Challenger Gold Limited (CEL) Earnings Call Transcript & Summary

Good morning, and thank you for joining the Challenger Gold Investor Webinar. I'm Jane Morgan, the Investor and Media Relations Manager. And today, I'm joined by Challenger's Managing Director, Kris Knauer, who'll be providing a company update and engaging in a Q&A session. [Operator Instructions] Kris, I'll pass to you.

Thanks, Jane, and everyone who's online. Thank you for joining. I'm going to focus mainly today on the scoping study and then give you a bit of an update as where to from here. Let's just work through the cautionary statements. So look Challenger, most people know who we are, 2 assets both in South America, 4.5 million ounces in Ecuador, which is on the back burner at the moment due to market conditions, lead asset, very much our Woodlard Gold project in Argentina, in San Juan Just finished a robust scoping study positions us as a top 20 ASX gold producer of lowest quartile cash costs. The study, look, it's an outstanding result, and it's an outstanding asset. And how do I know that? Not talk to this later, within a week of putting out the study, we were approached by the areas of groups wanting to talk to us about non-dilutory funding, potential strategic investments, and we're running a process now. So what does the study look like? Puts us in the top 20 of ASX listed producers. Yes, it was as scoping study but really it was pre-feas dressed up as a scoping study because you've still got some work to do on picking final process through and also the actual mine plan. But it was done to a plus or minus 15% accuracy where most studies are done to a plus or minus 25% but you've got to put a line in the sand. San Juan itself, a great place to build a mine, still voted #1 mining jurisdiction in South America. And most importantly, we're having this work done now, opportunity to become one of the lowest carbon intensity gold mines in the world. Financial metrics compelling life of mine EBITDA of AUD 1.1 billion. That's all at $1,750 gold. Rapid payback period, just over a year, which is really important in this current climate. Pretax NPV $800 million at current spot prices, really quick or high IRR as well. Again, to go into it in a bit more detail, average production of 116,000 ounces of gold, 440,000 ounces of silver and zinc all up, it's about 140,000 ounces gold equivalent, all-in sustaining cash cost of USD 830 which is world's lowest cost quartile and actual C1 cash cost of USD 527 you'll hear this a lot during the presentation, low risk. It's got a low-risk starter pit, followed by conventional underground mining with 3 working areas, which offers flexibility. Geological risk is really low. We've done 220,000 meters of drilling. The entire ore body is drilled out on 40 x 40-meter spacing at worst. 81% of this scoping study mine plan is [indiscernible] resource. So we're not going to get a [ enough ] surprise from the ore body. And when we do start processing, we've got half a year worth of material sitting on the ROM pad as well. So we've got a 6-month buffer, and that continues throughout the mine. Importantly, and I'll talk to why the study was targeted this way in the next slide. There's sort of 4 or 5 clear opportunities where we can add significant value. Firstly, we focused on the high-grade core because of the market conditions. There's another 1.7 million ounces left at the end of the scoping study mine plan that we're doing the work now. We think we can get a fair chunk of that out. We cut the ore body off for the purposes of recovering the zinc at a 1.5% zinc grade. We've now done some work down to 0.4% zinc, and we can recover the zinc economically. We double up the zinc we recover in the mine plan. It adds more than $100 million to the value. We're producing a gold and silver concentrate the cost of actually getting that concentrate from site to a smelter is about $150 a tonne. The cost of processing is that much again plus payability if we can produce gold door on site we add about USD 150 million to the value potentially. And we're doing that work now. You'll hear about that work in the next month or two. All the work on the mine plan was done at $1,700 gold, and you've got to draw a line in the sand somewhere and subsequent by doing all this optimization mining costs are 10% to 20% lower. So we'll redo that optimization at $1,750 goals. And there will be a material upside there. We'll get probably at least 100,000 likely 200,000 ounces additional in the mine plan, if nothing else changes. And not to mention the mineralization is open everywhere. And I suppose, look, how did we target the study? The study focused exclusively on this high-grade core, and we did that for a reason. And I'll talk to the state of the market right now. So what I'm showing you here is a chart of all of the South American developers, ASX listed that have got resources. And you can see there, it's not pretty. Every single one is down almost 60% to 90%. We've taken here just the Australian gold developers and explorers starting with a similar thing. Only one company is not down more than 50%, and that's down 37%. It's a terrible market to be a gold developer and if we had to come out with the start that admittedly probably it would have produced 0.5 million ounces more gold and had a bigger value that had a $300 million capital expenditure, we never would have had it funded. We just wouldn't have had a credible part to production. Whereas I know we do now because we've got some groups in the data room that are going to offer us that credible path to get into production. If not before the end of the year, early in the first quarter, so that then the market will, I think, know that the certainty of funding and then can all get the upside attached to the project. Just to highlight to the project of the scoping study, really robust project, it will be Argentina's next mine. This is where it positions us. So what I'm showing you here is the current ASX producers and their annual production also to near-term producers like the gray in Bellevue Gold puts us just inside the top 20 of ASX gold producers. This is cash cost of the current ASX producers and near-term producers. Again, it's got companies like Bellevue, and