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

So continuing with the mid-tier precious metal theme of today, our next presenting company is Canadian-focused gold miner, Alamos Gold. And joining me today from Alamos Gold is Chief Financial Officer, Jamie Porter. Jamie, please come up, and the podium is all yours. And of course, welcome to Miami. It's the first time I've seen you.

Thanks, Lawson.

Thanks for being here.

Thank you. Thank you, Lawson. So for those in the audience today, I will be making forward-looking statements, so I would encourage you to review our cautionary notes disclosure on Slide 2 of our presentation. On Slide 3, we provide an overview of where Alamos is at today and where we're going in the years ahead. We have 3 high-quality, long-life mines that collectively will produce about 460,000 ounces this year at all-in sustaining costs at around $1,200 an ounce. We also have a very strong outlook. We have a portfolio of low-cost growth projects that collectively give us the potential to get production up to closer to 750,000 ounces a year at substantially lower cost of approximately $800 per ounce. We also have a very low political risk profile with the majority of our production based in Canada, all of our growth coming from Canada and 85% of our net asset value attributable to our Canadian assets. Lastly, on this slide, we have a strong track record of delivering returns to shareholders. Since the company was founded in 2003, we have a 12% average annualized return. We pay a dividend, have done so for 12 years now, and over that period, have returned about $250 million to shareholders through share buybacks and dividends, including over $50 million last year alone. If we move to Slide 4, this slide really summarizes our corporate strategy. It's one that's focused on minimizing risk and taking a long-term view. We minimize risk by maintaining a very conservative balance sheet. We prefer to have no debt and a strong cash position. We also focus on high-quality assets in safe jurisdictions. In terms of taking a long-term view, we focus on assets and growth that we can develop in a responsible manner. So we prefer to self-finance development projects at a responsible pace. From a capital allocation perspective, we invest in our highest-return organic growth projects and in turn, use those returns to support higher dividends and returns to shareholders. We do have a very long-term track record of value creation. From an M&A perspective, we tend to be countercyclical. We were most active in the period from 2015 to 2017. In 2015, we did a merger of equal with -- a merger of equals with AuRico, thereby acquiring our Young-Davidson mine. And in 2017, we acquired Richmont Mines and it's Island Gold mine. Now since -- if you go back to the acquisition of those assets relative to now, we've added over $1.4 billion in value, with the majority of that being driven by exploration success at our Island Gold mine, where we've added over 4 million -- or sorry, almost 4 million ounces at a discovery cost of only $12 an ounce. So that's really how you can drive value growth at -- in the mining space. We also take a very long-term view with respect to ESG. From an environmental perspective, both our GHG emissions and water consumption are lower than our senior and intermediate peers on a per ounce produced basis. We have initiatives underway at each of our sites to further reduce our greenhouse gas emissions. We have a very strong safety culture. We have a program we call Home Safe Every Day that's focused on continuous improvement. And through that program, we've reduced our lost time injury rate by almost 40% over the course of the past 4 years. And I'd say from a governance and disclosure perspective, we're generally just getting better at reporting and being more transparent in what we do. And the ratings agencies are noticing. Our rankings have increased year-over-year for several years now. In fact, we're now ranked fifth by CDP in terms of all gold mining companies. So significant improvement there in the past several years. For 2022, we have a number of significant catalysts, the first of which was our reserve resource update that we published in February of this year showed a 4% increase in total reserves to over 10 million ounces. Notably, we also achieved the 5 million-ounce mark in terms of mineral reserves and resources at our Island Gold mine. So a pretty dramatic increase from the 1.8 million ounces we had when we acquired the project in 2017. Coming up in the next few months, later this summer, we plan on updating the Phase 3 expansion plan for Island Gold. So we're looking to incorporate the resources that we've added over the last 2 years into an updated mine plan, get those high-grade ounces into production sooner and evaluate expansion opportunities at that operation. So we're already going from 1,200 to 2,000 tonnes per day. We're looking at the best way to potentially accelerate that even further. Also later this summer, we will be announcing first production at our La Yaqui Grande mine in Mexico. We've been building that operation for 2 years now. I was there last week. We're now stacking ore on the leach pad. That will be under leach shortly. We should be pouring gold here in early July. That's going to dramatically change things in Mexico for us, is going to increase our production and lower our costs and generate significant free cash flow. And the last significant catalyst we have for this year is with respect to our Lynn Lake project in Northern Manitoba. We're in a provincial and federal permitting process now. We anticipate having the provincial permit approvals midyear with the federal approvals coming towards the end of the year. Lynn Lake has the potential to be Alamos' third Canadian mine. We're looking forward to getting it permitted and updating the feasibility study on that project. Just diving a little deeper into Island Gold. So back -- 2 years ago in July of 2020, we published what we call the Phase 3 expansion study. Maybe going back even further, when we first bought the mine, it was operating at 800 tonnes per day. We initially moved it to 900 then to 1,100 and now to 1,200 tonnes per day. The Phase 3 expansion study that we released envisioned taking that to 2,000 tonnes per day. Results in a pretty dramatic increase in production. We go from averaging around 140,000 ounces a year to closer to 240,000 ounces a year at industry low cost of around $500 an ounce. And that's because of the nature of this deposit, it's very high grade, 10 grams per tonne, and we're looking at increasing that potentially even further. We have -- since we published that study in July of 2020, we've added 1.4 million ounces with high-grade ounces right at the very shaft bottom. So we're looking at resequencing the mine plan, try to get those higher grade ounces in sooner and increase production beyond the 240,000 ounce per year level. This is a big catalyst for us, a big value driver. Island is just an asset. It's a gift that keeps on giving in terms of exploration success. The size of the deposit has tripled since we've owned it, and there's no signs of that slowing anytime soon. I mentioned our La Yaqui Grande project in Mexico. So we have been in a bit of a transition period in Mexico. We completed mining the Cerro Pelon deposit in Q2 of last year. And so we've been processing stockpiles, mining and processing some of the lower grade areas around the existing Mulatos pit. But starting in Q3, we'll have production from La Yaqui Grande. And again, that's going to result in a significant improvement in terms of production, much lower costs and higher cash flow going forward. This project -- visited last week, the crushing system is totally up and running. We've got the agglomerator, the stackers. We're stacking ore on the leach pad. All kinds of operational flexibility with the way this mine has been built and in fact, the ability to increase capacity. So we're excited about having this online and really increasing our production in the second half of the year out of Mexico. So you put it all together, and this is what our production and cost profile looks like over the course of the next 5 years. Very stable production, but lower cost in the near term. We get a step-up in 2025 on completion of the Phase 3 expansion at Island. That will move us to about 600,000 ounces of production. And we have the potential, again, to go to closer to 750,000 ounces of production with Lynn Lake coming online. But importantly, while production is growing, costs are declining pretty significantly from $1,200 an ounce down to potentially $800 an ounce 5 years out. So at that rate of production, we're going to be generating tremendous free cash flow. And again, these are all long-life mines. We've got 10- to 15-year reserve lives currently in the case of Island reserve and resource lives, and those have been growing. We added mine life at each of our operations with our February reserve resource update, and we expect that to continue. And I'll conclude on this slide just by saying -- you can see on the price to NAV chart at the bottom that we are trading at a bit of a discount to our peers currently. We don't think that's justified. We think we have all the qualities and characteristics to warrant a premium valuation. We have high-quality, long-life assets with great exploration potential in safe jurisdictions. We've got growth, and its growth again in Canada. And we have the potential to dramatically increase our free cash flow in the years ahead. So we think as we execute on our business plan, that discount to NAV is going to change into a premium valuation. So with that, Lawson, I'll turn it back over to you.

