Torex Gold Resources Inc. (TXG) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to Torex Gold's First Quarter 2021 Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Laura Totan, Investor Relations Analyst.

Thank you, operator, and good morning, everyone. On behalf of the Torex team, welcome to our Q1 2024 conference call. Before we begin, I wish to inform listeners that a presentation accompanying today's conference call can be found under the Investors section of our website at www.torexgold.com. I would also like to note that certain statements to be made today by the management team may contain forward-looking information. As such, please refer to the detailed cautionary notes on Page 2 of today's presentation as well as those included in the Q1 2024 MD&A. On the call today, we have Jody Kuzenko, President and CEO; Andrew Snowden, CFO; as well as Dave Stefanuto, Executive Vice President, Technical Services and Capital Projects. Following the presentation, Jody, Andrew and Dave will be available for the question and answer period. This conference call is being webcast and will be available for replay on our website. Last night's press release and the accompanying financial statements and MD&A are posted on our website and have been filed on SEDAR+. Also note that all amounts mentioned in this call are U.S. dollars unless otherwise stated. I will now turn the call over to Jody.

Thank you, Laura, and good morning to all on the line. The first quarter of 2024 marked a great start to the year for Torex just across the board. Production returned to more typical levels for us after our near record Q4 last year. Costs are tracking to expectations and ELG continues to fire on all cylinders. While it's still early in the year, obviously, we are well on pace to deliver annual production guidance for the 6th year in a row. Our liquidity position remains excellent, particularly impressive considering we've now crossed the 2-year mark on Media Luna construction. With the record gold prices we're seeing and funding well in hand to execute on our strategic objectives, we're in a solid position financially and expect to exit the Media Luna build with a very modest level of net debt we expect to pay back before the mine is even fully ramped up. In addition to the strong operational results, cash generation and balance sheet, Media Luna is progressing on schedule with the project almost 70% complete at the end of March and first concentrate production expected in Q4 and commercial production coming early next year. I was at the mine a few weeks ago and saw first-hand the progress being made. Dave will speak to the project in more detail, but what I saw was 2/3 of the concrete poured, steel being erected across multiple work fronts, the flotation cells now being set in place with the flotation circuit and the underground mine is starting to look like an underground mine with more than 30 active headings. It's really incredible to see the project coming together and the finish line in sight. Starting as always with our strategic pillars on Slide 4, it's the anchor for our presentation. You'll remember that last quarter we updated our strategy to reflect the progress that has been made and how we're shifting our focus to ensure that we not only deliver Media Luna on schedule and on budget, but that we see a smooth integration of the project with existing operations. We're well underway to deliver Media Luna to full production. With a number of scheduled critical milestones now behind us, our attention has turned to ensuring that our vendors meet key delivery timelines. It's turned to installing and commissioning the Guajes conveyors through the Guajes Tunnel. On the mine side, we're working hard at ore control drilling, underground construction at the mine and tighter and tighter iterations of the year 1 and 2 mine plan. On the processing side, we're preparing the final plans to complete the necessary tie-ins at the plant in Q4 of this year. Another important focus for us is integrating and optimizing the entirety of the Morelos asset, ensuring that our project is handed over to our operations team seamlessly and that both ELG and Media Luna work together at their peak operational performance. Work is very much in stride with what we call our operational readiness teams and our strategy is advancing as planned. On the pillar of capital allocation and disciplined growth, our balance sheet remains strong and we're building a buffer with respect to available liquidity and remaining spend on Media Luna. On grow reserves and resources, we released our year-end reserve and resource update in late March, and we did just that. At ELG Underground, we increased reserves to over 654,000 gold equivalent ounces, which now sees us with a reserve life through 2028. At EPO, indicated resources increased to 1.2 million with another 720,000 