Good morning. I would like to turn the meeting over to Mr. Jamie Porter, Chief Financial Officer. Please go ahead, Mr. Porter.
Thank you, operator, and thanks to everyone for attending Alamos' third quarter 2020 conference call. In addition to myself, we have on the line today John McCluskey, President and CEO, and Peter MacPhail, Chief Operating Officer. We will be referring to a presentation during the conference call that is available through the webcast and on our website. I would also like to remind everyone that our presentation will be followed by a Q&A session. As we will be making forward-looking statements during the call, please refer to the cautionary notes included in the presentation, news release, and MD&A, as well as the risk factors set out in our annual information form. Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Vice President of Technical Services and a qualified person.
Also, please bear in mind that all of the dollar amounts mentioned in this conference call are in U.S. dollars unless otherwise noted. With that, I'll turn it over to John to provide you with an overview of the quarter.
Thank you very much, Jamie, and welcome everyone to our conference call. We've had an excellent third quarter, operationally and financially, and we've delivered on several key catalysts, which have solidified our strong outlook. These include the completion of the lower mine expansion at Young-Davidson, the announcement of the Phase III Expansion at Island Gold, and the La Yaqui Grande construction decision. We produced 117,000 ounces of gold at significantly lower costs, with each of our operations performing very well in the third quarter. Consolidated total cash costs of $681 per ounce and all-in sustaining costs of $949 per ounce decreased sharply from the first half of the year. Both were below revised guidance. This reflected a strong quarter at Mulatos, another record quarter at Island Gold, and Young-Davidson starting to demonstrate its full potential with underground mining rates increasing as planned.
The strong operational performance and higher gold prices drove a number of financial records in the quarter, most notably record free cash flow of $76 million. We expect strong free cash flow to continue in the fourth quarter and remain on track to achieve our revised full-year production guidance and cost guidance. Moving to slide four. Our health and safety protocols continue to evolve as we look for the best ways to protect our employees, their families, and our communities from the COVID-19. In addition to the strict protocols already in place, we are now testing employees for COVID-19 before they start rotations within the camps at our Island Gold and Mulatos mines. The picture on the left shows the laboratory at Island Gold, where we're now conducting more than 1,300 tests per month. We're performing a similar number of tests at Mulatos.
These programs are extremely important to ensure we have the ability to identify and prevent the spread of the virus. Additionally, we continue to support our local communities in areas of need, ranging from sponsoring meal services for our communities around the Island Gold operation to supplying medical and safety equipment and supplies to the communities near Mulatos. Slide five outlines our focus on operating a sustainable business model that can support growing returns to shareholders over the long term. The completion of the lower mine expansion at Young-Davidson marked a transition from a reinvestment phase to a period of strong free cash flow generation. We will take a balanced approach to deploying this free cash flow, paying higher dividends, strengthening our balance sheet, and reinvesting in high return organic growth projects like the Island Gold Phase III Expansion and La Yaqui Grande.
At current gold prices, Island Gold and Mulatos can more than self-finance their respective projects, allowing us to continue generating strong free cash flow and support higher dividends. These projects will in turn drive additional free cash flow growth and further returns to shareholders that are sustainable over the long term. Given our strong cash position and outlook, we repaid the $100 million drawn on our revolving credit facility in October and are once again debt-free. Aligned with our commitment to returning capital to shareholders, we are also pleased to announce a 33% increase in our dividend to an annual rate of $0.08 a share starting in December 2020. We have now increased the dividend by 300% since 2018 and believe there is room for further dividend increases to come. I will now turn the call over to our CFO, Jamie Porter, to review our financial performance. Jamie.
Thank you, John. Moving on to slide six. We had the best quarter in the company's history from a financial perspective, with record operating cash flow, free cash flow, and adjusted earnings in the third quarter. Higher margins at each of Young-Davidson, Island Gold, and Mulatos contributed to record free cash flow of $76 million in the quarter. Island Gold and Mulatos both performed extremely well, generating mine site free cash flow of $41 million and $31 million respectively. The $41 million of free cash flow at Island Gold set another quarterly record. In fact, in the first three quarters of 2020, Island Gold generated $70 million in mine site free cash flow, already exceeding the previous annual record of $65 million generated in 2019. Mulatos has been equally impressive, generating $64 million of mine site free cash flow year to date.
