TORONTO Aug 12, 2015 (Thomson StreetEvents) -- Edited Transcript of Alamos Gold Inc earnings conference call or presentation Wednesday, August 12, 2015 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jamie Porter Alamos Gold Inc. - CFO * John McCluskey Alamos Gold Inc. - President and CEO * Peter MacPhail Alamos Gold Inc. - COO ================================================================================ Conference Call Participants ================================================================================ * Rahul Paul Canaccord Genuity - Analyst * Dan Rollins RBC Capital Markets - Analyst * Unidentified Participant - Analyst * Anita Soni Credit Suisse - Analyst * Mike Parkin Desjardins Securities - Analyst * Phil Russo Raymond James - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon. I would now like to turn the meeting over to Mr. Jamie Porter, Chief Financial Officer. Please go ahead. -------------------------------------------------------------------------------- Jamie Porter, Alamos Gold Inc. - CFO [2] -------------------------------------------------------------------------------- Thank you, operator, and thanks, everyone, for attending Alamos' second-quarter 2015 conference call. In addition to myself, we have on the line today John McCluskey, President and Chief Executive Officer and Peter MacPhail, Vice President and Chief Operating Officer. I would like to remind everyone that our presentation will be followed by a Q&A session. On this call, we will be making forward-looking statements. Please refer to the disclaimer on forward-looking statements in our news release and MB&A as well as the risk factors set out in our annual information form. All forward-looking statements on this call are qualified by these cautionary statements. There can be no assurance that our forward-looking statements, even though considered reasonable by Management based on information on hand, will prove to be accurate. Future results and events could differ materially. Technical information in this presentation has been reviewed and approved by Chris Bostwick, our VP, Technical Services and a qualified person. Also, please bear in mind that all of the dollar amounts mentioned in this conference call are in US dollars unless otherwise noted. Now John will provide you with an overview. -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [3] -------------------------------------------------------------------------------- Thank you, Jamie, and good afternoon, everyone. There are only a handful of intermediate gold producers in the market today and we believe we have created one of the best equipped to delivering sustainable long-term value to shareholders. We have diversified production from three North American mines, which are all benefiting from the strength of the US dollar. We have a peer-leading, low cost, low capital intensity growth pipeline. We have a strong balance sheet to support this growth and provide us with financial flexibility to successfully navigate this challenging gold price environment. And lastly, all of our assets are located in safe political jurisdictions. Among our peers, most possess one or two of these attributes. We possess all four and we believe this makes us stand out as a result. Operationally, we had a strong quarter with combined production of 95,000 ounces of gold. We remain on track to achieve full-year guidance of 375,000 to 425,000 ounces. Young-Davidson continues to perform well, with production of 39,400 ounces in the quarter. The underground mining rates increased to a new record of 5,149 tons per day and remain on track to achieve the year-end target of 6,000 tons per day. Reflecting the productivity improvements with the ramp-up and favorable weakening of the Canadian dollar, we achieved a new record in terms of unit mining costs of $33 a ton. As underground mining rates continue to ramp up and supply a growing contribution to the mill feed, we expect to see further production growth and productivity improvements driving costs lower. Our gold production from Mulatos totalled 33,000 ounces in the second quarter. The open pit, heap leach operation continued to perform well, with total crusher throughput and heap leach grades above the annual budget. As discussed with our first-quarter results, we ran the high grade mill below capacity and pushed through lower grade ore until the vertical grinding mill was installed to ensure we achieved the best recoveries with our highest grade stock piles. The mill was installed in July and is currently being commissioned. We are working on ramping up throughput rates and, combined with higher recoveries, we expect significant production growth from the mill in the second half of 2015. El Chanate had a record quarter, with production of 23,200 ounces of gold and has been a strong performer in the face of weak gold prices, generating positive free cash flows for the first half of 2015. The operation benefited from higher grades and recoveries and remains well-positioned to achieve full-year guidance. The weaker gold price environment has presented a significant challenge to the industry, for which we are well prepared. We have built the Company with assets and the financial flexibility to be profitable over the long term and at gold prices below today's level. We expect higher production and lower costs from both Young-Davidson and Mulatos over the next two years and expect both assets to largely self-finance their capital spending. In the meantime, we are committed to cutting costs across the organization and are already realizing significant synergies through the merger. Our development pipeline consists of low cost, low capital intensity projects that are economic at the current gold price. We are committed to developing these assets in a disciplined fashion and we intend to allocate capital where we can generate the highest returns. We received some very positive news during the quarter with respect to our most advanced of these projects, with the EIA for Kirazli reinstated by the Turkish High Court. Our share price represents a compelling opportunity at current levels. We are focused on delivering value to our shareholders and, with the combined attributes we offer, we are well-positioned to do so over the long term. And with those remarks, I will conclude my comments and ask our CFO, Jamie Porter, to make comments on our 2015 financial performance. Jamie? -------------------------------------------------------------------------------- Jamie