Challenger Gold Limited (CEL) Earnings Call Transcript & Summary

All right, guys, welcome today. Welcome, everyone. My name is Ollie. I'm here with Kris Knauer from Challenger Gold for a very special investor webinar. Today, he's going to be providing a company update, followed by a brief Q&A session for those of you that like to ask any questions. [Operator Instructions] And Kris, whenever you ready, I'll hand it over to you.

Yes. Thanks, Ollie. And I'll get you to roll through this slide and a couple of disclaimers, and we'll get on to the next one. Yes, that one. So what I'm here today to sort of really touch base on is a few days ago, we announced what we think is a transformational transaction in Challenger. What we've done is we've coupled a toll milling agreement with a strategic placement, which has the effect that transitions us to a producer in the very short term. Tolling agreement, it would cover about 85,000 high-grade ounces of Hualilan, which would be treated over 3 years, about 150,000 tonnes a year. Importantly, this agreement includes funding for our cost of mining, trucking and processing. So it's a low-cost start-up. That'd be highly profitable. We're talking about shipping and processing grades of almost 6-gram gold and 30-gram silver. And the key is it provides a pathway to fund the largest stand-alone Hualilan development, our cash flow and targeted to start in June 2025. The strategic placement, it's to Dolphin Real Assets Fund SPC, which is part of the Elsztain Group, represents approximately 9.4% of Challenger, raised $6.6 million, which will fund the work associated with toll milling. We're also doing an SPP capped at $0.045 -- or sorry, at the same price, $0.045, capped at $1 million. Now tolling, it's -- we're only talking tolling 3% of our ore. So it doesn't have an impact or a big impact on the overall project value. We're tolling oxide ore predominantly, which is not really suitable for the toll milling plant, and really, that placement ensures the alignment of goals between us and the Elsztain Group. Next slide, Ollie. So look, Challenger -- I'll just do a quick refresher given everyone on here is a shareholder, you should be familiar. Two assets, lead asset, very much our 2.8 million ounce Hualilan Gold Project in San Juan in Argentina; El Guayabo Project, 4.5 million ounces, large porphyry. We've got a resource upgrade pending on our 50% on ground. Plan is still very much to spin that off or monetize that asset. We've drilled 280,000 meters to date. So most of the money has gone into the ground. As a company, we've got 7.3 million ounces of gold. Market cap is about USD 80 million, and fully diluted EV is about USD 100 million. We've got a USD 15 million convert with QRC. And what we do have now is a clear pathway into production by a toll milling and then the stand-alone Hualilan development out of cash flow. Next slide. So who are we? Look, my background, exploration geologist, got out and run a package of assets that we rolled into a little vehicle, which became $1 billion cap company. Assets were in Saudi Arabia. Our Executive Chairman, Sergio Rotondo, original owner of the project, Argentinian; and Sonia Delgado, Executive Director based in San Juan, probably the 2 most important people in the company. And they have put this toll milling agreement together. I'd love to say it was me, but credit where credit is due. And I think that shows the quality of the team we've got in Argentina. In terms of major shareholders, we'll have the Elsztain Group combined will end up as our largest shareholder. BlackRock, the largest resource fund in the world, have a 11% holding. And Queen's Road Capital, which is a very smart [ long-only ] resource fund listed on the TSX that made a $15 million investment. And they all provide a really significant endorsement of not just the project in Argentina but also the management team. And key is management team. Post this transaction, still has 14% of the company. Our interests are aligned with shareholders. It's not about salaries. It's about what we make out of the share price. Next slide. Thanks, Ollie. Just a bit of history. We IPO-ed back in 2019 into a great market. 3 rigs went to 5 rigs. Drilling started in Ecuador. We raised $42 million at $0.28. Like everyone in the system, we had a really fun 3 years. Then about 2 years ago, market turned, gold price fell to $1,600. And really, it didn't matter and not just us, everyone you've had a bear market for small resources unless you were generating a cash flow. What have we done in the last 5 years? 280,000 meters of core drilling; 2.8 million ounce discovery in Argentina; 4.5 million ounce discovery in Ecuador; clear pathway into production in Argentina. Ecuador, you've got a reasonable spending. And really, I think around August, it looks like this market has bottomed. We bottomed at about 3.9. We're back to 5 now. I think for the next 1.5 weeks, the SPP will probably take a little bit of pressure on the share price. But I think we're now entering to next sort of 2 to 3 bull phase for gold and hopefully, companies like us have a very good time of it. And conversely, that sets up an opportunity here for shareholders to top-up via an SPP and hopefully enjoy that sort of same strong market conditions we had in post-IPO where the share price performed really well. Next slide, Ollie. Just before shot, this is Hualilan