A significant portion of this has been driven by Cerro Pelon, a project we built and brought into production late last year for $25 million in capital. This highlights the high returns and quick paybacks from these types of projects, something we can look forward to with La Yaqui Grande. On a consolidated basis, we sold 116,000 ounces of gold at a realized price of $1,882 per ounce for revenues of $218 million in the quarter. Total cash cost was $681 per ounce, and all-in sustaining costs of $949 per ounce decreased 18% and 15% respectively from the first half of the year and were both below full-year guidance. Lower costs reflected the completion of the lower mine expansion at Young-Davidson, as well as the resumption of normal operating levels at Island Gold and Mulatos following the COVID-19 related temporary suspensions in the second quarter.
We remained very well positioned to achieve our revised full-year cost guidance. We continue to enhance our health and safety protocols with respect to COVID-19, including adding testing in Mulatos and Island Gold during the third quarter. Looking forward, we expect COVID-19 testing and related costs at approximately $25 per ounce to our cost structure in the fourth quarter and into 2021. Operating cash flow before changes in non-cash working capital improved 63% year-over-year to a record $130 million, or $0.33 per share in the third quarter. Our reported net earnings of $68 million, or $0.17 per share, included unrealized foreign exchange gains of $11 million recorded within deferred taxes and foreign exchange. Excluding these items, our adjusted net earnings were $57 million or $0.15 per share.
Capital spending totaled $55 million in the third quarter, including $23 million of sustaining capital, $29 million of growth capital, and $3 million of capitalized exploration. As with the second quarter, growth capital spending was focused on completing the lower mine expansion at Young-Davidson, work on the tailings facilities at both Young-Davidson and Island Gold, and other infrastructure projects, primarily at Island Gold. We expect full-year capital spending to be in line with guidance of between $205 million and $235 million. Our next quarterly dividend of $0.08 will be paid in December, a 33% increase from the previous quarter. This will bring our returns to shareholders to $31 million in 2020 through dividends and share buyback, double the amount returned in 2019. We ended the quarter with $274 million in cash, up from $201 million at the end of June, and $40 million of equity securities.
Given our strong free cash flow outlook, we repaid the $100 million drawn on our revolving credit facility in mid-October, giving us $500 million of additional liquidity and no debt. We remain very well positioned to fund our internal growth projects while continuing to grow our cash position and grow returns to shareholders. I will now turn the call over to our COO, Peter MacPhail, to provide an overview of our operations.
Thank you, Jamie. Moving to slide seven. Young-Davidson generated mine site free cash flow of $11 million in the third quarter from the production of 36,400 ounces at total cash costs of $923 per ounce and mine site all-in sustaining costs of $1,196 per ounce. All were significant improvements from the first half of the year, reflecting a partial quarter operating from the new lower mine infrastructure. Following the completion of the lower mine expansion in July, underground mining rates increased in the quarter to average 6,700 tons per day. Mining rates are expected to continue to improve along with grades mined and milled, driving production higher in the fourth quarter. Young-Davidson remains on track to achieve its revised annual production and cost guidance. Over to slide eight.
We are already benefiting from the efficiencies of the new lower mine infrastructure with higher underground mining rates than the mine has ever achieved and at lower costs. Mining rates increased throughout the quarter and averaged 8,000 tons per day in September, with the operation benefiting from the significant inventory of broken ore built up during the tie-in. This demonstrates the expanded capacity of the lower mine infrastructure with its increased skipping capacity and ore storage capacity, as well as increased automation. In addition to supporting higher mining rates, increased automation, productivity, and economies of scale are driving costs lower. We expect mining rates to increase to a sustainable rate of 7,500 tons a day by the end of 2020, which will continue to drive production higher and costs lower.