Porter, Alamos Gold Inc. - CFO [4] -------------------------------------------------------------------------------- Thanks, John, and good afternoon, everyone. The second quarter was unique for us from a financial reporting perspective in that we reported stand-alone second-quarter financial statements and MD&A for each of former Alamos and AuRico. The merger closed on July 2, 2015. As a result, the second-quarter 2015 financial results have been reported separately on a non-consolidated basis. We have, however, included a discussion on the operating and financial results of both Companies in the press release we issued this morning and I will address these separately on this call. Going forward in the third quarter, we will be reporting consolidated financial and operating results for the newly merged Company. Though our transaction was structured as a merger of equals, (inaudible) accounting rules require that an acquirer be determined. AuRico was determined to be the acquirer for accounting purposes, which means that AuRico's financial statements will continue and form the basis for the newly merged Alamos' go-forward financial results. As a result of this and the spin-out of assets to AuRico Metals as part of the merger, there were a number of significant non-recurring valuation-related charges in the second quarter of 2015. Starting with AuRico's financial results, AuRico reported a loss in the second quarter of $380 million, or $1.43 per share. This included approximately $365 million in after-tax impairment and valuation-related charges and approximately $11 million of after-tax transaction costs related to the merger. Impairment charges were recorded in the second quarter, with the value of the Young-Davidson mine being written down by $326 million on a pre-tax basis to its current net carrying value of approximately $1.2 billion. This impairment reflects updated macroeconomic assumptions, including a lower long-term gold price forecast, a reduced [NAS] multiple and increased discount rates and updated life-of-mine assumptions. The Company believes that the revised net carrying value better reflects fair value in the current gold price environment. Updating the long-term gold price assumptions and reflecting higher processing costs resulted in a $40 million pre-tax impairment charge at El Chanate. The entire capitalized mineral property balance at El Chanate has been written down to nil. The remaining capitalized costs associated with El Chanate are with respect to its leach pad inventory. In addition to impairment charges, net realized gold value adjustments to gold inventories of $4.8 million and $7 million, both pre-tax, were recorded at Young-Davidson and El Chanate, respectively, again reflecting a lower long-term gold price assumption. Finally, a $40 million pre-tax impairment charge related to the Kemess project being reflected at fair value and transferred to AuRico metals was [recorded] in the second quarter. Accounting rules require that we segregate the assets and liabilities to be transferred to AuRico Metals on the AuRico balance sheet at the end of Q2. As a result, the $20 million cash and related assets are presented within a separate asset account on our balance sheet with the related liability reflecting the obligation to transfer these assets on July 2. Adjusting for the charges described above, the financial results for AuRico for the second quarter were strong. Between Young-Davidson and El Chanate, AuRico sold 59,700 ounces of gold for revenues of $72.1 million. Operating cash flow after changes in non-cash working capital was $20.8 million. After deducting capital and exploration spending of $40.7 million, free cash flow for the quarter was negative $20 million. Note, however, that this included non-recurring care and maintenance in exploration spending at Kemess of approximately $6 million, in addition to certain transaction costs related to the merger. We expect the rate of capital spending at Young-Davidson and El Chanate to decline in the second half of 2015. I will now touch briefly on former Alamos' financial results. Alamos produced 33,000 ounces of gold from Mulatos in the second quarter and sold 36,748 ounces at an average realized price of $1,198 per ounce for revenues of $44 million. Alamos reported a loss of $14.2 million, or $0.11 per share, in the second quarter, which was impacted by $8.2 million, or $0.06 per share, of transaction costs related to the merger and a $1.4 million, or $0.01 per share, unrealized foreign exchange loss. On a combined basis, the Company had approximately $380 million in cash at the end of June. Alamos' balance sheet remains one of the strongest in the industry, providing significant flexibility in a challenging gold price environment. The new Alamos is fully funded on its near-term growth opportunities with Young-Davidson and Mulatos expecting to self- finance the majority of their development spending over the next few years. This is expected to drive production higher and costs lower, leading to strong free cash flow growth from both operations in the coming years. Additionally, the Company is continuously seeking opportunities for further cost savings and synergies. Through the merger, a minimum of $10 million in annual savings has already been identified from corporate G&A, tax and purchasing efficiencies, and we believe there are opportunities to increase this further. At this point, I would like to turn the call over to Alamos' COO, Peter MacPhail, to provide an update on operations. -------------------------------------------------------------------------------- Peter MacPhail, Alamos Gold Inc. - COO [5] -------------------------------------------------------------------------------- Thank you, Jamie, and good afternoon, everyone. Young-Davidson had another strong quarter, with underground mining rates increasing to an average of 5,149 tons per day. (Technical difficulty) 25% from the 4,130 tons per day in Q1 is well on track to achieve the 6,000 ton-per-day target by year-end. Reflecting on the productively improvements with the ramp-up and the favorable weakening of the Canadian dollar, we achieved a new record with respect to unit mining costs in both US and Canadian dollar terms. Unit mining costs decreased to $33 a ton, down substantially from the $45 a ton a year ago and $39 per ton in Q1. We expect further improvements of the ongoing ramp up in underground mining rates. Gold production of 39,400 ounces was up from 38,100 ounces in the