Mandalay Resources Corporation (MND) Earnings Call Transcript & Summary

Good morning. My name is Hector, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Mandalay Resources Corporation's Third Quarter 2020 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. This call contains forward-looking statements, which reflect the current expectations or beliefs of the company based on information currently available to the company. Forward-looking statements are subject to a number of risks and uncertainties that may cause the actual results of the company to differ materially from those discussed in the forward-looking statements. Factors that could cause actual results or events to differ materially from the current expectations are disclosed under the heading Risk Factors and elsewhere in the company's Annual Information Form dated March 30, 2020, available on SEDAR and the company's website. Joining us on the call today is Dominic Duffy, President, Chief Executive Officer and Director of Mandalay Resources. Please go ahead, sir.

Thank you, Hector. Good morning, everyone, and thank you for joining us today. With me on the call today is Nick Dwyer, Mandalay's Chief Financial Officer. Before getting into any financials, I would just like to state that any dollar amounts, unless I otherwise state, are in U.S. dollars. So Mandalay released its third quarter 2020 financial results at market close yesterday. You can find our consolidated financial statements and MD&A on the Mandalay Resources website and also under our profile on sedar.com. Mandalay Resources had an outstanding third quarter in 2020. We leveraged another strong quarter of operational performance, a 16% year-over-year increase in realized gold prices and good cost control to deliver one of our best quarters on record. Before we get into our operations, I just wanted to take a moment to speak about just how significant this quarter was for the company. Compared to the third quarter in 2019 our third quarter in 2020, we grew our quarterly revenue by 73% to $50 million. We more than quadrupled our quarterly adjusted EBITDA to $27 million. We grew our consolidated production by 54% and lowered our cash and all-in sustaining costs by 30% and 27%, respectively. We generated an adjusted net income of $9.8 million or $0.11 per share, and we generated quarterly net cash flows from operating activities of $29 million and $17 million in free cash flow. To put this quarter into perspective, our revenue was at highest it's been since the second quarter of 2016, which was when we had 3 producing mines. And our free cash flow for the quarter was approximately 15% of the market cap of the company as of this morning. Our adjusted quarterly EBITDA was the second highest in the company's history. We've been producing since at the end of 2009. So for the Q3 2020 EBITDA to be the second highest out of plus 40 months -- now 40 quarters, that is extremely impressive. While I'm pleased with Q3 results, what I find most significant is that we have carried out our turnaround plan for 2020 in the manner which we have been highlighting to our investors for quite a period of time. So Mandalay has turned the corner. The company has now demonstrated 4 consecutive quarters of dramatic operational and financial improvement. This includes 4 straight quarters of consolidated salable gold production improvements and also 3 straight quarters where Mandalay has grown its revenue, EBITDA and adjusted net income. This continued and sustained performance highlights not only the successful execution of our operational turnaround strategy at Costerfield, which was to reach, develop and ramp up high-grade production at Youle, but also demonstrates our positive growth trajectory going forward. With 3 quarters completed, we are well positioned to maintain our upwardly revised consolidated production guidance of 100 to 109 ounces of gold equivalent. So I'll turn to our operations now. On a consolidated basis, we produced 25,664 ounces of salable gold equivalent. Cash and all-in sustaining costs of $826 and $1,355 per ounce, respectively. The company's consolidated production was driven in large part by Costerfield, which continues to deliver high-quality, low-cost production from the Youle vein. In the third quarter of 2020, Costerfield produced 11,749 ounces of salable gold and 991 tonnes of salable antimony for 14,620 ounces of gold equivalent. This is a major improvement over the same period in 2019, where Costerfield produced 3,103 ounces of gold, 402 tonnes of antimony and 4,747 ounces of gold equivalent. Costerfield's cash cost per ounce of gold equivalent production was $657, down 64% from the year ago quarter, and all-in sustaining costs were $1,088, significantly lower than Q3 2019. This resulted in a record quarterly EBITDA, adjusted EBITDA for Costerfield of $18.8 million, which surpassed the previous record of $15.4 million set last quarter. The uplift in production and reduced costs were largely grade-driven, as our process grades averaged 11.5 grams per tonne and 4.1% antimony. We expect to see similar production profile for Costerfield in the fourth quarter 2020. And while we have yet to release our 2021 guidance, we expect to see Costerfield production increasing in 2021 