Perseus Mining Limited (PRU) Earnings Call Transcript & Summary

[Audio Gap] Nice, and welcome to today's webinar. As indicated by our host, Nathan, my name is Jeffrey Quartermaine, and I'm the CEO and Managing Director of Perseus Mining Limited. And this morning, I'm joined on this call by Mr. Rick Clark, President, CEO and Director for Orca Gold; and Ms. Elina Chow, President of Corporate Strategy for Orca Gold. Late last night, both Perseus Mining and Orca published news releases on both the ASX and the TSX and announcing that Perseus has entered into a definitive arrangement agreement with Orca to acquire all of the issued and outstanding common shares of Orca that are not already owned by Perseus. This acquisition is to take place by way of a statutory plan of arrangement under the Canada Business Corporations Act since Orca is a Canadian-domiciled company. Now in the next half hour or so what I'd like to do, I'd like to provide you with an overview of the transaction, including taking you through the business rationale for the acquisition. I'll then invite my colleague, Rick to talk in more detail about Orca, and in particular, its excellent Block 14 development project as well as Orca's investment in another Canadian-listed company, Montage Gold, that is a Koné project that is in Northern Côte d'Ivoire, not far from Perseus' mine just Sissingué. I'll then provide an overview of Perseus Mining for the benefit of those on the call who are not familiar with Perseus and our recent performance, and we'll then be available to answer any questions that you may have in relation to our respective companies and/or the proposed transaction. So now turning to the transaction itself. Now Perseus currently owns 15% of the Orca shares, having recently acquired this holding from another ASX-listed companies through an off-market transaction. Perseus has now offered the holders of the remaining 85% of the outstanding Orca shares 0.56 Perseus shares for every Orca share held. Based on Perseus' closing price on Friday evening of AUD 1.74, Perseus' offer implies a consideration of approximately CAD 0.896 per Orca share, representing a premium of 63% to the last closing price of Orca on Friday. The consideration to be paid by Perseus for 100% of Orca totals CAD 215 million. And this includes CAD 17 million that was previously paid in cash to acquire the initial 15% interest and a further CAD 198 million in Perseus' shares to acquire the outstanding 85% equity interest. The average price worked out at around CAD 0.83 for the 100%. Now if this transaction is approved by Orca's shareholders, those shareholders will own approximately 9.1% of the enlarged issued capital of Perseus post Orca acquisition. Orca's Board of Directors has unanimously recommended that Orca shareholders vote in favor of the acquisition, and Orca's Directors and officers and certain shareholders of Orca owning in aggregate approximately 37% of Orca's voting securities, representing about 44% of the outstanding stock have entered into voting support agreements and have agreed to vote all of the securities they own or control in favor of the acquisition. Now aside from the approval Orca's shareholders, and I should say that 66.66% of the eligible voters will need to vote in favor of the transaction for it to be approved. In addition to that, the transaction also requires Canadian court approval, plus a number of other regulatory approvals along the way as well as a few other customary closing conditions such as no material adverse change, et cetera, et cetera. The vote of title by Orca's shareholders is expected to take place on or about the end of May, late May 2022, and the transaction should be closed shortly thereafter in early June. So why is it that Perseus has made this offer? In other words, what is the industrial logic behind the transaction? Well, in a few short words, for Perseus' shareholders, the Orca's -- Orca acquisition is expected to be a net asset value per share-accretive deal and result in the ownership