as we went in. The red dot there is us drilling our sort of first drill hole back in October 2019. And then the next slide. Thanks. Next slide shows sort of where we were. That's what 200,000 meters of drilling looks like 2.5 years on. You can see all the drill pads. So we have a really good understanding of the geology there at Hualilan and the resource. Next slide. And following slide, I'll talk about Hualilan. Look, first thing I want to touch on is Argentina itself. Argentina is basically transforming into one of the leading mining jurisdictions in the world under our [ LOIC ]. San Juan has always been the best jurisdiction in Argentina, voted the #1 mining jurisdiction in South America in the most recent Fraser Institute surveys. In terms of Argentina itself, it did have some key impairments. First one is currency control. You're producing gold. The way it works is you produce gold, you sell that gold bar in U.S. dollars, and then you've then got to convert that U.S. dollars into pesos and hold that profit there as pesos. It's not easy to repatriate dividends. And when you've got 200% inflation, you're looking at the value you're holding there in pesos just erode. What's happened recently. You've got a new President. Inflation has come under control. They've recently legislated a new law through. It's called the investment incentive regime or the RIGI for larger projects, including mining. Effectively, if your CapEx is more than $200 million, I have a lot to mine, which means you've got to spend $80 million of that $200 million in the first 2 years, which Hualilan will do, you qualify. And what this effectively provides is you've guaranteed framework of legal certainty, not that that's been the issue in Argentina. Importantly, it removes that requirement to convert the U.S. dollars into pesos, reduces the corporate tax from 35% to 25%; unlimited repatriation of dividends. We make $50 million, we can repatriate $50 million back to Australia and pay dividends. And an exemption of import taxes, which helps with CapEx costs as well. We don't have to pay back on importing plants. And I think that really is the reason you have seen BHP invest almost $2.1 million of cash. We're going to do a 50-50 JV with Lundin and Filo and Jose Maria, which is one of the largest combined copper projects in the world. And the chatter about Rio buying Arcadium Lithium. 3/4 of Arcadium's lithium carbonate production comes out of Catamarca province in Argentina. So what you see now is Argentina is going to be the next go-to mining destination for the foreseeable future. Next slide. Just a quick refresher on resource. I mean resources open in all directions. Red is high grade on the picture on the bottom left. We do have high-grade surplus, which is great for a small-scale start-up. It will be a much larger open pit. The resource is based on 240,000 meters, so we have a really good understanding. Still open in both directions along a strike and at depth. If this resource was in Western Australia, it would have been drilled down to 1,200 meters, not 400 or 500 meters. And the key is flexibility. It doesn't matter because we've got the high-grade core and the lower grade around it. It's a mine whether it's $1,300 gold or $2,300 gold. The $2,300 gold is simply a much larger open pit, which is simpler and more profitable. Next slide. Thanks, Ollie. And the other thing we have built up in Argentina is a 600 square kilometer district scale footprint. Why have we done this? You don't find discoveries like Hualilan in isolation where there's one. There's normally 2 or 3. That plot there on the right, the pink, are the intrusives. The way the geology works is the intrusives underneath to provide the heat source and the fluids that contain the gold, and around the edges of those intrusives you then have those fluids dropping out gold. So theoretically, we've got 30 kilometers worth of untested strike there. We know that we've got 2.8 million ounces in 2.2 kilometers. Another sort of extra 1.5 kilometers either side of that, that is mineralized, but you can see some of the results there. 2Ks north of the resource, we've got 26 20-gram material at surface. 800 meters south of resource in and out that we intersected 16 meters at 16 grams gold. So yes, there's a lot of exploration potential and the plan now is we will address that exploration potential as soon as we're in cash flow. We'll divert some of those funds, and we'll drill the sort of half a dozen really exciting regional gold projects that we've -- sorry, regional targets that we've worked up out of cash flow so that we're not diluting shareholders anymore. Next slide. Thanks, Ollie. This is the starting point. So we put out a scoping study back in October last year, terrible market conditions. And we took the view that, that scoping study needed to tick various boxes. First one was it had to be more than 100,000 ounces. Second one was really short payback period we never funded. Lower up-front capital was the third. Strong cash flow, and it did all that. Pretax NPV of AUD 630 million. That was at $1,750 gold, almost a year payback, a very strong project. Next slide, thanks, Ollie. And in terms of positioning, this is where that scoping study project positions Challenger on the ASX. In the top 20 gold producers, you look at GOR there and GMD either side of us. Both of those are capped at well over $1 