De Grey in there. We're the fourth lowest cash cost producer on the ASX once we're up and running. And then total capital expenditure, you can see in that table, the USD 150 million just $15 million contingency in there. So hopefully, it's $135 million. And that CapEx puts us at the lower end of capital intensity per ounce. And a project with $150 million CapEx with the 1.25 year payback that's eminently financeable. With that short payback, we've got the ability to go to some of the U.S. specialist mining lenders. If we've got a at 12%, 13%, 14% debt, it doesn't matter if we can pay that back in 1.25 years. And so that is how we get into production. Just on the scoping study mine plan itself, again, that were low risk. So it's a vanilla starter pit with 1 million tonnes of high-grade 1 million tonnes at better than 4 grams gold sitting at surface. It's a single pushback pit. And then we roll into underground. The 3 underground areas, we decoupled the entrants from the bottom of the pit. It doesn't really save as much development meters to take it out of the pit, and it let's us start early. It's vanilla underground mining. It's got 100% pace backfill, which lets us get 95% of the ore out. Each 1 of those 3 areas, if we have a problem, can be pushed up to 500,000 to 600,000 tonnes per annum. It's also got the ability that depending on adding reserves, you can push that underground production up from 1 million tonnes we've budgeted on to 1.5, perhaps more. So again, low risk lots of upside, there's a crown pillar in there. We haven't factored in moving equipment between the mines. We locked the equipment in the mines. There'll be another cost saving there and probably some productivity gains. That's all being worked on now and that will come out in likely a scoping study update at the end of the first quarter, start of the second quarter, and then we'll roll straight until pre-feasibility study. This is basically our production schedule. So the purple there is the high-grade gold and zinc ore, the yellow is the high-grade gold ore, to green is the lower grade material. And what you can see there is in year 0, which is when we're building the plant, we've mined 0.5 million tonnes that sits on the ROM pad ready to be processed. And then production is fairly steady over 1 million tonne per annum until we finish the mine life. Now that mine life won't end in Year-7. Deposits open in all directions. We've got holes at the bottom of stopes underground where we've got 25 meters of side that we just -- we haven't drilled right now in this market. We'll get no upside, but it won't be a 7-year mine life. And the reason we've gone with a 7-year mine life is if you run it out any longer than 8-years, you basically replace all the equipment. So 7 years, 8 years is what you want to target at the moment. And this is the process plan. And again, that word vanilla. It's pretty simple. It's off-the-shelf technology. We crush the ore, 40% of the gold that comes out in the gravity circuit. But then depending on the type of ore, it's a pretty simple flotation exercise. We produce gold silver concentrate and as the concentrate. As I said, we'll try and convert that -- that gold silver concentrate to dore on site, which would be $150 million win for us. And the plan is basically set up so that it can process the different types of ore, we just turn a switch and you bypass certain parts of the circuit. This is our forecast production schedule. So you can see with that 0.5 million tonnes, we get out before we start processing it gives us an opportunity if we get the plant finished to start production earlier. It also lets us put the best and high-grade material through we actually get 150,000 ounces of gold out in the first year, almost 200,000 ounces of gold equivalent. And then production is fairly steady at around about 115,000 - 116,000 ounces of gold, 140,000 ounces gold equivalent. This is just a cumulative cash flow. And again, at $1,750 gold it produces USD 527 million pretax cash flow. At current spot prices, it throws off over $1 billion of pretax cash flow over the life of mine. And then the upside. And this is the important thing. What you'll see over the next couple of months is a series of ASX announcements addressing this upside before we pick our final path and update the study and then go down the prefers. So upside one recovery of that additional 1.7 million ounces now we've started to do some preliminary work a much larger pit. It does work. We're doing the work now. We'll partner up with one of the open pit equipment suppliers, and they'll do a lot of that cost work for us. We used $2.50 a tonne increasing $0.40 a tonne every 100 meters, which is quite conservative. Other big open-pit mines in Argentina are mining at around $2 a tonne. We get our mining cost down around $2 a tonne, and this will be a big open pit. We'll still start with an underground component to make sure we can stage it and get the high-grade material. One of the key planks to that big pit is we're nearing the back end of the process to evaluate if the heap leach works. The preliminary results look really encouraging. The 90-day tests were at day 85 now. So we're about to start watching those, expect some news on that before Christmas. Low grades in concentrate I've spoken to. We currently recover 60,000 tonnes zinc in the scoping study. If we can double that and you will if you can lower that cutoff grade, then that's worth $120 million in revenue after all the costs. Again, that improvement in underground optimization we ran that underground cutoff for almost 2.5 grams a tonne. The real cutoff grade, we need to use is 1.9 now that we've tide up the cost. That should add at least 100,000, 200,000 ounces into the mine plan. And then we ran anything called Pseudoflow, which took another 70,000 ounces out, which likely goes back in as well. I've mentioned the production of gold bars on site. That could be a huge saving for us. That's worth USD 100 million to USD 150 million. And then I've spoken to the reduction in open pit mining costs. And look, this is, I suppose, shows this is the resource here, you can see the red and pink are high grade. This scoping study was focused on this yellow here, the 8 million tonnes