Earnings Call: Q1 2019

May 9, 2019

Earnings release

Good morning. Welcome to the West Elm Gold Mines First Quarter 2019 Financial Results Conference Call. I will now turn the call over to Heather Laxton to begin today's call. Great. Thanks, operator, and good morning, everyone. Thank you for joining us today. Before we begin, we'd like to remind everyone that during this call, we'll 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 8, 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. Site. In the room this morning, we have Duncan Middlemiss, President and CEO. Good morning. Ben Au, Chief Financial Officer. Hello, this is Ben Au. 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 so with that, it's back over to Lindsay for a review of the agenda for today's call. Thanks, Heather. Today, we will begin with Duncan introducing the Q1 overview. Then Marc Andre will provide a more detailed operational review. Ben will then take us through a financial review. After this, Mike will provide an update on the exploration activities this quarter at both Eagle River and KEDA. Finally, Duncan will conclude with a summary and outlook before we open up the lines for the Q and A. Duncan, please go ahead. Great. Thanks, Lindsay. We started out the year on a strong note, beating our Q1 expectations by more than 3,000 ounces with a total of 19,000 ounces produced at an Eagle River head grade more than 2 grams higher than the top end of our guidance range of 15.5 to 16.5 grams per tonne. We are confident that production is heading above the upper end of guidance with current exemplary grade performance and operational execution. Additionally, we also had a very good quarter on the exploration front with 2 updates at Eagle River, including the discovery of 2 potential new zones outside the mine diorite and a Kiena update with recent developments in our understanding of the A Zone up and down plunge, which Mike will talk about in more detail later in the call. All in all, this was a strong quarter in terms of operational, exploration and financial results. Work completed within the quarter will set us up to deliver even better results in the future. Let's now turn this over to Marc Andre for some color on the operational results. Thanks, Duncan. As you said, Q1 was a very strong quarter for us. Head grades and produced ounces were better than budget, primarily due to the higher grade within the 303 lens than anticipated and recovering more production ton at the higher grade in the 711 and 811 lens. In addition, we completed a lot of priority work that will benefit the mine in the future, including work on our dewatering system on the ground and preventive maintenance shutdown at our mill. At the start of the year, we changed our underground development contractor and now work is moving at a much quicker pace on the ground. We started Q2 with a 15,000 ton stockpile of Eagle River ore. This bodes well for our 2nd quarter as we will be continuing to execute our plan in order to steadily increase the amount of tons from underground with the ultimate goal of filling the mill at 800 tons per day with the high grade Eagle River ore. For us to accomplish this, we need to keep the pressure on development in combination with success in our exploration program. Mishi production was within expectations, and we expect to complete our mining of the pit header this year. I will now turn the call over to Ben for the financial review. Thanks, Mark. As we continue to increase gold production, our production costs have steadily declined over the last 2 years. In Q1, cash costs of US6.51 dollars per ounce and all in sustaining costs of US9.86 dollars per ounce were both at the lower end of our guidance range. G and A expenses this quarter were higher due to year end compensation. However, we expect the expenditure level will normalize between $1,500,000 to $1,700,000 going forward. In Q1, the Eagle River mine generated $8,900,000 in free cash flow. This cash is reinvested in exploration and development at Fokiguo and YUKENA to the tune of RMB6.6 million. Company wide free cash flow were neutral for the quarter, largely due to the exploration work we're doing in Beldor to support the potential of reopening the Kiena mine. We expect similar cash flow in the Q2 and we return to positive free cash in the second half of the year when production increased to 41 to 45,000 ounces. With quarter end cash of RMB28 1,000,000, we are sufficiently funded to carry out our planned CapEx and exploration programs. I'll now hand the call over to Mike for a review of exploration. Thanks, Ben. Exploration is off to another great start at both the Eagle River and Kiena Mine complexes. We have an aggressive exploration program planned for 2019, including over 174,000 meters of definition and exploration drilling for both sites. In Q1, we released underground drilling and drifting results from the Eagle River mine, extending both the 7300 West zones to depth and to the west, showing the potential to add to the existing resource base in these areas. Additionally, the 7 East zone has been extended further east than previously known. Exploration drilling was initiated in the eastern half of the mine diorite and initial drilling confirmed the existence of parallel zones of mineralization in the eastern portion of the mine gyrite with 1 hole returning 41.4 grams per ton gold over 4.2 meters. This could provide an additional workplace that would diversify production areas from the bottom of the ramp and therefore aid in increasing underground tons from their current levels. In addition to the underground drilling, approximately 7,000 meters of surface drilling was completed since the beginning of the year, focused immediately west of the mine diorite. The initial drilling intersected 2 parallel structures in volcanics that could be the on strike and up plunge extension of the 307 zones, respectively, that are presently being mined only 200 meters further east. With additional drilling, there exists good potential to define higher grade and wider zones of gold mineralization that would be proximal to existing underground workings. Drilling from surface and drilling underground to extend the known zones and the newly discovered parallel zones remain a top priority at Eagle River this year. At the Kiena complex, drilling since the start of the year has remained focused on the definition and extension of the Kiena Deep A Zone. Since the October 12 cutoff date for data used in the most recent resource estimate, an additional 17,000 meters and 64 holes has been added in addition to a number of additional exploration holes within the immediate vicinity. The ongoing definition drilling of the A Zone has continued to confirm the overall continuity of the geometry of the high grade gold mineralization. Additionally, drilling