Thank you
for standing by. This is the conference operator. Welcome to Torex Gold's First Quarter 2020 Conference Call and Webcast. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.
I would now like to turn the conference over to Mr. Dan Rollins, Vice President of Corporate Development and Investor Relations. Please go ahead, sir.
Thank you, operator, and good morning, everyone. On behalf of the Torex team, welcome to our Q1 2020 conference call. Before we begin the presentation, please note that certain statements to be made today by the management team may contain forward looking information. So please refer to the detailed cautionary note in today's MD and A. On the call today, we have Fred Stanford, President and CEO Stephen Thomas, CFO and Jody Kuzanko, COO.
Following the presentation, they will be available for the question and answer period. The conference call is being webcast and will be available for replay on our website. This morning's press release and the accompanying financial statements and MD and A are posted on our website and have been filed on SEDAR. Also, please note that all amounts mentioned in this call are in U. S.
Dollars unless otherwise stated. I will now turn the call over to Fred.
Thank you, Dan, and welcome to all on the line. From our home office locations, we will try and follow a pattern similar to previous calls. Jodi Kuzenko, for the last time as COO before she moves to the CEO role, will handle operations portion of the call. Steve Thomas in the CFO role will follow with a financial highlights overview of the quarter. After Steve and Jody have provided with updates, I will close with some thoughts on the resilience of the business in a world of pandemic uncertainty.
Before getting into the details of the quarter, I would like to recognize Jody and the entire site team for their continued outstanding ESG performance. On the last quarterly call, I noted that they had achieved a phenomenal safety outcome of 5,000,000 hours worked without a lost time injury. They have now extended that record performance to 6000000 hours and more than 1 year worked without a lost time injury. This commitment to safe work practices has transitioned naturally to healthy work practices to prevent the spread of COVID-nineteen infection at site. They have also extended their health control efforts to include helping local communities prepare for COVID-nineteen.
This has included donation of supplies and a number of education efforts. One of these education efforts was a video of local children demonstrating hygiene measures to prevent COVID-nineteen infection. The video went viral on some Spanish language social media platforms, making some new and positive ambassadors for the mining industry. Thanks to you all for continuously demonstrating that ESG is inherent to our culture. I will now turn the floor over to Jody for an overview of operations during the quarter.
Thank you, Fred, and good morning to all. Today, I will break my commentary into 2 parts. First, the safety and production update, which can best be described as another quarter that was solid, routine, relatively uneventful and in line with expectations. And then the COVID-nineteen update, which can best be described as none of those things. The words fluid, fast paced and unprecedented come to mind.
Starting first to safety. Today, our lost time injury frequency stands at 0. Compliance to incident reporting expectations is up, injuries are down, not just on lost time, but on lower level injuries as well. We have demonstrated to ourselves that with the right leaders in the right roles, all employees using key systems in a disciplined way and the creation of a culture of care that 0 harm is actually achievable. At the same time, we know that the only thing harder than getting to 0 is staying there And the team is fully engaged in the work necessary to deliver on that.
Turning to production. Out of the mines, rates continue to impress both at the open pits and the underground. The one item worthy of note is that mine grade in the open pit came in slightly lower than expected on the quarter at an average of 2.2 grams per ton. This is largely attributable to some isolated pockets in Ely Mont C North not coming through with the grade we anticipated, such as life when dealing with the scar and ore body. I think the important points are that we've been able to offset this grade impact to a significant degree with our now well established blending protocols and we are through those pockets in Alimoz B and so absent COVID expected to be in a position to maintain grade at budgeted levels for the balance of the year.
In the process plants, there are 2 issues that were the focus of much attention at the start of the quarter, uptime in the SAG owing to alignment concerns and the consumption of cyanide owing to soluble iron. I'm pleased to say that our database and systematic approach to problem solving has paid off and excellent progress has been made on both fronts. On the issue of alignment in the SAG mill, we reported in January that we took the mill down for additional time in that month to realign the drivetrain with the assistance of external experts. The purpose of this work was to attempt to rule out other potential contributing factors, including issues with grouting and sole plates. I'm pleased to say that since this work was undertaken, we have not seen any excursions on either temperature or vibration.
And despite the 88 hour January shutdown, we closed the quarter with availability at 90% and processed an average of 12,460 tons per day, our best performance since 2018. On the metallurgical side of plant operations, work has been ongoing to deal with soluble iron issues. We reported coming out of Q4 that our progressive trials that oxidizing the iron in the leaf circuit were working. Recall that we started with aeration into 1 tank, then progressed to piping oxygen into 1 tank and in January completed the piping of oxygen into 2 tanks. The results have been excellent as expected.
