TORONTO Jun 19, 2015 (Thomson StreetEvents) -- Edited Transcript of Dundee Precious Metals Inc earnings conference call or presentation Thursday, May 7, 2015 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Lori Beak Dundee Precious Metals Inc. - SVP, Governance & Corporate Secretary * Rick Howes Dundee Precious Metals Inc. - President & CEO * Hume Kyle Dundee Precious Metals Inc. - EVP & CFO * Dave Rae Dundee Precious Metals Inc. - EVP & COO ================================================================================ Conference Call Participants ================================================================================ * Sam Crittenden RBC Capital Markets - Analyst * Don MacLean Paradigm Capital - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to Dundee Precious Metals Q1 2015 results webcast and conference call. I will now turn the meeting over to Ms. Lori Beak. Please go ahead Ms. Beak. -------------------------------------------------------------------------------- Lori Beak, Dundee Precious Metals Inc. - SVP, Governance & Corporate Secretary [2] -------------------------------------------------------------------------------- Good morning everyone. I'm Lori Beak, Senior Vice President, governance and corporate secretary. Welcome to Dundee Precious Metals first-quarter conference call. With me today are Rick Howes, President and CEO, and Hume Kyle, our Chief Financial Officer who will each comment on the quarter as well as Dave Rae, our Chief Operating Officer, Nikki Hristov, Our Senior Vice President, Sustainable Business Development, and John Lindsay, our Senior Vice President, Projects who are here today to assist with answering questions following our formal remarks. After close of business yesterday we released our first-quarter results and hope you've had an opportunity to review the material. All forward-looking information provided during this call is subject to the forward-looking qualification which is detailed in our news release and incorporated in full for the purposes of today's call. Certain financial measures referred to during the call are not measures recognized under IFRS and are referred to as non-GAAP measures. These measures have no standardized meanings under IFRS and may not be comparable to similar measures presented by other companies. The definitions established and calculations performed by DPM are based on management's reasonable judgment consistently applied. These measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS. Please refer to the non-GAAP financial measures section of our most recent MD&A for reconciliations of these non-GAAP measures. Please note that operational and financial information communicated during this call has generally been rounded and is presented in US dollars unless otherwise noted. On this morning's call, Rick will comment on Q1 operating results as well as the progress being made on our capital projects and exploration programs for the quarter. Hume will then provide an overview of our Q1 financial results and our guidance for 2015. With that I'll turn the call over to Rick. -------------------------------------------------------------------------------- Rick Howes, Dundee Precious Metals Inc. - President & CEO [3] -------------------------------------------------------------------------------- Thanks, Lori. Hello everyone and thanks for joining us today. I'm pleased to provide you with a summary of Company first-quarter progress and our outlook for the remainder of the year. We have certainly benefited recently from lower oil prices and US dollar strengthening relative to most other currencies including the currencies we are most exposed to which are the euro and the rand, Armenian dram and the Canadian dollar. These currencies have weakened between 8% and 18% from a year ago and there are some indications that the US dollar strengthening may be coming to an end. Gold price appears to be flattening out and has been range bound between $1,140 and $1,300 for the last year with good support for this level but really no clear direction. Generally speaking, in recent years gold equities have underperformed relative to gold bullion itself which could imply significant market undervaluing of gold stocks or a reflection of the lack of sustainable returns or profits the industry is generating. In either case, interest in the sector will only return when investors see improved performances in margins and disciplined allocation of capital and management of balance sheets. So let me begin by reviewing our operating results and outlining what we are doing to optimize the performance of our existing assets, improving our low overall cost position and advancing our high return growth projects at a prudent pace that preserves our balance sheet strength. Overall in the first quarter we saw good mine operating performance from Chelopech despite lower grades and improved performance from Kapan. Tsumeb performance was affected by the advance of the annual maintenance shutdown to March from June. Metal prices declined by 6% for gold and 18% for copper over the corresponding period in 2014. Thanks to our hedging program our average realized price for copper including the hedge gains was $3.20 in the quarter. With our efforts and focus on reducing costs and maintaining our low-cost position I'm pleased to report a number of areas where we have made good progress. Our overall all-in sustaining cost for Q1 was $585 an ounce, 19% better than the low end of our guidance and well below industry average. Our G&A costs in Q1 were $3.9 million or 38% lower than the corresponding period in 2014 achieved primarily through active reductions in employee related expenses and the benefits of the strong US dollar. Both Chelopech and Kapan also showed significant cost reductions which I'll expand on next. Capital spending of $18 million in Q1 was down 73% from Q1 2014 largely reflecting the lower capital spending on the asset plan as the project nears completion. Full-year capital spending is expected to fall within guidance subject to receiving the Krumovgrad construction permit and a decision to proceed to construction later this year. While debt remains $150 million at the end of the