Mandalay Resources Corporation (MND) Earnings Call Transcript & Summary

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to Mandalay Resources Q4 and Year-End 2022 Financial Results Conference Call. [Operator Instructions] 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 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, 2022, available on SEDAR and the company's website. I would now like to turn the conference over to Mr. Dominic Duffy. Mr. Duffy, you may begin.

Thank you, Melanie (sic) [ Michelle ]. Good morning, and thank you, everybody, for joining us today. Yes, new to this call, but not new to Mandalay's operations is Ryan Austerberry, our recently appointed Chief Operating Officer. I'm very excited for Ryan, as he's been with the company since 2009, and he's proven his operational expertise while running both our Björkdal and Costerfield operations. Also on the call today is Nick Dwyer, Mandalay's Chief Financial Officer; and Chris Davis, our Vice President of Exploration and Operational Geology. Mandalay released its fourth quarter and year-end 2022 financial results at the close of market yesterday. You can find the consolidated financial statement and MD&A on the Mandalay Resources website and also under our profile on SEDAR. Mandalay has continually been able to demonstrate operational growth and financial success and 2022 was no different in which we were able to further strengthen our balance sheet, while growing our net cash position, which Nick will speak in more detail later in the call. Moreover, in 2022, the company was able to generate its highest level of positive free cash flow, actually, for -- on an annual basis with a pretty remarkable $45 million. This is approximately $27 million and $20 million more and annually as compared to 2020 and 2021, respectively. It's truly impressive results for a company with our production scale and market capitalization. This free -- this strong free cash flow generated has allowed the company to continue its aggressive investments in organic exploration growth opportunities. For 2022, we were able to invest more than $10 million collectively into drilling at both sites. This level of commitment continues into 2023 with another increase with $12 million planned in -- yes, in $12 million in planned exploration expenditures. I will now have Nick, Ryan and Chris give an update on the financials, operations and exploration. It's all your, Nick.

Thank you, Dominic. So to build on Dominic's earlier remarks, Mandalay ended the year with $38 million in cash and $24 million of debt, leaving us in a net cash position of $14 million. This is a $34 million improvement during the year since our net debt position of $19 million at the end of 2021. During the fourth quarter, we were extremely pleased to have completed a refinancing with Scotiabank. It was a $35 million revolving credit facility, and it was obtained with no hedging requirements, and it was also about a reduced interest rate as compared to the previous facility. The revolving credit facility also provides Mandalay with financial flexibility by removing the need to make a $29 million balloon payment that was due under the old facility in March of this year. Also in connection with the prior facility, the gold hedging obligations will be fulfilled in June this year, which will allow for increased cash flow in the second half of 2023, if gold prices remain constant. And lastly, on the Scotiabank facility, a repayment of $15 million was made towards this debt in December last year, which reduced our facility debt to $20 million overall. So turning to the fourth quarter, Mandalay delivered solid financial results in achieving $41 million in revenue and $20 million in adjusted EBITDA, both broadly in line with the previous quarter. Of those consolidated quarterly amounts, Costerfield contributed $26 million towards revenue and $8 million -- $18 million to EBITDA, with Björkdal making up the remaining $16 million and $3 million in revenue and EBITDA, respectively. The company generated $21 million in net cash flow from operating activities, leading to a consolidated net income of $1 million or USD 0.01 per share. These healthy results also mark Mandalay's tenth consecutive profitable quarter, and that reflects upon the team's hard work on controlling costs during this tough economic environment. Cash and all-in sustaining costs per gold equivalent ounce during Q4 2022 was $909 and $1,246, roughly in line with previous quarters. However, as compared to the same period last year, a 9% and 7% increase, respectively. These high unit costs were a direct result from a lower production rate. For the full year 2022, consolidated cash costs around gold produced was $896, while all-in sustaining cost was $1,207. Both metrics were in line with 2021, which is a solid accomplishment considering the inflationary cost pressures that we faced at both sites. Lastly, Mandalay generated $10 million in free cash flow during Q4 2022. And as Dominic mentioned earlier, $45 million for the full year 2022. For 2023, we expect this positive trend to continue as we work toward paying down on the debt and strengthening our balance sheet on a year-over-year basis. I'd now like to turn the call to Ryan. Thanks, Ryan.