In quarter 1, average cyanide consumption was 3.1 kilograms per tonne, tracking nicely down from 4 0.1 kilograms per tonne in Q3 before the program started. Important to note that this decrease in cyanide consumption was achieved notwithstanding of increased soluble iron over the same time. The oxidation is also supporting stable and healthy gold recoveries. In quarter 1, recoveries came in at 89.4% versus design of 87%. This is the record highest quarterly recovery since the plant has been operating.
In summary, for production on the quarter, we were able to put some critical operational problems in the solved pile and behind us and we were well on track to deliver production guidance for 2020. That is until COVID-nineteen came about, which takes me to the second half of this update. Much time and management attention during the quarter was spent designing and executed COVID-nineteen scenario plan. The purpose of the various plans was twofold: 1, to look after the health of our employees, our contractors and community members during this global pandemic and 2, to maintain production for as long as possible and subsequently to resume production as early as possible. The first phases of the planning occurred in the very early part of the quarter when the virus was reported overseas.
Given that key consumables in our supply chain are sourced from areas that were first infected, immediate actions were undertaken to shore up critical supplies of cyanide, bisulfides, other reagents and consumables. In addition to the supply chain work, we commenced educational campaigns, both on-site and in the local community. We're talking about the virus, methods of transmitting the virus and the need for good hygiene. We coupled this with a significant donation of hand sanitizer and masks to local communities to enable them to actually implement the hygiene measures we were talking about. At the site itself, various control measures were put into practice, including social distancing, meetings being held in outdoor spaces, the installation of additional sinks for hand washing, increased cleaning of vehicles and sleeping rooms and symptom reporting by employees to our on-site medical doctors.
In March, the operations transitioned to the 2nd phase of the plan. This was full production with the least number of people on-site. The underlying logic behind this phase was to maintain production while enhancing the ability for employees to maximize social distancing at all times. During this phase, travel was suspended for international employees, most service and support employees transitioned to working from home, All high health risk employees were identified and began to work from home. We instituted a complete barrier between the Medialuna drilling program and ELG.
Off-site lay down areas were created to enable contractors delivering critical supplies to do so without coming into contact with ELG employees and a 3 tiered health screening process was implemented for the employees absolutely required to attend site to maintain production. Then in April, we placed our assets on care and maintenance in accordance with the decree issued by the Mexican Federal Health Ministry on March 31. During the care and maintenance days, the majority of employees went home to isolate. In addition to the care and maintenance crews, we retained a healthy security force to safeguard the assets, and we chose to community relations employees based in the local communities to continue with education and information campaign. We continue to pay all employees their wages, paid out the annual bonus and are staying current with all other accounts payable.
The carry maintenance period was also used the process plant to undertake a detailed maintenance program, including performing non destructive testing on the SAG and ball mill drive assemblies, shaft and concave inspections on the primary crushing circuit and overhaul of the cyclone together with other regular maintenance. Discussions have continued throughout all phases with officials at the federal, state and municipal levels of government as well as local community leaders. And we are now moving into the next phase. As of May 1, the necessary crews have been brought back to site to test the work that was completed at the process plant during the care and maintenance phase with the intent of resuming gold pouring mid month. The operational plan during this phase will be to process material from stockpile only, while open pit and underground assets will remain in care and maintenance.
During this phase, all employees and contractors are subject to pre rotation quarantine. We will continue with the practice of a 3 tiered screening process for people arriving at sites. The rotations have been extended and site will effectively be locked down. Not even local employees will be going home to their communities in the evening. And if employees show any symptoms during the rotation, the individual and those with whom he came into contact will be quarantined at site for an appropriate period of time, including post rotation if required.
We believe this approach will enable us to generate sufficient cash to stay current on accounts payable and mitigate risks associated with the virus coming to site and do our part to mitigate the risks of the virus getting into the community. No doubt this situation will continue to evolve as the quarter progresses. And with that, I'll turn the call back over to Fred.
Thank you, Jody. Steve, can you please take us through the highlights of the financial results? Thank you, Fred, and good morning, everyone. As Jody described, Q1 saw solid operational performance. Cash flows tracked to plan in Q1 aided by rising gold price, and we maintain a strong treasury position.
