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

Great. Thanks. Good morning, everyone. I'm Tyler Langton, JPMorgan's Metals and Mining Analyst. With us this morning, we have Jamie Porter. He is the CFO of Alamos Gold. So thank you for joining us this morning, Jamie. And I think to kick things off, Jamie is just going to start with the presentation, and then we'll switch over to some Q&A. So I'll hand it over to you, Jamie. Thanks.

Thanks very much, Tyler. Thanks for the introduction, and thanks to you and JPMorgan for inviting us to present at the conference today. Please note that I will be making some forward-looking statements as part of the presentation. So I would encourage you to refer to our cautionary note disclosure on Slide 2 of our deck. If we move over to Slide 3. This slide does a good job of really introducing Alamos. So it gives you a good idea of who we are and where we're going over the course of the next 5 years. We're a growing diversified intermediate gold producer with a very low-risk strategy and a strong growth outlook. We'll produce approximately 500,000 ounces of gold this year, which represents a 15% production increase relative to 2020. And that increase has been driven by completion of the lower mine expansion at our Young-Davidson mine in Northern Ontario. We have the potential to grow production from 500,000 ounces a year to 750,000 ounces per year over the course of the next 5 years through both the expansion of our Island Gold mine and the construction of what will be our third mine in Canada, our Lynn Lake project, Northern Manitoba. While we're focused on growing production, we're also focused on expanding margins and improving profitability. We anticipate a 24% reduction in all-in sustaining costs over the course of the next 5 years. So this year, we'll average around $1,050 per ounce going to $800 per ounce in 2025. What that's going to do is drive dramatic free cash flow growth and a significant ongoing annual free cash flow in 2025 and beyond. We've always employed a very conservative and low-risk strategy. We tend to operate in very safe jurisdictions. We have 100% of our gold production coming from North America with 70% of that coming from Canada. From a financial perspective, again, we're very conservative. We prefer to shy away from debt. We've generally had a strong cash position on our balance sheet. And I think that financial conservatism has served us very well. It's positioned us to be acquisitive at the bottom of the market when perhaps others haven't been able to. We have a slide later in the deck where we'll talk to some of the value that we've created for shareholders through M&A over the course of the past several years. We also tend to build projects at a pace that we can afford. So we use the cash from our balance sheet and cash flow from operations to build out our development pipeline. That means we're not reliant on external financing, and we can really drive strong organic internal growth. What that leads to is a sustainable business model that supports growing returns over the long term. I think we've done a good job of reinvesting in our business and ensuring that we continue to grow and the results in terms of performance really speak for themselves. We have a 13% average annualized return since the company was founded in 2003. Over that same period, we've returned over $208 million to shareholders in the form of dividends and share buybacks. So long-term track record of success that we want to look to continue going forward. We move on to the next slide, a few points on ESG. I'd say the common theme at Alamos with respect to ESG is really continuous improvement in terms of everything that we do. On the environmental front, we're always looking for opportunities to reduce our footprint and minimize impacts. You can see on this slide that we do quite well relative to our peers, both in terms of GHG emissions and in terms of water efficiency on a per ounce of gold produced basis. Despite that, we're always looking for ways to do better. We have initiatives underway at each of our sites to further reduce our GHG emissions. At Mulatos mine, we're in the process of connecting to the grid to reduce our reliance on diesel power -- diesel power generation. At Young-Davidson with that lower mine expansion that I referenced complete, we've really automated the mining process and cut back on the number of trucks that we need to use for mining there. And at Island Gold, our Phase III expansion, our shaft expansion is going to result in a 