Lundin Gold Inc. (LUG) Earnings Call Transcript & Summary

Good morning. My name is Pam, and I'll be the conference operator for today. At this time, I'd like to welcome everyone to Lundin Gold 2021 guidance throughput expansion study and increased probable minerals reserve update conference call. [Operator Instructions] Mr. Hochstein, you may begin your conference.

Thank you, Pam. Hello, everyone, and thank you for joining us. Joining me today are Alessandro Bitelli, our Executive Vice President and Chief Financial Officer; and Dave Dicaire, our Vice President of Projects. Just over a year ago, we poured first gold here at Fruta del Norte and brought Ecuador's first large-scale underground gold mine into production. Shortly after that, we declared commercial production. And now we are looking to our future as the company embarks on expanding its mine and mill throughput and exciting exploration programs, both underground and regionally. The fact that we're able to do this so soon after going into production is a result of our hard-working team and further demonstrates what a truly unique asset Fruta del Norte is. On this call, I will review our 2021 production guidance and discuss the results of the throughput expansion study. I will also touch on our increase in probable mineral reserves, the new life of mine plan and 2021 exploration drill program. Afterwards, there will be time for Q&A. Before I get started, this discussion includes forward-looking information. Actual future results may differ from expected results for a variety of reasons described in the caution regarding forward-looking information and statements section of our presentation. All amounts are in U.S. dollars, unless otherwise indicated. Next year is anticipated to be our first full year of operations, and Lundin Gold expects to produce between 380,000 ounces and 420,000 ounces of gold. Average mill feed rate will start the year at approximately 3,500 tonnes per day. And once the throughput expansion is completed later in the year, average mill throughput will increase to around 4,200 tonnes per day. Average head grade is estimated to be 10.4 grams per tonne gold, with variations expected from quarter-to-quarter as we mine different areas of the ore body. Average mill recovery is estimated at 90%. All-in sustaining costs for 2021 are expected to range between $770 and $830 per ounce of gold sold. Lundin Gold remains in the lower quartile of all-in sustaining costs when compared to gold producers globally. At current gold prices, the company is poised to achieve significant operating cash flow in 2021. Our 2021 all-in sustaining costs takes into account a number of factors, including continuing COVID-19 costs, continuing training of our Ecuadorian workforce, increased concentrate transportation costs and increasing backfill and maintenance expenses. The company has assumed that COVID-19 protocols at Fruta del Norte will remain in place for the full year, representing a cost of approximately $27 per ounce. The increased concentrate transport costs are due to the fact that as we push on improving recovery, we are producing more concentrate but at a slightly lower grade. This results in higher transport costs on a per ounce basis. The commissioning of the paste plant occurred later than originally planned. And as a result, we expect higher backfill costs in 2021 to catch up in the mine. Sustaining capital programs include the completion of the first and second raises of the tailings dam, resource expansion drilling and other onetime improvements at the mine site, some of which had to be deferred this year due to COVID-19. Our throughput expansion is a near-term catalyst that we believe will bring additional value to our shareholders. We recently completed an internal study, which confirms that we can increase the mine and mill throughput from 3,500 to 4,200 tonnes per day or 20% increase at an estimated capital cost of only $18.6 million. This will be funded by cash flow from operations, and we anticipate that the expansion can be completed with minimal disruption to operations. We've hit the ground running and have already started detailed engineering as well as priced orders for the key pieces of equipment. Construction is expected to begin in the first quarter of 2021, with the mine ramping up to 4,200 tonnes per day in the third quarter and the mill reaching this rate in the fourth quarter. In order to complete the expansion, we will purchase 2 45-tonne mine haul trucks, 1 in 2021 and 1 in 2022; add rougher flotation capacity; a third gravity concentrator; a second concentrate filter press; and the second tailings paste pump. No additional infrastructure is required. Our increased throughput does not mean we'll be expanding Fruta del Norte's footprint as this is not expected to impact any of the undisturbed areas around the site, and it's within the scope of the environmental and social impact assessment for Fruta del Norte already approved by the Ecuadorian government. There are 2 remaining construction projects that are carried over from 2020, the completion of the South Ventilation Raise and our Zamora River Bridge. Completion of the South Ventilation Raise is expected near the end of the first quarter of 2021. And while completion is not currently impacting mine production, nor our early 2021 production plans, it is required to achieve expanded mining rates. Construction activities have begun for the bridge. The Zamora River bridge is expected to be completed in the second quarter of next year. In 2021, anticipated spend on these 2 projects is about $9.5 million. Underground conditions have pleasantly surprised us since the start of mine development, and we continue to see additional benefits. The good ground conditions experienced in the mine to date have enabled us to convert a significant portion of the drift and fill areas to long hole stoping. As a result of this change, plus increase in the west of long hole stopes from 12 and 14 meters to 15 meters, our probable mineral reserves have increased 8% to 5.4 million ounces and 8.1 grams per tonne. Our new probable reserves were updated as at the end of July 2020. Increased production can mean a shorter mine life, but that is not the case with Fruta del Norte. The new life of mine plan, which is based on the increased mineral reserves and throughput expansion, provides for a total of 4.8 million ounces of gold production over a 14-year mine life to 2034. Average annual gold production for the first 5 years is projected to be 390,000 ounces per year, and for the life of mine, has increased from 325,000 ounces to 340,000 ounces per year. Fruta del Norte continues to be one of the few multimillion ounce high-grade gold assets in production. Blue sky exploration potential exists within our concessions and, systematically, looking for additional gold-silver epithermal deposits is another way Lundin Gold is going to bring additional value to its shareholders. The highly prospective Suarez Pull-Apart Basin is 38 square kilometers, with Fruta del Norte located in the north. The southern area of the basin remains untested, and geological conditions there are similar to those at Fruta del Norte. We expect to start a 9,000-meter drill program in the first quarter of 2021 on our high priority drill-ready Barbasco and Puente-Princesa targets. Barbasco is located along the eastern edge of the basin and is a 3.8 kilometer long anomaly and have similar surface expressions, structural location and orientation of Fruta del Norte. Barbasco is defined by soil and rock samples, anomalous in the epithermal pathfinder elements arsenic and antimony, Illite and marcasite alteration and a resistivity anomaly. Small-scale epithermal gold-silver stockwork veins in the Barbasco area have also assayed up to 10.4 grams per tonne gold. A 6,000-meter drill program will test at least 3 sections across the target. Puente-Princesa is located on the western edge of the basin, and it has outcropping epithermal gold and silver mineralization, including 10 meters at 4.89 grams per tonne gold that was part of a trench in 2004. Untested pathfinder element anomalies exist in this target, Suarez Basin conglomerates, and a 3,000-meter drill program will test geochemical anomalies. The budget for the entire program is $11 million and will be helicopter-supported, and support services will be independent of Fruta del Norte's operations in order to comply with COVID-19 protocols. Drilling will start as soon as we can complete the required community socialization and construction of an exploration plant kept close to the 2 targets. With this tough year behind us, Lundin Gold is looking ahead to an exciting 2021. This includes producing 380,000 to 420,000 ounces of gold, increasing our mine and mill throughput by the end of 2021, continuing with the underground resource expansion drill program, and, last but not least, starting a 9,000-meter exploration drill program on our high-priority Barbasco and Puente-Princesa targets. It's going to be an exciting year for our shareholders and for the employees of Lundin Gold. Thank you for your time. And Pam, I now will open the call to questions.

