Earnings Call: Q3 2019

Nov 7, 2019

Earnings release

Good morning, and welcome to West Elm Gold Mines Third Quarter 2019 Financial Results Conference Call. I will now turn the call over to Heather Laxton to begin today's call. Great. Thanks, operator. 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 November 6, 2019. 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 a recording of this call will be posted on the company's website. Here in the room this morning, we have Duncan Middlemiss, President and CEO. Good morning. Ben Au, Chief Financial Officer. Hello, this is Ben Au. Scott Gilbert, Vice President, Financial Systems and Cost Control. Hello, everyone. Marc Andre Pelletier, Chief Operating Officer. Hello. This is Marc Andre. Mike Michaud, Vice President, Exploration. Good morning. And Lindsay Carpenter Dunlop, Vice President, Investor Relations. Good morning, everyone. And with that, it's over to Lindsay for a review of the agenda for today's call. Thanks, Heather. We will begin today with an operational review given by Mark, followed by Duncan detailing our 2019 guidance increase. We will then have Scott take us through a financial review and after that, Mike will update us on exploration activities at Eagle River and Kena. Finally, Duncan will conclude with the summary and outlook. Mark, please go ahead. Thanks, Lindsay. Q3 was a very strong quarter operationally with almost 29,000 ounces of gold produced, a 29% increase over Q2. Head grades continue to be high at 23.4 grams per ton due to the continued excellent performance of the 303 lenses. While cash cost per ounce remained consistent over Q2, The AISC increased because we have taken this opportunity of high production and favorable gold prices to accelerate work at Eagle River to better position us for the future. These projects include commissioning of a Falcon concentrator, which will increase gravity recovery, additional exploration platform development and a $4,000,000 spent on the tailings management area capital project during the quarter. TMA work included installation and dam construction in preparation of vertical race at the tailings management facility. This investment into the tailings will provide an additional 4 years capacity at current mill feed rates. Had we not accelerate some of these projects to better position us for the future, ASEK costs would have been CAD 11.76 an ounce or USD 8.90 per ounce, well below the low end of our guidance range. I will now give the call to Duncan for an overview of the 2019 guidance. Great. Thanks, Mark. As a result of the 303 lens reconciling higher on grade and with a total of 70,356 ounces produced at the end of the Q3, we have raised our full year production guidance from 72,000 to 80,000 ounces up to 88,000 to 93,000 ounces. We have kept cost guidance unchanged due to the tailings facility management project, but we expect to finish the year on the low end of these ranges. I'll turn the call over to Scott now for a more detailed review of financials. Thanks, Duncan. Q3 benefited from both strong production and a high gold price with realized price averaged at CAD19.57 per ounce. We generated free cash flow of CAD9,200,000 or $0.07 per share after meeting sustaining capital, all operational costs, advancement of the TMA project and investments of $5,900,000 at Kiena. Cash position increased from $27,400,000 at the end of Q2 to $38,600,000 at the end of Q3. Year to date net earnings of $0.21 per share have solidly increased over 20 eighteen's full year net earnings of $0.09 per share. Q3 also saw us closing the $45,000,000 revolving line of credit facility of which $5,000,000 has been drawn to replace equipment lease obligations. This facility has further strengthened our balance sheet, liquidity and access to capital. I will now turn the call over to Mike to review the exploration highlights. Thanks, Scott. Wow, an exciting quarter. Great exploration results at both Eagle River and Kiena. And of course, the release of the updated mineral resource estimate Kiena that has confirmed the high grade nature of this deposit. First at Eagle River, we have made some really good progress at the 303 lens that was initially defined from the 750 to the 1000 meter level, has now been extended another 300 meters down plunge to the 1300 meter level. High grade results included hole 104 that returned 92.8 grams per ton gold over 11.1 meters core length or 37 grams per ton over 6.4 meters true width, really fantastic hole. Our continued development of the 303 lens has demonstrated the good continuity of the gold mineralization up and down and has provided above average mine grades over 2019 and planned well into 2020. This recent expansion of the 303 lens has provided an opportunity to mine these high grades well into the future with additional mine development. We expect to include the results the existing resource and reserve base at year end. Additionally, the 303 lens has provided a new exploration target model for elsewhere in the mine diorite and the surrounding volcanic rocks for higher grade wider full nose areas. Elsewhere, we are continuing to aggressively explore the Eagle River deposit with 6 drills with 1 on surface to extend the known 7 East and 311 West zones as well as testing for parallel zones of mineralization in the eastern portion of the mine diary. And on surface, we continue to test the recently discovered Falcon Zones where there exists good potential to define higher grade and wider zones of old mineralization near mine infrastructure. While at Kiena, we're pleased with the updated mineral resource estimate. Compared to the December 2018 resource estimate, we increased the Kiena Deep A Zone indicated resource by 3 times. We increased the inferred resources by 38% and importantly, we increased the indicated resource grade from just under 10 grams per tonne to over 18 grams per tonne. As well, we increased a portion of indicated resources to over 50% in the A Zone, which was 30% previously in the A Zone. Our work has continued to grow and better define the high grade Kiena Deep A Zones and we are confident that the mineral resource will increase as a result of the ongoing drilling of this high grade area that remains open both up and down plunge. These updated results provide us the opportunity commence our technical studies supporting