Andean Precious Metals Corp. (APM) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the Andean Precious Metals webcast to discuss the company's acquisition of Golden Queen Mining. [Operator Instructions] The conference is being recorded. [Operator Instructions] Your host for today is Trish Moran, Andean's Vice President of Investor Relations. Ms. Moran, please go ahead.

Thank you, and good morning, everyone. Thank you for joining us to discuss today's announcement. Before we get started, I'd like to ask everyone to view Slides 2 through 4 of our acquisition presentation, which is available on our website andeanpm.com, to view our cautionary language regarding forward-looking statements and other important disclaimers. In particular, I'd like to point out the language around historical mineral reserves and resources on Slide 5. It highlights the fact that Golden Queens reserves and resources must be referred to by Andean as historical because the reserve and resource estimate predate the acquisition. Our press release is also available on our website as well as on SEDAR+. With us on today's webcast and conference call is Alberto Morales, Andean's Executive Chairman and CEO; Juan Carlos Sandoval, our CFO; and Segun Odunuga, our EVP, Finance. Following management's formal remarks, we will then open the call for questions. And now over to Alberto.

Thank you, Trish, and welcome, everyone. Since we [indiscernible] management in November of last year, we expressed to the market our priority to focus on transformational growth through acquisitions. Today, we are pleased to address you with this morning's announcement regarding the closing of our first M&A transaction, the acquisition of Golden Queen. It is an excellent fit for us. Located in Kern County, California, Golden Queen is a well-established open pit heap leach facility and has an operation -- been in operation since 2016. We are very excited about this acquisition and believe it will provide a solid platform for further growth in the United States. For the shareholders of Andean, this is an outstanding opportunity to add another high-quality producing assets to Andean's portfolio and to create a multi-jurisdictional precious metals producer with diversified production exposure to both gold and silver and cash flow generation. Out of the gate, Golden Queen gives us a turnkey-producing asset with historic mineral reserves of 670,000 ounces of gold and 9.4 million ounces of silver with plenty of opportunities for upside. Firstly, by growing the reserves and resource base; secondly, by increasing production, lowering cost and improving cash flow through mine optimization, [ block model ] improvement and all process control and production efficiency. And third, through exploration drilling around the pits within Golden Queens properties. We believe the Golden Green acquisition is a game changer for Andean and sets us on track to reach our mid-tier producer ambition. Turning to Slide 8, through the Golden Queen acquisition, we have secured Soledad Mountain Mine, a producing mine in the United States. Kern County is supportive of Golden Queen which is one of the largest employers in the area. In fact, the County has agreed to allow Golden Queen to defer certain mine reclamation until 2061. Since its first gold production in 2016, Soledad Mountain has provided its owners with consistent predictable production and operating performance, producing more than 340,000 ounces of gold and approximately 3.5 million ounces of silver. The mine comes with a strong management team that recently oversold more than 23 million in mine infrastructure upgrades. The upgrades are expected to reduce future CapEx needs and help sustainably lower cost and improved production operating efficiency and cash flow. Through extensive due diligence and strategic reviews undertaken by Andean and independent advisers, we see potential for further performance gains in the near term. In short, we will be a larger, stronger and more diversified precious metals producer. Turning now to Slide 9. Let's get into business and go through the details of the transaction. We were able to acquire Golden Queen on attractive terms that has allowed us to maintain a strong balance sheet with adequate liquidity. This will allow us to fund our growth strategy. Under the purchase agreement, Andean paid $5 million in cash plus some net working capital adjustment at closing and will pay $10 million in cash or shares at our discretion in 2 tranches of 12 months and 22 months from closing. In addition to these payments and as part of the purchase agreement, Golden Queen has retained a $50 million mainstream priority loan with CommerceWest Bank of California. Commensurate with closing, Andean cost Golden Queen to make the first principal payment owed to the bank totaling $7.5 million plus $200,000 in interest. The remaining $43.9 million in outstanding principal plus accrued interest will be paid back over the next 2 years. Under the deal structure and payment terms, Andean adds a producing mine with upside potential and maintains liquid assets in the range of $81 million for further growth. Turning to Slide 10. The Golden Queen transaction advances Andean towards our goal of becoming a multi-jurisdiction of mid-tier precious metal producers in the Americas. We now have foundations to grow from in both North and South America as well as a diversified asset base of gold and silver production. We now have operations, development and exploration expertise in the United States and in South America enabling us to identify and act on future opportunities in these exceptional precious metal jurisdictions. With most of our liquid assets still available, use of available reserves and to producing assets driving cash flow, we are in a much stronger position. And now over to Juan Carlos.