as stoping is ramped up in the Youle vein. At Björkdal, we delivered another quarter of stable profitable performance. The mine produced 11,044 ounces of gold in the third quarter of 2020, which was slightly lower than the 11,880 ounces produced in the third quarter of 2019. Cash and all-in sustaining costs were slightly higher at Björkdal as well at $1,051 and $1,505 per ounce, respectively, versus $941 and $1,332 per ounce a year ago. This resulted in a quarterly revenue of $21.9 million and $9.6 million in adjusted EBITDA in the third quarter of 2020. As you know, we have shifted our operating strategy at Björkdal to focus on maximizing the delivery of higher margin ore feed to the mill. This means boosting the overall mix of high-grade underground ore and supplementing the mill capacity with low-cost, low-grade stockpile ore. This transition is still underway, though. We are working to ramp up production in the haulage of underground ore with the goal of delivering at least 1 million tonnes of underground ore to the mill per annum. And we are developing further into the high-grade lower levels of the Aurora zone. We expect Björkdal's performance both operationally and financially to improve as we execute this strategy. Overall, our performance -- our operations are in a very good -- in a very strong position. And I can say they're stable and growing. They are performing well and generating significant cash with additional upside to come. We look forward to delivering further information on our 2021 production outlook when we release the guidance in January. Also subsequent to quarter end, we also had some exciting exploration success that I'd like to touch on. A few weeks ago, we announced some excellent results from our drilling at Costerfield at the high-grade yield deposit, which will help to continue growing this deposit. We encountered significant high gold graded pit confirming our expectation that the deposit is growing at depth, and that's more high-grade mine life to the Costerfield operation. Some of the grades we intercepted approximately 100 meters below the current Youle mining operations were extremely high. Some highlights include 99.8 grams per tonne of gold over a true width of 0.3 centimeters; 60.3 grams per tonne of gold over a true width of 24 centimeters and 144 grams per tonne of gold over a true width of 57 centimeters. We are also continuing extension drilling to the north of Youle. Some of the intercept highlights are 84 grams per tonne of gold and 53% antimony over a true width of 44 centimeters, 186 grams per tonne of gold and 37% antimony over a truth width of 27 centimeters and 214 grams per tonne of gold over a true width of 18 centimeters, which is the deepest hole drilled down plench on year-to-date, which shows the significant potential for depth extension within this Youle deposit. Our exploration program also indicated the potential for discovery of a minable mineral in the Minerva Reef, which is within the same new system as the Youle vein and in close proximity to the current operations there, around 50 meters above the current infrastructure. And this area has already been deep watered. Adding in a separate mining area close to Youle is especially interesting as it is not -- it not only adds to Costerfield's mine life, but it also would be very low capital for us to bring it into production. Before we turn over to questions, I'd like to lay out the company's priorities over the next 12 months. We currently have 4 main areas that we're going to focus on. Firstly, we want to maximize our cash flow from our operations. We definitely want to take full advantage of this record high gold price environment. This means continuing to grow our production at both Costerfield and Björkdal. We've seen a significant lift in year-over-year production versus 2019, and we expect the production uplift to continue in 2021. Next, we want to unlock further value and extend mine life through exploration. At Costerfield, this is extending the mine life at the high-grade Youle deposit, unlocking other value through new discoveries, whether that be Minerva, Brown's or other targets planned to be drilled over the coming year. At Björkdal, our objective is to continue to delineate and grow Aurora and other high-grade ore sources, focusing on depth extensions to the north of Aurora -- oh sorry, depth extensions into the north of Aurora. Our third priority is derisking our balance sheet. We plan to significantly strengthen our balance sheet in the coming quarters. As of quarter end, our debt position was $62 million. Improved operations and cash generation allowed us to grow our cash position from $21 million to $33 million quarter-over-quarter. We expect this trend to continue, and we are very well positioned to be net debt-free during 2021. Lastly, our balance sheet has been derisking. We will turn our attention to reinvesting cash in growth opportunities that will continue to strengthen the business and service value for our shareholders as we go forward. Thank you, everyone. This concludes my presentation. We can now turn it over to the -- back to Hector for any questions.

[Operator Instructions] Our first question comes from the line of [ Robert Plump ] with -- private investor.