Combined with lower capital spending, we expect this to drive significant free cash flow growth into the fourth quarter and into 2021. Over to slide nine. Island Gold set a number of new records in the quarter, including record mine site free cash flow of $41 million from record production of 39,600 ounces. Total cash costs of $394 per ounce and mine site all-in sustaining costs of $575 per ounce were down 22% and 17% respectively compared to the same period last year. Lower costs reflect the higher-grade mined and processed during the quarter, as well as lower royalties following the repurchase of the 3% NSR royalty in March of this year. In the fourth quarter, we expect grades to return to approximately reserve grade. Island Gold remains well-positioned to achieve its annual production and cost guidance.
Work on the Phase III Expansion is ramping up with higher capital spending expected in the fourth quarter. The current focus remains on advancing permitting, site clearing, and detailed engineering of the shaft and associated infrastructure. Moving to slide 10. In September, we reported the best surface exploration hole to date at Island Gold, with drill hole MH25-04 intersecting 27 grams per ton cut over nearly 22 meters true width. Another strong result was from drill hole MH25-03, intersecting 14 grams per ton cut over 50 meters. These holes were 100 meters and 40 meters respectively down- plunge from the high-grade inferred resource block and have true widths three to four times greater than the average width
These drill results continue to demonstrate the potential for further reserve and resource additions and also support our decision to sink a shaft as part of the Phase III Expansion. Moving on to slide 11. Mulatos had another strong quarter, producing 41,100 ounces, total cash costs of $746 per ounce, and mine- site all-in sustaining costs of $928 per ounce. Year-over-year, production was up 26% and total cash costs were down 14%, reflecting the contribution of higher-grade ore from Cerro Pelon. While we expect grades and production to decrease somewhat in the fourth quarter, Mulatos is on track to achieve its full-year production and cost guidance, given its strong year-to-date performance. Over to slide 12. As you can see in the photo, development of La Yaqui Grande is well underway, with activities in the third quarter focused on initial camp construction and clearing of the pit area.
Construction activities are expected to ramp up in the fourth quarter with a focus on haul roads construction and the start of stripping activities. The bulk of La Yaqui Grande's initial capital budget of $137 million is expected to be spent in 2021, with initial production starting in the second half of 2022. La Yaqui Grande is another low-cost, high-return project. We expect a quick payback on this investment, much like we're seeing this year with Cerro Pelon. With that, I'll turn the call back to John.
Thank you, Peter. Much appreciated. That concludes the formal part of our presentation. I will now turn the call back to the operator and open the line for your questions.
Thank you. We will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift the handset before making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel the question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participant register for questions. Thank you for your patience. The first question is from Fahad Tariq from Credit Suisse. Please go ahead. Your line is now open.
Hi. Good morning. Thanks for taking my two questions. The first, on capital allocation, you mentioned that you'd like to allocate a third of the free cash flow towards strengthening the balance sheet. Right now there's no debt. The cash balance is just shy of $300 million. What is the goal for the cash balance before you maybe consider redirecting the free cash flow to the other two buckets? Thanks.
Yeah. Thanks for the question. It's Jamie here. Alamos has always been, I'd say, more conservative than many of our peers from a balance sheet perspective, and I think it's served us well. It's positioned us to be active in terms of M&A when other market participants can't. We'd be targeting a cash balance upwards of $400 million-$500 million. Once we hit that target, we'd start certainly increasing the allocation to the other buckets. If you look at those priorities, a third going to growth and exploration spending, a third to dividends and other shareholder returns, and a third to the balance sheet. Those are kind of long-term targets that we anticipate realizing over the next 10 years.
If you look at the current allocation, the next three to four years, the majority of our free cash flow is going to our high-return growth projects, to the Phase III Expansion at Island Gold, to building La Yaqui Grande, and then eventually to construction of Lynn Lake. I think beyond that, beyond 2025 is when you see the free cash flow generation really start to increase, and at that time you'd see a real significant potential increase in the dividend.
Got it. That's very clear. Okay, the only other question I had was on Young-Davidson. Can you give some color why the Q3 milling throughput was lagging the mining rates? I know you said that it's going to pick up in Q4 and kind of match the mining rates, just curious why it lagged in the quarter.
