Aris Mining Corporation (ARIS) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Aris Mining Conference Call to discuss the acquisition of an additional 31% interest in the Soto Norte project. We will begin with a transaction overview from management followed by a question-and-answer session. Please view the accompanying deck located on the Aris website, which management will refer to during the call. As a reminder, the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Neil Woodyer, Chief Executive Officer. Please go ahead.

Thank you, operator, and good day to everybody, wherever you may be, and thank you very much for joining us at such short notice. But before I begin to discussing what I believe to be a very exciting announcement today, I'd like to draw your attention to the cautionary statements on Slide 2 as we will be making several forward-looking statements. Now on to our announcement today. A little over 2 years ago, Aris partnered with Mubadala by acquiring 20% to project Soto Norte. Under the original agreement, Aris became the operator of PSN with a mandate to develop a large-scale mine. Today, we announced a second agreement with Mubadala, whereby we acquired an additional 31% stake in project Soto Norte. We do this in exchange from issuing 15.75 million shares of Aris, which will make Mubadala approximately 9.9% shareholder. When we received the license approval, we will issue another 6 million shares, which will bring them up to 13% shareholder in Aris. The transaction closes in mid-June, and when it does, we will be the majority shareholder with 51%. And as such, Aris will manage the design, development and construction of the mine. Just some perspective, last year, Aris produced 225,000 ounces from our 2 Colombian mines, Segovia and Marmato, and we're currently investing approximately $300 million to double the production of these 2 mines. We employ 3,500 people directly and another 3,000 through our contract mining partners. Our management team has been together for over 10 years, initially operating in 5 West African countries and subsequently in Brazil and Mexico. Over the last 2 years, our operatorship of PSN, we've deployed our mining and Colombian experience. And we've also learned a lot about the project social and environmental complexities. But I think it's so important to understand the significance of the project as defined by the 2022 Feasibility Study that we published. Potentially, it is one of the largest underground mines in Latin America, 5 million ounces of mineral reserves is 6.2 grams, 7,200 per day of processing plant, average annual production of 450,000 ounces over 11 years, and a low all-in sustaining cost of $471. However, the last couple of years, we view the project through a mining company lens, obviously, as we should do, rather than through a finance lens as in the past. We've looked how to optimize the project to reduce environmental, construction and operating risks and how best to integrate it into the communities and their mining history. Our conclusion here is that the large-scale project does not make mining or business sense. It's just too ambitious. It doesn't adequately consider the complexity of Soto Norte in Santander. So we now reframe the project to a smaller, more efficient and longer mine life project. The key changes include building a smaller processing plant with a longer operating life, adopting a flexible mining approach to target high-grade material early in the mine life and installing a paste backfill plant to minimize surface tailings storage requirements. The advised plan also eliminates the need for a 7-kilometer tunnel and a tunnel boring machine. Many of these changes significantly reduced the project's environmental impact. We will also integrate our successful Segovia small mining model into the project. And now our partners, Mubadala, agree that this is the right approach. And we're both sure that the new approach will yield optimal results and build the best mine in the area. We'll be able to leverage our successes at Segovia and Marmato to the benefit of Soto Norte project and also to the PSN team. I'm very pleased with the transaction announced today and the decision to build a smaller mine. And the transaction today gives us majority control before we start to develop a small mine. By integrating the project Soto Norte team and the Aris team, we'll be able to focus reference to achieve synergies, streamline our procedures and ensure that best team drives the project forward. We'll continue to work on refining a new development plan for the project. In doing so, we'll implement best mining industry practice. We'll continue to reduce environmental impact and bring benefits for the Soto Norte community. And as I said, at the same time, our model will support formalization in the region. We're ready to start the PFS now as well as fine-tune the environmental submissions, so we can be ready by early 2025 to submit a new EIA to the environmental authority. We're convinced that the formula for success includes rescaling the project, reducing the environmental focus and working closely with the communities and small miners. I'd like to close my introductory remarks by walking Mubadala as a significant shareholder in Aris, and we look forward to continued partnership to divert this very attractive project. And now I'd like to hand over to Oliver, who has recently joined as a Senior Vice President of Capital Markets, to share further details about the transaction.