[Operator Instructions] Your first question comes from Trevor Turnbull with Scotiabank.

Yes. Ron, I think it's good news that you were able to modify the mining plan and pick up those extra reserves. I just wondered with respect to that, as you look at kind of the new weighted average of mining methods based on the new mine plan, can you give us a little visibility on kind of what that mining cost per tonne will look like going forward as you've made these modifications?

Trevor, yes, our mining costs right now for 2021, which is mostly going to be -- there's very little drift and fill that's running in the $60 to $65 per tonne of ore -- that's an ore mill. I believe, right, Dave, that's per ore tonnes or mills?

Correct.

Yes. So on a mining basis, it's obviously slightly less than that. But we're mostly in the transverse long hole stoping. Right now, our drift and fill, we're really not getting much of that for a couple of years.

And that's, I guess, what I was more getting at is more life of mine or maybe you'd given that kind of 5-year guidance that 5 years, we're kind of looking at 390,000 ounces. Can you give us a sense of kind of where that mining cost falls in, say, that next 5-year frame?

I would say it's -- I'm looking at some things right now, Trevor. I'd say we're not going to be that much different from that. I would say that $60 to $65 -- so I was just tracking, that's actually per tonne of ore mined, not milled. So it's -- we'll be in that range.

Okay. And the question just on unit costs is once you've made the plant modifications and are able to get it up to the 4,200, do we see much difference in the unit costs on per tonne milled?

