Cerrado Gold Inc. (ASND) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the Cerrado Gold acquisition of Ascendant Resources Management Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mike McAllister, Vice President, Investor Relations with Cerrado Gold. Please go ahead.

Thank you, operator. Good morning, everyone. Thank you for joining us. I'd like to note that this call may contain forward-looking information that is based on the company's current expectations, estimates and beliefs. Please review the Slide 2, in today's presentation and as well as the forward-looking information, which is in the company's annual information form, which is publicly available on SEDAR+ at the company's website. The accompanying presentation for today's call is available for download from the homepage of the company's website at www.cerradogold.com. Today's press release is also posted on our website and on SEDAR+. Please note that all dollar amounts mentioned today that are in U.S. dollars unless otherwise noted. Following management's presentation, as the operator has mentioned, there will be a Q&A period. Joining us today on the call are Mark Brennan, CEO and Chairman; Clifford Hale-Sanders, our President; Andrew Croal, Chief Technical Officer; Carl Calandra, Vice President, Legal Counsel; and David Ball, our Vice President, Corporate Development. As well joining us today is Joao Barros, the President of Ascendant Resources. With that, I'd now like to turn the call over to Mark Brennan to take us through the presentation.

Thanks, Mike, and good morning, ladies and gentlemen. I'd like to thank you for joining our call today. As Michael mentioned, we're going to be working largely from a presentation that's available on our website, cerradogold.com. So please take a look at that. I'll start by mentioning that Cerrado Gold has spent the last 6 months, 9 months, strengthening its balance sheet, getting its operations keyed, looking at driving strong value in terms of generating good cash flow out of Argentina, out of our MDN operation in Argentina. And again, reducing our debt on the balance sheet and making sure that we're now in a strong financial and operational position. With regard to our acquisition of Ascendant, we've been thinking long and hard about this acquisition. We love the asset. We've known the asset extremely well for the past 4 to 5 years. And frankly, it was the desire of Ascendant to remain independent and for us to have Ascendant as an independent entity as well. That said, the crux of the issue with respect to Ascendant was that it was doing great things. I'll refer you to a press release that we issued on December 11, that Ascendant issued on December 11, where this asset has been moving substantially forward with really good results from metallurgy, from optimizations, from drilling as well as from the development of pushing the asset forward on permitting as well. This asset is now coming to a point where it will be construction ready by the end of the year. We're currently working on the metallurgy, doing an additional round of metallurgical testing, where we see tremendous potential to improve the economics from the existing feasibility study that was completed in July of 2023. And I'll run through the terms of the agreement, and then I'll go through the rationale for our acquisition. As part of the transaction, each Ascendant shareholder will receive one share of -- for every 1 share of Cerrado, they'll receive -- for every 1 share of Cerrado, Ascendant shareholders well -- sorry, for every 1 share of Ascendant -- for every 1 share of Cerrado, there'll be 7.8 shares exchanged for Ascendant. So if you hold 7.8 shares, you'll get one share of Cerrado. This implies for the Ascendant shareholders a 22% premium over the 6% share price as of using the 30-day VWAP on June 30. It implies a 14% premium using the comparable VWAPs for Ascendant and Cerrado shares. The arrangement will result in Ascendant shareholders owning 21% of Cerrado with existing Cerrado shareholders owning 79%. We are looking to issue just over 27 million shares to have the shares -- basic shares in outstanding of 131 million shares. As you can see, with respect to our project NAVs, with respect to Lagoa Salgada, this asset on our feasibility study on July '23, had a net present value of $147 million within IRR of 39%. I'll run through now the rationale for the acquisition. Cerrado will be buying 80% of the Lagoa Salgada project with the acquisition of Ascendant. Again, this project had a post-tax NPV of $147 million and a 39% IRR. It also is a very, very low-cost producer of zinc equivalent. This is a polymetallic project that was comprised of 34% silver and gold, 30% zinc, 15% copper and 7% zinc (sic) [ tin ]. So we're looking at it as an asset that we're looking to improve our exposure to gold and silver as well as looking to improve looking at building a copper exposure and other critical metals. The project is targeted to receive its environmental impact assessment approval sometime in Q2. And we expect to complete an optimized feasibility study in Q3 sometime during the summer, sometime in July. Looking at the press release of December 11, it was highlighted that the optimization of this feasibility study, we look to see significant improvement from what was issued in the feasibility study of July '23. Following that, we expect a construction decision in Q4 of '25, moving to production in the second half of 2027. Important here is that we have a very strong supported construction funding with the U.K. export credit agency and Santander Bank looking to provide 70% of the required capital for the project. The project currently has CapEx of $164 million based on the optimized feasibility study, we expect that number to come down by 10% to 20%. And then on top of that, we also see very strong support in terms of the ability to gain a stream and likewise support