35% reduction in GHG emissions. From a social perspective, first on safety and safety is a core value of the company, it's -- we have a strong safety culture and safety is key to everything that we do at Alamos. We have a program we call Home Safe Every Day. And again, that's very focused on continuous improvement. And you can see the results of that here in the slide with a 59% reduction in our LTI or lost time injury rate over the course of the past 3 years. With respect to our local communities, we're always looking for ways to provide lasting long-term benefits that will extend beyond the life of our mining operations. A great example of this is community investment in infrastructure in Matarachi, which is a town proximate to our Mulatos mine, where we've invested heavily in hospitals and education and increase the housing stock and community centers. We've been awarded for our work in Mexico, and it's a great example of what we try to do in terms of creating long-term lasting benefits. From a governance perspective, we have a very diverse and independent board. We do very well in terms of leading governance rankings. We are World Gold Council members and are working towards adoption of the responsible gold mining principles. And again, I go back to that constant theme. We're always looking at ways to do better and continuously improve in terms of both what we do and how we go about disclosing it. If we move on to Slide 5. This slide provides a snapshot of our first quarter results. We had an excellent start to the year. 126,000 ounces of gold production, which exceeded our guidance for the quarter, and our costs were in line. That strong performance was led by our Canadian operations, where we set records at both Young-Davidson and Island Gold. At Island Gold, we had very high grades mined during the quarter, which led to another quarterly record in terms of production and generated $30 million of free cash flow. So a phenomenal quarter at Island. At Young-Davidson, we hit record mining rates for the quarter. So we planned on achieving mining rates of 7,500 tonnes per day, and we exceeded that and had a strong financial performance as a result as well. So a $120 million of operating cash flow generated in the first quarter of 2021, which was almost a 50% increase relative to the prior year quarter. Phenomenal financial performance across the board. We did reinvest heavily in the business. We invested about $90 million in capital expenditures in Q1. Focused on building our La Yaqui Grande mine in Mexico and on the Phase III expansion in Island Gold. But net of all that, we added $10 million to the balance sheet in the quarter. So ended with a very strong cash position of $236 million. Moving over to Slide 6. Here we really highlight that reinvestment in growth and how important that is to our sustainable business model in terms of supporting growing returns over the long term. We take a very balanced approach to capital allocation. So we take the free cash flow that we generate from our mines, and we split it into 3 categories. The first being returning capital to shareholders in the form of dividends or share buybacks. Second category being strengthening our financial condition and improving our balance sheet. And last but not least, the third category, it's that reinvestment in high-return internal growth projects. So if you look at what we've done over the course of the past 3 quarters since we completed the lower mine expansion at Young-Davidson, we've generated about $144 million of free cash flow over that period and how have we used it. While we've increased our dividend by 70%, we bought back stock. So we'd certainly returned capital to shareholders and increased the ongoing returns to shareholders. We've strengthened our balance sheet in that we've repaid $100 million of the [ strong ] revolver. We've increased our cash balance to just under $240 million. And we've reinvested in those high-return internal growth projects. We've effectively doubled our exploration budget company-wide. We are building that La Yaqui Grande mine in Mexico, and we've started the expansion of the Island Gold operation with the shaft expansion project that we initiated late last year. So we are currently in a very -- in a period of heavy reinvestment in growth, and this will continue until 2025. At which point, our capital spending really starts to decline, and our free cash flow increases quite significantly. If we move on to Slide 7. This slide really illustrates the strength of our existing production base and