previous quarter, reflecting higher throughput, partially offset by lower grades. Underground mine grades of 2.64 grams per ton in the quarter were lower than the previous quarter due to client (inaudible) sequencing. The ongoing ramp-up in underground mining rates is expected to drive mill grades and production higher in the coming quarters. The operation remains on track to achieve full-year production and cost guidance. Total cash costs at Young-Davidson were $697 per ounce, excluding the net realizable value, or NRV, inventory adjustment, down from $745 per ounce in Q1, reflecting the strong improvement in unit mining costs. All-in sustaining costs of $1,008 per ounce, excluding the NRB adjustment, were consistent with full-year guidance, including the NRV adjustment total cash costs of all-in sustaining costs were $80 per ounce higher. At Mulatos, the open pit, heap leach operations continue to perform well, with grade stacked of 0.83 grams per ton and total pressure throughput of 18,100 tons per day, [most above the annual budget]. This was offset by lower higher-grade mill production as the mill was run well below capacity at just over 200 tons per day during the quarter and was fed with lower grade stockpile ore from San Carlos until the vertical grinding mill was installed. The mill was installed in July and is currently being commissioned. We are currently meeting the required grind size to achieve 75% recoveries and are focused on ramping up mill throughput. The mill is expected to operate at or above the full-year budget of 550 tons per day once the commission is complete, with an emphasis on ensuring that we maximize recoveries. Underground production will be supplemented with the 45,000-ton hydrate stockpile grading in excess of 7 grams per ton. Mulatos produced 33,000 ounces in the quarter and 71,000 ounces in the first half of 2015. With stronger high grade mill production expected in the second half of the year, the operation remains on track to achieve full-year guidance. Total cash costs of $861 per ton were consistent with full-year guidance. All-in sustaining costs of $1,154 per ounce were above guidance of $1,100 per ounce, though are expected to decrease in the second half of 2015 with the ramp-up high-grade mill production. La Yaqui and Cerro Pelon, our two higher-grade satellite deposits at Mulatos, remain a development focus, with a mix of nearly 10,000 meters of infill, exploration, and combination drilling completed in the quarter. We expect [zero] grades roughly double the 2015 budgeted grades. These deposits are expected to supply significant low-cost production growth while also lowering overall cash costs in 2017. El Chanate had an excellent quarter with record production of 23,200 ounces. This was largely driven by higher grades and recoveries. Including run-of-mine material stocked on the pad, the average grade processed was 0.73 grams per ton, up sharply from 0.4 grams per ton a year ago. This translated into lower costs and contributed to positive free cash flow generation in the first half the year. Total cash costs at El Chanate at $621 per ounce, excluding the NRB adjustment, remain well below the full-year guidance. Further, all-in sustaining costs of $878 per ounce were down from $1,043 per ounce in the previous quarter, a reflection of a record quarterly production. With a strong first half behind it, the mine remains well-positioned to achieve full-year production and cost guidance. With that, I will turn the call back to John. Thank you. -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [6] -------------------------------------------------------------------------------- Thank you. That concludes the formal presentation. I will now ask the operator to open the line for your questions in the question-and-answer period. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you. (Operator Instructions) Our first question is from Rahul Paul from Canaccord Genuity. -------------------------------------------------------------------------------- Rahul Paul, Canaccord Genuity - Analyst [2] -------------------------------------------------------------------------------- I can appreciate the work involved in integrating an acquisition like this, so first of all, thank you for publishing it on a timely basis for financials and MD&A for AuRico as well. My first question on the impairment at Young-Davidson, you mentioned a number of reasons, including a lower gold price and also updated life-of-mine assumptions. What changes did you make to life-of-mine assumptions that impacted your valuation? I'm wondering if you could also talk about some of the other assumptions that support the $1.2 billion valuation, either gold price, discount rate, NAV multiple? -------------------------------------------------------------------------------- Jamie Porter, Alamos Gold Inc. - CFO [3] -------------------------------------------------------------------------------- Certainly, Rahul. It's Jamie here. I'll comment on that. The majority of that adjustment was related to changes in the macroeconomic assumptions. So the gold price, our long-term forecast for gold, previously $1,300, had been used. We dropped that to $1,250 which is consensus long-term -- it's average of consensus long-term pricing. That had the biggest impact. We updated the discount rate from 5.5% to 6%. We reduced the NAV multiple from 1.05 down to 1 to 1. Generally taking a more conservative view in terms of those assumptions. On the life-of-mine operating assumption, there was some tweaks here and there. Recoveries, for example, the previous model used 92%. We dropped that down to 91%, though we have had months where we've hit 92%. 