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

Good morning, ladies and gentlemen. I will now turn the call over to Scott Parsons, Alamos Gold's Senior Vice President, Investor Relations. Please, go ahead.

Thank you, operator, and thanks to everyone for attending this morning's conference call to discuss Alamos Gold's acquisition of Argonaut Gold. In addition to myself, we have on the line today from Alamos, John McCluskey, President and Chief Executive Officer; Greg Fisher, Chief Financial Officer; Luc Guimond, Chief Operating Officer. From Argonaut, we have Richard Young, President and Chief Executive Officer; and Marc Laduc, Chief Operating Officer. All will be available during the Q&A session of the call. We have prepared a presentation to accompany the conference call, which is available for viewing through the webcast and for download from the Alamos Gold and Argonaut's websites. Before we begin, please note this disclaimer concerning forward-looking statements. We refer all participants to our forward-looking statements and resources disclosure in Alamos and Argonaut's joint press release as well as Slide 2 and 3 from today's presentation and caution that mining and exploration are subject to a number of risks and uncertainties, particularly with respect to the mining and processing of ore, recovery rates, operating plans and the conversion of mineral resources to proven and probable reserves, to name a few. There could be no assurance that forward-looking statements made in this press release, presentation and conference call, based on the information on hand today, will prove accurate. Future results and events could differ materially from those anticipated in such statements and should not be relied upon. Technical information to Alamos Gold in this presentation has been reviewed and approved by Chris Bostwick, Alamos Gold's Senior Vice President, Technical Services and a qualified person. Also, please bear in mind that all of the dollar amounts mentioned in this conference call are in U.S. dollars unless otherwise noted. Now I'll turn the call over to John McCluskey, President and Chief Executive Officer of Alamos Gold.