how we see that growth coming about over time. Our 3 existing producing mines, Young-Davidson, Island Gold and Mulatos provide a very solid, long-life production base in around 500,000 ounces per year. That will grow to 600,000 ounces per year in 2025, once we've completed the Phase III shaft expansion at Island Gold, which is going to drive production at Island from approximately 140,000 ounces to 240,000 ounces per year. Also in 2025, we anticipate completing construction of our Lynn Lake project in Northern Manitoba. And once Lynn Lake comes online, that adds another 170,000 ounces of low cost production. So that gets us to a consolidated global total production of 750,000 ounces, again, at substantially lower cost. We'll be running around $800 all-in sustaining costs. So we've got tremendous free cash flow growth coming in 2025 and beyond. If we move over to Slide 8. We've been very successful over the years in creating shareholder value through both M&A and exploration. This has effectively provided the foundation for the outlook that we have today. We started with Mulatos on the far left of this slide. Our CEO acquired Mulatos back in 2003 for less than $10 million. The mine was built for $70 million. And to date has returned over $460 million in net free cash flow. In addition, it has a $530 million consensus now in value ahead of it. So that's a $10 million investment that's created $1 billion of shareholder value. And it's really been the blueprint for the company's success. We move over to the middle of the slide. We see our Young-Davidson mine. We acquired Young-Davidson through our no premium merger vehicles with AuRico Gold back in 2015. Since that acquisition, over the past 6 years, we've been operating the upper part of the Young-Davidson mine, taking cash flow from that operation to fund construction of the lower mine infrastructure, which is bigger and better and allows us to increase production. With that now complete, we'll be operating Young-Davidson for decades to come at 200,000 ounces per year. And at that rate of production, Young-Davidson will generate $100 million per year in free cash flow. So you can see, again, the acquisition costs $950 million, and we've driven the value of Young-Davidson up to consensus now currently of approximately $1.5 billion, so a 50% increase in value. Last but certainly not least, it's our Island Gold mine. So we acquired Richmont Mines in November of 2017, and in so doing acquired Island Gold. We paid approximately USD 620 million for the asset. Since -- in the 3.5 years since acquisition, Island has returned approximately $200 million in cash, and it has a consensus now ahead of it of $1.3 billion. So we've dramatically increased the size of this deposit. There was 1.8 million ounces in total reserves and resources when we acquired it. We went from 1.8% to 2.7% to 3.6%. We now sit as of the end of last year at 4.8 million ounces in total reserves and resources. And we're confident that, that's going to continue to grow. We added 1 million ounces of high-grade 18-gram material last year despite spending only half of our exploration budget. So Island is a really exciting growth story for us. I think there's no question in our minds that this will be a 5 million plus ounce deposit with now in excess of $2 billion once we've completed resequencing to get some of that higher-grade material adapting into the mine plan once we expand the resource even further. So tremendous value creation through M&A. So I'll end on this final slide. I'll close out the presentation, just touch briefly on valuation. As you can see from the chart on the bottom right, we are trading at a discount to consensus net asset value, I think, currently around 0.78x, suggests that represents great entry point for investors. It's certainly an attractive investment opportunity, just given the quality of the company. We have high-quality, long-life assets. We have that 50% production growth over the course of the next 5 years, relative to our peers with a very low political risk profile, again, with 100% of our production being based in North America. Extremely strong balance sheet. Again, $240 million of free cash and $500 million line of credit, so $740 million of available liquidity and a very strong free cash flow outlook. So we believe that we've got all the qualities required for to attract a premium valuation, and we think it's just a matter of time before we get there. So with that, Tyler, I'll wrap up the formal part of the presentation. I'll turn it back over to you.