by Perseus of a robust, fully licensed development project located in the supportive mining jurisdiction that is capable of being developed into a large-scale, long-life mining operation. And this aligns perfectly with Perseus' corporate strategy of seeking to upgrade the overall quality of our asset base. This transaction provides our portfolio with several key things -- several key ingredients. The first of these is size. And by that I mean a very material increase in Perseus' inventory of mineral resources and ore reserves. Now as many listeners will be aware, Orca has concluded an NI43-101 compliant feasibility study that validates this assertion. The second thing this transaction brings is longevity. When successfully developed, the Block 14 gold mine is expected to run for a very long time, well in excess of the lives of a couple of Perseus' existing mines. The third thing that is brought by the transaction is geopolitical diversity. Now Perseus currently operates in Ghana and in Côte d'Ivoire in the West of Africa. The Block 14 project is located in the Nubian Shield geological structure located in Northeastern Africa in the country of Sudan. So by bringing in a third country into the equation, we are spreading our risk further across the asset base. Furthermore, this transaction enables Perseus to benefit from the very distinct first-mover advantage gained by Orca through its presence in Sudan for over -- nearly a decade, which has positioned Orca to become the first large-scale professional mining operation in the country operating under the terms of a fully executed mining lease and shareholders agreement that are specifically designed to attract foreign investment into the country. I should also say that the government of Sudan very supportive of Orca and is also very strongly in favor of this transaction. And I was very fortunate to recently visit Sudan myself and as part of our due diligence effort and was granted 2 lengthy sessions with the Minister for Mines, his Honorable Mohamed Bashir Abu Numo, who confirmed the support of the government to me in person. The combination of Perseus and Orca is a classic 1 plus 1 equals 3 situation. It -- by combining Perseus' development and operating skills along with our access to internally generated capital and strong cash flows with Orca's potentially world-class asset base, we have all the ingredients needed for 1 and possibly 2 top class mining operations. Now while the acquisition involves a step-out in geography for Perseus, which inherently involves some additional geopolitical and technical risk, this does not threaten the existence of the company if things do not turn out exactly as we envisage. The Orca shareholders will own approximately 9.1% of the expanded capital of Perseus. And if there's some chance Sissingué Project doesn't reach our expectations, Perseus itself will not fail. And in fact, we'll be in the box seat to consider investment in Montage's Koné project as a fallback. And as I said earlier on, that's located in a country that Perseus knows very, very well. So finally, I guess, the business combination creates a Pan-African company of real substance. And as you can see from the -- actually from the last slide, I've been a bit quick on the trigger there, that's fairly evident. The pro forma market capitalization of the company is nearly AUD 2.4 billion. Now Perseus contributes ore reserves of about 3.3 million ounces of gold and Orca contributes an ore reserve inventory of about 2.9 million ounces. Now together, this is a sizable reserve inventory and creates a sizable company with tremendous upside potential, particularly in a strong gold price environment such as a that which we are experiencing at the present time. I really could go on stating the virtues of what I think is an excellent acquisition. However, I will now ask Rick to take the floor and to describe to you exactly what it is that he has built up in Orca over the years and what it is the Perseus is seeking to buy. Rick, over to you.