gold equivalent ounces in the inferred category. The pre-feasibility study at EPO is progressing nicely. We got to look at it as a management team a couple of weeks ago. And we expect to be in a position to provide a high-level results later this year. I'll touch on reserves and resources again before the end of the call. In terms of the remaining 2 pillars, I've mentioned last quarter that retain and attract best industry talent was not a new strategic pillar for us, but certainly -- was a new strategic pillar, but certainly not new to Torex. There's an important point here I want to touch on. It's that a key piece of the Media Luna build has been our workforce transition plan to retain our local talent and offer our open pit employees the opportunity to transition to underground mining as the open pit mine comes off mid next year, and of course, to attract and supplement with new talent as required. We're making good headway here. We have now hired 110 people and transferred 61 people to the Media Luna project with another 165 transfers in process. In fact, our first class of miners from our underground training program graduated in quarter 1. These crews are now working alongside our underground development team. And finally, we continue to build on ESG excellence. So this is shown through a number of improved ratings from various agencies that we got in the quarter. This is all in detail in our corporate deck on the website. I'd encourage you to look at it. It really does reflect the important work the team is doing on the ground on safety, social and environmental issues. Moving to Slide 5. Our unrelenting focus on safety didn't let up in the quarter. ELG Complex has now surpassed 14 million hours worked lost-time injury free. Our lost-time injury frequency for the Morelos Complex in its entirety, this is ELG and the project and all contractors, now sits at 0.15, down from 0.31 at the end of Q4 and 0.47 at the end of Q3. What you hear in those numbers is a solid downward trajectory and we're working hard to maintain this. Production at 115,000 ounces and costs with AISC at $1,202 per ounce are tracking to plan. Revenue of $237 million was supported by our highest quarterly average realized gold price of $2,023 per ounce. With quarter 1 being another quarter of significant spending on Media Luna, enterprise-wide, our free cash flow remained negative. That said, you'll see here that prior to Media Luna spend, ELG generated positive free cash flow of $77 million. This is a good indication of what's to come when we return to positive free cash flow enterprise-wide in mid-'25. On balance sheet, our liquidity position of over $400 million means we're comfortably funded for the remaining $257 million of capital expenditures on Media Luna. Turning more specifically to our operational performance on Slide 6. Our solid production was driven by yet another new record of the processing plant. Gold recovery averaged 90.7% for the quarter, really the highest to date. The processing plant also achieved its 5th consecutive quarter above 13,000 tonnes per day. You can see on the bottom left, processed grade, although lower than Q4, was in line with our expectations. Recall, Q4 was a bit of a great outlier after 2 quarters of heavy strip through the middle of last year. Our Q4 open pit mining rates were at record highs. So we fed the higher-grade open pit material directly to the mill and directed lower-grade feed to stockpiles in accordance with our feed strategy. Those swings are behind us now in the pits and we expect the grade to be relatively flat for the balance of the year, in line with what we saw in Q1. And lastly, our underground mining rates dipped below 2,000 tonnes per day in Q1 given the backfill priorities in the mine plan, particularly during the month of March. Mining rates are expected to improve in Q2 and return to what we now call the steady-state range of over 2,000 tonnes per day for the remainder of the year. Slide 7 shows our Q1 performance compared to our full year guidance. I've already talked about production of 115 places that's on track, total cash costs of $918 per ounce and all-in sustaining costs of $1,202 per ounce were both slightly above our full year guidance ranges. This was expected. Costs are expected to decrease through 2024 as stripping requirements continue to decline with the wind down of the open pit. We very much expect to achieve full year guidance for both TCC and AISC. During the quarter, $126 million was spent on Media Luna. We expect to remain above $100 million of spending per quarter through Q3 before CapEx comes off in Q4 as first concentrate production is achieved. There has been no change to full year guidance of between $350 million and $400 million on Media Luna this year. And on that note, I'll hand the call over to Andrew to discuss our financials in more detail.