at 5.5 grams gold. And if you look up to the actual resource, we've left more than half or half of the resource on the table, and we're now going back and doing that work. Treatment scoping study is a base case, and there will be significant upside that will come from this study as well. This is what we're working on now in terms of some of the upside. So the scoping study cases in the dark brown or the red, you can see the 3 small open pits and then the underground workings. The blue there is some recent larger open pit work we've done showing what a big open pit will look like. The encouraging thing out of that is still a fair chunk of underground material that gives us the ability to start with that high growth in the pit also go underground so that we keep that 1 million tonnes of high-grade feed going and then backfilled lower-grade material around it. But certainly, we'll produce a much larger pit. We'll get much more of the gold out, and that will increase the value of the study, which is already significant. This is just showing the pseudoflow analysis. So when you optimize an underground mine, normally you look at a cutoff grade and anything -- any stope above that cutoff grade in mind. What we've done is we've taken into account the development meters. So how far you've got to sort of dig a tunnel in order to get there to mine that. And what that's done is everything near that sort of yellow or orange has been taken out of the mine plan. Yet the costs we use in that analysis, we used $4,000 a meter for the decline with our real cost is much lower, same thing on your development meters. So a lot of that 72,000 ounces goes back into the mine plan when we review this at a higher gold price. And again, that will get at least a couple of hundred thousand ounces all up into the mine plan, which every 100,000 ounces likely to add USD 50 million to the projects valued. This is just some of the cost work we've done. I won't talk to at all I say is, look, all of these mining costs, processing costs were all done by external independent experts. All done from bottom-up principles using the mine design, Argentinian costs, imported costs, there's not a lot of risk you're going to see these costs flow out as we move forward to the next stage. And same thing on the processing costs. Not much risk attached to those increasing. And hopefully, we can bring those down with a slightly larger plan. The exploration upside again, we're now working up these targets. We've expanded our surface geochemistry program given some of the anomalies that we're building up, but there's going to be 3 or 4 really interesting looking targets to drill sometime next year once we've got some funding done it's not dilutionary. But Woodlard still open everywhere, it will be a much larger mine. But we're sensible. We're not going to go drilling right now because I don't think there's much value in this market. Although it does look like, I think we're getting to the turning point of the market now, there's a little bit more interest in the market feels better. So look, next steps, we're through from here. So look, right now, we've got a value of $110 million scoping studies, $600 million in a better market, normally trade at 50% of that scoping study value. We should be trading at the 3x the current price. We've got upside attached to the ounces not in the study. Not to mention Ecuador. We're sort of working on something to split Ecuador out of the company now. So you'll see Ecuador actually realize some value for us and for shareholders. But in terms of next steps, as I said, I know the scoping study was a great outcome despite the reaction we got in the market, which was all about funding. As we've gone around and seen some of the funds, the question is okay, you get 7 in the bank. Yes, that gets you through until June next year. But to finish the bankable is going to cost you $15 million, maybe $20 million worse case. How do you fund it? As I said, we've been approached by a couple of Australian-based mining funds that are in the data room now. We have been approached by strategic from overseas that's finishing up in the data room now. We've had a couple of royalty companies expressed interest. We haven't hit the button on that. That's something we'll do in January, depending on where we get to with these other sort of outcomes. But look, in terms of how to from here, the company -- we're not that interested in doing a deeply discounted placement any time next year. We'll get something done that involves something non-dilutionary for a strategic investor. And I think that's when we start to be re-rated. Right now, the market is concerned about how do we fund it. And I think we'll have that answer yet. Certainly, by the end of the first quarter, we'll have that answer to the market. In the meantime, we should get, hopefully, next week, the results of this testing to tell us how viable heap leaches. As I said, the results look good. But now what we've got to do is wash out those columns actually as a residue and see if the recovery is actually what the preliminary results are telling us. Some additional flotation test work has started to see if we can actually better refine that low-grade zinc pathway, which is a big value uplift. We're doing the testing now on can we produce a dore on site. We should have some news there during January. And if that looks encouraging, and that's a big tick for the project. Hopefully cash flow that makes the project much more -- well, makes the project adds $100 million, $150 million to the value. We're doing some work now to just rule out whether it is a CIL of flotation. The line ball at the moment. We've got a simple flotation pathway. We'll just do some more testing now to rule out CIL. What we want to see is that the flotation cases $50 million to $100 million more valuable than the CIL case before we rule out CIL. We'll update all of our cost models and then run the sort of bigger pit case. And you'll see this news come out progressively over the next 2 to 3 months then we'll update scoping study, and that will be the version will run through with the pre-feas target to get the pre-feas done by the middle of next year. Thanks, Jane, and so I'm happy to take any questions.