That would be great. And I'd love for you to come sit down, get comfortable.

Sure. Perfect.

With the [ 8 ] minutes we have left. Lots of time for questions. Certainly, if anybody in the audience would like to ask anything, please just shoot your hand up, and we'll address it. I will start the questions off though with the outlook for 2022. Obviously, the expectation is for much greater production in the second half, driven by the startup of La Yaqui Grande. It's not lost on me though that the rainy season typically is in Q3. So what sort of room or space have you built into that guidance in order to account for that sort of potentiality?

Yes. So the rainy season in Mexico historically could have a pretty significant impact on us. I mean going back to the early years of Mulatos, we weren't as well set up as we are now to deal with it. The reality though is that we'll be stacking right on the line, I mean, first lift material. So the impact of heavy rains is that it dilutes -- it impairs your ability to get that solution through the process plant because we're stacking right on the first lift. That should not be an issue. We won't have much of a deferral at all in terms of production there. So we haven't had rain in the mine site for about 8 months. It rains cats and dogs in July and August, but we're well set up to be able to deal with that without it having the impact of deferring our production.

So it sounds like confidence in the 2022 production.

Absolutely. Yes. We started and we guided to starting a bit late. We did 100,000 ounces in Q1, just under 100,000 ounces. That was the plan. We see production ramping up in Q3 with Q4 being our best production quarter. And yes, we remain very confident in that guidance.

Okay. Fantastic. Maybe let's touch on M&A, which you did, of course. So you've made a number of acquisitions, Island most recently. Can you maybe talk a little bit about what the M&A strategy is today? Are you seeing any exciting opportunities? And then size range? I know you have a couple of junior investments.