from off-takers. Our expectation is that we anticipate a very limited equity capital for a project of this size to come to production, to bring it to a construction decision. Again, we're looking at less than $5 million to bring this project to a construction decision and limited equity thereafter to bring this project online. Cerrado has been working for the last 6 to 9 months to improve its balance sheet. We have a very strong balance sheet currently, cash of $21 million. We expect that even with expenditures on Lagoa, on our Quebec asset, to bring the Quebec asset to a feasibility by year-end -- or sorry, Q1 of '26. We remain -- we expect that we will see our cash position flat at north of $20 million, even adding additional reduction in debt. So again, we feel very strongly that the company is in a very good position to make this acquisition. And we do not anticipate that this acquisition will hinder the financial strength or operational strength of the company. Looking forward, what we see with respect to this asset is this asset fits very nicely in terms of our cash flow generation currently at MDM, and our expected production construction -- construction production of our Quebec asset, the Mont Sorcier asset in Quebec. What we see is an ability to continue to generate strong cash flows out of Argentina. We currently have a 4-year mine life based on a PEA that was published in the summer of '24. The numbers are actually published in December report. What we're contemplating is 4 years of $25 million of free cash flow, $50 million of cash flow at $2,100 gold. At $2,450 gold, we're looking at about $29 million of free cash flow. So we feel we have the wherewithal to drive our development strategy forward. Obviously, as people are aware, we were in a position that we had to sell our Monte do Carmo asset. That asset was a first-class asset. And I think it will become probably Hochschild's cornerstone asset. However, we feel that Lagoa Salgada has the ability to replace Monte do Carmo in terms of its financial strength and potential. The asset itself, I'll go into in a few minutes, but we believe that this asset has been underexplored. And starting with its production profile that we are anticipating now should generate somewhere in the region of $75 million a year for the first 5 years of production, at the lowest cost quartile of under $0.59 per pound of zinc. So with zinc trading at $1.25 currently, we have a project that we're looking at that will have 50%-plus margins. And that's a very, very strong asset to have, particularly when it's in its early infancy. If we look at the combined company on a pro forma basis, we will be adding approximately 34% of precious metals from Lagoa. So the total combined entity will have precious metals of 62% with critical metals at 38%. It will continue to drive our production and cash flows from MDN. It's a natural extension of growing the business. And again, combined, we see potential cash flows in excess of $150 million. This will lead to our development of the Mont Sorcier project. In 2024, we made tremendous advancements on the metallurgical and processing side. And basically, where we sit today is we have a project that is now a high purity, high-grade iron ore project, which can sell project into the very important direct reduction, induction furnace market. This product sells at a substantial premium to the existing metrics in the market today that you see with the 62% quotation. So we expect that going forward, based on the previous PEA that we published Mont Sorcier, that asset has the ability to generate $350 million of cash flow, $250 million of free cash flow over a 21-year period. We expect to complete a feasibility study by the end of Q1 of '26. We expect that the economics will look equal -- at least equal to the PEA that was published in 2023. Moving forward, we anticipate that we will be able to use cash flows from MDN as well as Lagoa Salgada to assist in the Mont Sorcier development if and when it's necessary. At Mont Sorcier, we also have support from the U.K. government and TD Bank with 70% of the capital requirements in the form of very low-cost debt. So the objective that we have as a company is to look at the long term while not compromising our short term. And the reality is what we anticipate as a company coming out of the gate that should be able to produce approximately $400 million, $500 million of cash flow moving into the future. We believe that shareholders will be richly rewarded for that. If I look at the Lagoa Salgada asset itself on Page 6 of the presentation, again, we're in a world class jurisdiction. We're located on the Iberian Pyrite belt. This is one of the largest VMS districts of volcanic -- massive sulfide districts in the world. There's been many, many global deposits -- global class deposits from this belt. We are the new kids on the block with Lagoa Salgada. This asset has had only 40,000 meters of exploration drilling. If I look at our neighbor, Neves-Corvo, that has had 1.5 million meters of exploration drilling. So the reality here is that this is a very new project with very strong economics coming out of the gate. The objective within a very difficult environment is to get this project generating cash flows as quickly as possible, but also supplementing that with strong exploration. As part of our funding objective coming into the construction funding, we are looking at a $10 million budget of the funding to go into exploration. And we believe that this asset will grow very dramatically based on what we've seen today moving forward with exploration. The biggest challenge we've had that has existed at Lagoa Salgada has been to generate capital to go into exploration. So we think that we're getting an asset for Cerrado, where basically the -- it's an immature asset from a development stage. However, it's mature enough that we've got 27 million tonnes of