cost cutting initiatives are becoming evident here as well. Activity at Guadalupe de los Reyes was minimal during the quarter. Turning to our balance sheet, our cash and cash equivalents as of September 30 totaled about $4.3 million. The September 30, 2013, fair value of our position in Midas Gold was $26.7 million. This is an increase of $4.5 million during the quarter. The number of shares that we hold remains unchanged at 31.8 million. Last quarter, I talked about the potential to extend our term loan. In September, we reached an agreement with our lender to extend the maturity date of the loan from March 2014 to March 2015 subject to certain conditions. During October 2013, we terminated our Los Cardones earn-in agreement with Invecture, and sold our Los Cardones gold project located in Baja, California Sur, Mexico, for a total of $15 million, $7 million of which was paid in October at closing and $6 million of which is payable in January 2014 subject to the purchasers' option to elect to not make this second payment. If they elect to not make this second payment, Vista will keep the $7 million already received and 100% of the Los Cardones project will be returned to Vista. But in terms of our loan facility, we used $3 million of the $7 million that we received to pay down our term loan. Assuming the $6 million is paid to us in January, we will use $3 million of that amount to further reduce the term loan. Our working capital at September 30, 2013, totaled approximately $12.4 million, including cash of approximately $4.3 million. After giving effect to the extended maturity date and partial payment of the term loan and the $7 million received from the sale of the Los Cardones project, our pro forma working capital at September 30 is approximately $26.1 million, including cash of about $8.3 million, and the balance of the term loan is approximately $6.7 million. Looking ahead, at Mt. Todd, we have now completed several cash intensive programs. We've eliminated or postponed all discretionary programs at the Mt. Todd site, including exploration drilling. We're going to do several cost-cutting programs, and we continue to pursue further cost reductions. We expect to see the burn rate at Mt. Todd to be reduced to the $1.5 million to $2 million range for the fourth quarter of 2013 with similar spending in Q1 of 2014, assuming we have a normal wet season in the Northern Territory. We expect further reductions at Mt. Todd to below $1.5 million in subsequent quarters through 2014. We have also introduced measures to reduce our corporate G&A burn, mainly voluntary cash compensation reductions as Fred has mentioned. The G&A burn is expected to be approximately $1 million to $2 million per quarter going forward -- $1 million to $1.2 million per quarter going forward. Sorry, to be clear. Through the remainder of 2013 we will incur relatively modest other costs, mainly debt interest averaging $100,000 to $200,000 per quarter. We do not plan any programs for Guadalupe de los Reyes through 2014. I can summarize by saying our financial condition has improved from last quarter, and we expect continued improvements. We believe our current cash position, together with the $6 million payment due to us in January, will be sufficient to finance our operations through the third quarter of 2014. Our loan has been reduced to $6.7 million, and we expect to reduce that to about $3.7 million in January, again subject to receipt of that $6 million payment for the Los Cardones deal. Our loan is in good standing, and we've reached an agreement to extend its maturity to March 2015. We will need to raise money before the end of 2014, and on that front, we continue to focus our efforts on non-dilutive means. We continue to actively market the Colomac mill equipment. We are looking for a potential joint venture or sale transaction for our Guadalupe de los Reyes project in Mexico, and we're exploring the potential sale of other non-core assets. The completion of any one of these could provide us sufficient cash to fully repay our term loan and to fund operations into 2015. That concludes my comments on our financials. Fred will now give you an update on our projects.

Thank you, Jack. I will start with the non-core projects and conclude with the Mt. Todd gold project. I will start with the project review of the Awak Mas gold project in Indonesia. Our partner, One Asia Resources Limited, has recently completed the feasibility evaluation of the project and has obtained the environmental approvals for the development of the project. We are working with One Asia to complete the documentation needed to finalize the joint venture and to assess our options as we move forward. Those familiar with the original transaction will recall that Vista can elect to continue as a 20% JV partner in the project. We can elect to dilute to a 15% carried JV partnership, or we can elect to dilute to a 2% to 2.5% NSR royalty position. Moving to Los Cardones, as Jack noted on October 16, we closed a transaction to sell the Los Cardones project for $13 million, $7 million of which has been received, and $6 million of which is payable at the end of January 2014, failing which the project reverts to Vista and Vista keeps the $7 million initial payment. The decision to sell this project was consistent with our objective of financing the company through nondilutive means. I would point out it was made after serious consideration of the possible financing alternatives and dilution that would have occurred if we have had sold equity to raise a similar amount of capital. The Colomac mill equipment continues to be held by Vista for sale. A.M. King Industries continues to work to sell this equipment whether as a complete mill or as individual components. Recently we were advised that the company who had invested significant effort in evaluating our mill equipment have elected to purchase new equipment for their project. We are unsure if the sale of this mill equipment can be achieved prior to the end of this year. Moving on to the Guadalupe de los Reyes project in Sinaloa, Mexico. In previous calls, we have indicated that we have been discussing and had signed confidentiality agreements with several different mining companies. We have received 2 offers for the project and are in the process of review and further discussions with the interested parties. We have not yet reached any agreement with respect to a transaction for the project. At Mt. Todd, the environmental permitting process is advancing as expected. In August, the public consultation process on the initial environmental impact statement was completed, and all comments from both the public and the regulatory agencies were received by the company. We are in the very final stages of preparing responses and expect to file the final environmental impact statement before the end of this week. We believe that we are on schedule to receive approval for the final environmental impact statement near the end of this year. We have completed an extensive review of our ongoing holding costs at Mt. Todd. As Jack as indicated, our activities related to the water treatment program, the feasibility study and the completion of the initial environmental impact study have been completed with a corresponding reduction in cash expenditures when one compares the first and second quarters of the year compared to the third quarter. And we expect additional reductions as we go into the fourth quarter. Looking to next year, we are preparing for similar market conditions and have recently made significant reductions in our Australian-based project development and exploration staff. It's always difficult to let good people go, and I would like to take this opportunity to publicly thank each of these team members for their service, contributions and dedication to the Mt. Todd project. Looking forward, we expect to undertake an internal optimization review of the Mt. Todd project with a focus on capital cost reductions and operating costs improvements. We believe that the Mt. Todd project holds considerable value for our shareholders, and that is a value is highly leveraged to the price of gold. We are working with other project stakeholders to ensure that we maintain the project in good standing and preserve this value for a better market. I would like to thank those of you on the call and those who may listen to the call afterwards for your interest in Vista Gold and its projects. We remain bullish on the long-term price of gold, but we are taking steps to prepare for a protracted period of weak market interest in the gold sector. Our current market capitalization does little to recognize the value of the proven and probable reserves at the Mt. Todd project. We feel that our present share price represents a level of value with considerable upside opportunity for the insightful gold investor. In the meantime, we remain focused on preserving corporate liquidity and preparing the Mt. Todd project for development in a very cash-efficient manner. Our team has achieved significant results this past quarter, and we are committed to optimizing the benefit received from ongoing expenditures. In closing, I would like to reiterate our commitment to reducing our cash expenditures and preserving corporate liquidity. I would like to express my appreciation to the Vista management team who have joined me and the Board in taking voluntary reductions in compensation. These are challenging times, and we look forward to being able to deliver better results as we move forward. We will now respond to any questions from the participants on this call.