91% is a bit more conservative and consistent with our mineral reserve disclosure. So generally the assumptions that are in our model are still consistent with our plans and more aggressive than certainly more -- far more aggressive than where we are currently and we think that the $1.2 billion valuation reflects the fair value of the asset at this gold price. -------------------------------------------------------------------------------- Rahul Paul, Canaccord Genuity - Analyst [4] -------------------------------------------------------------------------------- Okay. Thanks. Thanks, Jamie. That's very helpful. From an operating standpoint, basically not too many changes. And in terms of -- on a guidance standpoint, you indicated a consolidated production guidance is unchanged, but didn't talk much about cash cost guidance. Is that because you are still reviewing things on a consolidated basis? Is that unchanged as well for the assets? -------------------------------------------------------------------------------- Jamie Porter, Alamos Gold Inc. - CFO [5] -------------------------------------------------------------------------------- It is unchanged at the asset level. We are still working towards establishing a baseline in terms of corporate G&A and share-based comp and some of those other factors that work into the all-in sustaining cost calculation. My view is that we'll come in below [1050] for the full year. -------------------------------------------------------------------------------- Rahul Paul, Canaccord Genuity - Analyst [6] -------------------------------------------------------------------------------- Perfect. Thanks. And then last question. Moving on to Mulatos, you did mention the new mill is being commissioned. How quick do you expect the ramp up to be and should -- and then from a mining standpoint, should we expect significant grade variables at San Carlos from one quarter to the other? We have seen that in the last few quarters. Just wondering what to expect moving forward. -------------------------------------------------------------------------------- Peter MacPhail, Alamos Gold Inc. - COO [7] -------------------------------------------------------------------------------- It's Peter. The mill commissioning is going well. By the end of this month we will be, I would expect to be fully commissioned. Then we will ramp it up the extent that the grind size and recoveries allow us to. As we mentioned, the 550 tonnes a day sort of budgeted rate for the year is going to be -- that's well within sight, and we hope to push it somewhat past that. We will see. Grade wise, we are not providing any more analysis than what we have here. It will be budget aligned. If we get lucky, it will be a bit better than that. We'll see. -------------------------------------------------------------------------------- Rahul Paul, Canaccord Genuity - Analyst [8] -------------------------------------------------------------------------------- Okay. Thanks. That is that I had. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Thank you. The following question is from Dan Rollins from RBC Capital Markets. Please go ahead. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [10] -------------------------------------------------------------------------------- Thanks very much. John, I was wondering if you might be able to talk on where the permitting situation lies right now in Turkey with represent to Kirazli. Have you applied or submitted the applications for the land use and operating permits to start to get that project moving? -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [11] -------------------------------------------------------------------------------- We haven't done that yet. We are ready to go virtually at any time, but the mitigating factor is we are required to have the written decision from the court in hand before we can make that application, so even though the decision was published and it's even been gazetted, we haven't seen a copy of the fully written statement from the court. They can be quite punctilious about this kind of paperwork in Turkey. That's been the limiting factor. We have put everything together from our side in order to take the permitting the next step. We're prepared to do that as soon as we receive the written decision from the court. You normally have expected it to be in place right now but the court has been in recess. Is gets back on September 1st. So sometime after that we expect to get the -- we expect to get the written decision. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [12] -------------------------------------------------------------------------------- And typically do you know how long that process is? Again I was just wondering, given the -- -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [13] -------------------------------------------------------------------------------- As I said -- -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [14] -------------------------------------------------------------------------------- No, once you have the permit submitted, is it a set timeframe or is it just going work its way through the bureaucracy? -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [15] -------------------------------------------------------------------------------- I would say it's a bit of both. It has to work its way through the bureaucracy, of course. But we're expecting that to be no more than a 60-day process from the time we apply to the time we get a response. When we ask for guidance as to what typically is a timeline, that's the response we get. So that's what we're looking to. We expect to have the permits in hand sometime this fall. So how does that fit with our overall schedule? Well, as you know, we hadn't planned on breaking ground in Turkey until the spring of next year. The start date we had in mind was the first week of April. So from that point of view, a month one side or the other, it doesn't really affect our timelines. There is a number of things that we can work on in advance of that, and we will continue to do that over the course of the fall. And then when the spring comes around we'll be, obviously, keeping a very close eye on the gold price and the market in general. If we feel that the conditions are right and we're comfortable with starting the capital expenditure, we will make the construction decision and we will break ground. If we perceive market weakness and we see the necessity for preserving our balance sheet and postponing that decision, we'll be in a position to do that. But I want to be in the position where the Company can make that decision as to when to start, not have the decision hanging on whether or not we have got all the permits in hand. We're going to continue to work diligently towards having all the permits in place and then have our board be in the driver's seat from that point of view; have the decision-making rest with us. And that's what I think we'll be able to achieve over the next six months. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [16] -------------------------------------------------------------------------------- Okay. While we're on Turkey, obviously the economic study was done at a different price environment. Specifically, the Turkish lira. Have you done any work to see what type of savings you could have on the project level with the recent depreciation of lira against the US dollar? -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [17] -------------------------------------------------------------------------------- We are indeed doing that. That work has been taking place over the last couple of months. The study is basically well underway. In fact, it should be completed within the next 30 to 60 days. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [18] -------------------------------------------------------------------------------- And will that be released in the market or is that an internal study? -------------------------------------------------------------------------------- Jamie Porter, Alamos Gold Inc. - CFO [19] -------------------------------------------------------------------------------- Dan, it's Jamie. That's an internal study. I think once we show some progress here on getting the outstanding permits, we'd likely release the updated economics in conjunction with news on the permitting front. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [20] -------------------------------------------------------------------------------- Okay. Roughly, so you know how much of the capital and operating capital are lira-based? -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [21] -------------------------------------------------------------------------------- In the pre-feasibility study that we've released in the middle of 2012, the currency exposure was a third, a third, a third between lira, USD and euro. What we are doing through this study is looking at what we can source from Turkey directly. We are looking at upping our lira exposure to north of 60%. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [22] -------------------------------------------------------------------------------- Great. Then just with Mulatos, obviously you are going through a low-grade phase, high (technical difficulty) phase. When do you expect to be back towards reserve levels and life-of-mine strip at Mulatos? Is this more, gets in 2016 and then back in steady state in 2017, or is 2018 a better year? -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [23] -------------------------------------------------------------------------------- I think in 2016 we are forecasting a return to our life-of-mine grade closer to 0.9. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [24] -------------------------------------------------------------------------------- Okay. And that's without the positive reconciliation you have seen to date within the main pit? -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [25] -------------------------------------------------------------------------------- That's right. And with that, we'll also see -- revert back to our life-of-mine strip, so you should see a corresponding improvement in cost next year at Mulatos. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [26] -------------------------------------------------------------------------------- That's great. With Pallone and La Yaqui, are they all still on the path for first production in 2016 and then again in early 2018? Have you got all the permits in hand? -------------------------------------------------------------------------------- Peter MacPhail, Alamos Gold Inc. - COO [27] -------------------------------------------------------------------------------- Yes. We're looking at -- I think it might have slipped a quarter. We are looking at 2017 now, beginning of 2017, but we're working -- things are progressing reasonably well there. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [28] -------------------------------------------------------------------------------- Is there any reason to believe there could be more slippage? Is it a permitting issue or are there just initial delays that just back-logged? -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [29] -------------------------------------------------------------------------------- This is John, Dan. Probably Peter wasn't fully apprised of what caused the delays, because most of them were already incurred prior to him coming on board the Management team. But with that in mind, we had two factors which pushed things back a little bit. One was the actual timing for the closing of the land purchase. It took a little bit longer because the owner hadn't protected (technical difficulty) and had some outstanding issues with the local [mujitos]. So we took some additional time to close so that he resolved those matters. That was factor one. Factor two was in areas where we had planned to do -- or we had planned to locate leach pad and so forth, we had not undertaken any condemnation drilling previously and when we did some preliminary work just to see whether that was an issue or not, we did find some decent gold values at surface. We ended up taking an extra quarter and conducted some further work, including drilling in that area, just to make sure we weren't going to cover anything up with the leach pad. Those were really the two factors. As far as the process that we undertook to achieve permits, that's right on track. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [30] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [31] -------------------------------------------------------------------------------- (Technical difficulty) lever on that front. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [32] -------------------------------------------------------------------------------- That's great. That's all the questions I have. Thanks. Congratulations on the deal. Looking forward to seeing the Company grow. -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [33] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Thank you. The following question is from Phil Russo from Raymond James. Please go ahead. Mr. Russo, your line is now open. You may proceed. If you're using a speakerphone, please pick up your handset or unmute your line. Hearing no response, we will move on to the next caller. The following question is from Andrew Quail from Goldman Sachs. Please go ahead. -------------------------------------------------------------------------------- Unidentified Participant, - Analyst [35] -------------------------------------------------------------------------------- Good afternoon, guys. It this is J.P. filling in for Andrew today. And thanks for taking our questions. My first question is on El Chanate operation. We saw significant