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 Q1 2021 Financial Results Conference Call. Joining us on the call is Dominic Duffy, President, Chief Executive Officer and Director of Mandalay Resources. [Operator Instructions] As a reminder, this conference 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 31, 2021, available on SEDAR and the company's website. I would now like to turn the conference over to your host, Mr. Dominic Duffy. Please go ahead, sir.

Thank you, Hector. Good morning, everyone, and thank you for joining us today. With me on the call is Nick Dwyer, Mandalay's Chief Financial Officer; and Chris Davis, Mandalay's Vice President of Exploration and Geology. Mandalay released its first quarter 2021 financial results at market close yesterday. You can see our consolidated financial statements and MD&A on Mandalay Resources website under our profile on SEDAR. Mandalay Resources delivered another solid quarter in Q1 2021. Overall, I am very pleased with the current state of the operations. Both are in strong positions, as we continue to execute on our operational strategy. This quarter, again, highlights the quality of the yield deposit, as it's becoming the anchor for the company with its continued financial and operational performance and exciting exploration potential. Before we get into our operations, though, I would like to pass the call off to Nick, who will walk us through the financial highlights of the company during Q1. Nick?

Thanks, Dominic. From a financial point of view, Q1 was a strong start to the year. We grew our consolidated revenue $53 million, which was a 26% increase compared to our Q1 2020. We recorded our third highest quarterly adjusted EBITDA of $26 million, which translated into a solid EBITDA margin of 50%. Our consolidated cash and all-in sustaining cost per ounce were $883 and $1,212, respectively, which was broadly in line with the comparative 2020 quarter. We reported an adjusted net income of $5.6 million or USD 0.06 or cad 0.08 per share, and a consolidated net income of $25.5 million or USD 0.28 or CAD 0.35 per share, which is the highest in the company's history. The difference between the 2 net income amounts was mainly due to a $20 million fair value gain on the hedges. This was due to the decrease in the gold price and the strengthening of the Australian dollar versus the U.S. dollar over the quarter. Finally, Mandalay closed the quarter with $30 million in cash, which was slightly lower than the $34 million at year-end 2020. And the reasons for the decrease were, first and foremost, the largest impact of around $4 million was a change in payment terms with our principal antimony customer at Costerfield, which meant that we only received 2 months' payment of provisional invoices in the quarter. It's worth noting, this is purely a timing issue that will only impact our first quarter. Secondly, we made a one-off, $2 million prepayment to a contractor [indiscernible], who's performing the major [indiscernible] uplift, which is happening this year. We incurred just over $1 million of start-up costs for the waste dump processing at Cerro Bayo. It's worth noting that, subsequent to the first quarter, in April, we sold our first concentration. And Dominic will speak more about this later in the call. We also pay -- repaid $3.8 million on our syndicated facility, leaving $55 million outstanding on that tab. And lastly, we paid $1.5 million to settle the obligations of our hedging program throughout the quarter. That said, going forward, we expect our cash balance to grow in the future quarters. Thank you. I'd like to turn the call back to Dominic. Dom?