Yes. So when we look at the externally available opportunities, it's hard for us to see value relative to what we have in our own portfolio. Again, Island Gold is a 10-gram deposit. We get a tremendous bang for our buck with every dollar that we spend on exploration. With every dollar that we spend in growing that deposit, we're going to have a very strong return. So we have to weigh external opportunities against what we have internally. We think Island right now is the best use of our capital. After that, we have Lynn Lake as the next stage in our growth. And again, we think that stacks up favorably relative to other similar single-asset development companies that would be out there and available. And we don't have to go buy it because we already own it. So we're very internally focused. We've got the ability to grow our production pretty significantly. We don't need to do anything from an M&A perspective, and we don't see a lot of opportunities currently.

Got you. Okay. So you touched on Lynn Lake. I kind of gather from that chart that you guys have had, I think, since Denver last year maybe showing Lynn Lake starting up in 2025 that it seems that you're implying that you expect to start construction basically as soon as you get the EIA and move ahead with that for first production in 2025. Is that fair? Is there some flexibility in that time line?

Yes. So there is definitely some flexibility in that time line. I think we acknowledge that Island is going to be our first priority in terms of capital investment. We want to get the Phase 3 expansion completed at Island as soon as we can. Lynn Lake, I think, will naturally go a bit slower. With the permits expected at the end of this year, there's still some remaining work that could be done. We also -- we keep finding -- we've gone from 1.6 million ounces to 2.3 million ounces in the mine plan at Lynn Lake. And every year, we seem to add a few hundred thousand ounces of additional minable reserves. So I think there's a natural delay that will happen with Lynn Lake. So we can focus on Island Phase 3 first and then move over to Lynn Lake, which means that, that incremental layer of Lynn Lake production could well get pushed out to 2026, 2027.

Okay. That's the time frame, like 1-, 2-year push out.

Yes. I mean we want to do things in a responsible way that we can self-fund. We don't like leveraging up in order to invest in growth in the environment we're in. Certainly, inflation pressures on capital. I think it's -- it would be prudent for us to take a slower approach with Lynn Lake.

Understood. I think we might be expecting some updated economics at some point on Lynn Lake. What are you guys expecting from that? I think the market is assuming CapEx is going up, but you mentioned a lot of ounces, too. Or is this just going to be an offset in terms of net asset value?

We think so, yes. I mean the last feasibility study on Lynn Lake was published in December of 2017. It had capital spending of USD 340 million, but again, based on 1.6 million ounces. So that capital number is going higher, no question. But we think that will be offset by the additional ounces that we've discovered over the last several years.

Got you. So maybe touching on Mexico. Your company has completely moved from Mexican-focused a decade ago to Canadian-focused. And I mean Mexico, post La Yaqui Grande, is almost a rounding error in the company. I mean is Mexico still a core part of the business looking out 5 or 10 years?

Looking out 5, 10 years, it's harder to say. It's certainly a core part of the business now. Internally, we're really excited about La Yaqui Grande. The visit last week, it's -- I mean, it's easy to get things done in Mexico. This is our -- really our fourth mine that we've built there. And it's been extremely well done. We set out our capital budget 2.5 years ago at $145 million, and we're going to be about $20 million over that, but that's because of scope changes, like we built a camp because of COVID. We decided to build a new crusher rather than reusing the one from Cerro Pelon to make the operation better. So it's -- we've got a great team down there, a lot of cash flow coming in the years ahead. We just announced in February a new underground reserve, 430,000 ounces of 4.5 gram material. That's got the potential lead into a development scenario and could extend mine life for another 10 years. So it's -- we've been operating at Mulatos for 17 years with a 6- to 7-year mine life. And we're still investing heavily in exploration. We think that operation will continue for many years to come.

Interesting point on the underground reserve. So last time you guys found an underground reserve, it was very, very high grade. Like what is the sense on this one?

Well -- so this is not Escondida. That was -- had a reserve grade of, I believe it was 13 or 14 grams per tonne, and that was ultimately what we mined it at. This is about 1/3 of that. Currently, it's between 4 and 5 grams. We do think there's the ability to expand it. We're doing some drilling to hopefully affect that this year. We went from 0 to 430,000 ounces. If we can get that up to 600,000 or 700,000 ounces, it gets really interesting.

And finally, long term at Island, I mean, internally, what are you guys thinking that, that asset becomes? I mean is it a single shaft asset? I mean once you hit your 2025 level, is that kind of what to expect from it?

In 2025, it will be. But yes, I mean, the expansion opportunities there are endless. We've gone from 1.8 million to 5 million ounces over the course of the last 4 years. We've taken it from 800 tonnes per day to -- we're going to 2,000 tonnes per day, and we're evaluating scenarios where we can even go beyond that. So I think Island's a bit of a unicorn. Tremendous exploration potential is located in Northern Ontario. Got the potential to get it up to close to 300,000 ounces a year at $500 or $600 all-in sustaining costs. So it's a great asset for us and has become our most valuable asset.

Island is a unicorn. It's a good note to end on.

There we go.

All right. Thanks a lot for being here, Jamie.

Thanks, Lawson.

Nice to see you.

Good to see you.