Thanks, Nick. So turning to our operations. 2022 was a strong year for Mandalay Resources. On a consolidated basis, the company produced 105,906 salable gold equivalent ounces, marking the company's second highest consolidated annual production rate since 2017. As compared to 2021, the lower annual production was primarily due to the asset sale of Cerro Bayo, which eliminated about 9,000 gold equivalent ounces produced. Despite this lower production, our cost per ounce metric stayed comparatively in line with the previous year, as Nick mentioned, due to tight cost controls, coupled with the strengthening U.S. dollar relative to the Australian dollar and Swedish krona, both of which helped offset the lower consolidated production rates. Unfortunately, both sites also experienced leave labor shortages mostly related to COVID with increased absenteeism over 2022. At Costerfield, personal leave was 16% higher in 2022 compared to 2021 and over 50% higher than pre-COVID averages. The site was also impacted by staff turnover at a rate of 29%, approximately 65 out of 220 employees. As such, any personnel with flu or COVID-like symptoms or primary contact were not permitted to be on site, coupled with the difficulty in filling roles and the learning curve involved with new employees, it directly impacted our underground production rates. Consequently, this resulted in the higher-than-expected utilization of the low-grade stockpile in the processing fee. This trend increased through the second and third quarters and has steadied since. Additionally, Costerfield mined gold grades during the third quarter were below budget, mainly due to several development drives continuing further than expected in the Youle body at lower, but still profitable grades. The decision to continue the development in these drives caused a short-term reduction in grades that will improve the long-term economics of the mine and expected future cash flows. For Q4, Costerfield produced 15,427 gold equivalent ounces, which is broadly in line with the previous quarters of 2022. The site produced less ounces in December as milled tonnes were lower due to a planned ball mill relining at the plant and a 2-day power outage. At Björkdal during Q4, we were pleased with its consistent rate of production as compared to the previous quarters, with 10,256 gold ounces produced. However, full year 2022 operating results were below expectations. This was mainly due to a lower underground production and grades due to increased dilution and trucking issues, which delayed stoping. The trucking problems were due to the contractor having a lack of available trucks. A renewed contract with new trucks arriving shortly will make improvements to this. These factors drove the need for a higher utilization of lower-grade stockpile material at the mill. Reconciliation work continues to better understand the underperformance of several key stopes relative to the block model, and we have implemented additional contingencies regarding staffing protocols. Looking ahead to 2023, we are anticipating a consolidated production of between 105,000 and 118,000 ounces of gold equivalent, expected cash cost of $800 to $975 and an all-in sustaining cost of USD 1,150 to USD 1,325. Broken down, at Costerfield, we are expecting a consistent production rate as achieved in Q4 of 2022. Annualized for the full year, we are guiding for 56,000 to 64,000 gold equivalent ounces at a cash cost of $650 to $800 -- between $650 and $825 per ounce. At Björkdal, we're expecting improvements with a higher annual production in 2023 of 49,000 to 54,000 gold ounces at a cash cost of $975 -- between $975 and $1,125 per ounce. I'd now like to invite Chris to speak on our exploration.

Thanks, Ryan. Earlier in the week, Mandalay announced an updated and upgraded mineral resource estimate and reserve for our Björkdal property. Encouragingly, the grade of the mineral resource and reserves increased by 10% and 11%, respectively, as compared to our year-end 2021 statements. This was achieved predominantly through the extension -- the exploration of the high-grade Eastern Plunge Extension during 2022. The mineral reserves saw an increase in grade to 1.54 grams per tonne, with an overall increase of 32,000 ounces of gold, net of yearly depletion. The addition of mineral reserves were at a cost-effective USD 31 per ounce. The mineral resource saw an increase in grade to 2.27 grams per tonne, with an overall increase of 72,000 ounces net of depletion. This result supports Mandalay's exploration goal of bringing higher grade -- higher gold grade areas into the near and medium-term mining schedule. As for Costerfield, its mineral resource and reserves were not updated for year-end 2022. The exploration programs in 2022 were not designed -- sorry, were designed more around drill testing of regional targets and large step-outs from the current mining areas. With its large 24% growth in mineral reserves at year-end 2021, we saw Costerfield's mine life extend by an additional 2 years to a total of 5 years. It was decided that the annual mineral resource and reserve update would be deferred to year-end 2023. Announced on Wednesday, we provided an update on the Eastern Plunge Extension drilling and significant intercepts from our Aurora Upper Extension program at the Björkdal. The consistent drill results from the Eastern Plunge Extension program are exciting -- are excitingly exceeding our expectations by producing highly significant grades, the likes of which we would consider exceptional for our high-grade Costerfield mine. A few highlights include 783 grams per tonne over 35 centimeters, 105 grams per tonne over a meter and 23 grams per tonne over 3.9 meters. As for Aurora, the system has been tested successfully, approximately 150 meters up-dip and to the east from our current mine plan. Drill highlights include 89 grams per tonne over 30 centimeters and 3 grams per tonne over 3.5 meters. This extension is encouraging as Aurora has been and is currently the main source of bulk ore tonnage at Björkdal. Lastly on these releases, unlike Costerfield, a reminder that Björkdal is a high tonnage and low-grade gold mine, with relatively small increases to its mine gold grades and relatively small increases to its mine gold grade has a potential for significant profit. Further drilling at Björkdal mine has been focused on defining the North Zone, a newly discovered veining array about 400 meters north of Aurora and the depth extension of the Aurora system. Regionally, work is underway analyzing core from 18 diamond drill holes drilled in prospective ground approximately 10 kilometers southwest of the mine drilled in the last half of 2022. At Costerfield, drilling continued at a slower pace on the Shepherd South extension and Shepherd infill programs with the Shepherd North extension program commencing at the end of Q4. For Q1 2023, we will see the commencement of the Sub-KC drilling program, testing the northern extension of the current mineral resource under the Augusta and Cuffley deposits. The Brunswick Deeps drilling program is continued, and the Shepherd Depth Extension drilling will recommence from the newly prepared underground drill platform. Regionally, the True Blue testing program has continued, while neighboring West Costerfield drill testing program commenced as well as the Margaret to -- sorry, as well as the Margaret program, which is south of the Augusta mine. With a sizable 2023 exploration budget, we will be busy at both of our operations. And I look forward to updating the market in the near future. Thank you. I'd like to hand the call back to Dominic. Dom?