Thanks very much, Jeff, and good morning, everybody. It's a pleasure for me to be here on this call with Jeff. And I can reiterate what Jeff has said is that the Board of Directors of Orca is 100% in favor of this transaction. Orca is a unique company in the sense that we have a sort of a who's who of shareholder base in terms of the mining industry, the largest position is the lending group, now followed by Perseus and then a dear friend of mine Ross Beaty, So -- with that strong support, we've been able to reach this point financially where a lot of our peers have struggled in this difficult market. The reason I want to say that is that with that strong shareholder support, we didn't have to run into any deals. This -- we have been holding -- we've been in Sudan for 10 years. We've had many overtures over those 10-year period because this project is fairly unique. I would argue it's one of the leading development projects certainly in the continent of Africa at the moment, pretty much on all metrics, obviously, which is why Perseus is interested. The thing here that's important is we found a combination, we found a partner that we think can unlock the full potential of Block 14 and other exciting exploration projects in Sudan and that is our main impetus from -- for doing this deal. Aligned mines, aligned business plans and the, obviously, financial strength of Perseus as a producer and a cash flower allows the greatest potential for this first major operation -- gold mining operation in Sudan and which we expect will follow with many others going forward. So that's our rationale. I don't propose to go into any significant detail on the technical merits of the project. We have been talking about this in the North American and the European markets for quite some time. I don't think anybody that's ever looked at Block 14 has suggested other than it's a spectacular project. The elephant in the room here obviously is Sudan. And that has been a situation for the 10 years we've been there. Now, as all of you will appreciate, the lending group has made its success, the majority of the success by going into difficult places politically and making their own assessment of where we think the political trajectory will go based on the resource potential we see. And Sudan was a no-brainer for us. What -- we went into Sudan, we did our due diligence, so we felt that Sudan was 10 years ago, was going to start going forward very quickly towards normalizing with the Western world. We didn't -- hiccups and bumps along the way, some of which we predicted, some of which we did not. Things have twists and turns. But where we are today is we have a public -- people of Sudan that are tired of military rule. They're tired of being restricted on communication with the rest of the world, and they want to open themselves up to the West and other partners and rose up against the military government a few years ago, which has resulted in a transitional format, involving still part of the military and the people of Sudan, and they are working through the process of heading towards democratic elections, which we expect next year. Now as I said, there's going to be twists and turns on the road. The road to democracy is not easy and any students of political history will know that. We take it for granted being in Western World, but these things take some steps. And I would say that Sudan is working very united, very strong. Everybody's got the same idea, and it's a question of how they're going to get there. We are very confident they will go to democracy, democratic elections, and there will be a unification of military and the people, and they will open their borders completely to foreign investment and that is going to be spectacular for the mining industry and other industries. And as Jeff said, we'll be at the forefront with Perseus as a first-mover advantage with this spectacular deposit. So that's the basis on which we looked at: a, getting into the country; and b, doing the deal with Perseus. We think that this team are the right team to go forward. I can tell you this has been the most extensive due diligence process I've ever been through, both politically and technically. Jeff and his guys have torn everything apart. And look, I would be doing exactly the same thing in his position if I was going into a new jurisdiction like this. So -- but the reward at the end, as Jeff said, is reserves of 3 million ounces, some of the best operating number is going. It is very much in line with Jeff's objectives of a low all-in sustaining costs for those projects. And we believe the growth potential here is significant. Being a small company, wondering where your money is going to come from most of the time, we stopped exploration a number of years ago, we're happy to report we're going to be going forward with that again. We didn't stop it because we weren't finding things we set up because we knew we had enough to do a feasibility study. So that's where we are. I'm looking forward to working with Perseus to make all this happen, just given you the time frame for the deal. Personally, I can tell you I will be a significant shareholder of Perseus and will align myself with Jeff and his management team to make this all work smoothly, not only in Sudan, but in other jurisdictions. We've got a lot of expertise in working with governments and people in countries. And again, as Jeff has said, this isn't the end of all this, Perseus is going to grow, and we think we're going to be one of the predominant producers in Africa in not the too distant future. Thanks, Jeff.