Congratulations on the good quarter, the production numbers and the cash flow. It's a tremendous quarter and a testament to all of your guys' hard work in these difficult times. My first question is about taxes. Can you tell me a little bit more about that? What do you -- does the company have a tax loss carry forward from all the prior year's losses? Can you just give me a little bit more color about that, please?

Yes. I might hand that question over to our CFO there, [ Robert ]. Nick, if you want to jump in?

Yes. Thanks for that. So we have -- so obviously, the 2 mines, I'll start with Costerfield in Australia first. The mine there, we obviously had not the best 2019. So there were accumulated losses that we were running up over that period. However, due to the, I guess, the stellar 2020 that we've seen from Costerfield, we do expect to be in a tax payable position in 2020. However, we are intending on having the -- we also have the hedges as well, which they'll be in the -- in Costerfield at that time. So there is a potential to offset some of those -- some of the hedging payments that we've made throughout the period to offset that. So it is a bit of an unknown at this stage, but for 2020, I think, where we'll be sort of -- won't be paying tax, but it will be going into next year that we have the potential, too. Similar position at Björkdal in Sweden, it's a slightly different tax system where you can defer profits, but we don't expect any profits in Björkdal -- or any taxable profits in Björkdal to be materialized over the next few years.

Okay. Very good. Also, can you speak as to the remaining life of the mines, particularly with Costerfield? When you guys purchased it, I think it had a life of just a couple of years, and specifically, has Costerfield ever had more than 3 years' worth of reserves?

Yes, [ Robert ], pretty much 3 years is a limit that we've always hit up against -- with our reserves. When Mandalay purchased it in 2009, it had 0 reserves. So they have gradually been growing. So I think you'd find with the success of the most recent drilling in Youle. I'd be confident in saying we've pretty much got 4 years of life confirmed in front of us. I do hope that we'll get further depth extensions from Youle. However, we've been drilling start -- we have been drilling Brown's that definitely has potential to turn into next deposit. Youle could get a -- sorry, Minerva up above Youle could get us another year or 2. But I definitely am confident of being able to add life through new discoveries and possibly some more in Youle as well. We have slowed down our drilling at Brown's as of late because of the success of the drilling down deeper into Youle, going there. We have moved both -- most of our rigs back there. So I was hoping to have more information soon on Brown's, but that's been pushed back as a result of the success on Youle.

Okay. You guys have done a tremendous job. I think one of the problems that casual investors come across is they think that the mines do not have that much more life left to them, when in actuality, they probably do. So hopefully that will be -- people will realize that the actual true quality going forward. My next question is, I know it's pretty hard to quantify, but your levels of capital expenditures here for the past couple of quarters, are those what you would consider normalized? Or are they a little bit larger than usual? What can we kind of expect going forward?

They're definitely inflated at the moment and will be next year as well. So the big capital cost we have over the 2020 and 2021 is a significant tailings dam lift at Björkdal. So that's costing us approximately $20 million. So a little under $10 million this year and probably slightly over $10 million next year. That lift gets us 10 years life at Björkdal. So following on from that, you can pretty much eliminate that $10 million spend at Björkdal per annum over these 2 years and you'll see a reduction in our capital from 2022 going forward. So that's why I do say they are inflated. At Costerfield, it is pretty stable capital at the moment, although we are doing capital development. So because we don't have our own capital development jumbo rig on site, when we bring in contractors to all the capital development, then that contract finishes, and we'll probably have a year without capital development occurring. And that cost us around about $9 million per annum. We would expect our current program of capital development to finish in the first quarter of next year. And then that gives us a yield period with no capital development and $9 million less before you'd look at bringing another contractor in for capital development.

Okay. Very good. And last question here. In 2021, you guys anticipate becoming net debt-neutral or having an actual cash position. After your cash exceeds your debt, do you have any plans for reinitiating a dividend? Or can you speak to that at all, please?

Yes. Yes. So yes, obviously, we are restrained at the moment with the debt and the covenants, we are unable to pay dividends. That is definitely something we'd look at once we are net debt-free again. Obviously, it's a trade-off trying to grow the company through other means possible acquisitions or the likes or even investing further in exploration. But it's definitely a discussion that will be ongoing at Board level, and it is possible that we would re-implement the dividend going forward.

[Operator Instructions] Our next question comes from the line of Peter Fraser with West Face Capital.