quarter, unchanged from the previous quarter, we remain in compliance with all our bank covenants and the available liquidity at the end of Q1 down $20 million to $181 million is really relatively unchanged as the difference relates primarily to the timing of some large cash receipts. The underground portion of the revolving credit facility remains at $165 million and we had $16.6 million in cash on hand at the end of March. As I've stated before a critical aspect of our strategy is enhancing the value of our existing business operations and I would like to highlight the work we're doing at each operation to achieve this. At Tsumeb we continue our transformation of the smelter to a world-class sustainable complex copper concentrate toll smelting business. The work we are doing to both grow the smelter capacity to meet market demand for these concentrates and upgrade the smelter to modern environmental standards will result in the creation of a unique specialty smelter that is both profitable and environmentally responsible. This work which began when we bought the smelter in 2010 is now nearing completion. The latest work to install the acid plant is now 97% complete. The project remains on budget and there is no change to the schedule since our last update with mechanical completions expected at the end of June and first on spec acid in September. First fill acid needed for the start of the commissioning is now being shipped and stored in the new storage tanks. We have also reached an agreement with TransNamib, the Namibian rail transport authority, to transport the asset to our primary customer. Final phase of this project, the new converter's installation and off gas capture to the acid plant, is well underway and expected to be completed and commissioned in Q1 2016. Our plan for the ramp up of smelter throughput continues as we endeavor to process increasing volumes of third-party complex copper concentrates. Smelter throughput in the first quarter was affected by the advancement of the annual maintenance shutdown to March 18 from June. This was caused by refractory lining wear issues that required the early replacement of the lining. A number of issues that have been identified as contributing factors are being addressed and we expect to return to normal refractory liner life of at least 12 months going forward. The smelter returned to normal operations on April 5, well ahead of schedule which allowed the operation to fully recover from the first-quarter shortfall in Q2 and achieve full-year guidance. Smelter throughput will continue to be constrained while we draw down excess secondary inventories this year until the new converters are operational in early 2016. Smelter margin will improve as we ramp up to reach the full 240,000 tonnes per annum capacity in 2016. A prefeasibility study is currently underway for a second phase expansion of the smelter to as much as 370,000 tonnes per annum through the addition of a holding furnace. The study will be completed in Q4 and work is also continuing on identifying suitable feed sources in commercial terms for this expanding capacity including exploring potential strategic partnerships to help fund the expansion. Following the Namibian government elections in November I attended the inauguration ceremony for the new President on March 21 which also coincided with the 25th anniversary of Namibian independence. With this change the country seems to be buoyed with new hope and enthusiasm as and for the future of the country. The President has appointed his new cabinet and we are already seeing more action on important issues affecting our business such as rail infrastructure. We have a good relationship with the new President and expect to continue to maintain a strong and productive working relationship with him and his new cabinet. Our flagship operation Chelopech continued to perform well during the period and saw a further reduction in its cash cost per tonne of ore processed by 10% to $36 from full-year 2014 cost of $40. This is one of the lowest total site operating costs for an underground mine in the industry. Unlike many mines Chelopech's costs have not increased year over year which reflects the continuous improvements and currency exchange benefits that are offsetting the inflationary pressures on costs. Cash cost per ounce of gold sold and a byproduct credit to Chelopech was $333 per ounce in the quarter. Because of the high variability in grades and mineralogy that exist inherently within the deposit and the individual ore bodies of the deposit we continue to see quarter-on-quarter grade and recovery variation which will affect metals output and financial results. In Q1 we saw lower cost of grades; however, we are expecting higher cost grades for the balance of the year as reflected in our mine plan. Gold grades in the first quarter are reflective of the gold grades expected for the balance of the year with some quarter-on-quarter variation. The new pyrite circuit is performing to expectations and full-year payable gold and concentrate sold is expected to be within the guidance provided. We are continuing with our success in our in-mine exploration program to add additional reserves to at least replace what we mine each year. Through the success of this program the mining reserve and a mine life still sits at greater than 10 years which has been the case for the last 6 years running during which period we also doubled production to 2 million tonnes per annum. In addition to this program we have started a regional exploration program around Chelopech. A number of high sulfidation and porphyry targets have been identified and drilling on these targets began in December from surface and will move underground shortly. There are no significant results to report yet. Following the Bulgarian parliamentary elections in October political stability has returned to Bulgaria following the successful formation of a coalition government led by the center-right GERB party. We do not expect this government to bring in any changes to policy that would negatively affect the mining industry or our progress with Krumovgrad or Chelopech. We continued to make good progress advancing our Krumovgrad gold