Okay. Well, thanks very much, Rick. And I think what I would like to do now perhaps is give listeners a bit of an overview of Perseus who is not -- is a company that is not so well known in the North American market, although we do have quite substantial shareholding in the U.S. and in the U.K. as well. Now just as a quick snapshot. So Perseus is a fairly compelling mid-tier gold investment opportunity. We, at the present time, are a multi-mine producer, and we're working in 2 countries, as I said earlier on, with 3 mines. So one in -- the first in Ghana and 2 mines in Côte d'Ivoire, Sissingué and Yaouré. We're currently producing at around 500,000 -- or at a rate of 500,000 ounces per year, and our all-in site cost is around the $950 per ounce level and falling. We have a fairly strong balance sheet at the present time, very strong cash flows coming from our businesses. And not only do we have the ability to fund future growth, but we've also declared an initial dividend last year and have continued that with the announcement of our half year results to December where we declared a further interim dividend. One of the things that we've been working on very strongly since we began is maintaining a strong social license to operate, and we have put in place very sound ESG practices to follow, and I'll talk to that in a little more detail in a moment. And of course, all this is overseen by a very experienced Board and management team. has a delivery -- a history of delivering on our promises. If you look at the capital structure of the company, the market capitalization on Friday, sat at around USD 1.5 billion. I think it's gone up a little bit since then. We have $50 million of debt and the enterprise value sits around USD 1.4 million mark. As I said, the share register is actually an exceptionally good share register represented about 46% in the United States, 23% Europe and about 29%-or-so in Australia. You can see on the right-hand side there, a number of names that you would all recognize as leading investors in the resource sector. And sitting below this top 10, there are another group of very well-credentialed investors who seriously know what they're looking at in terms of value and value creation. Our Board and management team, as I said, it's a very diverse group. We've got people from North America, America, Europe and Australia represented. We've got all of the requisite skills on the board, and we work exceptionally well as a team. And I should say, actually, my management team that we've put together over a period of time is first class as well. and really very, very committed to the task at hand and all driving in the same direction, which is extremely important when you have a mission of creating value for everybody. And what we've done over the last year or so speaks for itself pretty well. So we've been producing our gold at the top end of our guidance range. As I said, we're a little over the 500,000 ounce per year rate at the moment, making cash margins of USD 650 plus an ounce. So in a fairly healthy territory. So from that, we generated in calendar '21 something like $330 million of operating cash flow. We ended the year with cash and bullion on hand of around $212 million and all of that allowed us to be able to declare our initial dividend at the year. So this is the situation during the course of calendar '21, which included, I should say, the first 6 months of ramping up the Yaouré mine. So having done that now very successfully, the run rate is at the $500,000, and we brought the cash costs down quite considerably. When we reported our half year results up to the end of December, these numbers here are expressed in Australian dollars, which is our reporting currency. But the important thing is the growth that we're achieving, and you can see profit after tax was up 92% year-on-year, operating cash flow up 83%, net cash up $238 million in the period. And as I said, that enabled us to put in place the dividend policy, which is set up guaranteeing shareholders at least a 1% yield per year. Now our ambition is to pay this year in, year out unfailingly. And if we are in a position to pay more back to shareholders, we'd certainly be happy to look at special dividends or share buybacks, depending on the tax situation of our shareholders. Now going forward, in this next 6 months, we're predicting that will be producing between 230,000 and 265,000 ounces of gold, between USD 915 and USD 1,085 an ounce all-in site cost, which for the 12 months to June, which is our Perseus' reporting period, it's something like 471,000 to 506,000 ounces at $932 to $1,020. So we're well and truly on the track for doing that after 2 months of the 6-month period. I can say that we're [ writing ] on our forecast and on track to be delivering at the top end of that guidance range, if not better. However, where we're doing all this, as I said, we've got 3 operating mines at the present time. We've got the Ghanaian property, which was our first. Sissingué, up in the north of Côte d'Ivoire and Yaouré in the middle of Côte d'Ivoire. The production for the 6 months to December 2021 was 241,000 ounces. And you can see the spread of where that's come from. It's come -- the bulk of the production's come from Yaouré and that all-in site cost of $687, that's a fairly healthy place to be. Edikan has had its production challenges and this cost flow out for a period. I'm very happy to say that that's back under control and producing as it should be producing right now. And of course, Sissingué is a smaller operation, but traditionally been very, very lucrative in terms of its cash costs and cash generating. But across the group, USD 949 per ounce in site cost compares very, very favorably with our peers. But I think more importantly, the trend on our cost base is going down, whereas many of our peers are actually heading in the opposite direction. Now having built the 3 mines, what we are focused ourselves on trying to push out our production profile into the future using an organic strategy as the base. Now to that end, we committed ourselves to a drilling program over 3 years in which we're targeting to supply between 1.7 million and 2.4 million ounces of additional JORC-compliant reserves. Now to do that, we've got 10 rigs drilling at our Yaouré