improvement in grades recovery this quarter. We are wondering, can we expect similar levels going into the second half of 2015, given the guidance was unchanged for the mine? -------------------------------------------------------------------------------- Peter MacPhail, Alamos Gold Inc. - COO [36] -------------------------------------------------------------------------------- The guidance is unchanged, that's correct. The guidance is unchanged. But we -- if you look at how we have done in the first half, we're well over half of guidance. We would expect -- we did go through a particularly good quarter in Q2. It's continuing. Whether it continues -- it wouldn't be expected to continue for the rest of the year and we would expect to come in within that guidance range. Not particularly above it, which is what you'd get to if you actually just doubled the H2 production. -------------------------------------------------------------------------------- Unidentified Participant, - Analyst [37] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Peter MacPhail, Alamos Gold Inc. - COO [38] -------------------------------------------------------------------------------- (Multiple speakers) The accurate response to that -- that was a good response. I think what you are looking for is we've got -- we are getting better recoveries than we were getting, plus the grade -- we also had, in addition to better recovery, we had better grade this quarter. We don't expect the grade to continue above reserve grade until the end of the year. -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [39] -------------------------------------------------------------------------------- That's correct. -------------------------------------------------------------------------------- Peter MacPhail, Alamos Gold Inc. - COO [40] -------------------------------------------------------------------------------- That's not part of the plan. -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [41] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Peter MacPhail, Alamos Gold Inc. - COO [42] -------------------------------------------------------------------------------- So the grade is going to revert back to plan. But the recovery looks like we are going to -- -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [43] -------------------------------------------------------------------------------- They are going to be better going forward. -------------------------------------------------------------------------------- Peter MacPhail, Alamos Gold Inc. - COO [44] -------------------------------------------------------------------------------- And the recoveries are -- we have a quite a large inventory of gold on that leach pad. So it's not just a quarter-by-quarter ounces that go on and then ounces that come off. What we're leaching is really a leach pad that has been built over the course of the last seven or eight years and we continue to go from stuff that was stacked in years past. So recovery is -- really you got to look at gold production, not recovery. We guide on an annual gold production basis and we will be in that guidance. -------------------------------------------------------------------------------- Unidentified Participant, - Analyst [45] -------------------------------------------------------------------------------- Okay. And my second question is on Young-Davidson. I think you have already mentioned that you expect six kilotonnes per day by the end of the year. I was wondering about the timeline around the 8 kilotonnes per-day target. Is there any guidance on that? -------------------------------------------------------------------------------- Peter MacPhail, Alamos Gold Inc. - COO [46] -------------------------------------------------------------------------------- We remain on track. We're going through our budgeting cycle or will be starting our budgeting cycle for next year currently. We'll be putting out guidance in January. But at this point we don't see any deviation from the previously stated target to be at 8,000 tonnes a day by the end of 2016. -------------------------------------------------------------------------------- Unidentified Participant, - Analyst [47] -------------------------------------------------------------------------------- Okay. Very good. Thank you so much. That's it for me. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- Thank you. The following question is from Anita Soni from Credit Suisse. Please go ahead. -------------------------------------------------------------------------------- Anita Soni, Credit Suisse - Analyst [49] -------------------------------------------------------------------------------- Hi. Good afternoon. First question was with respect to the close of the transaction. To you expect any NRV or fair value adjustments on the close of the transaction, or was this quarter (technical difficulty)? -------------------------------------------------------------------------------- Jamie Porter, Alamos Gold Inc. - CFO [50] -------------------------------------------------------------------------------- Anita, it's Jamie. No. No, we don't expect anything going into Q3. So I think most of the updates, the changes in assumptions to gold prices and discount rates, that has all been done in Q2 and you shouldn't see the same type of noise in our third-quarter consolidated results. -------------------------------------------------------------------------------- Anita Soni, Credit Suisse - Analyst [51] -------------------------------------------------------------------------------- Okay. Secondly, with some of the outlook that you have put out for Young-Davidson, I think you talked about free cash flow. Free cash flow neutral, just saying that the operating cash flow would pay for the capital. [Bud] said that it would be a little bit of a challenge at the current gold price environment. Going back to your original plan where you thought it would be free cash flow neutral, what was the gold price assumption that you were thinking of then? Is that the $1,250 or more like spot? I have that at $1,200 at the time. -------------------------------------------------------------------------------- Jamie Porter, Alamos Gold Inc. - CFO [52] -------------------------------------------------------------------------------- I think the comment we make in our outlook is with respect to current gold prices, $1,100 goal. Our objective for Mulatos and YD to both be able to self finance their development CapEx. That's the goal. I think the cautionary language that we have introduced in the outlook section is saying it is a challenge. But the foreign exchange, the strength of the US dollar against the peso and Canadian dollar is really helping us. If you look at Chanate, they've generated $7 million of free cash flow this year and YD was (technical difficulty) break even in the first quarter and negative $10 million in the second quarter. We are achieving record low costs and that's going to continue as we ramp up throughput. So we expect free cash flow to continue to improve. -------------------------------------------------------------------------------- Anita Soni, Credit Suisse - Analyst [53] -------------------------------------------------------------------------------- Okay. I think that's it for my questions. Thanks. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- Thank you. The following question is from Mike Parkin from Desjardins Securities. -------------------------------------------------------------------------------- Mike Parkin, Desjardins Securities - Analyst [55] -------------------------------------------------------------------------------- Could you comment on the rainy season? I know we have heard that the rainy season started a little sooner. Didn't seem to have any impact at Mulatos; your throughput rates were good there. Can you give any kind of sense in terms of how it's been trending to date? -------------------------------------------------------------------------------- Peter MacPhail, Alamos Gold Inc. - COO [56] -------------------------------------------------------------------------------- Yes. The rainy season started early and is continuing in good force. I think it will be like previous years where you come out of a -- some of our gold is going to the ponds that gets leached during the quarter, but then perhaps recovered during the fourth quarter. I think we will see some of that. I think that's generally expected in our guidance and in what you model. -------------------------------------------------------------------------------- Mike Parkin, Desjardins Securities - Analyst [57] -------------------------------------------------------------------------------- Okay. And just following up on the El Chanate. With a move to higher cyanide concentration there, what kind of -- do you have a sense of what the gold still in the pile could -- what percentage of it could potentially come out through the higher concentration impact? -------------------------------------------------------------------------------- Peter MacPhail, Alamos Gold Inc. - COO [58] -------------------------------------------------------------------------------- I mean, it is -- the recovery of gold there is largely time-dependent and solution application-dependent. Somewhat cyanide concentration-dependent. Time will tell. We have upped the cyanide early in the year. Saw some benefits in this past quarter. And we would expect to continue to see some benefit. I can't quantify it, though. -------------------------------------------------------------------------------- Mike Parkin, Desjardins Securities - Analyst [59] -------------------------------------------------------------------------------- Okay. That's it for me. Thanks. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- Thank you. The following question is from Phil Russo from Raymond James. Please go ahead. -------------------------------------------------------------------------------- Phil Russo, Raymond James - Analyst [61] -------------------------------------------------------------------------------- Thanks. Not sure what happened earlier there. Apologies if I missed a portion of the call there. But just on YD, these unit costs, if FX is -- stayed the same here, a big improvement in the tonnage rates there, what sort -- how much lower can these unit costs go? Another 10%? Is it 15%? You are obviously at 5,000 tonnes a day here, but still have a long way to go. Are these unit costs going to keep falling that dramatically if we kept FX the same? -------------------------------------------------------------------------------- Peter MacPhail, Alamos Gold Inc. - COO [62] -------------------------------------------------------------------------------- Phil, it's Peter. Yes. I mean, if you go back to the guidance that we would have put out a bit over a year ago, I think we guided we would get into the mid-$30 per tonne range at full 8,000 tonne a day and I would say that we're still tracking to that. I mean, if you look at this past quarter, we were $41 per ton, which is a record quarter for us. That's a 5,000 tonne a day. If you go to 8,000, there is certainly significant fixed cost versus variable there. It's always a little bit bumpy. It's not a perfect straight line, but it will turn in that direction. -------------------------------------------------------------------------------- Phil Russo, Raymond James - Analyst [63] -------------------------------------------------------------------------------- Thanks, Peter. Just lastly, John, now that the dust settled here in the merger and I heard the comment earlier about Turkey. I am just interested in your comments. Has your commitment it to Turkey changed at all here over time? You have now strengthened your North American presence. Do you start to think about making that -- being North American centric in terms of development projects coming through in this part of the world? Does your commitment to Turkey waver at all here? -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [64] -------------------------------------------------------------------------------- I think we remain very committed to Turkey, and the strength of that commitment is underpinned by the strong economics of the project. I mean, the internal rate of return on a project like Kirazli is very strong and it's one of the few projects anywhere in the world that you'd still make a decision, a positive decision to construct in the gold price environment that we are in. The only reason why we would potentially delay things would be relative to our balance sheet. We are committed to developing this project pipeline without having to go to the market and issue any shares. We don't want to take any -- on any additional debt. We are just not sure what the gold price is going to do going forward. We are not hedged, so we're completely exposed to it. And depending what happens in the next 6 to 10 months, it's going to affect our thinking. But all things being