billion, which gives you an idea of the upside, our $80 million market cap to their $1.5 billion, almost $2 billion market cap in the case of GOR or when we eventually get there. Next slide. Thanks, Ollie. And then take that scoping study as a starting point. We've identified a lot more upside, which will come out of the pre-feasibility study. We've got a heap leach option that's being added on a pathway to recover the low-grade zinc. There's an extra sort of 100,000 tonnes of zinc worth $200 million in revenue terms we can capture. We don't have to sell a gold silver concentrate now. We can produce dore on site. That rips $100 million of costs out of the system, and then we're redoing everything for the current gold price, probably use $2,000 rather than the [ $1,700, $1,800], which is far too conservative now. And yes, below, that's a visual of what it will look like. The smaller scoping study where the sort of dark brown, mainly underground with some small pits and now will be a much larger open pit operation and probably a larger open pit operation than the one you see there with still some useful underground. Next slide. Thanks, Ollie. And I suppose that brings us to where we are now. Look, during 2024, we've met a number of important milestones. We've outlined a 5-kilometer long copper target at Hualilan. We've announced we're going to monetize the Ecuador assets as soon as the resource is out in November, really great testing results and Ecuador is on track for a significant resource. And really, the market just hasn't sort of given us any value for that. There's been no impact on share price for shareholders. So what do we do? Do we put out a really nice looking pre-feasibility study that shows 150,000 ounces a year production and probably watch the share price half, which is what's been happening to everyone else has done that. We took the view we're going to take a decision to how to get into production in the near term. There's a couple of ways we can do that. One is toll milling. The second is a small-scale plant. We've sort of scoped up both work. We signed the binding term sheet about a week ago, which we've now announced. And in the next little while, you've got -- the placement toll milling agreement will settle. We'll put out a study outlining just how much cash we generate with toll milling then we can talk to it. We have now lodged our EIA, which is the final approval we need not just for toll milling but for Hualilan itself. And then toll milling started -- targeted to start June next year, which is not very far away. And we're hoping what that does is it will change that there's a massive disconnect between our true value, which is scoping study AUD 600-odd million, doesn't include 1.5 million ounces, which are included now Ecuador resource compared to our market cap of $79 million or $80 million. The reason we got that big disconnect. And it's not just us, it's all of the sort of explorers/developers like it is the current perception is there's just no hope of us getting into production without massive dilution because that traditional funding model have put out a pre-feas, get rerated, finished it bankable, get re-rated, raised more money, just doesn't seem to be working. Whereas now this toll milling provides a pathway where we definitely can get into production out of cash flow, which I think should see the market reward Challenger once there's a little bit of indigestion from the SPP is out of the way. Next slide. Thanks, Ollie. And then I'll talk about the toll treatment agreement. So next slide, please. So the toll treatment agreement, it covers a minimum of 150,000 tonnes of ore a year for 3 years. As I said, really important, includes funding for mining, trucking and processing that ore so that sort of $6 million to $7 million potentially until we receive first revenue. About 85,000 ounces we'll produce and at this stage, it's potentially a campaign milling. We'll do the work to see if it's actually a better result to blend the ore. And importantly, we're the exporting party. So we get credited with gold sales in U.S. dollars and it provides that pathway to get in production. The strategic placement, Dolphin Real Assets, as I mentioned, which is part of the Elsztain Group, almost 10% Challenger, 147 million new shares. Now those shares haven't attached one-for-one warrant, which is struck at a 25% premium, which is about $0.055. Look, no apologies, we were price takers. In a perfect world, we wouldn't have had those warrants. The value of toll milling in that toll milling plant, it's -- yes, we just couldn't say no. We had to take that price, and it's a small dilution for shareholders. Those warrant exercise proceeds will be really helpful. About 2 years' time when they're exercised is when we're looking to place long lead item orders for stand-alone Hualilan development and the SPP, which I encourage shareholders to take up as well. Next slide. Thanks, Ollie. Now we can't talk to numbers, but what I can do is these are broker numbers. Henslow did a report, they released a couple of days ago. They've done it at $2,300 gold, so numbers are a bit light on, but they're close enough. So what you're looking at is about $350 to $400 a tonne revenue after recoveries of 80-odd percent for gold and 60% for silver. Your sort of total profit margin pretax is somewhere around $170 million to $200 million. And if you're