Great. Thanks, Jamie. I guess maybe just to start, kind of -- you mentioned how basically it's the expansion at Island Gold and the development of Lynn Lake are sort of the 2 sort of projects that should drive the growth going forward. I guess, with both, could you just talk about, I guess, some of the potential risks around those projects or sort of on that side just potential upside from them just so we can kind of frame the opportunity?

Certainly. I think -- I mean I touched on some of the upside in that M&A slide. I think we're very confident that Island is just going to continue to grow, and we'll be able to expand production through either higher grades coming into the mine plan earlier or through higher tonnage. But our Phase III expansion at Island Gold, it's really -- it's an expansion of an existing operation. We've already increased production at that mine by 50%. When we acquired it from Richmont, they were operating at about 800 tonnes per day. So we've moved that up to initially to 1,100 tonnes per day, and now we're operating at 1,200 tonnes per day. So we've already gone through the process of completing an expansion there before. Now what we're looking to do is move production from 1,200 up to 2,000 tonnes per day. Sink and construct a shaft and really automate the mine and make it more efficient and more cost effective to access those resources at that. But I think in terms of risk, I mean, it's an operating mine. So we're permitting the expansion of an operating mine, which is far different from construction of an entirely new deposit. The shaft construction itself, I'd suggest, is low risk, just given our experience. I mean we have our General Manager at Island Gold, Austin Hemphill, he was the underground mine superintendent at Young-Davidson. While we built both the MCM and Northgate shafts there. So he has a lot of experience in that regard. We have a great project team working on it. In terms of just the overall spend, we've got $0.5 billion of capital allocated to this project over the course of the next 5 years. And to date, everything seems to be lining up with what we projected. We just awarded the contract for shaft sink. It's about $100 million contract. And the timing, the cost, everything is well within what we've planned as part of our Phase III study. So we're very comfortable with that. I'd say, if there's a risk, it's around permitting. I don't think it's a question of if we get the permits, just a question of when. Timing with respect to the permitting, especially with COVID having been thrown in, can -- there can be minor delays there. But overall, we're very confident in both the time line and the capital budget that we've put forward there. So that's Island. At Lynn Lake, it's a really straightforward project. It's open pit, conventional milling. It's got a lot going forward in terms of very strong provincial government support. We've been working very closely with the provincial government all along. And our investment in Northern Manitoba aligns extremely well with their COVID economic recovery plan of infrastructure spending. So we're actually working with them and on projects related to upgrading our power line and road infrastructure and things like that. So the province is behind us. We do have access to very cheap hydroelectric power being where we are in Northern Manitoba. And we've got great exploration potential. So I think from the risk of whether we go ahead and make a construction decision, I think we're confident that we'll move forward with Lynn Lake. We've increased -- we did our initial feasibility study back in late 2017 based on a reserve of 1.6 million ounces. We've added 0.5 million ounces to that. So this project at consensus gold prices has well north of a 30% IRR. It will be a go. And in terms of constructability and everything else, again, there's great infrastructure in place, and it's a pretty straightforward project.

And then I know you mentioned for Island Gold sort of the cost had sort of generally been tracking in line with the expansion. Just in terms for your current operations, and Lynn Lake, I mean, are you seeing just sort of any general signs of inflationary pressures or if not inflationary pressures, just sort of difficulty -- difficulties with the supply chain or just lining things up from that perspective?

Yes. I'd say -- we get that question a lot with respect to our existing operations. And we're seeing some cost inflation, but nothing overly significant at this point. I mean the big thing that's affected us this year is really the Canadian dollar. We did our budget at $0.75, and Canadian dollar has been as high as $0.83. It settled back down around $0.8 currently. But that's got about a $50 per ounce impact on our all-in sustaining costs, just given the amount of spending that we do in Canadian dollars. Labor, 2.5% increase this year, which is pretty standard in Canada, 5% in Mexico. We are seeing slightly higher consumable costs, in some cases, where the inputs are related to steel. But we do have multiyear contracts for a lot of our consumables as well. So it hasn't -- overall cost inflation hasn't had a big impact on our operations other than the foreign exchange rate. On the capital side for Lynn Lake and Island Gold Phase III, we will be purchasing about $30 million worth of steel over the course of the next 3 years. So the increases in the price of steel will certainly hit us. But I think generally, we're not seeing anything significant. I mean we have contingencies in place, and maybe we're taking up part of those, but there's no significant inflation that's going to cause us to need to provide updated guidance on capital spending.

Great. And then I guess, I mean, I think you mentioned sort of in your prepared remarks that [ you said ] you benefit from operating in stable jurisdictions, and I guess, around 70% of your production is from Canada and the rest from Mexico. But I guess, could you just talk -- just in general, a little bit about geopolitical risks for the industry were sort of seeing some things in some countries in South America. So I would just be curious to kind of sort of get your thoughts on sort of what you're seeing and sort of how you think about your assets and sort of growth going forward?

Yes. No, I think that's a good question. We have -- I mean we've been fairly deliberate in our approach in terms of how we've set up the company. If you go back 6 years ago, we had 1 producing mine, Mulatos in Mexico, and that was it. We've been looking -- we have been looking for that long life, high-quality asset in Canada. We secured our first one with Young-Davidson and followed that up with Island Gold. So we've really repositioned the company away from Mexico into being a North American producer. I think geopolitical risk has been increasing across the industry. You've seen we filed a $1 billion arbitration claim against the Republic of Turkey as a result of some of the challenges that we've had there. Centerra has had their challenges of late, and you've seen risk of nationalization in Peru and higher royalties in copper and talk of higher royalties and taxes in Mexico. So absolutely. I think we've purposely designed Alamos so that we're in what we consider to be one of the most stable jurisdictions. And if you look at what we've done from an M&A perspective over the course of the past couple of years since the Island acquisition, we've been focused on really small transactions in and around our existing mines. In Canada, that really improve what we have currently. So we bought back royalty on Island Gold for $50 million, that will save us probably twice that over the long term. We acquired Trillium for $20 million at the end of last year. So we've been focused on small deals, just making our Canadian assets better, rather than taking a big step out into a new potentially risky jurisdiction for a development project there with a small producer.