Thanks, Nick. Now turning to our operations, Mandalay, we continue to build off the strong momentum that we've generated in 2020. And we delivered our sixth consecutive quarter of excellent operational results in its third consecutive quarter of the quarter -- of increased production, both demonstrating the sustainability of the company's operational turnaround. Consolidated salable production of 28,700 ounces of gold equivalent was the company's highest production rate since the fourth quarter of 2017. Mandalay's production profile is expected to improve, and this solid start to the year is putting us firmly on track to meet our 2021 production and cost guidance. A large part of the strong quarter was due to continued high-quality ore coming out of Costerfield, which averaged grades of 11 grams per tonne gold, and 3.9% antimony that was processed. I'd like to note that the slight dip in grades at Costerfield as compared to the fourth quarter of 2020 was planned [indiscernible] purposefully fed some of the lower-grade material into the plant, as we had to deal with reagents sourcing issues that was stemming from COVID-19. This supply issue has been resolved, and the site will be processing per normal going for the remainder of 2021. The 15,460 ounces of gold equivalent produced during the first quarter was Costerfield's best quarterly results since the second quarter of 2016. And these ounces were produced at a cash cost of $640 per ounce and an all-in sustaining cost of $937 per ounce, this resulting in Costerfield posting, yet again, another strong quarterly revenue of $31.8 million, a 56% increase from the $20 million generated in Q1 2020. Moreover, the $21.5 million in adjusted EBITDA generated in Q1 2021 exceeded the company's previous high of $20 million from last quarter. Looking ahead at Costerfield, we are expecting to see a similar production profile, with the continuation of the high-quality ore in gold grades coming out of the Youle vein. At Bjorkdal, we continued to deliver stable and profitable performance. The mine produced 11,855 ounces in Q1 2021, an increase of 10% as compared to the same period last year. In March 2021, we saw approximately 5% uplift in processing rates to 3,520 tonnes per day as compared to the first 2 months of this year, which resulted in excellent month with 4,500 gold ounces produced, Bjorkdal's best monthly result since July 2019. Cash and all-in sustaining costs were slightly higher at Bjorkdal, at 1,187 and 1,533 per ounce, respectively, versus 1,052 and 1,479 per ounce a year ago. As Nick mentioned earlier, this is related to the ramp-up, as we increase the tonnage hauled from underground. As compared to Q1 2020, we increased our underground mining by 23%, to approximately 269,000 ounces per tonne, at 1.52 grams per tonne of gold. Of that, we processed approximately 268,000 tonnes from underground, at 1.37 grams-per-tonne gold, on pace to exceed our annual target of 1.1 million tonnes from the underground. For the rest of 2021, we expect grades to lift as we mine further down into the Aurora zone. And just quickly, on the financial side, this resulted in a quarterly revenue of $20.8 million and $5.8 million in adjusted EBITDA. Lastly, regarding our Q1 results, included approximately 1,400 saleable gold equivalent ounces from the trial processing of the mineralized waste dumps dumped in [indiscernible] at Cerro Bayo, which commenced in February of this year. With the initial signs of economic profitability, the company intends to investigate the option of extending this trial project through to the fourth quarter of 2021. In addition, to our operational and financial success, I would like to invite Chris to speak on our recent exploration developments, which further strengthens the positive growth trajectory and underlying long-term value of the company. Chris?

Thanks, Dom. Subsequent to quarter end, we reported on some impressive gold grades coming from the newly discovered Shepherd zone at Costerfield. The Shepherd zone is located to the north of the central corridor and is situated just below the currently planned [ depth ] extent of the Youle development. This zone is linked, yet structurally distinct from the Youle ore body, which we believe is a ceiling to the [ generalization ]. Two subvertical [ veining ] horizons have been intercepted in multiple holes. The easternmost [ veining ] intercepted interpreted to join with Youle at the uppermost point, and includes some of the most significant grades yet seen at Costerfield. These include 24 grams-per-tonne gold over a true width of 6.3 meters, and 427 grams-per-tonne gold over a true width of 77 centimeters. This [ veining ] is paralleled by a second horizon approximately 80 meters to the west, also containing nuggety gold. Intercepts in this vein include 460 grams-per-tonne gold over a true width of 11 centimeters, and 231 grams-per-tonne gold over a true width of 18 centimeters. As yet, the strike and depth extent of these veins are unknown. However, gold-bearing veining to the south has been partially intercepted in a tail of an older hole. This, along with the understanding of Youle, points to a strike length of around 300 meters. Mineralogically, the intercepts look more akin to the world-class Bendigo and Fosterville style deposits than the Costerfield mineralization nearer to surface. This insight has understandably provoked much excitement around the Shepherd zone. Drilling in Q2 has ramped up, with an additional 3 drill rigs diverted to this project. This discovery could mark another step change for Costerfield, which is already one of the world's highest-grade producing mines, with a proven and [ probable ] mineral reserves of 12.8 grams-per-tonne gold and 3.5% antimony. Continuing with Costerfield, the exploration team have also been drilling at the Brown's prospect, following early success in the program and an inferred Youle-style environment at [indiscernible]. Beginning in late Q1, the Costerfield drilling is focused on another Youle analog to the south of the field, underneath the high-grade Cuffley ore body. In addition, the Cuffley [ Deeps ] drilling also began in Q2, with a focus on investigating the upgrade potential of the indicated resources below Cuffley. At the Bjorkdal, 2 drilling programs, extending both the main zone and Lake zone veining, are undertaken simultaneously -- sorry, were undertaken simultaneously during Q1. The main zone extension program began in early Q1, and a focus on the extension of the currently mined veins to the east and at depth, while also investigating the interaction of the veins with [indiscernible]. This program is expected to be complete in Q2 2021. The Lake zone conversion drilling was undertaken with the intent of gaining resolution on the multiple highly mineralized [ horizons ] located in the Bjorkdal [indiscernible] program of last year. This program is also expected to be completed in Q2 2021. With the Lake zone and Main zone objectives almost complete, drilling in Q2 will be recommenced on the Aurora deposit, extending the mineralization both up depth and to the east. Lastly, a significant surface percussion drilling program has begun in Q2 with the intent of gaining till and bedrock samples for multi-element analysis in 6 locations within Mandalay's exploration tenements surrounding Bjorkdal. Thank you. That concludes the exploration update. And I'd like to hand the call back to Dominic. Dom?