toll treating almost 0.5 million tonnes, that's a big number, which is why we're confident that, that will let us effectively fund the larger Hualilan development, pretty much out of cash flow, probably with a royalty to augment that. And look, as we finish our studies, we'll talk to our own numbers and we'll be able to publicize those numbers. Next slide. Thank you. In terms of next steps and milestones, we've had an internal sort of -- or a DD report done by a well-known consulting group in San Juan who've gone up and inspected and done an order of that toll treatment plant but waiting for that to come back. We're also waiting on some metallurgical test work we've undertaken recently with samples that approximate those toll milling pit ore. Results pending, which will give us a better feel for is the recovery 80%? Is it a little bit higher? You've obviously got the completion of toll milling in the placement agreements within 45 days, then a bunch of technical work. Final line design, detailed study, detailed discussions with contract miners and also contract truckers. We'll also look at owner-operated model. There's a fair bit of equipment available for rental, where we could potentially do it on a small scale cheaper. Asanko, we're doing the work on the final work on toll treatment at this well for us. But you'll have a bunch of technical work coming out over the next few months, which will lead to completion of -- it will probably be a PEA, which is the Canadian equivalent given we plan to be listed on the TSX as well by the end of this year. And then probably the big milestone we hope first quarter next year is our EIA for Hualilan itself, which is Hualilan being fully permitted for not just toll milling but also for stand-alone production, which we hope we'll get in the first quarter next year. Next slide. Thanks, Ollie. And look, this just sort of breaks down again. What I've done is I've taken Henslow numbers because we can't use our numbers. A little bit light on. But effectively, you look at the usage of funds over the next 3 years, and these numbers are in U.S. dollars. So corporates, including the pre-feas and drilling, we plan to drill out those sort of 6 or 7 regional targets, which probably run us about 10,000 to 15,000 meters of drilling out of cash flow. So you're looking at AUD 21 million -- about AUD 10 million a year to do that. The bankable itself will run us about AUD 10 million. And then what does it cost? We take the scoping study. Now the stand-alone larger pit is probably a little bit more expensive, but we don't have to do the heap leach. We can probably get financed from Komatsu on all of the year. If we take the scoping study number, USD 60 million is our 40% equity share of CapEx. We've spoken to some of the larger project finances, and we're fairly confident we'll get 60% project finance, particularly given we will be generating a cash flow. You look at what's the forecast after tax from toll milling, almost $70 million based on Henslow's numbers, which are done at $2,300 gold. Gold is currently $2,650. The exercise of the option is about USD 5 million and then $20 million from either a silver stream or a gold royalty, probably looking at a 1% to 2% gold royalty. And again, we've had discussions with a number of royalty companies, and we're confident that money is there. So that gets us to the point where, hopefully, there's only one more small round of dilution, and there will be one more small round. That will be in conjunction with the listing on TSX. The reason being that if we don't raise a little bit of money to create some liquidity, the stock will never trade on the TSX, but that will be as small as we can manage, which is probably $4 million to $5 million, purely the Canadians. And then if it goes to plan, that's it, no more dilution. We're fully funded once we get into cash flow. Next slide. Thanks, Ollie. And look, just a bit of housekeeping. So the SPP, everyone either should have got via e-mail a link to get into the register or mailed to them, which is probably arriving in the next couple of days. On the left there, that's the key page, the share purchase plan application form. You can see that you've got a number of different sort of amounts that you can take up. And then I've just zoomed in on the right there. And very important, if you BPAY, make sure you use that exact BPAY reference number. Or if you deposit funds directly because this money goes into the share registry's trust account, then you need to use that application reference number, which is specific to each individual shareholder that's on there. So in this case, that's my application. I'd be making sure I use the reference number, 1193775-12455 to make sure that the money we deposit is recognized is coming from me. And look, if there are any questions, we've got -- we've retained a group of SPP. I suppose SPP experts who are helping shareholders. Feel free that [email protected], you can drop a query there. You can also drop a query to me and I'll pass you on to them, which most of our ASX -- all of our ASX releases have my e-mail address on them. So if there's any questions, any problems getting this, please let us know. We're here to sort of help shareholders and make sure shareholders don't miss out on participating in this one. So look, thanks, Ollie. And I think we'd probably just open it up to question time now.