good grade material that will generate very substantial cash flow moving forward. Again, the IRR of 39% with a margin of 50% on sales is a wonderful place to start. If I look at the life cycle and moving forward with Lagoa, again, we're anticipating that we will see the environmental impact assessment approved sometime in Q2. We'll complete our metallurgical work sometime towards mid-Q2 as well. And then we expect a new resource estimate towards the end of Q2, early Q3. We'll publish an optimized feasibility study towards the end of Q3. And then from there, we expect to see a construction decision with -- a construction approval from the Portuguese regulatory bodies in Q4. And Again, we're a long way towards project funding. We've got the strong support of UKEF and Banco Santander for 70% of our capital requirements. We have the strong support of Sprott and a stream -- potential stream to minimize the equity requirement. And on top of that, we are talking with different offtakers, and we believe that there will be a strong component for an offtake agreement as well that will reduce our capital requirements. So our expectation for the ultimate equity requirement moving forward is that it will be a de minimis amount moving forward. So we like that. We think the long-term benefits to Cerrado will be that we've got a very strong project to come after or during MDN while waiting to bring in the Mont Sorcier project in Quebec. For the benefit of Ascendant shareholders, as you can see by the press release issued on December 11, we've seen tremendous progress with this project in the last year and half. Basically, the feasibility came in with very strong economics. The metallurgy has only improved those economics. The optimization has further improved the economics, and we've also taken this project through the permitting process where we expect the environmental impact assessment, again, to be approved very shortly. And then we expect to see the construction decision in the fourth quarter. What we haven't been able to do and very common with much of the junior market, is gain the attention of investors for this asset. Irrespective of the fact that we're well ahead of many of our competitors on the belt, we have more resources at higher grades, we're pulling very good drilling results out continually, it is just not the environment for the market as a whole to be funding junior development companies. And so as a consequence, we saw Ascendant shareholders being penalized in this market where ultimately it would have been very, very expensive for Ascendant to go out and raise capital in the market. It would have meant that existing shareholders would have been very, very penalized at the expense of the new shareholders coming in. We felt, and we feel, that Ascendant shareholders are going to be well served by the benefit that having access to Cerrado's cash flow and development pipeline will bring in terms of minimizing dilution. And conversely, we feel that Cerrado is gaining the strong benefits of a long-term asset with a potential 14-year mine life according to the feasibility study, that basically will enable the future of Cerrado's cash flow to have more security and also be more growth. So as we move forward, we see a combined entity with very strong short-term steady production coming out of Argentina, with MDN, we expect 55,000 ounces a year over the next 4 years. Again, at $2,100 gold, we're looking at $25 million a year of free cash flow. At $2,800 gold, we're probably approaching $35 million. With respect to Lagoa Salgada, we will be potentially in construction very close to this time next year. We believe that, that asset will over time, while it's determined that it's not going to require a great deal of capital, and the capital that is required will be able to be funded from Cerrado from our existing operation, we believe that, that asset will gain in value substantially. With respect to Mont Sorcier, we expect to complete a feasibility study that we expect to be extremely robust, I'll remind people that we published a feasibility -- a PEA, excuse me, at Mont Sorcier on July of '22. That PEA showed a 21-year mine life at 5 million tonnes per annum returning $350 million of cash flow per annum, $250 million of free cash flow over a 21-year period. CapEx of $600 million. Again, we see that, that CapEx, 70%, we anticipate to be supported by the UK Export Credit Agency as well as TD Bank. And the balance, we think a large part of that can come from an offtake, likewise a stream. And then on top of that, the cash flow from operations, if indeed that's necessary. I'm not saying that we may not see -- this is our current thinking. There could be changes. There could be developments that we can exploit moving our operations in different ways. But for now, we see this as a way that is a very strong plan to be a company generating $0.5 billion of cash flow potential with the market cap of $50 million. So I think that's basically all that I have to say at this time, I don't know if there's -- I'm very happy to address any questions. Again, we hope that this is going to be a 1 plus 1 equals 3 situation. We appreciate and understand that Cerrado is trading at somewhat of a discount in terms of what we believe it's worth today. But by the same token, we certainly believe that Ascendant's Lagoa Salgada asset is likewise trading at a substantial discount. Combined, I think it's a very fair transaction for both sets of shareholders. And I think that we will ultimately a year from now see the very, very strong benefits that will be achieved by both companies through this acquisition. And again, I just want to stress, we have made sure that our cash and our balance sheets are in a very strong position where we can afford to do this transaction without hindering our financial strength moving forward. I'll leave it at that. And Mike, I'll hand it over to you.

