Earnings Call: Q1 2020

May 6, 2020

Good morning, and welcome to the Westdome Gold Mines Q1 2020 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now turn the call over to Lindsey Dunn to begin today. Actually, Heather is going to start for us today. Please go ahead, Heather. Great. Thanks, Lindsey, and good morning, everyone. Thanks for joining us today. Before we begin, we'd like to take this opportunity to remind everyone that during this call, we will discuss our business outlook and make forward looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could cause outcomes to differ materially due to a number of risks and uncertainties, including those mentioned in the detailed cautionary note contained in yesterday's press release and in the company's management discussion and analysis dated May 5, 2020. Both documents are available on our website and on SEDAR. Please note that all figures discussed on this call are in Canadian dollars unless otherwise stated. The slides used for this presentation and the recording of this call will be posted on the company's website. I'll now hand the call over to Lindsey Dunlop, VP, Investor Relations, to get us started today. Thanks, Heather. Also on the call today, we have Duncan Middlemitz, President and CEO Scott Gilbert, Chief Financial Officer Marc Andre Pelletier, Chief Operating Officer. Hello. This is Marc Andre. And Mike Michaud, VP, Exploration. Good morning. We will begin today with an operational review by Marc Andre, followed by a financial review from Scott. Mike will then take us through an exploration update, and Duncan will conclude with a summary and outlook. Please go ahead, Marc. Thanks, Nizze. The 1st 2 months of the quarter were unpacked up by the COVID-nineteen pandemic. In mid March, we began to take steps to comply with the government's social distancing guidelines by stopping non essential work. The Mishi open pit production and some unessential work on surface and underground were temporarily stopped in order to reduce the amount of people in the common areas of the camp. As more uncertainty evolved pertaining to the pandemic, we decided to benefit from the higher mill availability to process additional higher grade ore from the Eagle Mine stockpile. Grades were lower compared to Q4 2019 due to stope sequencing and processing the stockpile. Grades are expected to be within guidance as we are now back into mining the 303 and 311 lands in the 2nd quarter. The daily production rate was 4.35 tonnes per day in Q1 and we plan to increase the productivity through the year as we are making improvements in our ventilation system at EGO. At this stage, the production guidance remains unchanged as we are focusing on essential mining and development activities from the Eagle River mine. Our production and sustaining cost were within budget prior the addition of the stockpile allocation. I will now turn the call to Scott for detailed reviews of the financials. Thanks, Mark. Operating costs increased in the Q1 for a few reasons, primarily the $9,700,000 decrease in ore stockpile and bullion inventory adjustment resulting from inventory level changes and an increase of $3,400,000 in site operating costs due to more tonnes processed at the mill, additional mine and site service costs and higher royalties. We realized a gold price of $2,162 per ounce, which was 15% above our budgeted price and generated $57,300,000 in revenue. Despite the higher costs, the company generated $33,400,000 in operating cash flow and $16,200,000 in free cash flow. We spent $15,700,000 in capital during the quarter, which included $9,200,000 at Kiena and $6,500,000 at Eagle River. The bank balance is $49,400,000 We are fully funded to execute our planned programs for the year. Over to you, Duncan, for an outlook summary. Great. Thanks, Scott. Due to the COVID-nineteen pandemic, as Marc Andre mentioned, we have moved to a reduced workforce at the Eagle River mine. And as a result, production in the second quarter is expected to be lower than the Q1, but on budget for the year. We are maintaining both production and cost guidance, albeit our cost for the year will probably trend towards the higher side of the range. We have slowed down development and ceased exploration activities for the time being in order to maintain social distancing, and we will return to this work when it is deemed safe and appropriate. To date, no employee or contractor has tested positive for COVID-nineteen. Our employees have all been doing a superb job in the face of these uncertain and challenging times. And for that, I would like to extend our thanks and appreciation for their efforts. We will continue to monitor the impacts of the virus and provide updates as they become available. I'd now like to pass it over to Mike for an update on our exploration. Thanks, Duncan. Despite the slowdown in exploration drilling due to COVID-nineteen, we have remained busy. Earlier in the year, we updated the mineral reserves at Eagle River and realized increases in the reserves of 36% net of 2019 production. The reserves now total over 550,000 contained gold ounces with a corresponding 20% increase in grade compared to that of last year. Prior to the temporary system at Eagle, we had initial success this year both on extending the 303 lens at depth and also extending the Falcon zones. Surface and underground drilling has now extended the Falcon zones from surface to the 1,000 meter elevation where mining of the 7 Zone is ongoing. Given the proximity of this zone to existing mine infrastructure, it remains a focus for the 2020 drilling. Drilling of the 300 East zone continues to return exceptional high grades with strong widths and has now been extended to the 13 50 meter elevation. Ton over 5 meter core length or 52 grams per ton gold over 2.5 meters true width. We are currently compiling some remaining assays from drilling completed earlier in this year and we'll publish those results in Q2. At Kiena, the Quebec government mandated a shutdown in March 24. So we had to pause exploration and development work at that property as well. Prior to the shutdown, 7 underground drills were in operation and early 2020 drilling extended the Kiena Deep A Zone an additional 100 meters down plunge and now extends a total of 8 30 meters. In order to test the up plunge extension of the A Zone, an exploration ramp was established on 79 level. 