Some, but not a lot. Yes, there's not a lot, Trevor, there.

Okay. And then my last question, just looking at the Slide #11, you've given the life of mine production profile. Obviously, there's some -- a variability, I guess, based on grade and access. The 22 to 23 transition is pretty sharp. Is that something that you think with -- as you get a little closer in time, potentially, you can smooth out? Or is this probably as good as it gets for the time being?

No, it isn't as good as it gets. Obviously, what we'd be looking at is trying to smooth that out and, if necessary, even start looking at further expansion. As that grade drops off, can we expand more to keep it more consistent, higher gold production, that's something that we'll start looking at, Trevor.

Your next question comes from Bryce Adams with CIBC.

The first question relates to the expansion stage. So originally, when this was first talked about, you indicated the expansion study could range from 4,000 to 4,500 tonnes per day. I just was wondering, what were the trade-offs you considered when you landed on 4,200 tonnes per day? And what do you expect to be the bottleneck or critical item in that 4,200 tonne per day scenario?

Dave, do you want to -- you've been involved in this from the start. Do you want to take that question? Thanks, Bryce, for the question.

Yes. We looked at a couple of things. There's a couple of bottlenecks. In the mine, the bottleneck becomes air -- air supply. And there is some things we can look at going beyond 4,200, but those are more longer term. So we will look at those in the future if we drill that. But right now, we have enough air to support the fleet that's required for the 4,200. And the other thing, when we went over the process plant, we're basically starting to hit the limits on power on the mills at around 4,200. To go beyond that, we probably have to put some additional cooling on the motors, and we wanted to allow a little bit of catch-up. 4,200 is a constant rate. So there are just days we will have to run 4,200. Whether we could do that consistently, I don't think that's something you want to do in your base plan. So the mills and the air supply is -- the 2 constraints we'll have to look at to go beyond 4,200.

Got it. And then that changed to a high proportion of stoping that's cut and fill that will help on the underground production rates, I assume?

Yes. We can look at things like different configuration of the trucks. In the early years, we have some cemented rock backfill. So we have to backhaul underground some of that. So yes, when we do the next life of mine plan, we'll have an opportunity to optimize that, a better experience on the air supply and whether we can push the limits on that. We're pushing up against the velocity limits in some of the areas of the mine, but we can look at that further once we model it and get it all operating.

Got it. Just jumping up to the 2020 gold recovery. Do you expect this to improve over the course of 2021? Or would you be thinking of it ending 2020 at around 90% and maintaining that level throughout the year?

No. The expansion study is going to help us to give us more opportunities to further increase recoveries, Bryce. The addition of the rougher flotation obviously gives us a lot more retention time, and that would give us opportunity to go above the 90%.

Yes. Okay. And so if you weren't doing the expansion study, and you're just sticking to the original technical report and configuration, was there any issues with recoveries? Or you would have got to that 92% level, you feel?

I think it would have been tough for us to get to 92%, but we are seeing performance now. The team continues to do different things. We've seen quite a step-up of recovery increase in our gravity because we made some changes in October to the flow sheets so that all our underflow now is going to the gravity circuit. And we've seen that go from 18% to -- into the low 20s recovery on the gravity. And we -- and with reagents, rate of distribution, we started trying out copper sulfate. There's some things we're doing, Bryce. We continue to see improvements in recoveries, but that additional retention time will just make it that much easier to get there.

Yes. Okay, good. Last one for me is just on the regional exploration program and a pretty specific question for my model. Just wondering if those costs would be expensed or capitalized.

Good one for you, Alessandro?

Those costs would be expensed.

Your next question comes from Arun Lamba with TD Securities.

So congrats on the update, guys. Just a quick one, regarding the outlook, can you just remind us on the timing of concentrate shipments? Like I know sales, like, production in Q3 and then you fully caught up in October. Just wondering, should we expect that kind of going forward? Or was the lag kind of just because the COVID-19 shutdown when you started? Just kind of wondering how sales versus production will be next year.

Alessandro, do you want to take that one?

Yes. No, the Q3 had an original lag because we effectively started production from a deal base on July 1 after the suspension of operations. We do expect the natural lag of -- sorry, concentrate sales and cash receipts to be consistent on shipments. But as we are producing on a more regular basis, the fluctuations between -- and the differences between production and sales of gold will be much smaller. And therefore, similarly, we do not expect those much larger working capital calculations that we saw in Q3. So the production and sales, we expect them to be fairly consistent with minor differences.