a potential restart as we continue to drill and expand the current resource base during the remainder of 2019 beyond. Meanwhile, 5 drills remain in operation on the A Zone and focused on the up and down plunge potential of the Kiena Deep A Zone that is not currently in the mineral resource estimate. As well, we continue the infill drilling to convert inferred to indicated resources. The development of the 79 meter level exploration drift is underway and will provide an improved drill platform to test the down plunge extensions of the VC-one and VC-six zones and the transition to the A zone further down along the same structure. Additional drills are expected to arrive once the development is completed before the end of the year. Work is ongoing on the PEA expected in the first half of twenty twenty, and this will determine the next steps and timing of potentially restarting almost halfway to our goal of becoming Canada's mid tier producer. At the Eagle River mine, we are all seeing the near term potential of becoming a 100,000 ounce per year producer. With the new 303 down plunge exploration results, we have added 300 meters of high grade mineralization, which bodes well for the future grade profile. Our surface exploration program of the Falcon Zone has also been very successful, demonstrating mineralization in the surrounding matrix. The potential is huge here, kilometers. Additionally, the infrastructure improvements at Eagle are setting us up for the long term with the installation of the Falcon gravity concentrator at the mill plus the work done at Suntailings management area, which will add over 4 years of capacity when completed in 2020. However, the majority of this work will be completed in 2019, weather permitting. At Kiena, the recent mineral resource estimate has certainly demonstrated high grades in the A Zone and likely more to come with 5 drills turning. The 7 90 meter exploration platform will help us better assess the up plunge potential, which we all see as a very advantageous area in a restart scenario. Work is ongoing in support of the Kiena preliminary economic assessment, which will be completed in the first half of twenty twenty. This PEA will define next steps for Kiena. Our progress so far in 2019 has been positive. Production, exploration, infrastructure improvement all coming together, also an increasing bank balance, which I think is fantastic in terms of what we've been able to accomplish and get going here. I'd like to thank all of our employees for their contributions. I will now hand over the call to the operator who will open up the lines for the question and answer session. Thanks. Our first question comes from Phil Kehr with PI Financial. Your line is open. Thanks, operator. Duncan, just a question on unit costs. Just correct me if I'm wrong, but it just slightly appears that the unit costs, mining costs per tonne have been going up maybe ever since driving into the 303 lens. Could you maybe just touch on what's causing that? Yes. So what you see there, Phil, is really the reduction of Mishi really is what it is. So if you're looking at the cost per tonne, that's certainly part of it. Obviously, the volume is down from that. Really, I've been saying for a year now, really the emphasis we are on right now is quality over quantity for sure. And we foresee Eagle River being able to generate 750 to 800 tons per day to fill the mill as we say in the not so distant future. I think that the exploration results we are seeing in mine and just outside of the mine are very positive. And I am sure that we will be able to bring it Cost per ounce, though, that is the metric which we certainly have to be cognizant of. Yes, fair enough. Okay. So with that said, what percentage of the ore from underground is actually coming from the 303 lines at present time or last quarter? I'd say this is Marc. It's about 50%, 50%, 55% of the fee. And is that ratio expected moving forward? We are in the budget process. So it's a bit premature to talk about that, but it's going to be lower for sure, maybe in the 20%, 25% range. Okay, okay. That's good. And just touching on development, obviously, the 300 meter extension down plunge is clearly positive moving forward. Can you just elaborate on what development has been done and maybe what you foresee needing to be completed in the next kind of 6 to 18 months? So the development on 79 meters is halfway done as we speak. So we're talking about 550 meters. So that will be done this year. Our team is actually looking at the design to develop a drift to allow us to better drill the down plunge of the Kina Deep at depth. So that's something that we are working on. And I mean, once the design is completed, that's something we plan to pursue early next year. Okay. And so could you just clarify what level you've got ramp development down to at present and where that exploration drift is being planned? Yes, it's at the 1,000 meters level. But what we're looking for is to provide access to the Northeast of the Kennadeep. Okay. So the exploration drift at the 1,000 meter level, where is the ramp at present? The ramp is at 10.15. Okay. All right. Very good. Thanks a lot guys. Thanks, Tom. Thank you. Our next question comes from Ryan Walker with Echelon Wealth Partners. Your line is open. Ryan, your line is open. Please check your mute button. Hi, guys. Just wondering if you could provide a little coverage or sorry, color rather on the decision to run through the Mishi stockpile material? Is that to give more time to develop in 303 or just to capture higher gold price for that? We actually plan to process Michi ore in Q4. In Q3, what we've done and I'm sure you understand is we prioritize higher grade ore to the mill due to lower mill availability. So that's what we've done in Q3. In Q4, with a higher mail availability expected, so we will be processing some Mishi. It was all our plan, Ryan, through the annual budget for 2019 that we'd be getting 3000 to 4000 ounces of Mishi. So essentially, we're enacting that plan and setting ourselves up. Also, the winter time is upon us and just that we have the Mishi stockpile sitting there so much better in the later December period. Okay, great. And then congratulations and it's been fantastic to follow. Cheers. Great. Thanks, Ryan. Thank you. This concludes the Q and A session. Thank you for