Yeah. Thanks for the questions. Peter here. The skipping from the mine in Q3 was back half loaded to a certain extent. The mine was really able to put a lot of tons up the shaft during the latter part of August and into September. It ended up creating a bit of stockpile in front of the mill. The mill has no problem milling at 8,000 ton a day rate. For instance, in October we're well above that. That's why it lagged the mine in the quarter.
Okay, great. That's it for me. Thanks.
Thank you. The next question is from Mike Parkin from National Bank Financial.
Hey, guys. Congrats on the good quarter. A couple questions from me. The power line at Mulatos, will you be carrying that over to La Yaqui? When will that be over there in time for first production?
Yeah, absolutely, Mike. Production doesn't start there until 2021. We'll have plenty of time, and it's planned to bring that over early on.
Okay.
In time for that production.
Is the CapEx budget factor that in, or would that be incremental to that?
No, that's factored in.
It's not that far. It's about 5 km power line to bring it over.
Okay. The cost estimates you've provided then, I guess, already assume that power line connection?
Correct.
Okay. You've always had kind of a strong discipline of buy when prices are low with respect to gold. What about the thought of, in this environment, selling any assets? Is there anything within the portfolio that you maybe would look to release, or is that something that you guys are considering?
This is John McCluskey. I'll answer that, Mike. There are a couple of projects in our portfolio that are clearly far smaller for us now than when they were initially acquired. They're decent projects. We continue to work on them and move them along. In this market environment, as you could well imagine, we have inbound interest coming on those projects. We're in discussions. It wouldn't be inconceivable if we sold some of those non-core assets.
Okay, super. That's it for me. Thanks, guys, and congrats again.
Thanks, Mike.
Thank you. The next question is from Cosmos Chiu from CIBC. Please go ahead.
Thank you, John, Jamie, and Peter. Congrats on a very strong third quarter here. My first question is on Young-Davidson. You talk about the underground throughput at 8,000 tons per day. You also talk about getting to a sustainable rate of 7,500 tons per day by year-end 2020. Can you help me bridge that sort of gap? What do you need to do still to kind of get to that consistent rate? It sounds like you're already kind of there.
Yeah. Thanks, Cosmos. Clearly, the underground infrastructure, the ore and waste movement infrastructure is well capable of 8,000 tons a day, and we've demonstrated that now. Our stope sequencing and opening up of areas, we budgeted to get to 7,500 tons a day by the end of this year with that ramp up.
While we were down through the tie-in period, that we've set ourselves up to do that. We will continue to ramp that up to 8,000 tons a day by mid-ish next year. We were able to demonstrate the 8,000 tons a day in September by drawing down on a bit of inventory that we would have built up through the tie-ins. That's the bridge.
For sure. I guess again, on YD, as you talked about the throughput at the mill was slightly lower in Q3 due to there's no more stockpiles. I know you've talked about matching milling and mining rates into the future. As mining rates go up and if it exceeds your expectations, is there any chance that you might want to build up a stockpile once again, or is that not in the cards?
I would suggest that it's rare that you see a stockpile in front of a mill in a underground mining situation. It can happen. We had one at the end of Q3. The mill has demonstrated in the past 8,000 tons a day. It has no problem doing 8,000 tons a day. I think we're sitting at close to 9,000 tons a day through the first three weeks of October. There's no problem with the mill if anybody is concerned about that. It demonstrated 8,000 tons a day before we put in a pebble crusher. We now have a pebble crusher in there. It's not going to have any challenge doing those kinds of tons. This mine is a 8,000 ton a day or maybe better yet to think about it as a 200,000 ounce a year plus producer. That's what it'll do going forward.
Okay. Maybe the last question on YD here. Certainly, the last several years was focused on the tying up or the underground infrastructure, the operations, and more recently, tying up the lower mine. Now that everything's sort of in place, and I know in the recent past, exploration has not really been a focus area, at least for YD. Is that going to change now?
Cosmos, this is.
This is John here. I would say we're clearly interested in seeing what the further extension potential is at depth to YD. We don't have anywhere near the same sort of needs, let's say, to build reserves at YD as we do, say, at Island or Mulatos, where reserve growth is driven by very specific production requirements. YD has 13 years of reserves the way it sits right now. You're only adding marginal value when you're adding reserves that go out beyond 15 years. Having said that, we have started drilling at YD again. As we get into the second half of this year, we do have exploration drilling taking place there right now, and we're going to allocate a reasonably good budget for it for 2021. I would say going into 2021, we'll update on success. You'll probably see additional reserve growth at Young-Davidson based on that drilling.