So how does Argentina's inflation affect project development in terms of CapEx and other costs?

Yes. So look, first thing is people might not be aware there was an election for a new President 2 weeks ago. There's been a change in government. The new President is from the far right, is very progressive, one of his key plans is to open Argentina upper business. The challenge with inflation in Argentina has been massive social welfare and they run sort of 2 and 3 different currencies, very complex and his plan is basically one exchange rate, he'll let the market decide what the exchange rate is. He wants the government won't try to control it. And what you'll find is, look, Argentina may have a difficult first 6 months. But in -- I'd say by the time we get into a second year of presidency it will be a much lower inflation environment. It will be a much simpler place to do business. You might see some more favorable terms for miners. For example, our scoping study factors in an 8% export tax on gold. Now that 8% export tax is a temporary tax supporting by presidential decree. If that was to go again, with probably $150 million better off in terms of value and it wipes about $150 of our all-in sustaining cash cost. So look, we've managed to get our drilling done, we managed to get our work done. They've been dealing with inflation for years. But I think this change in government is a really encouraging it will make putting a mine into production much, much easier. And also you'll see a lot more interest from foreign mining companies on getting into Argentina now, and we're already starting to see that.

Wonderful, so the next one, and you touched on this in the presentation, but when do we expect to release the updated data based on the USD 1,750 per ounce gold spot price and the lower mining costs.

Yes. So look, as I said, you'll see progressive news over that. The aim is to get something out every 3 to 4 weeks. First will be the results of the column testing to give us an idea of the heap leach case and that will add significant value. Then January, you'll see the results of the testing, can we produce dore on site. If we can, as a $150 million value if we can't, well, we've already got the value then we'll really optimize post doing a little bit more cost work for the higher gold price. We're still working out. Do we use $1,750, not $1,700 or do we use $1,800 we'll put the results of that out. And then that will see an updated scoping study probably sometime in March and then roll straight into a pre-feasibility study. And by that time, you'll have certainty of funding for one of these non-dilutionary options are strategic. And I think the market will respond well to that. There's a couple of companies recently that have announced these non-dilutionary transactions, and they're all up 30% to 40%.

Thank you, Kris. And again, you touched on this question in the presentation, but what are the financing options for the project? Will you seek to bring on a strategic partner? Or is it possible to presell some of the goals to assist through the financing?

So look, all of those options are possible. So as I said, we're talking to a strategic a couple of strategics now. We've had a data room open for about 10 days. We've got both strategic investors and mining companies in there. We've also got royalty well, not royalty, they're more project finance groups that will do early stage debt funding. Then either rolls into a royalty or wraps up into a larger project finance facility. So yes, that's an option. We haven't gone the wider royalty route yet because we don't think we'll need to. We think if we can get something done that involves an overall project finance facility or a strategic -- that the market will take that much better. If you sell a royalty now, look, it's not dilutionary, but you probably get half the price for the royalty that you would get if you're selling that as part of a package to actually finance line. But yes, look, all of those options are available and we're down the path of 2 of those, and we've got the royalty option as Plan C and an equity raising some time late first half, early second half of next year is very much a plant in DARF.

Thank you, Kris. And so can you please outline the exploration strategy for 2024 to extend the life of mine beyond the initial 7 years?