All right. Beautiful. Thank you, Kris. Lots going on for Challenger, obviously, there. [Operator Instructions] But just a couple of pretty broad ones here. How do you see this share purchase plan impacting Challenger's liquidity and financial flexibility, particularly in the near term?

Yes. So look, I mean, we've still got the Ecuadorian assets. We finished drilling there. So Ecuador now costs us less than AUD 100,000 a month. That extra $1 million in the SPP would be quite useful as it gives us that additional runway where we can sit back and make sure we accept a good offer for Ecuador, not just the first offer that comes along. So that extra sort of liquidity from the SPP will be important if there's any sort of cost overruns. It covers that off as well. So it's -- look, it's 2 reasons. Yes, it's useful, but also we've never done an SPP. I mean, touch wood, hopefully, at the bottom of the share price cycle. And I think it's only fair that we let all of our retail investors in it at the same price as strategic.

Beautiful. With the toll milling -- with the Hualilan project and the toll milling starting in the next few months, what major operational milestones should we look out for along the Hualilan?

Yes. So look, I think as I said, first, is that order we've had done at the plant and the restart. Second will be some more metallurgical test work. And then Asanko getting to it for us, you will have a restart and a kick over of that plant, which has been on care and maintenance. Then you probably have first treatment of ore, and then the next milestone will be us commencing contract mining. And then really, I suppose, first shipment of ore or hopefully around about March, leading to first gold before the end of that first quarter. And then I'd like to think that our June quarterly report, when it comes out, we'll have some cash flow in it.

Beautiful. Beautiful. Still on the topic of the toll mining now. How does it compare so far with the rest of the Hualilan resource in terms of grade and quality? Can you speak to that at all? Or...

Yes. So look, the toll milling plant -- in Hualilan proper, there will be flotation, which is mainly sulfide ore and then there will be a heap leach component as well as the lower-grade material. The toll milling plant is a CEL plant, which is more effective for the oxide ore, which is the near surface ore, which mostly will toll mill. So the near surface ore is generally higher in gold. You did get a little bit, not much of supergene. It just so happens that's where you've got high-grade pods. And really, that sort of toll milling ore because it's mainly oxide is actually better treated through a toll milling plant than actually the sort of planned stand-alone Hualilan flotation plant that admittedly does have a flotation tails leach circuit, which will recover that gold anyway. But it's -- we're not losing anything by toll treating that oxide ore.

Okay. Okay. In terms of the tolling again. Will you have approval to run a large, any infrastructure, large road, trains, trucks, et cetera, to haul or to the toll mill itself?

So that's part of an [ AAR ] we're preparing and lodging now. We think that should be relatively quick. We also had an option. There's 2 transport options there. The second option is actually using secondary roads, which are fine. So it may well be that we use the secondary roads, not the main highway, which is still around the same distance. But no, we don't envisage any problems with getting that final approval through the trucking ore.

Okay. Awesome. And in terms of the SSP oversubscriptions, if it came to that, would you -- would Challenger consider scaling up with the offering and...

We've left ourselves the room. I mean what I would hate to see is a bunch of shareholders who all put in for a $3,000 or $4,000 worth get $500 worth. I don't think that's really fair. So look, we'll wait and see what happens, but that's a decision and a conversation we'd have towards the end of the SPP in the event it does happen.

Of course. Of course. Okay. And lastly, I think this is probably the last one we have time for. Can you -- with the current state of the prices of gold at the moment, what kind of steps is Challenger taking to maximize for the financial benefit of your current assets, the gold assets?

Yes. So look, as soon as we put this announcement out, we've had a bunch of groups approach us saying we want to hedge. Hedging is actually quite cheap at the moment. We will -- we haven't made any decisions. We will have a good look at that as to whether we do -- look, I think if we're going to do anything like that, it's probably buying puts where we don't have any risk the other way. I mean the thing is those numbers that have been down there for $2,300 gold at the current price, there's a lot more upside in there. Look, at most, we would probably cover our operating component with sort of out-of-the-money puts, which isn't going to cost much. You're looking at maybe 2.5% to do that. So that's really all we'll do rather than go and lock yourself in with a big forward program. We've seen other gold companies who have done that and then the production hasn't materialized. But effectively, if it goes the wrong way, they'd blow themselves up. We're not going to do that. So I'd rather take the gold price risk, then take this sort of hedging risk, particularly given the grade that we're treating. I mean it's going to be low cost.

Amazing, Kris. Thank you so much. Look, I don't see any more coming through and it is 12:00. But just to reiterate, guys, [email protected] is that e-mail address that Kris mentioned before. And if any questions, please feel free to reach out to Kris or [ JMM ] at the details, at the base of any of the ASX releases. Thank you so much, Kris, for joining me today. Thank you, everyone, for joining, and we'll see you next time.

Thank you, everyone. Thank you. Buh-bye.