project. The minister of culture recently approved the removal of the status of archaeological and movable cultural assets at the site of the archaeological discovery of the Thracian mine at Ata Tepe which allows us to seek preliminary approval for land-use redesignation from the forestry agency. We have received approval of the detailed development plan for the water well and our successfully advancing all other DDPs, detailed development plans, including the main detailed development plan for the overall site and plant. We are now estimating an issuance of a construction permit in late Q3 2015. Release of funds to begin construction will require Board approval which will not take place until the construction permit and all necessary approvals have been received. And we are satisfied that we are fully funded to complete the project. We are currently upgrading the access road to this site and advancing better vendor date of procurement, detailed engineering, contractor selection along with project baselining and completion of the detailed execution plan and operational readiness plan. At Kapan following the setbacks experienced at the mine in Q2 and Q3 of 2014 resulting from the fatality and the subsequent remedial actions undertaken we started to see some good progress on a number of fronts in the fourth quarter of 2014 which have continued into the first quarter of 2015. Following the arrival of new development and long-hole drilling equipment in fourth quarter all operators are now trained in improving their levels of performance toward the required activity levels. We expect to reach levels by Q3 which will allow us to start to build the developed and drilled inventory levels needed to sustain higher production rates. Mine grades improved in the quarter as we focused on improving drilling and blasting practices to reduce dilution. We expect dilution to improve over the next several quarters reaching targeted levels in the second half of 2015. We have maintained our 2015 production guidance for Kapan. A good effort has been made to reduce costs at Kapan. Cash cost per tonne of ore processed in the first quarter of $67 were 20% below the full-year 2014 cost of $85. Significant savings were achieved through initiatives to reduce diesel consumption, drilling consumables, mine and other reagents, shipping cost and the control of waste dilution into ore. Kapan cost also benefited from the weakening dram relative to the US dollar. In addition to the regional exploration activity I spoke about at Chelopech, our exploration team is also active with regional exploration around our Krumovgrad and Kapan operations. Surface drilling testing of several targets have began on the Iran Tepe and Kesebir exploration license immediately adjacent to the Krumovgrad mining concession. Further mapping, sampling and IP screening of numerous other targets in this area is also underway. At Kapan we're continuing with systematic drill testing of several identified targets to the north of the Kapan deposit. Following the business combination of Avala and Dunav of which we now hold a 51 -- 50.1% of the shares, Avala has since undertaken a comprehensive review of all of its projects and licenses and consolidated its efforts around the key exploration and development projects and will look to joint venture or release non-core exploration licenses. Avala have developed a near-term work plan and strategy around these key properties which includes identifying new targets in areas in close proximity to Avala's key properties and evaluating various alternatives for financing future explorations and development activities on one or more of its exploration properties. It has also implemented cost-reduction measures to reduce staff and office overhead costs. In summary, we remain focused on controlling cost and executing on our plans to achieve performance targets we have set at each of our operations as well as completing our mandatory capital commitments at the smelter and moving our Krumovgrad gold project forward. Thank you. I will now return the call over to Hume who will review the financial results and 2015 guidance following which we will open the floor to questions. -------------------------------------------------------------------------------- Hume Kyle, Dundee Precious Metals Inc. - EVP & CFO [4] -------------------------------------------------------------------------------- Thanks, Rick. Adjusted net loss was $0.01 per share for the quarter compared to $0.02 during the corresponding period 2014 and from a cash margin perspective adjusted EBITDA for the quarter was $20 million compared to $17 million for 2014. Similarly funds from operations or cash flow from operations before working capital was $18 million compared to $17 million in the first quarter of 2014. These increases were primarily driven by higher volumes of payable metals sold by Chelopech as a result of the drawdown of copper concentrate inventories and higher gold grades and recoveries which more than offset the impact of lower copper production during the quarter as a result of lower copper grades as well as a US dollar that was stronger against all of the currencies or local currencies in which we operate which contributed to lower operating costs as well as corporate costs. These favorable factors were partially offset by lower volumes of concentrate smelted at Tsumeb primarily as a result of advancing the Ausmelt furnace annual maintenance shut from Q2 to Q1 as well as higher stockpile interest and metal exposure costs at Tsumeb. In addition these results were also impacted by a Q1 copper shipment at Kapan that was pushed into the second quarter as a result of new customer requirements which will result in there being an additional shipment in the second quarter as well as lower metal prices. From a cost perspective overall mining cash cost remained at relatively low levels compared to industry peers and support the generation of free cash flow at current commodity price levels. Consolidated cash cost per tonne of ore processed for the quarter was approximately $41, down 20% from Q1 2014 benefiting from a stronger US dollar, higher volumes and cost improvement initiatives at Kapan. Consolidated all-in