Thank you, Scott, and good morning, everyone. I'm very pleased to be joined by Richard Young to announce Alamos Gold's friendly acquisition of Argonaut Gold and its key asset, Magino. I would also like to take this opportunity to welcome Argonaut's exceptional group of employees to Alamos. I look forward to working together as we close the transaction and integrate our operations. Let's start with Slide 5. The Magino mine is a long-life asset located in Northern Ontario, Canada, adjacent to our Island Gold mine. Given their close proximity, we will be combining the 2 operations, creating one of the largest, lowest cost and most profitable gold mines in Canada. The integration of the 2 mines is expected to unlock significant near- and long-term value, with total pretax operating and capital synergies of approximately $515 million, which we will detail later in the presentation. This includes approximately -- this includes G&A and operating savings by processing ore from both operations through the existing Magino mill and capital synergies with the mill and tailings expansions at Island Gold no longer required. In addition to the significant synergies, the transaction is accretive across all key financial and operating metrics, including net asset value, cash flow, production and mineral reserves per share. The combination of Magino and Island Gold strengthens and further diversifies our portfolio of assets. In the near term, our production increases to over 600,000 ounces per year. Longer term, we now have the capacity to grow our production to over 900,000 ounces per year. The integration of the 2 assets also creates opportunities for further longer-term production upside at both Magino and Island Gold through a potential expansion of the Magino mill. Our exposure to Canada continues to grow with nearly 90% of our net asset value now supported by Canadian assets, in one of the best jurisdictions in the world. We are the third largest gold producer in Canada and growing, given our pipeline of high-return organic growth projects. Magino will be a key part of that growth. Since achieving initial production last June, the Argonaut team have worked through a number of challenges of Magino that are common with new operations, while dealing with capital constraints in tough market conditions. The challenges are well defined and Argonaut has made good progress over the last several months, ramping up mining and milling rates toward design rates. With Alamos's strong balance sheet and significant technical and operating expertise, we are well positioned to complete the ramp up and optimization of Magino and unlock the full potential of the operation. The addition of Magino will make Alamos a stronger company and enhance our unique position as a growing intermediate producer with declining costs and one of the lowest political risk profiles in the sector. We've been very selective throughout our history when it comes to acquisitions and have demonstrated a strong long-term track record of value creation. We expect that track record to continue with Magino. The details of the transaction are summarized on Slide 6. The acquisition of Argonaut is by way of a plan of arrangement with Alamos shareholders only 95% of the combined company and Argonaut shareholders holding the remaining 5%. Under the terms of the agreement, 0.0185 Alamos common shares will be issued for each Argonaut common share, a value of $0.34 per share. In addition, Argonaut shareholders will retain exposure to Argonaut's U.S. and Mexican assets through a newly formed SpinCo with an estimated value of $0.06 per share. This represents total consideration of approximately $0.40, a 34% premium to yesterday's closing price or a 41% premium based on the 20-day volume-weighted average of both companies. Alamos expects to issue approximately 20 million common shares as part of the transaction, representing an equity value of approximately $276 million on a fully diluted in-the-money basis and an enterprise value of $516 million. The transaction is subject to a customary court and regulatory approvals and will require approval of 66 2/3% of Argonaut's shareholder vote cast. The transaction includes customary non-solicitation covenants, termination fees and senior officer and director lockups. The Board of Directors of Alamos Gold and Argonaut Gold have unanimously approved the arrangement, and Argonaut's Board recommends that shareholders vote in favor of the transaction. In addition, Argonaut's 2 largest shareholders have entered into lockup agreements in support of the transaction, representing 40% of its shares outstanding. The shareholder meeting materials, including the information circular, will be mailed in May with the transaction expected to close in July. The benefits to Alamos shareholders are detailed on Slide 7. The integration of the adjacent Island Gold and Magino mines and the ability to leverage one larger centralized milling and tailings facility at Magino is going to drive significant synergies. We expect operating and capital synergies will total $515 million based on Island Gold's current mine plan with further upside as the deposit continues to grow. Given the rapid ongoing growth of the Island Gold deposit, the larger mill and tailings facility has become increasingly valuable. With access to an already constructed mill at Magino, we no longer will require the mill expansion at Island Gold, further derisking the Phase 3 expansion. The acquisition is accretive across key financial and operational metrics as we continue to create value on a per share basis, including net asset value, cash flow, production and reserves. The acquisition adds a fourth core long-life producing asset in Canada with a large reserve and resource base totaling over 5 million ounces and exploration upside. It will provide an immediate boost to our near- and longer-term production profile with our combined production rate increasing approximately 25% to over 600,000 ounces per year. Longer term, we have the capacity to increase production to over 900,000 ounces per year. Through further optimization and expansion of a centralized mill at Magino, led by both Magino and Island Gold ore, there is potential to take long-term production even higher, improving our already strong growth profile. The acquisition firmly positions us as the third largest gold producer in Canada and further increases our exposure to one of the best jurisdictions in the world. We expect to continue increasing this exposure through our portfolio of organic growth projects. These include the Phase 3 expansion at Island Gold, which is well underway, and our Lynn Lake project in Manitoba. This transaction does not change our time line to Lynn Lake with early-stage work already underway and more significant construction activities expected to ramp up in 2025. With a solid balance sheet and stronger overall cash flow generation with the acquisition, we are well positioned to continue executing on our organic growth plans. Now I'd like to turn the call over to Richard Young, President and Chief Executive Officer of Argonaut Gold, to review the benefits for the Argonaut shareholders.

Well, thank you, John. This is a positive transaction for both companies, and I'm pleased to be here with John to present this to our respective shareholders. I'd like to start by thanking the entire Argonaut team across our asset base. Our employees at Magino will be joining a world-class asset in Island Gold. Together, both operations are stronger with longer and brighter futures. Over to Slide 8. The team has made considerable progress at Magino over the last several years, taking it from a project to its first gold pour last June, followed by commercial production in November. We have dealt with some start-up challenges. But as I will touch on later, we have identified the issues. We're in the process of implementing changes and we are seeing steady improvement. With a much stronger balance sheet and a deeper and experienced team, we are confident that Alamos has the financial capacity and the team to complete the ramp up and optimization of the Magino mine, unlocking its full potential. Our shareholders are receiving an immediate premium and will own 5% of the combined company, providing exposure to a much larger, better capitalized and well-run company. This includes a diversified portfolio of high-quality, low-cost operating mines in North America, a strong growth pipeline and a solid balance sheet to support that growth. Argonaut's shareholders will also participate in ongoing exposure at Magino's operating and exploration upside with the considerable synergies to be realized through this combination. Additionally, Argonaut shareholders will retain ownership in the Florida Canyon mine in the United States and our Mexican assets through SpinCo, an attractive new junior gold producer. We look forward to participating in the success of the combined company and the SpinCo as shareholders of both companies. Now I'll turn the call back over to John to present the new pro forma portfolio of assets.