project, drilling the CMA underground resource, doing both an infill drilling program and a step-out project. We've got 4 rigs operating at Edikan on a newly discovered the positive Nkosuo which is about 10 kilometers north of the mill, and we've got a single rig up around the Sissingué area. Now between all of these -- this drilling activity, we believe that we can extend our position of production now towards the end of this decade without any really dramatic exploration success. What this chart shows you, the maroon bars are our reserve situation as at the end of June last year and the gold bars are what we believe we'll be adding over the next couple of years through that program, the 3-year program out to '24 that will allow us to increase the inventory. And of course, we won't stop drilling in '24. We'll continue that and that gives me a lot of confidence through existing reserves and organic growth, we can maintain our 500,000 ounce production profile to the end of the decade. Now having just announced the acquisition today with Orca without making bold predictions as to when that will come on stream, but it would certainly be we would believe in the 2025, '26, '27 period, now we're adding a couple of hundred thousand ounces a year from Orca going forward that in fact, our profile will take a step up and be producing well in excess of the 500,000 probably closer to 700,000 ounce per year. And with that, Perseus is becoming a fairly substantial company. Now I'd just like to -- before I close, just mention briefly the work that we do in the ESG area and sustainability. Now for us, this is not a new concept. I know that in recent years, the market -- many market participants have taken a much closer interest in this area. But for us, this has been part of our DNA from the beginning. We believe that responsible gold mining can play a progressive role in a sustainable development of emerging economies and at the same time, deliver sustainable returns to our shareholders. And we've been focusing our attention on doing that for many, many years. The things that we need to do to identify those parameters that are critically important to the host country in particular and to make sure that we deliver programs that achieve those outcomes. If you look at what we did in fiscal year '21, you can see from the -- on the social side, where we do place an awful amount of large amount of effort we're contributing quite a significant amount of money to the economies in which we operate. And we do that in many ways, taxation is one. But perhaps more importantly is local procurement, where we buy about 81% of our inputs from the local communities. The other area, of course, that's vitally important in these emerging countries is employment where it's important to try to -- for the countries to, in order to be able to deliver programs to have full employment. About 95% of our workforce across the across the 2 countries are from those countries. And we work very hard at training people and having them operate at the standards that would apply in the West irrespective of where the location is and our safety record is fairly healthy. We've had 0 fatalities, and we're bringing [ our record ] down as we speak. Environmental management goes without saying that's a given as far as we are concerned. Our work on tailings dams and the likes of world-class standards. And our emissions intensity is an area of particular focus, and we're now steadily reducing that, and we brought it down quite a bit from the earlier figures. The earlier figures were somewhat distorted by the emissions from the construction project at Yaouré, but now having gone into an operating mode where we're generating power from a hydro dam adjacent to the mine site and the amount of equipment moving around has substantially reduced, those emissions numbers are improving as we speak. Our operating in developing countries as we do, governance is a key factor. And we operate our business in Africa as if it was in North America or Australia, we abide by the absolutely the highest standards of our performance, and we don't compromise. Certainly, the GRI and the SASB practices are important to us, and we work where we can to the world's [ law ] counts as responsible mining principles. We've got a very clearly defined plan over the next 3 years to get us to exactly where we want to be. We've assessed across all 3 operations where we have any shortcomings in terms of maintaining those global standards I mentioned. And we're working as we speak at putting in place programs that within the 3-year period will have us operating at a standard that would be acceptable to any observer. And certainly, what we're in the process of doing is ensuring that all of our ESG statistics are validated by independent order prior to reporting. So look, we have a very interesting situation here. Perseus has come a very long way in the last 10 years or so, having come from a junior explorer to what I used to term as the accidental miner. We're no longer the accidental miner. We're in a place where we're pushing on to become what we hope will be the preeminent African gold producer in the [ mid-tier ]. So ladies and gentlemen, that brings us to the end of our formal presentation. Before opening the floor to Q&A, may I say that the Board of Perseus I understand from Rick, the Board of Orca are very happy about this transaction and this business combination. For some time now, industry leaders have been saying that the gold industry, particularly in Africa, needs consolidation. In other words, information of fewer, stronger and better managed companies that are capable of riding the commodity and the geopolitical cycles and in the process, consistently generating wealth to the benefit of all stakeholders. As I said, I genuinely believe that this transaction creates such a vehicle. And both Rick and I strongly recommend that you as either existing or prospective shareholders, carefully study our market release and presentation and we're very confident that you'll reach the same conclusion. So with that, we'll open up the floor for questions. I'm very happy to respond on any question that you may have, whether it relates to our individual companies, the transaction or the plans for the future. Thank you very much.