However, earnings reflect the significant impact of peso devaluation in March arising due to the global crisis. The 3 key elements impacting our financial results for quarter 1 are as follows. Firstly, the balance sheet remains strong with a sizable cash balance of $134,000,000 at the quarter end and a $9,000,000 improvement in working capital over the quarter to $105,000,000 And that's having taken account of the liability for peso hedges, which I will expand upon shortly. Secondly, the significant peso devaluation drove a large earnings loss due to its impact on those currency hedges and impacts on our deferred tax calculation. Lastly, a change in accounting estimate for stockpiles goes towards explaining elevated Q1 TCC and ACIP cost per ounce compared to Q4 and our initial guidance.
This effect was anticipated in that guidance. Turning firstly to our liquidity position. Cash flows generated from operations are in line with plan. As expected, net cash outflow reflects the anticipated payment of $47,000,000 of 20.19 tax liabilities, further debt reduction of $22,000,000 and capital investment of $26,000,000 This results in a net cash outflow of $26,000,000 over the quarter. It is worth noting that in 2020, the company is paying income tax installments and therefore won't build up a significant tax obligation to settle in Q1 2021.
Regarding the debt principal repayment of $22,000,000 this sees our term loan reduced to $111,000,000 and with $50,000,000 drawn on the revolver results in a net debt position of $26,000,000 at the quarter end compared to $22,000,000 at the year end. Shortly after announcing the decision on April 2 to temporarily suspend operations, we worked with our lending partners to draw a further $50,000,000 from the revolving credit facility against the then remaining $90,000,000 headroom available. This measure was done purely as a precaution to strengthen our cash position and reduce liquidity risk during this period of COVID-nineteen uncertainty. That injection leaves our cash balance at the end of April at $134,000,000 This means that we are well positioned to meet our financial obligations over the next 12 months. And even if operations are impeded through this quarter, we are projected to meet all debt covenants over that 12 month period.
Turning to the impact of the 25% depreciation of the peso during March. This resulted in a $36,000,000 loss on the peso currency hedges put in place in Q1, of which $26,000,000 is unrealized and adjusted out of our adjusted earnings. Similarly, the peso devaluation gave rise to a $47,000,000 unrealized FX loss in the tax basis of our PACE denominated assets, resulting in a $32,000,000 charge to deferred tax. Again, this unrealized FX loss is adjusted out of adjusted earnings. Turning now to operating costs and total cash cost and AISC per ounce.
Operating costs in Q1 came in below plan and lower than Q4 2019. This reflects lower profit share costs, reagent consumption rates and lower underground and maintenance costs for mining. Now despite that tight cost control driving down operating costs, Q1 TCC is $177 above Q4, due in large part to fewer ounces sold, which explains $108 per ounce, a one time diesel tax credit arising in Q4 equal to $56 an ounce and the balance of $13 an ounce comprises the cost savings mentioned earlier, offset by the impact of stockpile movement costs, which feed into our production costs. The change to now account for stockpiles based on ounces versus on a per ton basis previously impacts Q1 TCC and AISC by approximately $100 an ounce. This impact will reduce significantly in Q2 and tend to 0 in the second half of the year, bringing the overall annual effect in line with the $25 per ounce identified in our 2020 guidance.
In Q1, we saw rising gold price through the quarter, averaging $15.71 per ounce and an average realized margin of $7.77 per ounce compared to $8.64 amount in Q4. The reduction reflects the cost related differences described, which more than offset the $90 per ounce increase in the sales price. Turning now to our tax position, which shows an unusual current tax recovery and significant third tax expense driven by the peso devaluation in the quarter. The tax recovery reflects the expense of the 7.5% royalty arising for Q1, offset by the realized gain on the 2019 tax liabilities settled in Q1 and the unrealized gains on the current royalty liability. As mentioned earlier, the deferred tax expense of $32,000,000 is explained in large part by a $47,000,000 unrealized loss, arising due to the translation of the peso denominated tax assets into U.
S. Dollars at a 25% lower closing exchange rate for Q1 when compared to Q4. The deferred tax charge along with the derivative costs go a long way to account for the net loss of $47,000,000 or $0.55 per share for the quarter. For adjusted earnings, we add back $75,000,000 for the unrealized loss components within the derivative costs and deferred tax calculations. This results in an adjusted earnings figure of $20,000,000 or $0.23 a share on a basic and diluted basis.
In summary, in Q1, we have continued to tightly control operating costs and bolstered our liquidity position and so ensured that we are financially robust to carry us through the current hiatus. Thank you for listening. And with that, I will turn the mic back to Fred. Thank you, Steve.