Thanks, Chris. For 2023, we are anticipating another year of strong positive free cash flow generation, which is indicated in the improved guidance for 2023 over '22 results we just obtained. At Björkdal, we will continue mining areas of higher confidence with improved grades in the lower levels of Aurora and initiate the development of the Eastern Central Zone in several high-grade areas. Although this area is not fully permitted, we have advanced significantly in obtaining the mining permit extension, and we're very confident it will be obtained before the end of the year. I am also excited about the future of Björkdal with the drilling results we're obtaining at depth to the East. And I'm looking forward to see how this develops over 2023. At Costerfield, we expect margins to remain strong as we continue mining the high-grade dual deposit while working towards bringing online to deeper Shepherd veins, both of which will continue to supply high-grade ore into the processing plant. I'd like to thank everyone. This concludes this portion of the call, and I'd like to open the lines up for any questions.

[Operator Instructions] Your first question will come from Kevin Tracey at Oberon Asset Management.

As usual, I have a number of questions here. First on, could I ask you about kind of the operational disruptions you saw from COVID and the relining of the Costerfield plant? Were those kind of behind you as you entered this year? And then specifically on the COVID issue, am I right in reading that in October, there were changes in the rules in Australia, but maybe lessened the isolation requirements? And if so, will that be kind of less of an issue as we think it towards 2023 in terms of COVID disruption?

Yes, we're definitely starting to see an improvement in the personnel levels at the site. So it was a hang out from the COVID, and that people with any type of flu had to stay home. Whereas in the past, that wouldn't occur, people with a small cold would come to work. So we do -- we are seeing much less of employees with COVID, and people -- because people are locked up for a long time as well so a lot more people had flu. So we are saying that, that is lessening. It will be new problem though to some degree because more people in post-COVID do stay at home when they have been sick. But I think you can almost say it's behind us. We've selected the right manning levels at Costerfield to account for the anticipated sick leave. However, manning in Australia is very difficult these days. The whole industry is suffering, trying to find [indiscernible] in the west. So we do have some advantage that we are over east, it does make it a little bit easier.

Okay. So at Costerfield this year, do you think you can get back to the 170,000 -- or 160,000 to 170,000 tonnes mined that we saw you do in 2020 and 2021? Is that the goal?

Yes, yes. And definitely, we aim to have over 150,000 tonnes. We're still mining quite a bit more than we can process.

Okay. Okay. And then in terms of the mine grade at Costerfield, I heard comments on the call about some areas of Youle extending further than expected, but those were lower grade. Can you talk about what's in the mine plan in terms of the mine grade at Costerfield in 2023? Because we've seen quite a bit of volatility there. My eyes got pretty big last quarter, you reported 16.5 ounces -- sorry, 16.5 grams per tonne of mine grade. This quarter, it fell back to the 12.5 range. So I'm curious if you could comment on that and talk about what's in the mine plan for this year?

Yes. I would anticipate that we'll be getting similar results this year to what we got last year. But 16 grams, that was a bit of an anomaly. And quite often that can be based off one individual stope that has super grade that pushes everything up. The lower grade that sometimes we do find in the extremities. You call it low grade, but you're still looking at 8 grams, which would be super high grade for any other mine in the world, excluding Fosterville. So even wherever we can add additional material, we will add it at Costerfield because it is profitable. The biggest issue at Costerfield, it is it doesn't have the long, long mine life 5 years. So if we do find more low-grade material this year, we will. And you have to mine it now, we will mine it instead of sterilizing it. And so that really is on the way, I see that we underperformed with our production this year if we are finding additional material to the extremities, which I hope we do, it adds to mine life and the long-term profitability of the operation, but we haven't seen anything to date. So I anticipate that results for our guidance and a little better than what we produced this year.