Thank you, Neil. Starting on Slide 4, I'd like to add to what Neil has told you by highlighting the following. One, we're securing control of the Tier 1 gold asset and we're doing that at improved terms and an attractive valuation. We're acquiring an additional 31% interest in the project for 2 tranches of Aris Mining shares with an aggregate value of USD 90 million, $65 million at closing and $25 million contingent on receipt of an environmental license, replacing the previous option agreement to soon to which we would have had to pay $300 million in cash for a 30% interest. To this transaction, we are gaining 2.6 million ounces of indicated and 1.1 million ounces of inferred resources on an attributable basis as well as majority control of the project at a combined acquisition cost of $24 per attributable ounce, which compares favorably to other recent transactions in the sector. Also importantly, with a 51% controlling interest, as Neil mentioned, we will integrate the Soto Norte development team into our management structure and procedures, enhancing operational efficiencies and creating synergies. And we believe that this transaction will remove any possible overhang associated with the previous $300 million option and any potential financing needed. Finally, we're convinced that our operating model, which is based on a collaborative partnership approach with contract mining partners will enable us to unlock Soto Norte and we're committed to incorporating processing solutions for contract mining partners into the design and development of Soto Norte following the successful partnership model we have developed at our Segovia operations. As stated on Slide 5, this transaction increases our focus on Colombia, and we're excited about that prospect. Colombia is rich in high-grade gold deposits and remains underexplored compared to Indian countries such as Chile and Peru. We are at the vanguard of an emerging gold industry in Colombia while pioneering an operating model that enables us to operate successfully in the country, taking into account its century's old legacy of artisanal mining. Moving on to Slide 6 of our presentation. This transaction furthers our repositioning within our peer group, increasing our measured and indicated resources from previously 17.5 million ounces to 20.1 million ounces and our inferred resources from 8 million ounces to 9.1 million ounces upon transaction close. What this transaction doesn't change, though, is our focus on delivering our transformational organic growth projects at Segovia and Marmato, which will increase our production from 226,000 ounces last year to an annual production rate of 500,000 ounces, which we expect to achieve by the second half of 2026. On Slides 7 and 8, we have outlined our new smaller scale development plan for Soto Norte. As Neil mentioned, key changes compared to the Feasibility Study include one, reducing the environmental footprint; two, building a smaller processing plant with a longer operating life. 2,750 tonnes per day of processing plant capacity instead of 7,200 tonnes per day, which is a reduction of about 60%; three, adopting a flexible mining method to target higher-grade material earlier in the mine life, which can be quickly accessed from an existing portal; four, installing a paste backfill plant to minimize surface tailing storage requirements. Paste backfill will only be used in the second stage of mining, though, when the support pillars will get systematically extracted and hence, CapEx for the paste backfill plant will be deferred. It's also important to highlight that our new development plan envisions replacing a 6.9 kilometers long tunnel, which was to be created by way of a tunnel boring machine with aerial roadway to move mill feed from the existing portal to the processing plant and tailings back to the paste backfill plant. Roadway technology is currently in use in Colombia, requires minimal land use and is easily removed at the end of the mine. It also accelerates construction time lines and reduces capital cost. As Neil has mentioned, we are commissioning a new prefeasibility study and NI 43-101 compliant technical report for the scale-down concept to be completed in early 2025, and we're looking forward to providing a comprehensive update on Soto Norte done. On Slide 9, we are providing further details on the transaction, namely: one, the 7 -- sorry, the 15.75 million shares that we will issue to Mubadala will be subject to a 12-month hold period. Two, the current market value of the 21.75 million shares. This includes the 6 million shares to be issued to Mubadala upon receiving an environmental license for Soto Norte is $90 million, implying $24 per attributable ounce. Third, Aris Mining and Mubadala have mutual rights of first offer should a partner choose to exit the JV; fourth, as a result of us integrating the Soto Norte development team into our management structure and procedures, Aris Mining will sole fund certain operating costs on behalf of the joint venture during the prelicensing period, including the pre-feasibility study. However, nonoperating and project construction costs will be funded on a pro-rata ownership basis. Fifth, closing of the transaction is expected to occur in June 2024, following satisfaction of customer closing conditions, including execution of definitive documentation related to the issuance of the shares and approval of the Toronto Stock Exchange and the NYSE American. To conclude our prepared remarks, I'd like to summarize our key investment considerations. We have 2 operating mines undergoing transformational organic growth, which will double our production rate by the second half of 2026. We have a high-grade resource base which we have further enhanced through this transaction. We have generated and remain committed to generating value through the drill bit with an extensive exploration program at Segovia. With Soto Norte and Toroparu, we have 2 projects that we control for long-term growth. And all of this is underpinned by strong liquidity, ongoing cash generation from Segovia and the management team with a track record of success, having built several gold mining companies over the past decade. With that, I will hand it back to the operator to kick off the question-and-answer session.