Okay. Thank you, Jody, and good morning, everyone. I'll start my commentary discussing our Q1 financial performance, and you can see this summarized on Slide 9. You'll note here that despite another quarter of elevated spending on Media Luna, and this has been the highest quarter of spend to date, we ended the first quarter in a strong financial position. Our Q1 operational performance, supported by a record realized gold price of over $2,000 an ounce, helped us achieve an all-in sustaining cost margin of 39% and generated $113 million in adjusted EBITDA. Although our financial performance was supported by these higher gold prices, the strong Mexican peso did erode some of this margin and impacted our cost performance, averaging MXN 17 to $1 during the quarter and has remained around these levels since. As a reminder, we budgeted this year at an exchange rate of 18:1 and for every 1 peso move relative to the U.S. dollar, all-in sustaining costs annually will be impacted by about $10 million. On cash flow, with the ongoing investment in Media Luna, we did again see free cash flow remain negative this quarter as it has been over the past year. We are, however, still very much on track though to return to positive free cash flow in mid-2025. And in addition, the current gold price environment combined with the consistently strong operational performance we're seeing from ELG bodes well for further margin expansion and robust cash flow generation. This should further strengthen our funding position and allow us to exit the Media Luna build with only a modest level of debt. Turning now to Slide 10. You can see a summary of our unit cost performance here, and just a few comments I want to make on this slide. Firstly, looking at the open pit unit costs, in addition to the peso strength I mentioned, the mining costs there were also impacted and also higher due to some higher contractor and fuel costs in the quarter. At the underground, the higher costs you see there are directly related to the stronger peso and also the lower underground mining rates that Jody mentioned earlier. These costs are expected to come down through the year as mining rates ramp back up to around and above 2,000 tonnes per day. Other plant processing costs were higher due to the stronger peso. And then finally, I just want to talk briefly about the Mexican profit sharing or the PTU. And just to point out that this amount is accrued quarterly and that's based on the expected full year taxable income, which is then allocated between OpEx and CapEx. The lower expense you see here in Q1 is just due to the lower taxable income currently forecasted for 2024, and that's due to the 1-month planned shutdown where we're building into our forecast for Q4 and also an increased employee focus on Media Luna. And those Media Luna employee costs, of course, get capitalized to the project. That said, the continuation of the current gold price environment could start to increase the PTU costs through the year. And so if the $2,300 an ounce price does remain, you should expect that will kind of increase back up to closer to 2023 levels. Turning now to Slide 11. The strong EBITDA generated in the quarter helped to offset the $126 million spent on the Media Luna project, while closing the quarter with a cash balance above $110 million. And that's without yet having to draw on our credit facility at the end of the quarter. In addition to the significant capital expenditure, and as a reminder, tax and royalty payments are always higher in the first quarter. The taxes paid in the quarter of approximately $44 million included the annual 7.5% Mexican mining royalty payment, and that was for $25 million. And in addition, there was also $12 million in revenue-based royalty payments made in the quarter. And these royalty payments are not considered taxes and are therefore accrued quarterly within our reported costs and EBITDA. And as a reminder, our profit sharing or PTU will be paid this month, and in fact, that's getting paid today and will have an impact on our Q2 cash flow. This year, we expect the payment in relation to 2023 to be approximately $23 million. And finally on this slide, I also want to just remind everyone that in addition to the tax royalty in PTU seasonality this year, we are expecting cash flow in Q4 to be impacted by the 1-month shutdown of processing plants in the Media Luna tie-ins where we'll only have the 2 months of revenue during that quarter. Looking now at our liquidity position, which you can see on Slide 12. This slide really shows that we closed the quarter with over $400 million in available liquidity and no amounts yet drawn on our credit facility. You will recall though that one of our strategic objectives is to retain approximately $100 million in cash on the balance sheet through the build. And based on the current forecast, I expect we'll draw about $150 million on the credit facility to achieve this. And so with $100 million in cash, really a net debt of $50 million coming out of the build. On this note, we did draw the first $30 million of the credit facility this April. And so that -- you'll note that in our disclosure here that was a post-quarter end activity. Just briefly touching on leases. Our lease-related obligations also did increase this quarter to $44 million and that was driven by $11 million of additional lease-related obligations. In summary, our balance sheet continues to remain strong, leaving us well positioned to deliver on our strategic priorities. The continued strength in the gold price also bodes well for further balance sheet strength, which if continued should allow us to exit the Media Luna build with only modest levels of net debt. And we expect we'll be able to repay that debt back very quickly as Media Luna ramps up. And you can see this liquidity position much more clearly on Slide 13. And you can see how our liquidity position compared to both the $257 million of remaining spend on Media Luna and our strategic objective of maintaining at least $100 million on the balance sheet. Executing on these priorities compared to the $13 million of cash and $292 million of available credit facilities we had at quarter end, resulting in a funding surplus of about $50 million at the end of the quarter. Our surplus, we expect will further improve over the remainder of the year given the strong cash flow generation from ELG, which after taking into account corporate G&A and exploration, has generated $246 million of free cash flow prior to Media Luna spend over the last 12 months, and that's an average price of just under $2,000 an ounce. With the gold price now hovering around the $2,300 ounce range, we're well positioned to further strengthen our funding position through the remainder of the year. And with Media Luna tracking to plan, I expect, as I mentioned earlier, we'll return to positive free cash flow during 2025. Finally, just a quick reminder to the listeners on our hedging position. You can see these summarized on Slide 14. At the end of the quarter, we had just over 114,000 ounces remained hedged on gold at an average price of $1,975 an ounce. Recall, these hedges were purpose-built to protect the balance sheet during the build out of Media Luna. We do not have any plans to add any hedges in 2025 or beyond, which will provide full exposure to the strong gold price, copper and silver prices going forward. And also in terms of the Mexican peso, as I mentioned, we're currently seeing it trade around 17:1, and that compares to the 18:1 assumption we had in our operating budget this year and also the 20:1 assumption we made in our Media Luna feasibility study. As reported previously, to help manage the foreign exchange risk related to the build, we did enter into a series of zero cost call-outs to hedge against foreign exchange movements, and the details of that are summarized on this slide. Just as a reminder, approximately 45% of the remaining expenditures are expected to be denominated in pesos, and the level hedged represents just under 40% of the peso-denominated expenditures. So with that, I'll turn the call over to Dave for an update on Media Luna.

