Alamos Gold Inc. (AGI) Earnings Call Transcript & Summary

Hi, and thank you for joining us today. My name is Jimmy Connor, and I'm with Bloor Street Capital, which is a corporate access firm based in the city of Toronto. Today, I have the pleasure of introducing you to John McCluskey. John is the Co-Founder and CEO of Alamos Gold. But before John begins his presentation, I want to say a few words first on the format of this presentation. We're going to keep it to 45 minutes. In order to keep -- or maintain that time line, I'm going to be asking the questions. A number of attendees have already submitted questions. I'm going to be asking those throughout the presentation. [Operator Instructions] And now for a few words on the company. Alamos Gold is a Canadian gold producer. It has 3 producing mines, 2 in Canada and 1 in Mexico. It has -- it trades on the New York Stock Exchange and the Toronto Stock Exchange under the symbol of AGI. It has a market cap of USD 3.5 billion or CAD 5 billion. It has 400 million shares outstanding, and it's paid dividends for 11 consecutive years. And with that, I'm going to hand things over to John. John, before you begin your official presentation. Why don't you give us a little bit of background on yourself? You have a very unique and interesting background in the sense that you're not a geologist or mining engineer. So maybe you can just touch on that, too.

Thank you very much, Jimmy. Thanks for the introduction, and I'd like to welcome everybody to the call. And just before I get started, I'll mention that I'm going to make forward-looking statements, and so I encourage everyone on the call to read our cautionary notes as far as those statements go. As Jimmy pointed out, I do have a rather sort of unique background as far as a mining executive is concerned. I have been in the mining industry my whole life. I joined what was at the time a small start-up company in Vancouver called Glamis Gold, and it was started one of the -- by one of the great sort of mining pioneers in Canada, a gentleman named Chester Millar. If that isn't a great mining name, what is? Chester was starting a company called Glamis in the early '80s. It would've been about 1982, '83 when I joined. And at the time, he was pioneering a new approach to gold mining, essentially using heap leach in conjunction with open-pit mining to mine very, very low-grade ores. And at the time, gold was not much more than $300 an ounce. And the grade of the deposit called Picacho mine in Southern California was about a 1-gram deposit. And this kind of things were just unheard of, that you would attempt to put a deposit that was essentially 0.03 of an ounce of gold, put that into production and try to make a profit on it. But as it turned out, the Picacho mine was incredibly profitable, and the mine was started pretty much what they call by bootstrap methods. In other words, they didn't go out and raise a bunch of capital from bankers. They basically made a very small keep at a very, very low cost. And then they used the gold revenues coming out of that heap to build the next stage of the mine. And by the time we put the Picacho mine into production, we had a little more than 6 million or 7 million shares outstanding. And so you can just imagine how highly leveraged that was to the rising gold price, and the profits we generated started Glamis on a very early path of paying big dividends to its shareholders. And that was more or less how I was brought into the industry. I watched that company growth from a peanut into what ultimately grew into an $8 billion company, where it was ultimately merged in with and became part of Goldcorp, which is now part of Newmont. So as far as my pedigree goes, I go right back at the very beginning of heap leaching being used by junior companies. Like, Glamis ranked among the first of the juniors that tried that. And I learned a great deal, not only about how to access capital to build a mining company, but I learned a great deal about the mining business itself and how to get the gold out of the ground and get it out at a low cost and make profits and turn around and pay dividends to the shareholders. So Glamis, when I joined it, it was about a $2 stock or so, and it ultimately hit $30 a share by the time I left. So I did pretty well on my first entrée into the gold market. But ultimately, I stepped out on my own, and I started to do more entrepreneurial things. And that was another interesting thing that I learned along the way by essentially working with a group of mining entrepreneurs, and that gave rise ultimately to starting up my own little mining company, which as it would turn out, I started with Chester Millar as my partner this time around. And that was the formation of Alamos. Alamos basically started as a little exploration company with a focus on Mexico. And we kind of pushed that along until the market absolutely collapsed underneath us. And those are the best markets for entrepreneurs because when everything is basically decimated, that's the time you can go in and buy very valuable assets cheaply. And with that in mind, I acquired -- in 