[Operator Instructions] Our first question is from Carey MacRury with Canaccord Genuity.

Congrats on the announcement. Just a question on grade. When you talk about pulling higher grade forward, is there any indication that you can give us on what that potentially looks like? I guess, relative to the existing reserve grade?

Richard, can you handle that one?

Yes, I'll take and handle that one. Yes, the original resource reserve grade was closer to 6 grams a tonne. Of course, we knew mining as a smaller mine, you can afford to high-grade it. We're looking at any numbers from upwards from 9 grams a tonne and probably even higher in earlier years. However, these numbers will be confirmed once we do the mining design and schedule from the PFS, then we'll have a far better idea of what has happened. So initially, we did some work on our technical economic study. And yes, we saw some of the numbers like that, but really, we're waiting to confirm from the PFS.

And then just on the reserve model, like in the reserve grade 6 brands. How sensitive is that to cut-off grades? I guess what I'm asking is, with the new conceptual plan here, should we expect a similar reserve grade at the end of the day?

I think the reserve -- I think you'll probably see that the reserve grade will definitely go north of that number in the longer term here.

Sorry, can you say that again?

It will go -- it will be above the 6 grams a tonne in the new mining plan, but we're waiting for the PFS to confirm it.

Okay. Great. And last question for me. You're targeting a PFS in Q1. Would then you go to FS and then permitting? Or what does the sort of high-level timeline look like?

I've been looking for a bankable pre-feasibility study.

Okay. So you can go in, in the permitting potentially and then that would take what, 2 years or something potential?

That's probably around 18 months.

The next question is from Don DeMarco with National Bank Financial.

First question, the prior arrangement that you had with Mubadala provided for a purchase of additional 30% for $300 million. So we see this very attractive acquisition cost this morning. Can you explain some of the factors that contribute to the delta? Of course, we're awaiting this streamlined study, but what other factors might explain that delta?

I think one of the issues was that we've got very close to Mubadala over the period of time, and they've got a higher degree of confidence in this. And I think the fact that we really wrapped Aris' arms around the project and refocus the whole effort, they could see that the best way to support it was to go forward with us. And we have a limited capacity, financial capacity. So it's a question of this is the best way forward.

Okay. Okay. That's great. It's -- so then building on the -- Carey's questions on next steps. There'll be permitting, potentially construction first. Do you have a kind of a blue sky time frame for first quarter? And also, if we could dive into the permitting a little bit more in terms of what some of the key issues might be, of course, we understand that promo is not far, but if you could just talk about mitigating aspects or other concerns with respect to permitting and the potential first port timeline?

[ Alejandro ], do you take that one?

Of course. So maybe recapping a little bit on what the other parties have been stating. We expect that the new PFS study should be finished by early 2025, which means that we will follow up with a submission to the environmental regulator of our EIA and environmental licensing process. This licensing process is estimated more or less at 18 months, which includes the public hearings according to Escazu principles. And then after that, a construction decision will be made by the JV partners with construction estimated to start in early 2027. This timing is very suitable for Aris because we are currently finishing up the expansion of the Segovia in early 2025. And of course, the Marmato lower mine in late 2025, which these 2 compounded, hits an annual rate production of 500,000 by second half of 2026, and then our team can fully focus on the Soto Norte project.

Yes. Okay. So that really dovetails nicely. And then going back to the permitting, what are some of the key issues with respect to the permitting that you anticipate?