equal, that's a project that you build at the current gold price. I think that's also going to be the driver. We've tended to focus on countries that we think that they are safe places to invest and where we are going to get a fair shake from the government. We hadn't had any difficulty at all with the Turkish government. There is this perception out there that they have been hard to deal with, and that's not the case. We have had issues with respect to the courts. We have been taken to these local courts by small groups that have been opposed to the development of the projects. We have been quite successful in getting local courts to grant injunctions that pretty much brought the whole project development to a grinding halt. But by the time we have gone through the process, as you know, Kirazli went all the way through the Superior Court and the Court of Appeal and we won. That had nothing to do with the government. And one can say that even from the perspective of the court, we ended up getting a very fair hearing and a good result. So if anything, having gone through this process, I am more committed to Turkey than ever. The country has certainly come through with what I would have expected. You're going to meet opposition everywhere in the world where mine development is concerned, Canada included. We're not going to duck that by becoming, say, a North American-focused company. I really like the idea that we have three producing mines in North America. It does underpin the quality of the asset base and, call it, the political risk security. From that point of view, I think investors feel very, very comfortable with what we are doing. Having a strong anchor in Canada makes anything else you take on that is perceived to be somewhat riskier, it has a really good offset when you have a strong Canadian-based production. So I would say what we've done is, in effect, through the merger, is we have skewed the political risk profile in a much safer direction. But I don't think we were taking very much political risk by being in Turkey in any case. -------------------------------------------------------------------------------- Phil Russo, Raymond James - Analyst [65] -------------------------------------------------------------------------------- Great. That's helpful. Just so lastly, then, in Turkey, if you -- once you got the permits there, how long of a ramp up do you need to just get your presence there beefed up? I understood that you'd let people go over time here. I am not sure what your -- you need to get going again once you get a favorable decision? -------------------------------------------------------------------------------- John McCluskey, Alamos Gold Inc. - President and CEO [66] -------------------------------------------------------------------------------- Yes. We kept a crew of about a dozen people. All the key people that we felt were necessary to keep on board to get things ramped up quickly. If the market conditions were what they were eight years ago when we were trying to beef up our team and everybody else was trying to do the same thing, I would say that would be a big challenge. But given the market conditions that we are in, there is plenty of capacity in Turkey right now. There are people available. There are contractors available. Long lead time items. Those long lead times are far shorter than what they previously were. So I would see making a construction decision in the spring of 2016, it's a far more realistic proposition in terms of getting the people, getting the contractors and so forth, getting them all together. It's an easier proposition than it was, say, five years ago, seven years ago. -------------------------------------------------------------------------------- Phil Russo, Raymond James - Analyst [67] -------------------------------------------------------------------------------- Okay. Thanks very much, John and the team. -------------------------------------------------------------------------------- Operator [68] -------------------------------------------------------------------------------- Thank you. The following question is from Mike Parkin from Desjardins Securities. Please go ahead. -------------------------------------------------------------------------------- Mike Parkin, Desjardins Securities - Analyst [69] -------------------------------------------------------------------------------- Hi. Just a quick one. Any thoughts on hedging and locking in the Canadian dollar where it is to help protect Young-Davidson's margins? -------------------------------------------------------------------------------- Jamie Porter, Alamos Gold Inc. - CFO [70] -------------------------------------------------------------------------------- Mike, it's Jamie here. Great question. We actually had a Board meeting yesterday and sought approval to do exactly that. So we have locked in about half of our operating cost exposure for the first quarter of next year at rates consistent with the current spot and we're going to look to do the same for the rest of next year as well. We might do half. We might do the whole thing. It depends on the rates and what numbers come out of our budgeting process. -------------------------------------------------------------------------------- Mike Parkin, Desjardins Securities - Analyst [71] -------------------------------------------------------------------------------- Okay. Sorry, that was for -- you have locked in for the first half or Q1? -------------------------------------------------------------------------------- Jamie Porter, Alamos Gold Inc. - CFO [72] -------------------------------------------------------------------------------- For Q1. -------------------------------------------------------------------------------- Mike Parkin, Desjardins Securities - Analyst [73] -------------------------------------------------------------------------------- Okay. Thanks. -------------------------------------------------------------------------------- Operator [74] -------------------------------------------------------------------------------- Thank you. There are no further questions registered at this time. If you have any further questions that have not been answered because of time limitations contact, please feel free to contact Mr. Scott Parsons at (416) 368-9932, extension 439. Thank you. That concludes today's conference call. Please disconnect your lines at this time and we thank you for your participation.
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