Yes. So look -- and again, this will be post getting one of these funding options done, it's not dilutionary. We've extended our sort of soil and rock chip sampling looking for anomalies outside of the mine area is produced some nice lumps. They're still growing South, they're still growing North. So what you'll see is we'll put all of that together over the next 2 to 3 months. Generate -- it will be at least 3, hopefully, it's 4 or 5, really nice drilling targets. And then again, we'll look to do some of that drilling once we've actually got this non-dilutionary funding through, we won't do too much drilling. We've got to focus on getting into production. In terms of extending the mine life, 7 years mine life, and that will probably roll out to at least 9 or 10 years when we update the study is plenty. In terms of -- if we go and drill holes now, yes, look, we'll add 300,000, 400,000 ounces easily to the resort as at depth, there will be high grade. But I think the difference between 2.8 million ounces and 3.2 million ounces. The market is not going to care. That's far better left in for end production. We've got the declines deeper, and we're drilling them from underground where it's far more cheaper. I mean look, 70 mine life is plenty, and that will be just a start. But I think the value we'll get for finding new areas is far greater than actually adding 400,000, 500,000 ounces to the current resource now.

Wonderful. Thank you, Kris. And I mean, it's no surprise that the gold price has been reaching all-time high and there's significant potential for the spot price to increase much further than this as well. So if this occurs, would you reset the study in the future based on that higher gold price?

Look, we will. But I think at the moment, we'll probably stick to the same $1,750 gold price in the study. I think most institutions, most brokers have their own gold price forecast they use anyway. I think if we were to turn around now and update the study tomorrow based on $2,000 gold, we look a bit silly. So it will either be $1,750 to $1,800 when we update it. And I think we'll sound out a few of the market participants first, just to make sure that they're comfortable with the price we're using. I think what price to use, the market will factor in the prices, it wants to use anyway and value us accordingly.

Jumping around a bit here. So do you still plan to do an updated MRE in Ecuador this month?

We are working on that now. Yes, and it will be done. It's not so much an update. It will be an update, but it will be done to Canadian standards, 43-101 standards, which probably gives a hint of what we're learning to do with down Ecuador.

Thank you, Kris, again, jumping around. But when are we targeting first production?

Look, realistically, the time line from here is finish the previous feas middle of next year. One year to finish a bankable and then you've got 6 months to close financing 4-month construction. So you're looking mid-2025, mid-'26 late 2026 and if I tell you, we can do it sooner than I'm not telling the truth.

We'll just further to that in the next question. So when are we expecting to deliver the pre-feas study?

Yes. So the aim is to deliver that in the middle of next year. So June, July next year.

All right. Next one. So what are the potential risks in bringing the mining to production on time and within budget.

Look, I think we've seen that most mines are blowing out their capital costs at the moment. Hopefully, by the time we're sort of 3 years out, inflation is under control. I think it's also a case of building a decent buffer. I mean, let's assume we can almost 100% project finance the mine because of the quick payback with the combination of debt, project finance and royalty. Quite frankly, what we do once we've done all that, and we're at a much higher price as we go out and raise equity to cover us as a buffer anyway. Look, it's all about doing the cost work, probably doing externally so that you're not trying to bring it in at a cost. The cost is what the cost is and make sure that works on properly and you've gone out and got vendor quotations. And you should see some partnerships with underground and open pit equipment vendors sometime in the first quarter, which will take a lot of risk out of that. We're talking with them about things like vendor-managed inventory, which takes all of the replacement parts of our books, they'll provide those. It takes potentially maintenance off our books and the equipment then that provides that as well. So we're looking at sort of some novel things like that will hopefully reduce our headcount and lower our costs and give us -- derisk a lot of those costs.

Thank you, Kris. I think just finally, so you did mention this, and there is a slide in the deck. But just to reiterate to the webinar attendees, I mean what should they be looking forward to from a new slide perspective over the next 3 to 6 months?

Yes. So from a new supply perspective, you'll see does the metallurgy likely to support that heap leach case, which will -- should lead to a much larger pit and a bigger NPV. Can we recover more of this zinc with a lower grade, which again adds to the value of the project, double the amount of zinc we produce can we produce concentrate on site from gold and silver dore, which again adds $100 million to the project value. If none of that works, we still got a great project that companies are interested in right now. You'll see some partnerships with equipment vendors. You'll see a strategic or a non-dilutionary finance done sometime next quarter. So and then you'll see an updated study and hopefully by then in a better market, we're not trading at $0.25, $0.30 on the dollar like not just us, but most gold stocks are that are in production.

Wonderful Kris, that's all we have time for today. Thank you all for joining us for the Challenger Gold Investor Webinar. If we've missed any of your questions, please feel free to reach out by the contact details on the bottom of our ASX releases. But thank you all for your time.

Thanks, Jane. And thank you, everyone, and again, reach out to me if there's any questions by our e-mail.