No, that's great to hear. Those are all the questions I have. Thanks, John and team, and congrats again on a very strong Q3, and stay safe, everyone.
Thank you. The next question is from Kerry Smith from Haywood Securities. Please go ahead.
Thanks, operator. Peter, just on YD, if I can just maybe ask the question a different way. You have averaged 8,000 tons a day in September. What was the best week you had, let's say, on an average? I'm just curious how much this mill can do.
The mill? We put out 9,000 ton days all the time.
Oh, you do?
Yeah.
Okay. That's great. You've got all kinds of capacity there, and probably just assume it's going to do 8,000 ton a day, no problem. Okay.
The miners get one chance to bury the mill, and they took advantage of it with some tremendous performance in the latter part of the quarter. You'll never see it again.
Yeah. Okay. John, just on the portfolio optimization on the non-core stuff, I'm assuming that maybe Esperanza and some of those projects fall into that bucket. Would you consider today that Turkey's a core asset there? Just given the delays you've had there, are you thinking that maybe that's something that you maybe would optimize out of the portfolio?
It's certainly not core. For example, we acquired it, remember, in 2010 when they were exploration projects. We were very successful in that exploration, and we built up a fairly substantial reserve there, roughly 3 million ounces. That made it quite interesting. When we completed the economic studies, they demonstrated very strong economics. They were very attractive projects. Between the time that we fleshed out those economics and where we are today, we've since acquired Young-Davidson, we've acquired Island Gold, we've built our production up over a run rate of 500,000 ounces a year normalized. From that perspective, Turkey clearly isn't as core as it once was.
Questions have come up over the course of the last few quarters on these calls and at conferences and investor meetings and so forth, and we've been very candid about the fact that we're disappointed with the delays that we've experienced. I don't see things getting any easier in Turkey. We may very well benefit from taking on a Turkish partner. It's no secret that we get all kinds of inbound interest on these assets, and particularly from Turkish mining entities. From that point of view, we're going to look as best we can to surface values for those assets. It's not satisfying at all to us to just be in a sit-and-wait mode when we've got a project that's effectively fully permitted, and construction was underway. We were four months into construction when we were effectively stopped. Current situation is certainly not acceptable.
We're going to do something about it one way or the other. One of the alternatives we're looking at is taking on a party who would come in at the project level to partner with us.
I got you. Okay. Okay, that's great. I appreciate that. Thank you.
Thank you. The next question is from Dalton Baretto from Canaccord Genuity.
Thank you. John, I'd like to continue on the segue Kerry made into Turkey there. Has anything changed on the ground regionally in Çanakkale, either for better or worse?
Well, things are continually changing in Turkey. Probably the most stark change over the last year is that the lira has gone from approximately 5.9 to the dollar to 8.2 to the dollar. The economy of the Çanakkale region is in really desperate shape. It's a region that relies very heavily on tourism, particularly the capital of Çanakkale itself relies very heavily on tourism, and tourism was down drastically this year. Yeah, the economy is taking a real hit. The economy of this region is taking a real hit. There's quite a very vocal discussion going on there between those that would like to see the project develop and who would benefit from the jobs, and supplying a substantial business of that kind in the region, and those who effectively oppose it.
The people that support it, by and large, are those people that are located closest to it, and those that oppose it are those from outside. It's an old story, and we've seen similar things in Canada as we're seeing here in Turkey. We're having to navigate a very sort of tricky waters here, and we're doing everything we can to put ourselves in the best position to take advantage of the change in sentiment that I think we're starting to observe. When I refer to that, I mean there's becoming a lot more interest in seeing this kind of economic activity in a badly hit region. We're hoping that that is ultimately going to lead the government to reinstating our mining licenses and allowing us to get back to work. Right now, the best thing that we can do is be patient.