Thanks, Chris. Some very excellent exploration results. We're definitely starting to see the benefits of having the funds available and the backing of the board to start testing these multiple targets. And definitely, it looks like we are going to be adding some extremely high-grade mine life to Costerfield and Bjorkdal in the course of this year. But lastly, I just wanted to thank the continued commitment of our employees and contractors to execute on our strategic initiatives during a global pandemic. Thank you, everyone, and this concludes our call. I would now like to open the lines for questions.

[Operator Instructions] Our first question comes from the line of [ Ernie Molesh with PNG ].

Congratulations on the excellent results this quarter. I've got one question regarding the financials on the $20 million gain. Is that an actual cash gain, or is it just a bookkeeping gain that's based on the value of the derivative contracts?

I'll hand that question over to Nick.

Yes. The $20 million gain is -- it's a noncash item, and it's effectively the mark-to-market adjustment, or an accounting gain that's showed in the books from -- on a quarter-by-quarter basis. So we map those with future hedges at the end of each of the balance sheets, on a quarter-by-quarter basis, and we use a valuation method. So, in short, it's a mark-to-market gain on future hedge or derivative programs that we -- that may or may not end up eventuating.

And the second question I have is regarding the [ gravity ] recovery at Bjorkdal. I noticed over the last, say, from 2014 to 2020, the recovery from the gravity circuit went down by about 4%, with the corresponding increase of 4% in your flotation circuit. Can you provide a little bit of insight as to what the reason for that is? Has there been a change in the amount of mass outflow going from the hydro cyclone overflow into the flotation circuit? Or has it been an issue with the gravity [indiscernible] concentrators?

Yes, [ Ernie ], it's probably more related to the metallurgy than anything else. What we have been finding over the last several years is we do process more skarn, or limestone-like material. These aren't big batches, but what we do find, when this material does pass-through. Almost the bulk of it does pass directly through the gravity circuit and is recovered within the floatation. So more so changes in our process, and it's related to the metallurgy as we are processing more skarn material. And this skarn material, historically, there was no focus put on it, and all of the focus was on the actual veining at Bjorkdal. So, but we have found that a lot -- some of the skarn material can be extremely high grade, so that's why Mandalay has put a high focus on it over the last prior years. However, that being said, the recoveries of the skarn, overall, are significantly lower, so it can be as low as 78%. So what you see is we have made metallurgical changes in the processing plant to get our overall recoveries up with normal processing of veining ore, but it has dropped when we do process the high-grade [ skarn ] material, and more of it goes to our floatation.

Okay. And then the other question is, you mentioned about going from 1.3 million tonnes a year to 1.7 million tonnes per year. My understanding is that your [ crushing ] circuit already is operating at over 200 tonnes per hour, so how easy is it to make that -- to add another 40 tonnes per hour to your primary ball mill?

So we have we have ball mills and rod mills. So, to get to 1.7 million tonnes per annum, we would actually have to add another ball mill to the circuit. However, this year, we are going to be transitioning one rod mill to a ball mill, so that does give us some more capacity, some more throughput. It gives you a finer grind easier, and you have less down downtime. So that's a small change we are doing. But the overall study, we'll be looking at exactly what capital is -- would be needed. Because it's not just an additional ball mill, it's upgrading the [ cyclones ], likely another [ Nelson ] and other -- pretty much upgrading the whole plant process. So that's why the study is required. But we are making small changes in the grinding circuit and cyclones to be able to get some incremental [indiscernible] because of this year, which we were starting to see in Q1.

Great. That sounds like a good future for Bjorkdal. Now the other question is, on the flotation circuit, has your expert system improved the recovery of the flotation, or how does that interplay with the gravity circuit?