sustaining cost per ounce of gold net of byproducts was $585 in the quarter, down from $1,048 during the same period in 2014. This increase reflects the same factors that impacted cost per tonne that I just noted, higher gold rates and recoveries, lower cash outlays for sustaining capital expenditures and lower G&A expenses that have been allocated to Chelopech and Kapan. Costs per tonne at Tsumeb for the quarter were approximately $410, up from $307 in 2014 reflecting the impact of advancing the annual maintenance shut, higher labor costs, higher maintenance costs as well as higher cost associated with ongoing productivity initiatives, partially offset by the weaker ZAR relative to the US dollar. Sustaining growth capital expenditures during the quarter were $6 million and $12 million respectively for an aggregate of $18 million down from $68 million in the corresponding period in 2014. This decrease was due primarily to lower growth capital expenditures on both the Krumovgrad and acid plant projects and the completion of the pyrite project at Chelopech in Q1 2014. At March 31 aggregate liquidity stood at $182 million including the $165 million of undrawn lines under our revolver. And looking forward over the balance of the year, despite annualized Q1 production falling short of our annual guidance due to a number of timing-related factors that are expected to reverse over the balance of the year, we are maintaining our 2015 production and cost guidance although we foresee coming in at the lower end of the range with respect to cost reflecting the impact of a stronger US dollar and various cost improvement initiatives. With respect to sustaining capital and growth capital expenditures each are expected to be within the ranges that we've previously guided to with our capital primarily focused on the completion of the acid plant and the new converters at Tsumeb and securing the remaining permits in connection with our Krumovgrad gold project to be in position to commence construction later this year. Based on this outlook in the current market environment we expect to exit the year with aggregate liquidity including undrawn lines under the revolver in the range of $130 million to $150 million. With that I will turn the call back over to the operator for Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Sam Crittenden, RBC Capital Markets. -------------------------------------------------------------------------------- Sam Crittenden, RBC Capital Markets - Analyst [2] -------------------------------------------------------------------------------- Thanks. Good morning. Just to clarify something, the guidance you've given for Tsumeb on concentrate produced, does that include only primary material or is some of that secondary material? -------------------------------------------------------------------------------- Rick Howes, Dundee Precious Metals Inc. - President & CEO [3] -------------------------------------------------------------------------------- Yes, Sam, Rick here. That's just primary material. -------------------------------------------------------------------------------- Sam Crittenden, RBC Capital Markets - Analyst [4] -------------------------------------------------------------------------------- Okay, so over and above that you would process some secondary material? -------------------------------------------------------------------------------- Rick Howes, Dundee Precious Metals Inc. - President & CEO [5] -------------------------------------------------------------------------------- Yes, that's correct. -------------------------------------------------------------------------------- Sam Crittenden, RBC Capital Markets - Analyst [6] -------------------------------------------------------------------------------- And then in Q2 I mean is that more slanted towards Q2? Are you going to have more percentage of secondary in Q2 trailing off towards the end of the year or is it steady throughout the year? -------------------------------------------------------------------------------- Dave Rae, Dundee Precious Metals Inc. - EVP & COO [7] -------------------------------------------------------------------------------- The secondaries are a proportion of the total feed to the plant so it's steady through the course of the year. -------------------------------------------------------------------------------- Sam Crittenden, RBC Capital Markets - Analyst [8] -------------------------------------------------------------------------------- Okay, thanks, David. And then a question on the pyrite concentrate at Chelopech, do you expect to maintain the current levels going forward? And if you could just remind us when the contract for that offtake expires, I believe it might be this year. -------------------------------------------------------------------------------- Dave Rae, Dundee Precious Metals Inc. - EVP & COO [9] -------------------------------------------------------------------------------- So the company contract for the pyrite concentrate there's an option to extend, so we're still in the process of communication on that one, a conversation on that. In terms of the production we've been looking at how we've been operating over the last nine months of the last year, the first quarter of this year and we do expect to see increases in the amount of pyrite production through the course of this year. So if you will have done the calculation presumably you would have seen we'd have been at the bottom end of guidance, we're expecting to be well within guidance of pyrite production this year. -------------------------------------------------------------------------------- Sam Crittenden, RBC Capital Markets - Analyst [10] -------------------------------------------------------------------------------- And do you want to extend that going forward? Like is this a profitable side business for you? -------------------------------------------------------------------------------- Dave Rae, Dundee Precious Metals Inc. - EVP & COO [11] -------------------------------------------------------------------------------- It's price dependent so we would like to continue it. It does provide other advantages other than just directly profit. Of