Thank you, Richard. Slide 10 provides an overview of the combined company. Magino will be our third producing mine in Canada and fourth North American -- fourth in North America, taking our combined production to over 600,000 ounces per year. We also have a portfolio of growth projects, including the Phase 3 expansion at Island Gold that is currently underway. The Lynn Lake project in Manitoba, where we plan on making a construction decision next year and the PDA project in Mexico, where we plan to release a mine plan in the second quarter. Slide 11 illustrates the impact that Magino will have on our production outlook. The addition of Magino will take annual gold production from just over 500,000 ounces currently to over 600,000 ounces per year post acquisition. Longer term, with development of the PDA and Lynn Lake, our growth potential increases to over 900,000 ounces. This is all underpinned by a portfolio of high-quality, long-life assets with average mine lives of over 15 years. Our costs are already well below the industry average, and we expect our low-cost production growth to drive further decreases over the next several years. One thing not highlighted in this slide is the additional upside potential at both Magino and Island Gold. Through an optimization and larger expansion of the centralized Magino mill, there's potential to expand mining rates at both operations, supporting further production upside. Slide 12 highlights the accretion we will see across some of our key operating metrics. Our production is expected to increase 25% on an absolute basis to 630,000 ounces. But more importantly, our production per share is increasing 18%. Similarly, our total reserves are increasing 22% to 13 million ounces or 16% on a per share basis. With the addition of a third producing mine in Canada, we maintain very favorable low political risk with nearly 90% of our net asset value base in Canada and just under 80% of our production over the next 3 years. Slide 14 illustrates the various synergies that we expect to realize from the transaction, which totaled $515 million over the life of both mines on a pretax basis or a net present value of $250 million on a discounted basis. Through the utilization of a centralized mill at Magino, the expansion of the mill at Island Gold will no longer be required. Combined with the use of the larger tailings facility at Magino for both operations, we expect this will result $140 million of capital savings over the life of the mine. A centralized mill will result in lower processing costs and lower consolidated G&A for the combined operation, resulting in annual savings of $25 million or $375 million over the life of the mine. With 3 operations in Canada in close proximity to each other, we will have an increased purchasing power for consumables. In addition, having recently completed construction, the Magino operation has a substantial amount of tax pools available that could be brought forward and used at Alamos' other Canadian assets. This is expected to defer any meaningful cash taxes payable in Canada by 3 years to 2028. Slide 15 demonstrates what is driving these synergies, the close proximity of the 2 operations. The 2 deposits are right beside each other, and the incremental haul distance from the Island Gold shaft to the Magino mill is only 2 kilometers. Combining these 2 assets and using a centralized mill is going to unlock tremendous ongoing value as we continue to find new mineral reserves and resources in the district. Slide 16 further demonstrates how close Island Gold and Magino deposits are and how large their combined mineral endowment is. The deposits are within 300 meters of each other, across a 4-kilometer strike and they contain combined mineral reserves and resources totaling 11.5 million ounces. This includes 6.1 million ounces of total reserve and resources at Island Gold and 5.4 million ounces at Magino with upside potential at both. Slide 17 illustrates our plan for incorporating the centralized mill and tailings facility at Magino. For the remainder of this year, we will continue to use our current mill to process Island Gold ore. Magino will continue to ramp up operations towards designed rates of 10,000 tonnes per day. Following the expected closing of the transaction in July, we will continue to ramp up an optimization of the mill with the target of reaching a throughput rate of 11,200 tonnes per day by year-end. This will be sufficient to handle ore from both Magino and Island Gold. From then on, the Island Gold mill will no longer be required, resulting in a significant decrease in processing costs for Island Gold ore. In 2025, we will work on further optimization in expanding the Magino mill in order to accommodate higher throughput rates from Island Gold once the Phase 3 expansion is completed in 2026, we expect to be able to expand the Magino mill to an operating rate of 12,400 tonnes per day to accommodate ore from both Magino and the expanded Island Gold at a modest capital cost. With the transition to the Magino mill, we will no longer need to expand the Island Gold tailings facility. With a permitted capacity of 150 million tonnes, the Magino tailings facility has more than sufficient capacity to accommodate Magino's reserves and Island Gold's growing reserve and resource base. Now looking at Slide 18. With a 20-year defined mine life at Island Gold, a 19-year mine life at Magino and a centralized mill with expansion potential, there is significant longer-term potential for higher production rates at both mines. Island Gold's impressive track record of reserve and resource growth continues, including having increased 1 million ounces beyond what was incorporated into the 2022 Phase 3 expansion study to now sit at 6.1 million ounces. With the deposit open laterally and at depth and new opportunities emerging in the hanging wall and footwall of the deposit, we expect that growth to continue. The shaft infrastructure being developed at Island Gold will have excess capacity that can support higher skipping rates. The Magino processing facility currently has a nameplate capacity of 10,000 tonnes per day. However, expansion scenarios to increase that capacity to between 15,000 and 20,000 tonnes per day are being evaluated. In addition, the operation is permitted for a processing rate as high as 35,000 tonnes per day. Slide 19 highlights the impressive growth of the Island Gold deposit and why we expect that to continue. When we completed the 2,000 tonne per day expansion study in 2020, Island Gold contained 3.7 million ounces of reserves and resources. By 2022, reserves and resources have increased by 40% to 5.1 million ounces, supporting the 2,400 tonne per day Phase 3 expansion study in 2022. Since the release of the 2022 study, reserves and resources have increased another 21% or 1 million ounces to now sit at 6.1 million ounces, supporting a mine life in excess of 20 years. There remains considerable opportunity for further growth. The main structure is opened laterally and at depth and there are numerous emerging opportunities in the hanging wall and footwall zones. Including mine depletion, to date, 7.5 million ounces have been discovered at Island Gold as it continues to establish itself as one of the highest grade and fastest growing deposits in the world. The acquisition of Magino not only gives us the infrastructure to accommodate that growth, but also opens up opportunities for expansion over the longer term. I'll now turn the call back to Richard to provide more detail on the key assets of this transaction.