Okay. Okay. And then on the cost guidance of Costerfield, the midpoint for this year was $740 an ounce cash cost. That number is pretty puzzling for me when I look at the fourth quarter where you did $608 of cash costs and what was the quarter where you kind of suffered from some operational disruptions. You mentioned the environment, the mining environment is tough in Australia. Is that just reflective of kind of a big increase in the inflation you're seeing? Or can you help me square that number?

Yes. Inflation is the biggest issue. We are in country. Obviously, the diesel costs are costing us quite a bit more. Electricity costs are going up insignificantly in Victoria, the inflationary wage issues. Obviously, you're having to increase salaries of the workforce to keep them happy and not moving out to Western Australia. So the main issue really is just inflation and everything goes certainly to increasing diesel costs, et cetera.

Okay. And then in terms of the list of drilling projects that kind of Chris went through, not on that list was the Robinson project at Costerfield. I know that was a big part of your exploration activity last year. Can you talk about that? Or was that a result of kind of Robinson drilling coming in worse than expected? Or can you just give an update on Robinson specifically?

Yes, so we haven't given another update to the market on that because we haven't got that much else to report on. We will before year-end this year. It's a complicated deposit to understand. So it's -- I can't say too much because we haven't released on the drilling that has occurred there. But it's taken some quite a bit of time for our geologists to understand what is happening there. So we had to focus any future drilling. But we will be updating on that later in the year, possibly after doing some more drilling.

Okay. Great. And then finally here, how is the share repurchase program going? The volume seems to have been pretty low lately, but have you had any success doing any block transactions?

We haven't purchased a single share yet because when we announced our NCIB, we were in blackout because of earnings. So we come out of -- it would be on, I think, Monday just coming up. So that would be the first opportunity when we would be able to begin purchasing shares.

[Operator Instructions] Your next question will come from [ Ernie Malech ], a private investor.

Congratulations on your results last quarter. I do have a couple of questions regarding Björkdal. My understanding is that you installed new hydrocyclones, how come the [indiscernible] Björkdal?

Sorry, can you repeat that, Ernie? I didn't catch it.

Yes. You installed new hydrocyclones in your process plant there. Why hasn't that change resulted in higher gold recovery?

The -- we were -- probably the biggest impact there at Björkdal for recoveries is where we are mining at the current time and where we are processing. And what we have found is in the -- so I'd say if you were comparing same material, same material, the same material with the cyclones, you would get a slight increase in recoveries. But a lot of our mining over the course of this year has been in the Aurora zone, where we are getting a slightly lower recoveries. That material just seems to be metallurgically is behaving differently to everywhere else we've been mining in the last few years. So I think that the cyclones are compensating a little, the improvements and other improvements that we've done in the plant to get the recoveries up to similar to what we were producing in the prior year, but they don't give us a huge increase in recoveries. They do give us some. But it's -- a lot of it is fall throughput as well because at the end -- towards the end of this year, we are looking to upgrade our processing to 1.5 million tonnes per annum with implementation of great discharge mills in our milling. And so we also need those cyclones to be after do that as well because they're high capacity.

Okay. And...

So the reason, yes.

And what's the breakdown of the production in terms of how much is going to flotation versus high-grade gravity concentrate?

I think it's approximately 80% -- sorry, 60% goes to the gravity and then between the middlings and Nelson concentrate, that gets around about 30% and only 10 to 20 years in the flow comp. That's more tons of gold distribution.

Okay. So the flotation really hasn't increased that much?

No.

The other question I have is you sold like 95, 69 ounces of gold but you produced about 700 ounces more. What happened to the rest of the gold, is that just the shipment timing?

Yes. That's just in inventory, the timing between both year-ends or quarter ends. So it is out over the course of many years. So it's more...

Okay. And at Costerfield, is there any planning for increasing the production facility there since your remaining more than you're currently producing?

Not at the moment. We actually haven't looked at it, but it's a difficult one to justify the capital for because I must prefer any capital that we are, the Board gives us permission to invest in Costerfield at the current time of putting all of that into exploration to see what we can find to keep on looking for our Fosterville one load as opposed to upgrading the processing plant. If we get enough mine life in front of us, definitely, we would look at upgrading the processing plant, but we also would have to look at tailings capacity along with that.

At this time, there are no further questions from the phone line. So I would like to turn the conference back to Mr. Duffy for any closing remarks.

Okay. Thank you, everybody, for joining us on this call today. I just wanted to reiterate that the progress made in 2022 really positions Mandalay well financially and is allowing the company momentum to carry through in achieving our long-term growth and value-creation objectives. So thank you, everybody, for your time.

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you for participating and ask you to please disconnect your lines.