Thank you, Jeff. [Operator Instructions] First question, what are the key items to address between now and the final investment decision? Is there a possibility of its decision before June 2023?

Well, look, on that, I mean clearly, your first step off the ramp is to have the Orca's shareholders approved the transaction. And as I said, we're hopeful that, that vote will take place in May. But what we will be doing together in anticipation of a favorable outcome is to start planning that transition period and start looking at what work we need to do in the immediate future to confirm the feasibility work that's been done by Rick and his team over the years. And I should say that work has been done to very high standards, but as you would appreciate, when you're looking at a project from a different perspective, you always see things where you can improve and that's what we'll be hoping to do to come up with a plan to build the optimum project going forward. Now how long is that going to take it? Well that's a very difficult question to answer directly, but we would think that between a year and 1.5 years should be sufficient time to not only come up with that plan and have front-end engineering and design study completed, fully costed, et cetera, et cetera. But we'll be pushing it to the extent that we can during that time, we'll be keeping a close eye on the country and all of the other factors that influence in the investment decision.

Is the local partner and government [ free carriage ] for the capital or is the company required to fund 100% of that?

Okay. What -- in legal terms, it's called a quasi-carried interest. At the outset, yes, we're required to fund 100%, but we get to recover, on an accelerated basis, the money that we are putting forward on behalf of the government and our local partners. So in other words, before we declare any significant dividends to the shareholders Orca/Perseus will be able to recover all its preproduction capital.

Thank you. Given the situation in Eastern Europe, are you willing to provide observations on the relationship between the Sudanese government and Russia?

Rick, do you want....

Sure. I'll start. Look, Sudan has had various relations with the Russians over the years under different governments. There's no question, Sudan is looking for friends. And they'll -- the one big item has been the possibility of a naval base in Sudan that's been kicking around for a few years now. I think what's going on is Sudan and in its current government structure is canvassing the major powers of the world to seek assistance, economic assistance and other types of assistance. But I can tell you that the relationship with Sudan and its priority is a very strong and friendly relationship with the West.

And I think to reinforce that point, it's worth making my observation that the United States appointed an ambassador for the first time in 25 years, about a week or 2 -- or a couple of weeks ago...

Canada as well.

And Canada as well. So very clearly, North America is taking the emergence of Sudan very seriously. They have a clear interest in assisting the country to get to that position. And I think as we quite rightly said, Sudanese, I guess they are keen to send the message to the West that they're open for business, but they also know other people as well. So I wouldn't place too much importance on the rest of business to Russia and all the rest of it. I think the Sudanese people are very keen to see their country emerge from an extended period of underperformance and to ensure that the citizens of the country can receive the services to the lifestyle to which they aspire. And that will only come through strong economic development, we believe, and I believe the -- most of the European people with interest believe the same thing.

Thank you. There are no further questions at this time. So I'll now hand back to Jeff for closing remarks.

Okay. Well, look, thanks very much, Nathan, and listeners for joining us today. As I said previously, we're very, very excited by this acquisition. And we believe that we are putting together the foundation of a very, very strong credible mid-tier gold company that we think is -- really does represent a compelling investment opportunity for to people who are looking for companies that have long life, strong assets basis and are well managed and do their work in an environmentally and socially responsible manner. And on that basis, we would certainly commend Perseus to you and invite you to come and join us on the journey. Thank you very much for joining us today.