Thank you, John. Turning to Slide 20. The Magino mine is located in Northern Ontario, approximately 40 kilometers northeast of Wawa, right beside the Island Gold mine. Magino is a large-scale open pit deposit, containing 2.4 million ounces of reserves and total reserves and resources of 5.4 million ounces. Construction of project commenced in early 2021 with first gold pour in June 2023 and commercial production declared in November of 2023. A feasibility study was released in early 2022 outlining a 10,000 tonne per day open pit mining and milling project with average annual production of 117,000 ounces over a 19-year mine line. The 10,000 tonne per day mill capacity was chosen to manage initial capital costs. However, studies are underway to evaluate an expansion of the process facility to between 15,000 and 20,000 tonnes per day. Moving to Slide 21. The ramp-up of the mine and mill have been slower than we anticipated. However, the issues are well understood. We are implementing changes to address these issues and we are seeing steady improvement. Mining rates have increased steadily through the year, and are approaching design rates. Our focus is now on improving grade control through a number of initiatives. This includes the implementation of high-precision mining, drilling and blasting practices, all designed to reduce dilution. We're already seeing the early benefits, and I have every confidence the improvements will continue. Over to Slide 22. Similar to our mining rates, our milling rates are improving and our challenges are well understood. The biggest challenge within the mill has been unscheduled maintenance downtime due to premature wear of poor quality components and consumables. These components are being replaced and the issues systematically addressed, which is expected to drive higher throughput rates over the coming quarters. During the fourth quarter, we demonstrated that mill is capable of achieving throughput rates well above nameplate capacity of 10,000 tonnes per day. Overall, the plan is complete, and the necessary work to improve equipment reliability and circuit optimization by midyear, enabling an increase in throughput by approximately 10% by the fourth quarter. We have solid plans in place for both our mining and our milling operations that are showing improvements. I'm confident these improvements will continue with Alamos, given their strong resources, deep and very capable team. I look forward to seeing Magino reach its full potential with Alamos and a significant value to be created through its integration with Island Gold. Over to Slide 23. Part of the potential will be through exploration upside. Magino already has a large established reserve of 2.4 million ounces, with another 3 million ounces of resources below the current reserve pit. There's excellent potential that reserves will grow extending an already long mine life of 19 years. An infill drill program focused on the conversion of some of those resources to reserves is well underway, and expected to be complete in June. I'll now turn the call back over to John for a look at the combined company.