That's what the government has been asking us to do. I guess there's a certain point in time coming when we will no longer be patient, and at that point, we're going to have to look at what our alternatives are. It's not a good position to be in. They're great projects, but unfortunately, we found ourselves just over a year ago, put into a pretty tough position where we effectively can't do any work. It's not something we anticipated, and it's not something we're happy with, but I think we're going to see a change one way or the other on the approval for the next six months.
Thank you. That's helpful. John, when you talk to investors, does this situation Or do you feel that the situation impairs you at all from an ESG perspective?
I would say no. Anyone who has looked at what happened there closely understands that effectively we were somewhat railroaded. It was a social media campaign based on a whole slew of false allegations, and that is very well understood right by now by our investors and certainly by everyone inside of Turkey. Even the people who did it know very well what they did. That's probably why it just doesn't have the power to stick as it otherwise would if we were actually guilty of something in terms of violating our permits or doing something that would be harmful to the environment. I mean, the primary criticism that the project development received was the cutting down of trees in this region. Of course, all those trees were cut down by the Ministry of Forests. They weren't cut down by the company at all.
No company has a right to cut down trees. The government themselves cut those trees. They harvested those trees. They sold the trees. They kept all the revenue for those trees. We had nothing to do with that. This is a very actively forested region, and our particular site represented less than 2% of the area of Çanakkale that was forested that year. It's really a political situation that we're in the middle of there. It's the way of the opposition to attack the government through attacking their environmental policies, and they've tried to make much more out of this than it actually was. They've managed to initially gain a tremendous amount of support, but all based on false allegations. This is so well understood, I would say that we are not facing a great deal of difficulty from a perspective.
If you don't look at the situation carefully, if you were to just go online and take your ESG policymaking or decision-making from what you're reading on Twitter or something like that, yeah, maybe you're going to be misled. Anyone who looks into the details of what happened wouldn't make the mistake.
That's great context. Thank you. Maybe I can just switch gears for one more question. Lynn Lake, I understand sanction's still a couple of years away, and you're going through permitting, but can you give us a sense for what you would want to see from this project in order to sanction it? When we, as analysts, will see an update on the project?
Do you want to take that, Peter?
Yeah. Maybe I'd put it over to Jamie, actually.
Okay.
You'll recall the feasibility study that we put out back in December of 2017. The project had about a 12.5% IRR at a $1,250 gold price. We've been working away at it from an exploration perspective, finding additional ounces to put into that resource, and I think we've had some success. Our goal ultimately is to get it to about a 15% IRR at a $1,300 gold price, and I think we're pretty close to there. We're spending $6 million-$7 million a year on exploration. We have a massive land package there. We've had some very encouraging results, so we do anticipate being able to expand resources there and make the project better. Even at a $1,500 gold price right now, it's got a 22% after-tax IRR, and at anywhere close to spot, it's closer to 32%-33%. We like the project.
It gives us the potential to get to 600,000 ounces of Canadian production in 2025 when you add Lynn Lake to what we'll be producing at Island Gold and the 200,000 ounces a year we'll get from Young-Davidson. We do like it. We'd be in a position to make a construction decision in the middle of 2022 once permitting is complete. Obviously, we'd evaluate the gold price, the Canadian dollar FX rate, and all the other factors at that time before moving forward.
Thanks. Do you anticipate putting out a study ahead of that?
We may update the study. The capital that's in our 2017 feasibility study is fully baked. There hasn't been a lot in the way of changes to that, though we've continued with engineering and further studying those costs. I don't think there's been a material change on the CapEx side. If we're able to add materially to the resource, and by materially, I'm talking like 200,000-300,000 ounces, then we'd consider updating the study, certainly.
Great. Thanks, guys. That's all for me.
Thank you. Next question is from Steven Grodko from Pershing Global Financial Solutions. Please go ahead. Mr. Grodko, your line is open. Please proceed with your question. If you are on mute, unmute your line, please.
I think you might have lost him, operator. Why don't we proceed to the next caller?
We have no further question registered at this time. This concludes today's morning call. If you have any further questions that not have been answered, please feel free to contact Mr. Scott Parsons at 416-368-9932, extension 5439. The conference has now ended. Please disconnect at this time, and we thank you for your participation.