2001, when gold was under $300 an ounce, I acquired the Mulatos mine off of Placer Dome. It was a project they'd spent over $50 million on. They developed, by Placer Dome estimates anyway, about a 3 million-ounce resource, of which about half, but 1.5 million ounces, was what we call 43-101 compatible. In other words, it would fit into some sort of a definition recognized by the Canadian regulators. And that little project we acquired for $10 million plus a royalty. We built the mine over the next 3 years, got all the permits, raised the capital and built the mine for $75 million, and we've never looked back. So when I took the reins of the company, it was effectively less than $1 million market cap. And as Jimmy pointed out, we've built it up into a $3.5 billion company so far. We're producing 500,000 ounces of gold a year. And we've got lots of scope to grow. And from that perspective, it's been a very exciting growth story as much as anything else. I'm reminded of my kids. I have 4 kids, and they kind of think it's a head-scratcher that their father got into the mining business, a gold miner, of all things, producing gold in the Sierra Madre in Mexico. It sounds like something out of a movie script. And for those of you who are movie buffs, The Treasure of the Sierra Madre is on about every top 50 list among those U.S. critics. And that's a great old movie, Humphrey Bogart in the lead role, about a bunch of prospectors going into Mexico and basically losing everything, including their lives, trying to get gold out of the ground in Mexico. But we were a lot more successful than that, and I often tell people who've seen the movie that I'm the guy who ended up with the gold. Anyway, I'd like to make a presentation to you today about where we are today as a company. We've come a long, long way since the beginning. We've actually been producing gold since 2005 when we poured our first bars in -- at the Mulatos mine in Mexico. And by now, we control 2 of the -- probably 2 of the best gold mining assets in Canada in the Young-Davidson mine in the Island Gold mine, both of which are in Ontario, Canada. We have some development projects in Turkey, which we'd actually acquired small exploration projects quite early on, and we acquired them because they looked exactly like the Mulatos District, and we thought there was big potential there. So as it turned out, we were incredibly fortunate in delineating over 3 million ounces in Turkey. But of course, that left us with the responsibility of getting all the permits and putting that group of projects into production. And we're trying to do that, albeit with some difficulty just given the politics of Turkey and the difficulty of operating there. But effectively, everything we've done has created a tremendous amount of value for our shareholders. And I think that almost speaks for itself when you consider how far we've come and what the focus of our whole management team is. So I'd like to turn your attention to Slide 3 now. And for those of you that are not familiar with Alamos Gold. We're a growing diversified intermediate gold producer by now. In 2014, we were still operating from the 1 mine, from the Mulatos mine, and we produced 140,000 ounces of gold a year. Well, we're now producing at over 500,000 ounces of gold a year from 3 North American mines. We have a deep pipeline of development projects, and we acquired all these projects after the gold price turned down in 2013. So virtually, all of our acquisitions were made between 2014 and 2017. And we were probably one of the most aggressive companies on an M&A front when things were going very, very badly and most mining companies couldn't really compete with us. Now, of course, you can -- gold's $1,900-some-odd an ounce, and you can't go back and try to do that again. Now there's very stiff competition for gold projects and valuations on companies all across the board. We're a conservatively run company from a balance sheet perspective. We generally have no debts. We currently have about $100 million that we drew down from our credit facility. We never really used it. We'll pay it back before the end of the year, and we'll still have well in excess of $100 million, probably upwards of $150 million, cash even after we do that. We're generating free cash flow from operations. And we're still very focused on our growth. 2020 has been a very transformational year for Alamos. We've delivered on several very important catalysts in terms of our future growth. And those include completing a $400 million upgrade of our Young-Davidson mine. We effectively built out all the lower mine by deepening 2 shafts down to 1,500 meters. They were all -- shafts were down to the 750-meter level. We've now deepened them to the bottom of the deposit as it's currently known. We also pushed the ramp system down that low, and then we built all brand-new infrastructure at the 1,500-meter level. That really sets that mine up to be a profitable operation for the next 15 years. And collectively, the work that we've done on Young-Davidson, along with the incredible exploration success we've had at the Island