Thank you, Alberto. Turning to Slide 12. Golden Queen has operated Soledad Mountain gold and silver mine in Kern County, California for about 8 years. It is a conventional open pit heap leach operation that has been a model of consistency over the years. The mine is conveniently located between Los Angeles and Las Vegas and is easily reached [indiscernible] and well-traveled roads. Soledad Mountain is connected to the electrical grid while wells and a water treatment plant are on site. The mine has run 250 workers and is close to the town of Mojave. Soledad Mountain is exactly what we were looking for in terms of a turnkey mining opportunity with upside potential. It is well positioned to benefit from a new mine plan and an improved production and cost profile. Turning to Slide 13. The Soledad Mountain mine utilizes conventional open-pit mining methods, cyanide heap leach and Merrill Crowe processes to recover gold and silver from cross agglomerated ore. The mine processes approximately 4 million short tons of ore per year. Soledad Mountain's equipment and facilities are generally in good condition. And the mine has recently received approximately $23 million in infrastructure upgrades including a Stage 3 heap leach pad and mine and processing equipment, which are expected to positively impact mine and cost performance. Because the mine is relatively new and improvements were made as recently as 2021, 2022, capital expenditures are expected to be minimal in coming years. Turning to Slide 14. It is important to note that Golden Queens mineral resource and reserve base included here on this slide does not tell the entire story as they must be considered historical at this time. However, Andean has retained independent consultants to evaluate and provide an updated NI 43-101 compliant mineral resource and reserve estimates for Soledad Mountain within 45 days. As we have indicated, we also plan to announce an updated mineral reserve and resource estimate for our San Bartolome mine in Bolivia. For the first time, that estimate will include fines disposal facility savings and contracted high-grade offsite material from other mines. As such, we expect this slide to look somewhat different in the next time we showed. Turning to Slide 15. The acquisition of Golden Queen strengthens our capability as a diversified precious metals producer, significantly increasing our anticipated silver equivalent production in the coming years. San Bartolome has been operating continuously since 2008, producing an average of 5 million ounces of silver equivalent per year. While Golden Queen's average annual silver equivalent production for the last 4 years has been nearly 4.7 million ounces or around 50,000 ounces gold equivalent ounces. And based on historical 2P, we serve estimates of Soledad Mountain, Andean is targeting to maintain steady-state annual production until at least 2028. Turning to Slide 16. Soledad Mountain production and performance has been consistent in recent years. However, our due diligence and review of independent technical advisory reports indicate strong potential to create value and drive cash flow through mine optimization and efficiencies with minimal cash investment. We have seen opportunities that will bring synergies and cost savings through the reduction of overhaul and maintenance cost through new truck being purchased, renegotiation of certain contracts, consolidation of our insurance programs that will save us between 10% to 20% in premiums and other general and administration costs. These measures will piggyback on $23 million on recent infrastructure investments and current cost improvements to drive meaningful change in the mine's performance. We look forward to undertaking this work and recognizing the benefits. Turning to Slide 17. We are very excited about the potential to expand the Soledad Mountain project through exploration and adding ounces to mineral resources and reserves. We have identified potential opportunities through near-mine and delineation exploration to highlight productive zone and extend mine line. The epithermal mineral system at Soledad Mountain consists of a cluster of Northwest trending banks and bank [indiscernible] with proven gold mineralization from near surface to that [indiscernible] been favorable for new discoveries. Of the media interest there is the potential to upgrade the project's inferred mineral resources. In addition, the potential for discovery of new mineralized structure to the East and West of the main deposit will be examined and prioritized by Andean, stay tuned for that. On Slide 18. We have talked about the attractive terms of the Golden Queen acquisition. To further underscore that point, the acquisition was completed at well below half of the junior gold producers current median multiples for both production and 2P reserves. This indicates room for value creation based on prospective profitability jurisdictional and commodity diversification and no immediate shareholder dilution, if at all among other factors. Turning to Slide 19. We see an obvious disparity in our value relative to our peer group. This slide highlights how we can move up relative to the peer group post-acquisition with a potential re-rate. Factors that support a re-rate include alleviation of the single asset risk, increased production, increased mineral reserve and resource base, diversification of geopolitical risk and the significant increase of gold exposure. All of this had a very attractive purchase price while maintaining at all times, a strong balance sheet with ample liquidity. Turning to Slide 20. Today, post-acquisition close and after paying only $5 million in initial considerations and net working capital adjustments, our liquid asset position remains strong. The number of outstanding shares remains the same. There was no dilution -- there was no short-term equity dilution. Golden Queen will maintain a very manageable level of debt, $43.9 million to be repaid over the next 2 years. This means that the majority of our $81 million in liquid assets remains available to us while we regularly pay down debt from our ongoing cash flow. This [indiscernible] to undertake further accretive M&A activity in the near term, a win-win for our shareholders. Now turning to Slide 21. Based on audited financial statements of Golden Queen as at December 31, 2022, the Golden Queen acquisition has added $133.4 million in net assets to Andean's proforma balance sheet. The significant increase to our net assets provides further support for a re-rate, which we expect will ultimately benefit Andean when required to make the deferred purchase price payment. With that, back over to Alberto.