Thanks, Richard. We are confident in the progress that the Argonaut team is making and that plan currently in place to complete the ramp-up of Magino will prove to be a success. Slide 24 highlights how the combined operation ranks in terms of Canadian mines. Post expansion, the Island Gold mine would rank as the sixth largest Canadian mine. Combined with the Magino, this will become not only the fourth largest but also one of the lowest cost and most profitable gold mines in Canada. This transaction is also increasing our overall ranking in terms of total Canadian production. We are firmly the third largest producer and, through the Phase 3 expansion and development of Lynn Lake, we have the capacity to double our rate of production in Canada to nearly 800,000 ounces per year over the next several years. Over to Slide 25. The acquisition of Magino fits well within our broader strategy of consolidating the underexplored Michipicoten Greenstone Belt. This started in 2017 with our acquisition of Richmont Mines, through which we acquired Island Gold along with an attractive 9,500 hectare land package with significant regional exploration potential. As our exploration success unfolded at Island Gold, in particular, to the East, we acquired Trillium Mining in 2020, expanding our land package to 15,000 hectares. In 2023, we more than tripled our land package to 55,000 hectares with our acquisition of Manitou. With our acquisition of Argonaut, we have 60,000 hectares, a long strike from Island Gold and Magino. In addition to 11.5 million ounces of reserves and resources contained within the Island Gold and Magino deposits, this land package includes many past producing mines across 100 kilometers strike length. I have no doubt that between Island Gold, Magino and significant regional potential, this district will be producing gold for decades to come. Now moving to Slide 29. In addition to consolidating the district, we've been active in acquiring and canceling royalties in our gold operation. This includes the repurchase of a 3% royalty in 2020 and a 10% NPI royalty in 2021. Given the ongoing growth of the deposit and the increase in gold prices, these acquisitions have significantly increased the value of the operation. I'll now turn it back to Richard to provide an overview of SpinCo.

Well, thank you, John. Over to Slide 30. As part of the transaction, Argonaut shareholders will retain exposure to Argonaut's U.S. and Mexican assets through a newly created junior gold producer with a strong balance sheet and significant upside. SpinCo will own 2 producing mines with expected production of over 100,000 ounces of gold in 2024. This includes the Florida Canyon mine in the United States and the San Agustin mine in Mexico. SpinCo will also own La Colorado, which has the potential to deliver meaningful value through a restart of the operation and the development stage Cerro de Gallo project, both in Mexico. Collectively, these assets carry a consensus analyst value of over $170 million, giving SpinCo an attractive valuation. Argonaut shareholders will own 80% of SpinCo, with Alamos owning the remaining 20% as part of a $10 million financing to be completed upon SpinCo going public. I'll now turn the call back over to John.