Just like [ Robert ], I'll congratulate you on a great quarter. I think what was even more impressive in the quarter is you had described to us over a year ago where we would get to by Q3 end of 2020. And I think you've exceeded that. So congratulations to the entire team at Mandalay. What I'm also excited about is you were saying you anticipate further improvement in the fourth quarter in Costerfield. And maybe you could just sort of describe -- just add a little more color to that statement there.

Yes. So you'll see there would be a larger increase in 2021. But yes, we do still anticipate some further growth in the fourth quarter because little by little, you're always becoming more predominant of the source. So probably in the third quarter, approximately 80% of the material was coming from mill. That will be getting up to the mid-80s in Q4. And also, we are slowly increasing our stoping. So the stopes because they are narrower than the actual development drives because these are very narrow veins. The grades of our stopes are higher grade than the grade of our development drives. So it's just a transition of from development to production, and that's where we get our further grade lift. That's it. I wouldn't expect it to be very significant in quarter 4, but we do anticipate a slight increase as well.

Okay. And could you just describe a little bit more about Minerva? What your plan is to figure out whether that's worth going after hard? And it's very exciting to see that the drilling results at depth. But I'm just sort of -- I'd just like a little more of your description of what -- how you will go after Minerva?

Yes, definitely. So our focus at the moment is deep drilling at cost of Youle because we focus firstly on the shorter term material. So that material would be mining before Minerva. But we do have 1 machine slowly drilling into Minerva. It's unknown at the moment because there's not enough holes into it. But what we do have does show that there is quite a bit of continuity. And this is a same to same system as Youle because it's actually set from there's a mine fold that is part of the mineralization. And so this Youle is below this fold and Minerva. And then this fold becomes mineralized as you continue to go up. And then the mineralization becomes more vertical, so passes into this Minerva vein. So it's only approximately 50 meters away from Youle. The reason we haven't really seen it earlier is because it's in the footwall of what we've been drilling historically. So we've been drilling from the wrong angle that we never pass-through. So it's extremely exciting because of its proximity, and it's a natural continuation of the old Costerfield mine and what they use to mine there, and it's a vertical continuation of Youle. So we have confidence that we should be able to find minable reserve within this Minerva. You won't be getting the results very quickly because our focus is again on adding to this area down deep to the north and south of Youle that we have drilled. I don't think we'll be having enough information on it you see it to put out another release, but I'll expect early in the New Year.

Your next question comes from the line of [ Ernie Molesh ] with -- private investor.

Congrats on a great quarter. I was a little bit surprised by the amount of tax that you guys had to pay. Is the tax rate in Australia 39% because that's what it works out to as the percentage of your income?

Yes. I'll hand that one over to Nicholas, [ Ernie ].

No, it's actually -- it's 30%, [ Ernie ]. What -- I think what you're seeing there is the prior period true-up from last year. So when we lodged last year's return, there's always a sort of true-up, it's the way it works. So that's the -- I think that's the effective interest rate, but the actual interest rate that we're paying on our taxes is 30%. And I did fail to mention earlier, it's around 22% for Sweden, just out of interest. But yes, the main reason it is slightly higher this period was because of the prior period true-up from 2019.

The second question I have is, are you still planning to put in an ore order in Sweden to increase the effective ore grades there?

Dom, you might be on mute if you're...

Yes, sorry about that. So in 2021, we're not currently contemplating that because our focus for capital expenditure will be on mainly exploration at both of our sites. I do anticipate we'll see a significant ramp-up in our exploration at Costerfield and also increases at Björkdal. We just feel at the current time with the capital we have available, we can add more value to the company than putting in optical sorting because you're looking at the margins of ore sorting it is profitable for us, by doing it has a payback period over a couple of years, but we still do want to add more life at Costerfield and that will be our capital priority for next year.

Okay. So there's more of a bank for the buck going after the higher grade ore, right?

Yes, definitely. I think there's more value for the company in growing the Costerfield mine life and finding higher grade mineralization at Björkdal.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I'd like to turn the call back to Mr. Dominic Duffy for closing remarks.

Thanks, Hector. Before we disconnect, I would like to just give a special thanks, and thank you to the Mandalay team for their contributions to delivering such a strong result and ensuring that the company could be placed in such a strong position. And I look forward to updating the market on future progress, and hope everybody has a great day. Thanks, Hector.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.