2 drills were mobilized into this area only 2 weeks prior to the shutdown. So we remain clear to return to drilling and further test this area. In the meantime, we worked on finalizing the PEA, which is still on schedule to be released in May. As well, we are doing some early work on the pre feasibility study. Back to you, Duncan. Thanks, Mike. We've had some indication that we may be able to be back working at Kiena on May 11. Top priorities, once we get the go ahead, are to continue our up plunge and extension drilling and the resource conversion drilling. At the start of the year, we had planned to drill 237,000 meters and spend $20,000,000 on our 2020 exploration drilling program. The COVID-nineteen pandemic has obviously impacted our ability to do this, and we will update everyone on revised meterage and CapEx guidance for the year at both projects in the Q2 and once the situation becomes clear. Despite these COVID-nineteen related delays, we are maintaining this year's production guidance. Longer term, West Elm's plan of becoming an intermediate gold producer remains intact. There have been some setbacks related to this pandemic, but we can still see becoming a 200,000 plus pounds producer in the medium term. We had originally planned on updating our Kiena resource statement later in the summer and following that completing a pre feasibility study at Kiena by year end. The timing of our objectives is currently now under review. The question is how do we catch up on the 8 weeks of loss drilling at Kiena and generate results from the up plunge drilling, which we all see as potentially impactful to any restart scenario. As more developments on the management of the pandemic become evident, we can then have a better idea on timing of deliverables. The good thing is that Kenan is already built and permitted and current estimates of preproduction timing is 6 to 9 months. So this delay and our activities at Kiena have not yet altered our timelines materially. Once again, I'd like to express our gratitude and appreciation to all our stakeholders during these challenging times. We really are all in this together. I'll now hand the call back over to the operator who will open up the lines for question and answer session. Thank you. Thank you. And I see we have our first question comes from the line of Andrew Mikkel with BMO Capital. Your line is now open. Thanks for taking my question. Just maybe if you could add a few comments on the range of costs that these COVID progressions that are in place today are adding, whether it's on a monthly basis or kind of forecast over a quarter, just so we can have a sense of what this is doing to the cost to mass, please? Sure. I'll pass that on to Scott Gilbert, our CFO. Scott? Thank you, Duncan. For the Q1, we didn't have a significant impact at either one of the sites based on the fact that we didn't really start to implement the additional measures until middle of March. But going into Q2, we will see fairly additional costs and but we have ramped back our expenditures as well to reflect the lower costs with regards to operations and exploration. Okay. So you still just have to kind of wait to see how this all rolls out in the balance of the quarter and then you'll have to convert it later? Correct. Yes. It's early days. Yes. I think what we see right now, Andrew, is that based on our reduced activities, obviously, the cessation of all drilling, of course, that's just saving the forecasted spend. However, based on our development rates right now, we're probably developing at about 80% of our capacity. We still feel that we're able to maintain our production guidance, which I think is important. However, I would have to say that the productivity is taking a little bit of a hit based on how we have to go about do things a little less efficiently than we would have ever done it before just by regarding our guidelines and what we have to do in terms of COVID-nineteen. So I think as this goes on, we're going to get a much better feel for the cost. But in terms of, I would say, efficiencies, I think that we're starting to see a little bit of leakage of those. And then just if I could just get you a comment broadly based on your kind of outlook. I guess, to me, it looks like you guys are clearly strengthening the treasury, preserving all optionality to react to this and restart activities or to weather any further extensions of some of these precautions. Is that a fair summary of your approach here and the positioning of the company overall? Yes. I think really as a snapshot in time, everything is going to be subject to change in an instant perhaps. But it was a conscious decision that we milled through the stockpile. We had good stockpile inventory. Really, we had exceeded our own internal budget. Budget was something like 23,000 ounces. And honestly, we would have gone away from the higher grade stockpile and gone to the Mishi stockpile, which we had something like 40,000 tons sitting there. So we obviously were concerned at that point throughout March that we were not going to be deemed essential and we weren't exactly sure whether we have to cease all operations or not. We certainly were very fortunate that we had the stockpile available, and so we took advantage of it. And the resulting bank balance at the end of the quarter was quite significant, as Scott had said earlier, Andrew, that the we budgeted at CAD18.85. We sold our gold at almost CAD300 more of that during the Q1. And here we are almost CAD500 in the second quarter above our budgeted gold price. So just projecting that forward to provided we're able to maintain our production guidance, I would have to say that the budget this year was definitely focused on a big spend at Kiena. We had outlined about $44,500,000 of spend there and big exploration program and the whole bit. And as based on 18/85, we were probably going to end up the year kind of neutral. And obviously, with the gold price supporting us, we'd be able to continue to add cash to the bank. So I don't see gold price going anywhere for a little while. I'm not sure what you see, but anyways, it's sort of unintended consequence of the situation where we're not able to do our exploration. We're not spending what our commitments were on that. And so we're as long as we can continue producing, we're going to be adding cash to the bank, I think. Okay. That's a great color on that. And thank you. Congratulations. Yes. Thanks, Andrew. Thank you. And at this time, I'm not showing any questions on the phone line. So ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.