Thanks, Andrew, and good morning to everyone on the call. Slide 16 shows the progress at Media Luna during Q1, which was announced in a press release earlier last week. As at the end of March, overall progress sits at 69% complete, up from 60% at the start of the quarter. Underground development and construction was 64% complete. Significant progress has been made here on installing the Guajes conveyor system with 78% of the conveyor tables installed at the end of March. The conveyor belt segments have been received and are being spliced to length at site with their installation expected to commence mid-Q2, well ahead of commissioning in August. In-mine development also continued to advance steadily. The first charging base for our Sandvik production equipment and Rokion/MacLean support equipment were excavated and the installation of the charging equipment was completed in April. On surface, 2/3 of our planned concrete for the project has been poured, including all concrete for the paste plant thickener area. The balance of the plant concrete is to be completed during the second quarter to facilitate the start of steel erection in May. On the north side of the river, significant progress was also made, including the setting of the first flotation cells at the processing plant, the start of installation of the Guajes tailings thickener, piping installation in the water treatment area and at the processing plant between grinding and flotation circuits. Procurement reached 78% with deliveries of important infrastructure such as the ore and waste transfer conveyors taking place during the quarter. Finally, engineering was at 91% complete at the end of Q1 and continues to focus on finalizing electrical deliverables, such as electrical schematics. We are working closely with vendors to expedite purchase orders and compress delivery times where possible. Moving to Slide 17, you'll see some pictures of the project development. The conveyor table installation I just mentioned can be seen on the left side of the slide. The picture really gives you a good idea of the scale of the size of the Guajes Tunnel when you look at the workers in comparison. As a reminder, the tunnel sits at 6 meters wide by 6.5 meters tall. The top middle photo is the Guajes conveyor head station where the conveyor will terminate outside the Guajes Tunnel portal. From here, ore and waste will be rehandled to its final destination. During the quarter, the e-house for the Guajes conveyor was placed on to concrete supports to prepare for electrical installation next quarter. The top right shows the copper and iron sulfide flotation cells being set in place and piping being installed. And finally, the bottom photo shows progress made at the paste plant where concrete foundations have been poured. Erection of the binder silo and thickener will commence shortly in parallel with erection of the filter building steel work. In summary, a lot of progress has been made in Media Luna during the quarter. With first production still on track for Q4 this year, we're looking forward to delivering Media Luna into plan. With that, I'll turn the call back over to Jody.