[Operator Instructions] Your next question comes from Kerry Smith with Haywood Securities.

Dave, maybe you can answer this question. In this new plan, what is the percentage split over the life of mine between drift and fill and the long hole?

It's 82-18 from what I recall. I think Ron, am I correct on that?

Yes, that's about right. Yes, yes.

And so basically, 18% long hole. Is that pretty constant year-by-year over the mine plan? Or is there some...

No, it's -- what's left in the drift and fill, Kerry, is down deeper where we really haven't got the development to test to see whether we could shift it as well. And then -- and also the drift and fill, which will -- I think will likely stay drift and fill up near the top of the -- we're reminding you the crown pillar.

Okay. So...

It's primarily going to be -- for the next little while, it's primarily going to be long hole.

Okay. And would the next little while be, like, say, the next 3 to 5 years in the mine plan, it's pretty much all the long hole then?

I could say pretty close to always, right, Dave?

Yes. I would say that's pretty good indication. I think it's -- yes, 3 to 5 years is probably there. One thing that we tried to do was to level our development. Also over the life of mine, we don't want to push too much development to go after some of these areas. So we're doing a trade off, and we'll see where we get this year and the next life of mine plan. Obviously, we're going to try and bring as many ounces forward as we can, but we still have a life of mine plan to keep that development fairly level in...

Okay. Okay. Great. And then, Dave, also, for the front end of the plant, the crushing and grinding circuit, when it was originally designed, what was on -- just remind me what the notional design rate was? Was it the 3,700? Or was it something larger than that because it is oversized?

The crushing plant is it's based on availability, not throughput. We're seeing the rock come out of the mine pretty fine. So we're not having really any issues pushing tonnage through the crushing plant. The key thing is the mills, and we made a conscious decision to add 20% power to the mills. Basically, we had bank scale, hardness tests. We didn't have access to the underground to do a lot of testing on hardness. So we did add 20% to the mills, which is the key components that you have to expand in that area, so.

And actually, right now, we're actually -- it's pretty rare, but actually, we're seeing more softer than what we'd anticipated, so.

So based on -- I'm not sure if you can answer this question. But based on the hardness of the ore that you're seeing, do you think [ that's a sign ], like, the mills could do 4,500 tonnes a day? Or is 4,200 kind of pushing to the top that...

Dave answered that already, that that's -- we think we might have to look at some changes maybe at cooling or something, but we'll keep -- that's the next step, Kerry, get the 4,200 up and running and keep pushing days into what we can do and see what we find out.

Okay. Okay. And Ron, for the reserve increase, what would the reserve of business you would use to gold price, the same as you had last year, the $1,250? Do you know what that number might be? Just curious how much...

Yes. Yes. Very little of the increase was due to the change in the cut-off grade due to a change in gold price, Kerry. It was less than 10%, probably less -- around 7%, 8% increase due to the change in the cut-off grade. This ore body kind of has a natural cut-off grade of just around 4 grams per tonne. Where we saw this was just a change in the ability to convert this and a little bit more on the stope, but most of it was conversion. And as I say, very little was actually change in price.

Okay. Okay. Great. Okay. And just on the 2 exploration targets that you plan to drill, I can't remember, but can you remind me if either these targets had any stope drilling back in the old days? Or are they both targets that have only been prospect-entrenched?

There are only -- there's no drilling that's been done on any of those. The drilling that we did do was further south and -- further south of Puente-Princesa on the west side of the basin. We did that in 2018, I believe. But that's certainly drilling 18 holes we did in 2018, but these 2 targets are total greenfield.

Okay. I guess in terms of the drill schedule, you'll -- I assume you're going to have 1 rig out there, and it's going to go from 1 target to the other. So that program would run for, I don't know, 4, 5 months, I guess. Is that roughly how it work, Ron?

Yes, it's roughly a 6-month program right now, Kerry. We'll start with 1 rig and probably bring in a second rig in after we've got a couple of holes into Barbasco. And Steve and the team had looked to see where -- which way we should be going, and then we'd probably bring a second rig in to support it. They are -- the initial holes are deep.

There are no further questions at this time. Please proceed.

Great. Thanks, Pam. Thanks, everyone, for taking the time. And again, thanks to the team here for getting ready for 2021 and continue to perform through 2020. So thanks, everybody, and have a great day, and a good chat with all of you, and have a great Christmas. Thank you. Thanks, Pam.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.