Gold mine, which is giving way to now a Phase 3 expansion of that mine -- we've only owned it for 2.5 years. We've more than doubled it in size. But with the work that we're going to be doing at Island Gold over the next few years, along with the benefit of the completion of the Young-Davidson project, and we're opening up a new mine. We'll start construction on that later this year. As we sort of get into the fourth quarter, we're going into sort of full-scale construction on another pit down in the Mulatos District. All of these things are teeing up the company to be a highly profitable company in the years to come. And I think, as a company, as well as we've done over the last 15 years, our best years lie ahead of us. Everybody is aware of COVID-19 and how it's affected business and, specifically, how it's affected the mining industry. In the very early days of COVID-19, we were just starting to hear about it in the early weeks of March, we didn't hesitate to take very aggressive measures to address it. We treated it quite seriously from the moment we heard about it. And of course, first and foremost in our thinking was the health and safety of our employees and our communities. So we got out in front of it. And in the case of our Island Gold mine, where effectively, all of our employees coming into that mine would live in a town called Dubreuilville, a small town, about a 20-minute drive from the mine. Those people coming in had the potential to bring the virus into this remote community, and we wanted to make sure that didn't happen. So we closed that mine down for the first 6 weeks to make sure everybody was healthy, local communities stayed healthy. And we effectively kept the mine on care and maintenance during that period. In May, April, throughout the month of April and into the middle of May, we also closed down the Mulatos mine in Mexico for the same reasons. Bringing workers into a remote region in the Sierra Madre, we had the risk of affecting those communities and bringing in the virus. We also didn't think that Mexico had a very good handle on the virus in those early phases. So the government ultimately mandated a closure, but we were well ahead of them. We were already social distancing. We'd already introduced testing. And as it would turn out during all of that period, we had no incidence of the virus at any of our mines. And it's only been in recent weeks that we've started to see the virus show up among our workforce in Mexico. But even then, nobody has gone out to the site with the virus. Essentially, we test them in Hermosillo before they leave for the project, and they're tested 2 days ahead. And if they show any signs of virus, we keep them out of the mine. So we have not had any incidents of the virus spreading within the cap itself. So all of these things are important to mention because I think it's important for any investor to know that the company they're considering investing in understands the issues well with respect to this virus and has put the safety protocols in place in order to safeguard its operations and its employees. So I'd like to draw your attention to the next slide, which shows a map of the world. We're not all over the world. All of our producing mines are in North America, as I've mentioned. We have these development projects in Turkey. Turkey is kind of a fairly tough jurisdiction, but there is about a dozen operating mines in that country, and they're all doing relatively well. We're in the very western part of Turkey, which has its pluses and minuses. The infrastructure and the climate is really second to none. It's a great place to operate. But it's also a part of Turkey where the opposition party in that country has a very strong -- whatever you want to call it, it's their stronghold. And so they've been using certain political tactics to delay our project and sort of lay grief at the feet of the government and cause us difficulty. They want to basically show that it's difficult for foreigners to invest in Turkey and effectively hurt their own economy and doing so. But we're persevering. We've got strong support from the local communities, all the communities in proximity to the mining operation. And we also have very strong support and always have that strong support from ruling party, from the government that's in power. So we were able to obtain all our permits and get the right to construct the mine and so forth quite readily. And it's only after the mine went into construction that we started to face some opposition. So with that, it's important to mention that 100% of our project -- or production is coming from North American projects. 85% of the consensus value on our assets is -- this is analyst consensus. I think we're covered by 17 analysts or so. 85% of our value is attributed to our producing mines and our North American growth projects. So Turkey is accountable for perhaps 15%. And effectively, none of that is in the stock. There's -- Turkey, if you want, is a free option. And if we ultimately get it right, I think that's going to pay off quite, quite generously to our shareholders. The fact that our...