We've been building a lot of information around the permitting process, not only the lessons learned from the prior submission that the prior operator did, but also the other activities that have been coming around Colombia. We also are compounding our expertise that we got from the Marmato lower mine licensing process. And we believe that the main issues are how water is going to be managed. And part of the message that has been very well conveyed is that industrial partners, industrial miners, partnered up with the small industrial miners is actually a very good solution to the environmental issue brought by illegal or informal mining in the area. So that's what are the issues that is being addressed, and this is actually being conveyed as one of the solutions to the environmental issues in the year. Secondly is the stakeholder engagement in the area. When we received the project in maybe early 2022, we did a baseline survey where more or less 60% of the population was against the project. Our latest review of the project and survey that we did in December 2023 actually scaled that number down to only 10% disapproval rating, with a 24% advocate rate as well. So we actually have community and miners on-board with the project, very excited about it, including the new regional and local leaders in Santander and in the Soto Norte area. And thirdly, and this is something that we've been developing very closely, is the hydrogeological models, which is something that the environmental authority is very interested in analyzing. And we believe we have the necessary information to correctly convey what the true impacts are and how this project actually serves as a solution from an environmental and social site to the illegal and informal mining in the Soto Norte area.

And can I just add a point, Alejandro's numbers on the social acceptability of the project were relating to the large mine. We expect a totally different situation with the small line.

Okay. Okay. Neil congratulations on securing a larger piece of this Tier 1 gold copper asset.

The next question is from Kerry Smith with Haywood Securities.

Just so unclear, Alejandro, on this stakeholder engagement survey that you did. The first one was done when you took -- when you acquired your interest in March of 2022, and the second -- and that 6% were against the project. And in December of this past year, you did the same survey and 10% were opposed. I'm just curious, how large those surveys might have been? Like how many people would have been pulled in those 2 studies?

Just to clarify, the disapproval rating when we received the project was at 60% and now it got reduced to 10%. The total Soto Norte population of our area of influence of the project is more or less 4,000 people. The survey, the last survey conducted was done with 1,300 people in the area. So it is a sizable portion that represents the general feeling of the area currently.

Okay. Okay. That's helpful. And that area of influence, if you want to call it, the 4,000 people, is that the area of influence that the government would recognize as being a reasonable area to consider in terms of seeing what the stakeholder engagement is? Or would they want you to use a bigger area?

Currently, the area that we have been discussing with the environmental authority includes the 4,000 people in the Soto Norte area, which is 3 municipalities: California, Matanza, and Surata and additionally, we are also considering the inclusion of 3 other municipalities, which are Tona, Vetas and Charta. All of this in the aggregate amount account for more or less 9,500 people in total. The environmental regulator feels that the footprint that is currently envisioned does address the local impacts in the areas where we would be operating.

Okay. And do you think the consensus in the broader 9,500 population area would be similar to the consensus that you got from the 1,300 people that you serve, and I guess that's the expectation?

Absolutely. And this asset has something very particular that is also something that is widely seen in Segovia and Marmato. These are mining districts, contrary to other areas in Colombia that are -- do not have a mining tradition. Soto Norte has been doing mining on an informal basis for perhaps more than 200 years. So we're dealing with the stakeholders that is very understanding of what the mining process is and what the advantages of having an industrial player partner up with them in the areas actually represents, that will show builds upon the experience that we've had in Segovia and Marmato, which has proved to us a very good advocate base from the communities locally supporting the projects that we've been developing. So we believe that those other municipalities that are included are well on track because they're part of the mining district and they understand the complexities of operating in these areas.

Right. Okay. That's great. And what would the rough number of artisanal miners be today in that area?

Currently, the latest survey that we have is approximately 600 miners within the project area, of which 160, we have already started a formalization process under the name Calimineros, these are 160 miners that are currently developing their formalization process with the regulator here in Colombia and partner up with ourselves. So at this point, we are roughly 160 out of those 600 in due course and discussing with them. There's a very ample opportunity to address those other 440 relatively quickly, building upon the good experience that we've had with Calimineros.

Right. Okay. Okay. Great. And just a question on the structure of the joint venture. You mentioned that there are certain costs that Aris would fund on a 100% basis until you get the environmental approval. What might the number, that dollar amount be?

I think over the next 3 years, it's about $23 million in total more this year because of the studies. So after this year, the studies are finished, it significantly reduces. It's that all, just over $20 million.

Okay. Okay. And that's your sole funding obligation as well?

Capital funding or anything like that will be split on a pro-rata basis, but this is the operation operational funding of the studies and the environmental work and social work we have to do.

Right, right. Okay. And you...