Thanks, Mark. Operator, we would now like to open the call to Q&A from participants.

[Operator Instructions]

Moderator, I don't believe there are any questions. If there are no more questions...

Looks like we have a question here. First question is going to come from Surya Sankarasubramanian with Red Cloud Securities.

Congrats on the acquisition announcement. As far as MDN goes, is there any chance of increasing the life of the mine there? What are the chances rather?

Thank you very much for the question. We believe there's very strong potential to expand the mine life. And the reality is, to remind people, we have 330,000 hectares on the -- on a very prolific belt. We basically have not -- we basically have been so focused on driving the operations and making sure that we're generating strong cash that exploration post-COVID and subsequent to COVID has not been -- has not been exploited as strongly as we believe it should be. The sale of Michelle to Anglo for -- on an option basis initially for $4 million and a potential sale for an additional $10 million should indicate to people that we have a very -- again, it's a very prolific mined district, and we see other areas with very strong potential. Initially, we are looking to go underground. We're planning to go underground in the first quarter. And with production coming out sometime in the second quarter. However, our objective is not really to focus on the production profile from the underground scenario initially. The reason we're going underground is we see extensions from the Paloma pit, which is where we had significant production historically. And we see that the gold continues underneath that pit. It's open in all directions at depth. And we anticipate that, that will be a highly productive area for new resource and reserve acquisition. We also have other areas that -- another area called Paula Andrea, where we produced out of a couple of very high-grade deposits. We went down to depths of 50, 80 meters. We believe below that 50 to 80 meters area that there's substantial room for improvement or for resource acquisition. And from that regard, we're working on the plan right now. And we anticipate having some news, some fairly significant news in the not-too-different -- in the not-too-distant future, just outlining our -- parts of our plan and how we're going to evolve that plan moving forward. In conclusion, if we look at our neighbors at Cerro Moro, they've had 3 million ounces, Cerro Vanguardia, 8 million ounces. We anticipate Cerro Negro, 8 million ounces. We anticipate that there's a lot more to come, but we just got to go out and get it.

Thanks for that. But will the development of these additional resources require CapEx that might compete with Ascendant with Lagoa Salgada? And/or is that the time line will be such that it won't matter.

Yes. Based on budget, we've built in -- again, one of the premises of this acquisition is that we anticipate our cash position to be flat by the end of the year, and we've built in a fairly healthy exploration budget for this year. We built in currently a $4 million budget for the balance of this year for exploration. If necessary and if successful, we will obviously expand that budget moving forward. So again, we don't anticipate that we will be in a position where there's any threat to capital for any of the projects. Had we have felt that, that would have been an issue, we would have probably had some consideration for -- we've had consideration for everything here.

The next question comes from [ Guy Philippe Burton ], Private Investor.

Congratulations. Just a quick question. The July 2023 feasibility for Ascendant was based on gold prices, which are now up 64% and copper prices up 16%. So when you forecast 124 million pound of zinc equivalent, has this -- or will this figure change? Or is it taking into account that the current gold price and copper price, which I guess is not the case because it wasn't in the feasibility study. Are we going to see an increase of this level of production of equivalent of zinc?

As you may recall, Guy Philippe, we -- in the feasibility study that was published in '22, we were looking at a scenario where we produced -- production was about 1.2 million tonnes per year over a 14-year period. Again, we've seen very significant shifts in our metallurgy that have not only -- not only will be improved in terms of our recoveries, grades, but we'll have a fairly material impact in terms of our -- we'll have a material impact in terms of the NSRs, which will also have another impact in terms of expanding the resources as well. So we see multiple benefits that will come where we'll probably see additions to reserves, resources, higher -- as you mentioned, higher pricing. So there are a lot of benefits that are going to -- that we anticipate will come. As you can see, as we published in the December 11 press release, but obviously, without those numbers and still working on those numbers, we don't -- we have not published nor do we disclose or discuss any of those numbers because we just don't have numbers at this point. So long story short, we really expect to see improvements. I failed to mention the optimizations. The optimization we're expecting to see, again, lower costs as well which should add to the metallurgical work that's being completed, to actually add resources and also drive greater revenues [ and excellent ] cash flows. Thank you very much, Guy Philippe.

[Operator Instructions] Seeing that there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mike McAllister for any closing remarks.

Thank you, operator, and thank you, everyone, who joined us today. As a reminder, a recording of this call, along with the presentation can be found on our company's website. And I would like to also turn over to Mark just for any closing remarks.

Thank you, Mike. We are very, very excited by the combination of these 2 companies. I understand that we're in a very, very difficult market environment right now. Assets are not getting their due. But we believe that, that will not be in perpetuity. However, we are prepared if we -- for a lower price environment for the next few years. From that perspective, we're very excited to see Lagoa join Cerrado's asset base. Our ultimate goal with any assets that we develop here is to drive cash flows. And we see this as a very strong contribution in addition to what we have as very strong assets in Argentina at MDN and also Mont Sorcier in Quebec. So we'll keep our heads down. We'll keep working away, but we believe that the intrinsic value of this company is not being recognized. However, we think that, that will happen as we continue to develop these assets. Thank you very much for your time, your attention. And we are available should you have any further questions or comments, et cetera. Thank you very much.

Operator, please end the call.

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