John, actually...

Go ahead.

John, sorry, I just want to jump in here and ask a couple of questions, first of all, from our attendees. One question. In addition to owning these development projects, you also own stakes in a number of publicly traded companies, and one of which is Orford Mining. In May of 2019, Alamos Gold paid $4.6 million for 22% ownership in Orford. And what is your goals and plans for Orford Mining? And also, what is the value of this investment to Alamos Gold?

Well, we've never made a really large investment relative to our size, we tend to invest in some of these smaller companies, all of which we think are great companies. They're generally well-run by good exploration people. They have ground that they're in close proximity to operations that we're currently running. Where Orford is concerned is a little bit different. They're in -- their total focus is in Québec. Their flagship project is in the northern part of Québec. And the reason why we're invested there is we think they've got an excellent chance at making a really significant discovery. And we've looked at a lot of things. We've only invested in a few of them. But I'm proud to say virtually everything we've invested in over the last decade, we've been in lots of stocks, not really with that much scrutiny, but we've helped a number of companies, and they've all done exceedingly well. I think our whole portfolio of ownership in various companies might amount to around $50 million. But I think our entire investment might be less than $15 million. So we're doing really well on the things that we've invested in. Yes, we have high expectations for a company like -- companies like Orford, and we've been up there. We've been on the ground. We've looked at the data. And the type of things that we're invested in are not things that what will develop into small but interesting projects. We're interested in investing in companies that hopefully have home run potential. So the idea behind Orford is to find a multimillion ounce gold deposit. And there's a whole string of them across the northern part of Canada in Nunavut, and the last of those, they're basically all run by Agnico Eagle. The last of them more or less ends towards the Hudson's Bay (sic) [ Hudson Bay ], the western shore of Hudson's Bay. Well, you go across the eastern shore of Hudson's Bay and you arrive on land, well, you're in Québec. And the first place you arrive is the Cape Smith peninsula, and that is where Orford is focused. And we think there's an opportunity to find a similar type of gold deposit to those that are being operated by Agnico Eagle in the Nunavut region. So I hope that answers your question.

Yes. Yes.

We have 10 million ounces of reserves and another 20 million ounces of resources over and above that. I mean we're a fairly substantial company as far as the richness of our asset value, and we actually trade at a discount to our asset value. But nevertheless, I think that there's a tremendous amount of leverage to be made from investing in the right companies.

And John, the other thing that stands out to me on this map is you don't have any investments in South America.

That's not for -- it's not for the fact that we don't like any countries down there. I think Peru is a great opportunity. Companies have done extremely well there. Newmont has been producing in Peru for decades and similarly with Barrick Gold and so on. I mean there's a number of companies doing well in South America, but you've got a focus where you think you're going to do best. We started in Mexico. We started with the Mulatos project there. We saw a great opportunity there. Mexico was part of NAFTA. It was very keen to encourage investment and still is -- encourage investment in mining from Canadian companies, in particular. When I first went to Mexico, there was 4 Canadian companies. A decade later, there was over 200. And then, of course, they brought in a bunch of very poor regulations. And in fact, they increased royalties, and they made life difficult for explorers and drove a lot of the juniors out. In fact, they did that just in conjunction with the gold prices going into a big decline. This was at -- this would be about 2013, 2014, in that time frame. So things have slowed down in Mexico quite a bit, but that hasn't worried us at all. We've continued to operate at Mulatos very well. And as -- if you've looked at any of our financials, you'll see that we generate tremendous cash flow and revenues from Mulatos. It's been a great mine for us. I think in total, we've earned over $450 million in free cash flow from that mine. I mean we made a $10 million investment to acquire it. It's been a great return. So nothing against South America per se. There's some places there, of course, I wouldn't want to go. But we decided after Mexico. We would go down the political risk curve rather than up. So we went from Mexico and tried to acquire things in Canada, and we were successful in acquiring 2 first-rate assets. That's how we -- that would explain the chart now.