Great. Moving to Slide 31. M&A has been a key driver for Alamos in an area where we've been able to create significant value for shareholders. We've done this by staying disciplined and focusing on the long term. With all 3 of our producing mines, we paid a reasonable price and then, through expansions, optimizations and exploration success, we've created more valuable operations. Island Gold is an excellent example of this and our most recent success story. We acquired it for $600 million in 2017. It's now worth more than 3x that at $2.2 billion, and we expect the value will continue to grow given the magnitude of our ongoing exploration success. In total, we've created over $3 billion of value across our operating mines. We expect this track record to continue with the acquisition of Magino. Upon closing, we will work on completing the ramp-up of the operation, followed by optimization and expansion. Ultimately, we will create a complex that leverages both Island Gold and Magino, unlocking considerable value above what each asset will provide alone. Finally, Slide 32. In summary, we believe this is a good transaction for both Alamos and Argonaut shareholders. The combination of the 2 companies is going to create significant value for shareholders. Together, we are building a stronger company, one that is uniquely positioned as a leading Canadian intermediate gold producer, one with all the attributes needed to continue delivering peer-leading shareholder returns. That concludes our formal presentation. I'll now turn the call back to the operator to open the call for your questions.

[Operator Instructions] Our first question comes from Kerry Smith of Haywood Securities.

John, just a couple of questions on your plans for the pro forma balance sheet. I guess, with the hedging, I presume it will just continue to deliver into the hedges that Argonaut had. I know they're at, I think, [ 18.50 ] or something. And then the other question I have is what would your plans be on the debt that Argonaut was trying to refinance?

Kerry, this is Greg here. I will take that question. On the hedges, you're right, we'll keep that in place, deliver into those. We'll look at opportunities to restructure those over time. And with respect to the debt, we will pay off that debt, basically transfer it into our credit facility because the borrowing costs are significantly lower. And over time, we'll look to pay that off through our cash flows coming from the existing operations.

Okay. Great. And then maybe Luc has answer to this question. There had been great issues at Magino, what -- and cost issues as well relative to what they expected from the feasibility. So what was your assessment of the grade challenges and the cost challenges at the operation when you did your due diligence?

Yes. Kerry, I'd say from a grade perspective, based on our due diligence, certainly, I mean, it's like any mining operation as they start into the mining phase, there's some early challenges with regards to the grade control. But through our due diligence process, we had a good review with the management team and there's certainly on an action plan there to resolve some of the issues that they've had with regards to grade. Looking at the design with regards to their drilling and blasting patterns to get some less blast heat in that process so to avoid some of the dilution aspect from the blasting practices. So they've made some adjustments there to be able to correct that. They've implemented a fleet management system as well with regards to their equipment. So giving them better control on their dig lines, certainly for high grade, low grade and waste removal from the mining process. And so I think -- we certainly think they're on the right track and, over time, they're going to get much better control of that dilution. And certainly, under Alamos's control, we can bring some more value and some more expertise to that process to be able to control the dilution aspect. And then certainly on the cost aspect, the team maybe touched on a little bit with regards to John and certainly Richard's narrative. Some of the challenges that they've had with regards to availability of the plant and lower mining rates certainly have had some impact overall on their cost profile. But again, we're very confident that we're going to be able to get that under control and put it into the right direction. But certainly, the management team from Argonaut are on top of that and are certainly headed in the right direction to resolve those issues even currently.

And, Luc, what do you think their run rate would be on a steady-state basis for the mining -- or the milling cost per tonne in that plant?

Well, once you combine, I guess, both assets with regards to Island and Magino, I think our long-term run rate will be about $16 per [ ton ].

And is that U.S. or Canadian?

Canadian.

Canadian. Okay. Okay. And the last question I had was what -- what is your thought on the 2024 guidance that Magino had -- that Argonaut had given for Magino? I think it was 120,000 to 130,000 ounces in the cost guidance. Do you think that's a reasonable target? Or do you think that, that's something that you can achieve or that you might have to sort of revise at post closing?

Well, look, at this point, I mean, certainly, based on our review with our due diligence, we've reflected some -- certainly some improvements with regards to the mining fees moving forward. But we've also incorporate. [Audio Gap]

Once the deal closes, can you give me a rough idea?

Yes. I mean if you broke it down to the components on the equity basis, we're going to be issuing just over 20 million shares. So that's about, call it, USD 280 million. On the debt side, including their leases, it's about $325 million and then transaction costs would be anywhere from $15 million to $20 million. So we're talking just over $600 million in total deal costs with respect to this transaction for Alamos.

[Operator Instructions] Our next question comes from Matthew Murphy of Jefferies.