Thanks, Dave. We're looking forward to that too. Before we wrap up here, I wanted to touch on the excellent year-end reserves and resources update we put out at the end of March. Our teams are doing a lot of work to grow our resource base, and the results we released highlighted just that. You can see here on Slide 19, a summary of the changes to our reserve base. You can see that 67% of the reserves processed last year were replaced. Importantly, the focus area here is the mine life of ELG underground. It was extended by 2 years through 2028. This underscores our belief in the resource potential of this deposit that we'll be able to mine a year, add a year, mine a year, add 2 years, year-after-year for the foreseeable future. And this ELG Underground is an important part of the life of mine plan to complement Media Luna production fill-the-mill post 2027. I'll also note here that we increased our reserve prices across gold, silver and copper. We saw this as a prudent thing to do given where commodity prices sit today. The reserve price used for gold was $1,500 an ounce and it's in line with the average of North American listed precious metals producers. Resources are shown here in the next slide, Slide 20. In 2023, we increased our measured and indicated resource base by over 900,000 gold equivalent ounces. The year before, we added over 1 million ounces of gold equivalent to the M&I category. So almost 2 million ounces in 2 years, which I think is pretty impressive for a company our size and there is more to come. The 2 main drivers of resource growth this year were not surprisingly our focus areas. ELG Underground now sitting at 1.4 million ounces in M&I and EPO now sitting at 1.2 million ounces in indicated. Similar to reserves, we increased our resource prices as well, now sitting at $1,650 per ounce gold, $22 per ounce silver and $3.75 a pound copper. Again, we're still relatively conservative here. The gold price used for resources is modestly below the average of the North American listed precious metal peers. And finally, Slide 21 highlights our overall exploration and drilling plan for 2024. With 2 strong growth years behind us and $30 million budgeted for this year on the drill bit, we're confident we'll continue to see success in growing reserves and resources on both the north and south sides of the property. And we're also this year advancing early-stage exploration on some of the more regional targets across the property. We expect to release initial results from the 2024 program at ELG Underground in June and have a steady cadence of exploration releases throughout the year and into early 2025. With 3 million ounces produced, we crossed that milestone last year, another 10 million ounces in our resource base and the property remaining 75% unexplored. We all know there is much more value to unlock here at Morelos and we're working a way at doing just that. So that's the sum up of an excellent quarter that was and the finish line at Media Luna. And with that said, I'll now hand the call back to the operator to open the line for questions.

[Operator Instructions] The first question comes from Don DeMarco with National Bank Financial.

Great work proceeding with Media Luna development. It's great to see another quarter of execution. So first question, what's on the critical path of Media Luna development over the next 3 quarters?

Don, thanks for the question. Dave Stefanuto here. Yes, in terms of critical path, for us, it's really just delivery of the final components of electrical gear to support the commissioning of the flotation plant and the paste plant later on in the year. So it's making sure those vendors meet those commitments and ensuring we have that gear installed to facilitate that commissioning.

Okay. And are there any parts or equipment that's not on site yet that could be potentially delayed?

Again, primarily electrical gear, we do have some switch gear. It wasn't long lead item, but there's a lot of high demand in the industry for this. So vendors are struggling to meet deliveries. But we do have workarounds for many of these in plan B. So we do have ways to mitigate that risk moving forward. Other than that, the majority of all of our major equipment, major processing equipment and major underground equipment is already arrived at site.

And Don, I just want to make another point here on this question around delay because it's an important question. While we're very much planning to produce copper con in Q4 of this year, if and as this electrical gear doesn't come in, all we're going to do is continue to produce out of ELG in the way that we have. And so, unlike a true greenfield project where delay means massive over-run costs and no cash flow, we're sitting in a very different situation in terms of the business reality of schedule risk on this project. So I just want to amplify that.

Okay. So looking at operations over the next few quarters, could you walk us through those next few quarters? Like, obviously, Q4 is going to be the low watermark for the year with the shutdown and the tie-in. But would you expect Q2 and Q3 then to be the higher production quarters relative to Q1? I see the strip is easing and so on.