Yes, so it definitely has increased our recovery of the floatation, so how are they going to go back to their [indiscernible]. And I think the floatation increased by approximately 4% if you're looking at both the skarn and the vein material. But everything has been held back [indiscernible] by when we are processing skarn material, which drops our overall recoveries. But it looks pretty flat line, the whole way through, even though we do get [indiscernible] improvements on the processing of the normal...

And then, on your ore trucking from underground, is there a bottleneck there? Or would the current underground portal, or the portal to the underground, support throughput of 1.7 million tonnes.

We use a contractor, so definitely, we have the capacity. We'll be able to haul more ore. It's just bringing more trucks online to get up to 1.7. It would take several years to get up to that level. However, the haulage distance are getting further, as we get further down the Aurora zone [indiscernible] the extent of the mine. So that's why it's so exciting for us. Positive results we are starting to see from the Lake zone and Main zone, which brings the haulage back closer to the portal, which does make it easier to increase our haulage and less likely for it to be a bottleneck.

Okay. Congratulations once again on an excellent quarter.

[Operator Instructions] Next question comes from the line of [ Barry Morgan ], private investor.

I would like to start by thanking you and all of the Mandalay staff in Toronto, Australia, and Sweden for the excellent job that all of you have done turning Mandalay into a profitable company in the past 18 months. My question is, given that Mandalay will be debt-neutral in 2021, do you have any plans to reinstate dividends in 2022?

Thanks a lot for the very positive feedback, [ Barry ]. Yes, so that is -- I can't commit to anything at the current time, but that is definitely an ongoing discussion that we are having with the board. It's a trade-off of how much do you reinvest in capital development -- sorry, capital exploration and the possibility of external growth within Mandalay against a dividend, but there is a possibility that we would reimplement the dividend. And if we did, it would likely been based on a similar philosophy to what we did previously, basing it off a percentage of our trailing quarter revenue. We do expect to even have more funds available from 2022 going forward, as we [indiscernible] the bulk of our tailwinds to [indiscernible] in Bjorkdal this year will be completed. That's approximately $10 million spend that we are incurring this year and last year, so that means we should be generating even more free cash flow, which would make the possibility of being able to pay dividends more likely next year. But unfortunately, I can't commit to anything at the current time.

Your next question comes from the line of Peter Fraser with West Face Capital.

I have 2 questions. The first question is, can you just talk about -- the cash costs at Costerfield has crept up. Could you just explain why that's happening and your outlook for the rest of the year?

Yes. So part of it is if you look at Costerfield, it's pretty much a fixed-cost operation because it's relatively small tonnage, a very fixed workforce from underground. So where we get variances in our cash cost per ounce is directly related to, obviously, our ounce throughput and production, and then the exchange rates. So the exchange rates are the one that does hit us the heaviest, really, with our overall production. So, with the Australian dollar lifting this year, we have seen an increase in our U.S. dollar costs at Costerfield. So you can pretty much attribute 100% just to the change in exchange rate within Australia [indiscernible] strengthening.

Perfect. Because I noticed your mining cost per tonne of ore actually went down, but the cash cost went up, and so that makes sense. Okay. Second question, Chris, and I wasn't paying full attention, but could you add a little more color on the [ nature of ] mineralization in the new exploration area? Did you say that you don't think -- you think it could be the same system as more like [indiscernible], rather than the existing Youle system? Or if you could just repeat and expand, that would be great.

Yes, I'll let you take that one, Chris.

Okay. Yes, so I guess what I mean by that comment is that as we go deeper in the -- well, basically at the base of the Youle deposit, and now we understand headed into this Shepherd deposit, we're seeing nuggety gold within ports, which is the dominant feature, rather than antimony present. So -- or [indiscernible] with the quartz and gold. So, in the upper reaches of the Costerfield ore deposits, we see a lot of mixing between [indiscernible] and gold, and some refractory gold within [indiscernible] surrounding veining. But at this step, it seems to be more a sort of primary phase of nuggety quartz -- sorry, nuggety gold within quartz, which is what we see more to the west within the [indiscernible] zone in Victoria.

Okay. That sounds very exciting. Congratulations, guys, it's really kind of neat to hear that.

Yes, it's exciting for us.

I'm sure it is. It was a theory, and it looks like that there's a reality, the theory is being possibly proven. It's not fully proven, but it looks like you're on the right track, so that's great news. I have no other questions.

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

Thanks a lot, Hector, and thanks, everybody, for joining us today. I look forward to updating the market with our progress, both exploration and operationally going forward. And I hope you have a great day and day and stay safe. Thank you.

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