So with that, I can move on to the next slide. I'm going to just make a few comments about Young-Davidson. It's one of the biggest underground gold mines in Canada. It has an 8,000 tonne per day mill. And with all the lower mine infrastructure that we've just completed building, it has an 8,000 tonne per day mining rate now. We're -- we've just completed that work in July, and we're going to ramp up to that 8,000 tonne per day rate over the next 8 to 12 months. But suffice to say, we're already exceeding 7,000 tonnes per day, and the ramp-up is going exceedingly well. The expansion completion has a number of immediate benefits to the company. First of all, we were spending roughly $90 million of the money the mine was making. We were spending it on expanding it. We're not spending that anymore. We will, as -- by virtue of economies of scale, we'll see the rate of production increase from infrastructure that was basically designed to do 6,000 tonnes a day. We pushed a bit harder than that, but it was a 6,000 tonne per day mine. So we're going to see costs come down in absolute terms by roughly $10 per tonne. So we operate at about -- we're operating at just over $50 per tonne underground mining cost. We're going to see that drop into like around a CAD 40 mining cost. At CAD 40, so this would be roughly USD 30 underground mining rates. And that goes directly to our bottom line. So we envision the Young-Davidson turning into a tremendous cash flow generator for us for all the years to come now that we're finished with that work. At current gold prices, just to put it in perspective, Young-Davidson should generate over $160 million in free cash flow in 2021 and beyond. So...

John, I have another question here from one of the attendees.

Okay.

Two of your producing mines have cash costs of $501 for Island Gold and $750 for Mulatos, but your third producing mine, Young-Davidson, had a cash cost of $1,564. What is your cash cost guidance for Young-Davidson going forward? And how and when are you going to bring its cash costs down to be more in line with?

Well, first of all, I think you're quoting all-in sustaining costs rather than cash costs. Or if you are quoting a number, it might have something to do with one particular quarter where, if you're quoting from the second quarter, we had -- we shut down the Young-Davidson mine in February of this year, and we didn't reopen it again until mid-July, that is, we shut down the shaft. And so we -- so production effectively plummets during that quarter. So if you're quoting from a quarter, production would have plummeted that quarter with the shutdown. But we needed to shut down the mine in order to tie the upper and lower mine together. So we essentially had a shaft going down from 750 meters, then we did a raise bore from underneath at the 1,500 meter level up to the 750 meters. And then we had to knock out the ground in between, join that shaft together. And in order to accomplish all of that, the mine would have not been operating on a normal basis. So what does the mine look like at -- on a more normalized basis? Well, when we were operating from the mid-level, our all-in sustaining costs would have been in the $960 per ounce range. And now that we've completed the tie-in of the upper and lower mine, now we're going to be operating at 8,000 tonnes a day from this lower mine infrastructure with brand-new infrastructure. You're going to see costs start to fall down into the $800 per ounce range in terms of all-in sustaining costs. In terms of cash costs, it'd be quite a bit lower than that, probably $750 per ounce range. So Young-Davidson, now that, that big project is completed, that's going to turn into a very low-cost and very profitable mine.

Very good. One more question with regard to Young-Davidson. With the tie-in of Young-Davidson at the beginning of the summer, followed by the announcement of the Island Phase 3 expansion, have you strengthened -- you have strengthened a multidecade portfolio of North American-based ounces. Has the priority of development projects changed, i.e., more Canadian-based versus the Turkish development assets?