Thank you, Juan Carlos. Turning now to Slide 23. Golden Queen ticks all the boxes that we were looking for. We preserve our strong cash balance, ensuring that we are in a position to conduct further growth through M&A and invest in our current projects. We significantly increased our gold and silver equivalent production in the U.S. and Bolivia with near-term growth catalysts on the horizon for both projects. We are now a multi-asset producer with a growth platform located in the United States in an unparalleled Tier 1 jurisdiction. We now believe to offer a compelling rationale for a share re-rate based on our diversified and improved production profile, reduced jurisdictional risk and increased asset value. Turning to Slide 24. Recently, we shared our old ambition to become a mid-tier precious metal producer in multinational jurisdictions. The Golden Queen acquisition is an important milestone in that direction, and we continue to build from strength. We have proven teams on both sides of the equator that have identified and acted on opportunities to create value for shareholders. We now have producing assets with significant upside in 2 jurisdictions well-known for centuries of leadership in precious metals production. We have a strong expectation of operational enhancements and extended production in both mines. Under current market conditions, Golden Queen clearly stood out as the best-suited opportunity for Andean initial expansion. In closing, we are incredibly excited about the Golden Green acquisition, and we are thrilled to introduce it to our shareholders today. We have now given you a lot of information to digest in a short period of time. So let's open up the line for questions. Operator?

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from John Egilo from Desjardins.

A couple of questions for me. You mentioned optimization efforts on the cost side. Can you give us a sense of what Soledad's cost base looks like right now? broadly, I guess, their cost per ounce to give us a platform to judge improvements from.

John, as we mentioned, we've been seeing some driven gross improvement with Golden Queen acquisition. In the last 6 months, with respect to cost averaging between 1400, 1500, 1600, not be specific about it, and we see some improvement going forward also too. With respect to the optimization, we are looking at improvement on the working model and also on the [indiscernible] get better understanding about the [indiscernible] of demand. And all this, we believe that will give us some more efficiency in [indiscernible] we put on the stock on the [indiscernible] part. All this really turn out to be very, very profitable to us in the long run.

And just a follow-up to that. You mentioned ore control improvements. Is the current mine, I guess, struggling to feed planned grade from dilution or I guess, is there any problem with ore control going on right now that is inhibiting the mine from reaching planned grades?

The last 8 months has been very challenging technically for the mine. And from what have been identified by our technical advice of the consultant that we had due diligence. In that control, we give better dilution and also [indiscernible] from the pitch. So right now, that is what we will be focusing on in the near term that we have on the -- especially on the understanding -- better understanding of where the -- all materials are. That will also bring some improvement [indiscernible].

And do you guys view the asset as kind of a 50,000-ounce-per-year mine moving forward? Or is there an annual production target that you want to get to?

Okay. Right now, we have seen some improvement in the -- with respect to production. And going forward, we believe that our steady state will be between 50,000 to 55,000 ounces.

[Operator Instructions] This concludes the question-and-answer session. I'd like to turn the conference back over to Alberto Morales for closing remarks.

Well, thank you, everyone. Before we go, I'd like to welcome the Golden Queen Soledad Mining team to the Andean family. They developed and brought Soledad Mountain into production and help set it up for long-term success. We appreciate the expertise and passion for mining that they bring to work every day. We look forward to working with our new team members to advance and enhance the operations for the benefit of all of us. Next, I would like to thank the entire Andean leadership team. Over the past few months, they have worked hard and efficiently to land a foundational acquisition that sets up for further success. We analyzed many different acquisition opportunities and believe we have selected the best one, at least for now, and we believe there will be more to come. Thanks to everyone for joining us on today's call. As always, if you have any further questions, please do not hesitate to reach out to us by e-mail at [email protected]. Thank you very much, and have a great day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.