[Operator Instructions] And our first question comes in from Adrian Day from Adrian Day Asset Management.

I caught what Jack was saying about the cost at Mt. Todd, but if he said it, I missed what your other expenses are. So what's your either overall burn rate or burn rate x Mt. Todd?

Burn rate excluding Mt. Todd, Adrian?

Yes.

It's really going to be our corporate G&A costs in the range of $1 million a quarter. We've got other miscellaneous costs, principally debt interest, as well that's going to be in the range of $100,000 to $200,000 per quarter.

[Operator Instructions] And our next question comes in from Dan Miranda [ph], who is a private investor.

I'm trying to figure out -- where are you giving your numbers from for the working capital $26 million? Could you just run through that for me, please?

For the working capital numbers? $26 million. Those are full [indiscernible] numbers, Dan [ph]. In other words, they are as if we had closed the Los Cardones transaction at the end of September. Los Cardones transaction brought $7 million in cash in the door, and it reduced our debt by $3 million. So that has working capital impacts. I also included the effect of the extension of the term loan. The term loan was due to expire March 2014, so as such it was a current liability. When we consider that we have extended that now to March 2015, it becomes for accounting purposes a noncurrent asset and comes out of the working capital calculation.

Okay. And that doesn't include any shares of Midas at all or value there?

Yes, it will include the shares of -- the value of the Midas shares. Let me just go to the balance sheet for a second. It will include the shares of the Midas stock. It also includes -- that's offset by the current -- by the deferred tax liability related to the tax liability that would be incurred in the event of a sale at Midas.

And we have another question coming in from Adrian Day from Adrian Day Asset Management.

Two questions actually, if I may. On the Midas shares, are there any encumbrances on you selling those? And then the second and perhaps bigger question, Mt. Todd, there is no question as you'd say there's huge value there, and it's very sensitive -- very leveraged to a higher price of gold. Would you be willing to entertain some kind of, I don't know what, investment in Mt. Todd, some kind of joint venture on Mt. Todd, that would reduce your costs, but obviously also reduce your ownership, or are you trying -- shall we say you're trying everything you can to hold on to Mt. Todd?

I'll let Jack respond to the question about Midas shares, and I'll respond to the Mt. Todd question.

With regard to Midas, Adrian, I think the fact that we have a control position in Midas is the biggest impediment to selling the stock. There are a few factors here. The stock is technically free trading. All of the legends and the conditions to our trading have now expired, and so it could be tradable. The control position dictates certain notices and time periods in advance of its grade. In addition, the stock is not registered in the United States, and so the logical buyer likely would be outside of the United States.

Right. Okay, okay. Don't get me wrong. I'm not urging you to sell it. I just wanted to know if you could sell it, yes?

Yes, understood.

And Adrian, the response to the second part of your question with regards to the Mt. Todd project, due to our belief that there is considerable value in the Mt. Todd project and that it is highly leveraged to the price of gold, and the fact that we have essentially completed all of the cash intensive activities that were planned and do not intend to undertake other similar activities given that we've been able to bring down our holding costs down considerably and are yet working on a couple of other options to further reduce our cash costs, our inclination at this time is to preserve a 100% interest in the Mt Todd project for our shareholders. Should this current market condition continue for a protracted period of time, this is something that we will likely revisit and review as time goes on, most likely sometime the latter part of the first half next year. But for the present time, it's our goal and ambition to preserve this value for our shareholders and to finance ourselves via undilutive or nondilutive means.

And there are no more questions at this time. Please continue.

Ladies and gentlemen, it appears that there are no further questions. On behalf of the Vista management team, I would like to thank you for your time this afternoon and for your interest. And we look forward to catching up with you individually as we're out and about and holding shareholder meetings, or if not before, at our next quarterly conference update call. Thank you very much. Have a good afternoon.

Ladies and gentlemen, this concludes your conference call for today. We thank you for your participation. You may now disconnect your lines.