Well, to some extent, that is kind of dictated to us by circumstances. We just haven't been able to move forward in Turkey regardless. But the way things are going, we've been investing heavily in Canada. We acquired Turkey in 2010 as exploration projects. The things we focused on buying in Canada were producing mines. We acquired Young-Davidson in 2015. We acquired a development project called Lynn Lake in 2016, and we acquired Island Gold in 2017. Lynn Lake is the one development project we have in Canada, and it's a great mine. It's got about 2 million ounces of gold. We can develop that mine at a fairly reasonable cost, probably in the range of about $340 million, $350 million. And it will produce about 170,000 ounces of gold a year. And that will be a great addition for our Canadian production. So that will -- between the 2 existing mines, we're producing something north of 400,000, 450,000 ounces a year. Lynn Lake would take us up in the 600,000 ounce a year range, just production from Canada. And Canada is a great jurisdiction in which to operate, but there's another advantage that may not immediately occur to you, and that is there's a natural hedge built into producing in Canada because we're producing gold in a Canadian dollar environment. And generally, when the U.S. dollar is high, the Canadian dollars low. It also means the gold price is low. So we get the offsetting effect of a lower Canadian dollar during a high Canadian -- high American dollar scenario. Where the Canadian dollar is high, that generally means the gold price is high and the U.S. dollar is low. So that natural hedge is a real benefit to Canadian producers and one of the reasons why we wanted to focus on Canada. That similar hedge, by the way, also exists in Turkey. Generally, when the U.S. dollar is really strong, the Turkish lira is really low, and that typically means a lower-cost operating environment for the producer. So look, we like being focused in Canada. We're -- I can get to the Island Gold mine or the Young-Davidson mine in about a 25-minute flight on a fixed-wing aircraft I can pick up at Toronto Island Airport. Or I can drive up to Young-Davidson, as I've done a number of times, in about 7 hours from my home here in Toronto. That's a big advantage. And it allows us to keep in close touch with operations and keep in close touch with our management and our miners out at the mines, and I really like to do that.

You -- John, you mentioned Lynn Lake a couple of times, and somebody did ask a question, when will that be in production?

Well, we only completed our environmental baseline studies. We did environmental baseline studies over the last 2.5 years, and those were completed about a month ago. The study itself was completed and submitted. In Canada, it's typically an 18- to 20-month -- 18- to 24-month permitting timeline in order to get our environmental permit approved by the federal government. And once that is done, call it, 2 years from now, we would be in a position to start construction on that mine. And it's probably, again, about an 18- to 24-month construction period. So that's about 4 to 5 years away, roughly speaking, very, very typical for the mining industry. That 5 years may sound like a long-term fit for most investors. I know people's attention span tends to be rather short. But to have an asset of that quality that you could set up and operate for the next 10 or 15 years, that's a great thing to have. And putting 5 years into permitting construction is pretty typical for the mining industry. Another aspect of Lynn Lake that doesn't often get mentioned but one that I think makes it extremely attractive is Lynn Lake is like the buckle in a very, very wide greenstone belt. And it's comparable to, say, the Red Lake District in Ontario. But circumstances being what they are, Red Lake received a lot of investments going back to the early part of the 20th Century. And Red Lake has been an important mining district in Canada for all of that time and remain so. But Northern Manitoba just didn't see the same degree of investment. And part of that was due to the lack of infrastructure. It was a different province. It was managed very differently. And it just didn't see the same investment dollars. But things have changed. Manitoba has become one of the best jurisdictions in the world for the mining industry to invest. They're highly encouraging of us to invest there. There are roads going right into Lynn Lake. There was an old nickel operation. There was a producing nickel mine there that operated during the 1980s and closed down in the early '90s. As a result, there's power line going in there, roads and so forth. So it's an advantage for us to be able to build off the back of that infrastructure, although we clearly need to upgrade some things. But another big benefit that Manitoba enjoys it enjoys the cheapest power costs in the world. And if you have to operate a mill, which we will for the Lynn Lake project, having power costs in the $0.03 to $0.04 per kilowatt-hour range, that is highly attractive, and it means we're going to be able to operate that mine at a much lower cost than we would in other jurisdictions, including Ontario. Those are far lower costs than what we pay for power in Ontario.

Very good.