Even though COVID is the issue of the times, before getting to it, I have to say something about Muckahi on my last conference call. I'll make it short. The team continued driving the 30 degree down ramp at ELD. They mined out another long hole open stope with a slusher and achieved the design conveyable fragmentation.
These successes aside, the bulk of
the effort in the quarter was training new miners in Muckahi techniques and getting ready to mine the Media Luna Tunnel with a hybrid of conventional and Muckahi techniques. We expect to set modern day tunnel advance rate records in that tunnel. That's it from our prior. Now to COVID-nineteen. Clearly, we don't have a crystal ball that will provide clarity on how this pandemic is going to unfold.
Accordingly, we have suspended guidance. And when reestablishing guidance, we will do so on a fact based assessment. Getting back to producing gold is in everyone's interest and we are on that path. We have excellent community support to do so. The virus is scary, but it is not the only thing that is scary in their world.
We will put together we will work together to find ways to get back to full production while reducing the net risk to them. Our teams are also anxious to get back into production. We've recently augmented the care and maintenance team to start warming up the processing plant for an anticipated return to gold pouring in mid month. This can be done without restarting mining. 6 months of low grade stockpiles are available.
Processing stockpiles can stop the cash drain, but it will not generate the cash needed to build Midelona. We need to get back to mining. We have excellent contagion prevention practices, but we have to believe that at some point, the virus is going to get through these defenses. We will be prepared for that. Prepared doesn't mean shut everything down at the first hint of infection.
We have significant health screening at the start of shift to identify when the virus has arrived. Since we have tightly controlled contact with others, contact tracing will be relatively straightforward. We have areas set aside for the quarantine of those that need to be isolated. We have medical professionals on-site that can see to their needs. If required, we have equipment that can safely transport those that need hospital care.
At the end of the day, this is a pandemic and all of us are at risk whether we are in our home communities or at work. It is our goal, though not easily measurable, to reduce the risk of infection at work to borrow what most would experience when they are away from site in our home communities. These are difficult times. We all have decisions to make that are decisions with imperfect information. They are not calculations.
There's no perfect answer. We will adjust the circumstances dictate.
Once we come out the other side
of this pandemic, torrex will be a company that is well positioned to capitalize on its capabilities as a social and technical innovator in an industry that needs both social and technical innovation. In June, I am passing the CEO baton to Jody and will step into the Executive Chair role. I look forward to continuing to work with Jody to grow the company and reward you all. I'll now turn the floor over to the operator to coordinate any questions from call participants. Thank
The first question comes from Mark Mihaljevic of RBC Capital Markets. Please go ahead.
Perfect. Thanks. Good morning, everyone, and congrats, Fred. Well earned, stepping down from control, although I guess retirement might be a strong word considering what you've got planned going forward. I guess my first question, can you guys just provide a bit of a breakdown of the cash spend through April and kind of bucket it between, I guess, corporate spending, ELG holding costs and what you're spending on Medi Luna?
Thanks for the question, Mark, and thanks for the comments. Steve, I'll
turn that over to you.
Okay. Thank you, Fred, and thanks, Mark. During April, we saw the site transition. We spent about $7,700,000 as we still in the 1st week saw some operations. I'll come back to the capital piece in a second.
For the CapEx for the corporate office at Degepahlen, that's the normal burn rate in April of about $1,700,000 And for media, Luna related spend, it was about $3,000,000 for April. Mark, does that answer your question?
Yes. No, that's helpful. And then, I guess, just moving on, once you guys have made the decision to research active mining, should we envision a bit of a ramp up period? And kind of how are you thinking about that once you go back to full restart, will it be a gradual restart? Will you be going back to the 16,000 tons a day of ore that we were kind of seeing before this all started?
And any expectations for cost impacts from whatever social distancing you need to implement?
Thanks again, Mark. At this time, it's still early days, but it will definitely be a gradual ramp up as we manage the social distancing limitations that we find ourselves under. So we haven't quite got that sorted out yet. The planning is underway.
It will definitely be in May.
Okay. That makes sense. And then I guess on the underground mining side of things and kind of just looking a bit longer term, I'm assuming this won't be the first thing you restart, but just do you think that these north of 1,000 tonne a day levels are now more sustainable given the positive reserve update you had? And then if you do bring in or kind of as you bring in ELD, should we view that as incremental tonnage or tons per day? Or would that be more of a sub or kind of just offsetting some of the subs still?