And then, I guess, as you mentioned, with the investment treaty claim against Turkey, I know that the process can take up to 5 years. But I guess, is there a hope or a possibility that it could be potentially settled sooner than that?

There certainly is. I mean as part of that process, you're encouraged to negotiate. So our legal counsel suggests that at the outside, it's a 5-year period. I think there's the real potential for another party to potentially come in and an arrangement where the permits would be reinstated, and we'd be compensated for the projects by this other party. That could certainly happen. I think, for us, our process was effectively frustrated. We've been sitting for 18 months without access to any real insight as to when we get that permit reinstated. So this was the -- really our last recourse. And yes, I think ultimately, we're comfortable we'll get a multiple of our cost base back. I mean we filed the claim for $1 billion. Our cost base for our Turkish assets is $250 million. And we've had interest at a level certainly at multiples of our cost base. So I'm hopeful that that's where it ends up. And I'm hopeful that it does get settled prior to 5 years from now.

Great. And then talk a little bit about, but in terms of sort of capital allocation, I guess, could you talk a little bit about how you think about sort of prioritizing sort of growth versus increasing the dividend versus potentially buybacks? And then I guess, maybe just a little bit with the dividend. You sort of focus more on sustainable increases, but have you ever thought about linking the dividend to some sort of equation or formula?

Yes. We've certainly thought about that in the past. Our view has always been, the dividend should be based on cash flow. And in periods where we're generating tremendous free cash flow and don't have higher return growth projects to reinvest in, then absolutely, we'll increase the dividend. But we've never -- we've always shied away from an approach where we tie the dividend to the gold price or to some specific percentage of operating cash flow. I think we prefer to have the discretion. And that's -- frankly, I think that's served us fairly well. We are in a heavy -- I talked about in the presentation. We're in a very heavy reinvestment phase now. And I think that's what's required to give us that 50% production growth over the next 5 years. At that point, though, I mean if you look at the cash flow, it's 750,000 ounces and $800 sustaining costs, we're generating $750 million of pretax, pre-growth capital cash flow annually. So there will be a tremendous amount of cash available for distribution to shareholders in the form of higher dividends, bolstering our balance sheet further and investing in whatever other projects are interesting at that time.

Right. And then maybe, I think we have a couple of minutes left. But in terms of ESG, I guess, could you sort of comment, obviously, you're reducing greenhouse gas emissions into water, those are some of the main topics. So I guess could you comment a little bit about what [ areas ] Alamos is most focused in those areas?

Sure. I'd say over the past, couple of years, it's really been -- our focus has been on just doing a better job of telling our story. I mentioned -- I referenced in the presentation, but these are -- ESG has been a focus for us since the company was started. It's just inherent in everything that we do. But where I think there was a lot of room for improvement was just in how we measure what we're doing and measure progress and continuous improvement and improving our transparency in terms of disclosure in our sustainability report, and related filings. So I think we've done a great job of that. We just filed 2 weeks ago our 2020 sustainability report. It's the best one we've ever done. And again, it's really just getting better, continuous improvement. We have a great safety record over the last 3 years. But how much can we improve that? From a -- I guess, GHG emissions perspective, it's understanding where we think we can get our operations to over time. From a climate change risk perspective, we just completed a study on what the key climate change risks are to Alamos, and we're in the process of -- we've certainly updated our filings to disclose risks around that. But we're trying to just understand that better as a management team, so we can manage against it going forward. So I'd say it's really just formalizing our approach of being more transparent and doing a better job of reporting what we're doing.

Great. Well, I think with that, we've about a minute left, don't want to try to squeeze in too many more questions. But again, Jamie, thanks for attending this morning. I really appreciate it, and take care.

Thanks very much, Tyler. You too.