course we're not in the business of producing at a loss. So (multiple speakers) we would revisit that. -------------------------------------------------------------------------------- Rick Howes, Dundee Precious Metals Inc. - President & CEO [12] -------------------------------------------------------------------------------- And I might add, Sam, just to clarify that so we have a contract to 2015, option on 2016. And we're in discussions on extending that contract. -------------------------------------------------------------------------------- Sam Crittenden, RBC Capital Markets - Analyst [13] -------------------------------------------------------------------------------- Okay great. Then just lastly could you remind me when you're back expecting to come out with the updated Krumovgrad economics? -------------------------------------------------------------------------------- Rick Howes, Dundee Precious Metals Inc. - President & CEO [14] -------------------------------------------------------------------------------- It's likely to be in the third quarter I would say. -------------------------------------------------------------------------------- Sam Crittenden, RBC Capital Markets - Analyst [15] -------------------------------------------------------------------------------- Okay. Great, that's it for me, thanks everyone. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- (Operator Instructions) Don MacLean, Paradigm Capital. -------------------------------------------------------------------------------- Don MacLean, Paradigm Capital - Analyst [17] -------------------------------------------------------------------------------- Good morning guys. Krumovgrad is almost on your doorstep it sounds like, gold equity markets as we all know are not very appealing. You had mentioned the possibility of partnering Tsumeb. I guess the question is have you ever thought about or maybe share your thoughts about selling part or all of the project, what that might be worth? -------------------------------------------------------------------------------- Rick Howes, Dundee Precious Metals Inc. - President & CEO [18] -------------------------------------------------------------------------------- Well certainly we've indicated I think in the past that we are considering these partnership ideas. We won't really know what the valuations that others would put on the smelter. We know what we carry as a book value in the smelter and we would have an expectation if we were to partnership in some sort of an equity arrangement that we would definitely want to see the numbers reflecting that book value. -------------------------------------------------------------------------------- Don MacLean, Paradigm Capital - Analyst [19] -------------------------------------------------------------------------------- And the book value at this point? -------------------------------------------------------------------------------- Rick Howes, Dundee Precious Metals Inc. - President & CEO [20] -------------------------------------------------------------------------------- It's $400 million. -------------------------------------------------------------------------------- Don MacLean, Paradigm Capital - Analyst [21] -------------------------------------------------------------------------------- And maybe this is a question for David. If we start to consider replacement value, could somebody ever build a project like that for that value? -------------------------------------------------------------------------------- Rick Howes, Dundee Precious Metals Inc. - President & CEO [22] -------------------------------------------------------------------------------- Could they build a smelter at that. -------------------------------------------------------------------------------- Dave Rae, Dundee Precious Metals Inc. - EVP & COO [23] -------------------------------------------------------------------------------- Well, the first thing is yes, but I just wanted to make sure we're still talking about Krumovgrad. In terms of the smelter the first thing you've got to do is you've got to find the jurisdiction where you can build something, a smelter of that kind. It's very difficult to do that. So we have a facility that's well-founded, well understood and we're putting money into it in a way that we believe is creating a sustainable producer going forward. Could you build it for $400 million, $500 million? I doubt it actually. And that's not just based on current experience, that's based on what I've seen before at (inaudible) -------------------------------------------------------------------------------- Don MacLean, Paradigm Capital - Analyst [24] -------------------------------------------------------------------------------- Great. So if you could actually find a place to build that you still couldn't replace it for $400 million? -------------------------------------------------------------------------------- Dave Rae, Dundee Precious Metals Inc. - EVP & COO [25] -------------------------------------------------------------------------------- I believe that's true. -------------------------------------------------------------------------------- Don MacLean, Paradigm Capital - Analyst [26] -------------------------------------------------------------------------------- Okay. Well good luck with the discussions. -------------------------------------------------------------------------------- Rick Howes, Dundee Precious Metals Inc. - President & CEO [27] -------------------------------------------------------------------------------- Thanks, Don. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- (Operator Instructions) There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Howes. -------------------------------------------------------------------------------- Rick Howes, Dundee Precious Metals Inc. - President & CEO [29] -------------------------------------------------------------------------------- All right, thank you very much and have a good week. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Thank you. The conference has now ended. Please disconnect our lines at this time. We thank you for your participation.
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