At this point, I think the 1,000 tonne a day moving forward is I think those are very sustainable rates. At this point, we haven't formalized a plan for ELD. We're just getting it opened up and we're primarily testing Muckahi there. So deliberately haven't put a plan number to it because the priority is to test the technology as opposed to deliver tonnes out of it at the moment. Later in the year, that will ramp up a little bit more significantly.
Sure. And then just one last one for me. I guess you mentioned that you picked up a little more soluble iron than you were expecting. Are there any limitations to the amount of oxygenation you can hand or the amount of sulfuric iron you can handle with the current oxygenation capacity in the 2 tanks? Like would you potentially need to add a third or you guys have more than sufficient capacity right now?
Jodi, I'll let you take that one.
No real limitations on the amount of soluble iron, Mark, but we won't be adding additional oxygenation to a third tank. We've achieved what we can achieve. We'll control the levels of iron moving in on grade. We have some ideas about the proportion of which that iron is soluble, although there was no perfect correlation. We're starting to build models around that.
And so I think what we've described in quarter 1 will be what status quo looks like moving forward as it relates to soluble iron, oxygenation and cyanide levels.
Okay, perfect. That's it for me. Thanks, guys.
The next question comes from Trevor Turnbull of Scotiabank. Please go ahead.
Yes. Thank you. I just wanted to follow-up a little bit on the soluble iron question. It sounds like Jody that you've started to build metallurgical models to get a, guess, a better handle on where it occurs and then exactly what forms. So that answered that question.
But I'm curious, when you put out your original guidance on costs, I assume you factored in some additional costs for dealing with the soluble iron. Is that right?
Yes, we
did. Yes, we did.
And I guess what I was wondering, not knowing exactly the extent of it, did you factor that in for the full year? Or were you just assuming 1 or 2 quarters would have the iron issue?
No, we assume that the iron issue would be present throughout and we also assumed that we would achieve some level of benefit through the oxidation.
Okay. So to make a long story short, I guess what I'm getting at is, so now that you've had some good luck with the oxygenation reduction in cyanide consumption, Is there are you kind of ahead of plan now with the reduction in cyanide versus that original guidance? So are you actually starting to win a bit in terms of what your original guidance was factoring in the iron?
Yes, that's right, Trevor. Now in quarter 1, our processing costs were $30 a ton. And so the gains we saw on cyanide consumption were offset in large measure by the maintenance costs that we had to put into the realignment. So I expect you'll see the gains on cyanide consumption moving forward and the maintenance costs starting to come in line as those problems have been solved.
Okay, great. Thank you. And then I had a quick question for Steve on the taxes paid in the quarter. I think it was about $47,000,000 Hopefully, you didn't mention this already in your comments. I got a bit bogged down.
But was the $47,000,000 could you break that down between kind of what was related to 2019 taxes and what was related to 2020? And can you give us a little bit of a sense of how 2020 cash taxes play out going forward?
Yes, sure. The $47,000,000 I mentioned was all 2019 related tax liability. For 2020, yes, we're on a tax installment program, which the burn rate on that is dependent upon revenues. So although you have an anticipated cost of circa $4,000,000 to $5,000,000 installments per month against original plan, we will obviously be revisiting that because month of April would mean the installment paid in May doesn't happen or is minimal. And we get a chance to go back to the tax authorities and reset that installment burn rate for 2020.
But the program is designed to keep you by and large on track with your tax in 2020 through those installments.
So sorry. So that makes sense, but you actually didn't the $47,000,000 wouldn't have included anything. Where would I find kind of those monthly payments that you would have made in Q1 towards 2020? Or doesn't that happen until Q2?
Yes. No, there were small amounts of tax installments. So obviously, our cash flow where we capture taxes paid, they will be within that figure, both the taxes paid for 2019 and the small amount of installments made during Q1, which order of magnitude about $5,000,000 or $6,000,000 Okay,
I got it. Thank you very much, Steve. That's all I had.
Thank
you. Thank you. There are no more questions at this time. I would now like to turn the conference back over to Mr. Fred Stanford for any closing remarks.
Thanks all for your questions.
In closing, none of us
asked for this COVID journey. But if we have to be honest, I'm glad to be honest with the Torex team. We're a values based organization that has stuck to those values when facing adversity in the past. We will do so again and like before, we will come out of it stronger for it. Thankfully, this time, the strength of those values will be complemented with a much stronger balance sheet.
Final word, it's been an interesting 10 interesting and eventful years. I deeply appreciate your support, advice and friendship over those years. Best wishes to all. Please stay safe and stay healthy. Thank you.
Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.