completed immediately up and down plunge of the known resource has extended the mineralization up to 100 meters in both directions, and we are confident this drilling will grow the current resource base. Subsequent to the quarter end, drilling commenced from the 670 meter level to test the potential of the A Zone extending an additional 500 meters up plunge to intersect with the previously mined VC zone. Initial drilling intersected goldenization within the ultramafic schist similar to the A1 and A2 zones below, but did not immediately intersect the A zone style of mineralization along the schist basalt contact. However, subsequent drilling did intersect more characteristic A zone style of gold mineralization consisting of visible gold and quartz veins. It is now interpreted that the schist splits into 2 zones on either side of a thicker portion of the salt. The recent drilling on the northeastern flank of the 2 schist intersected VG mineralization and quartz veining at the 980 meter level. Obviously, given the potential to host additional high grade mineralization along the schist contact between the 10 50 and 670 meter levels, this will be an immediate focus for the drilling of this partially drilled sector. We believe this is a very positive development and remain excited to testing these structures. I will now pass the mic back to Duncan for his summary. Great. Thanks, Mike. In summary, the Q1 was a very strong quarter operationally and in terms of completing our planned development, our mill maintenance campaign and other projects, which will contribute to the higher production in the second half of the year and beyond. Our first half guidance is 31,000 to 35,000 ounces. And with 19,000 ounces produced in the Q1, we are tracking very well to exceeding the upper end of that range. Q1 was a strong exploration quarter. The drilling at Eagle River is identifying potential new workplaces underground, and this will be a focus for the rest of the year. One more workplace underground will get us to our goal of filling the mill with 800 tons a day of high grade Eagle River mine ore, and we are on the path to delivering this in the near to midterm. We will continue to update you on our progress on this throughout the year. At Kiena, we continue to better understand the complexity of the Kiena Deep A Zone as we do more drilling. The up plunge extension splitting into 2 zones was certainly more complex than previously thought. However, still very positive that this mineralization is discovered next to the existing mine infrastructure above the 10 50 meter level. This would bode well in a restart scenario due to speedier reserve development potential and all the while concurrently ramping down to the A zone at depth. We continue to be very excited about the future of this asset and plan to release an enhanced resource estimate in the second half of this year, while concurrently working on a PEA, which will help in determining the next steps on the way to engineering a restart of the mine. The goal of having 2 operating assets within the company is set and is our primary focus. Finally, we look forward to welcoming shareholders to our 2019 Annual General Meeting at 10 a. M. Eastern on Tuesday, May 14, at the TMX Broadcast Center Gallery. I will now hand the call back over to the operator, who will open up the lines for question and answer session. Thank you. Thank you. Our first question comes from Andrew Myszczyk of BMO Capital Markets. Your line is open. Good morning. Very strong quarter, obviously. Can you give us any guidance on how we should think about Q2 with a similar level of increased development be expected in Q2 and maybe similar unit costs before you get to the second half of the year where higher grades and lower development is scheduled? Yes. Andrew, I think that Q2 will be at least as good as Q1, I think, with the where we would be tracking right now. I don't want to I'd have to say the 303 right now is reconciling very well as are the other zones. I mean we've got some very good developments in the 7 and 8 series lenses there. So certainly things are tracking perhaps better than what we had expected in our budget. So I would say that we're definitely to a similar level in Q2. And again, H2, we see that as being as it is, 41,000 to 45,000 ounces. So sitting here, I'd have to say that we're certainly looking at the upper end of annual guidance, if not a bit beyond. So we'll see how that tracks. So we'll be happy to update everybody on guidance after the second quarter. Sure. And just to come back to Mishi. So I think the commentary that went through earlier on the prepared comments was that the inclination or the plan to cease mining at the mine at the open pit later in the year. Is that a temporary thing or a permanent thing? Or how are you evaluating this? Yes. It's temporary. I mean, the mining program set out in the 2019 budget will be completed probably in the Q3 of the year, and we'll have to assess how Mishi fits into the scheme of things going forward. As you know, there is a significant reduction in the reserve picture at Mishi this year. I think we're down to about 11,000 ounces. And as it is this year, we'll probably mine out about 4,000 and really the other 7,000 are in a sort of a smaller satellite pit. So I would say that we're going to assess that and the timing of that. So but really, Mishi, for all intents and purposes, is wrapping up. Okay. Thank you very much. Great quarter, and I'll let other people ask questions. Great. Thanks, Andrew. Thank you. Our next question comes from David Valesteri of Quad Group. Your line is open. Hey, Duncan. How are you doing? Can you just give I know you said you're going to update guidance in Q2, but can you kind of give us an idea on Eagle when you think you can get to 800 tons per day? Because correct me if I'm wrong, if you're doing 800 tons per day at the reserve grade at Eagle, you're all in sustaining drops considerably to 685. Is that correct? It would be in that range for sure. I think that the pressure would definitely be on the sustaining development there. I mean, we recognize that Eagle is a narrow vein environment. And in order to generate the tons you require, you have to do a lot of development. Like, for example, this year, we recognized that we needed to expand our flexibility. So we have to really go from 5000 to 6000 meters of development in support of getting better prepared for the future. But yes, no, definitely, I mean, this is what we see here at Eagle. The costs are essentially flattish here. And obviously with better production, we're going to start to drive down unit costs. So, dollars 685,000,000 sounds a little aggressive, but I'm all for that. We'll definitely try to certainly bring them down, and that's what we would see. So having said that, the 800 tonne per day goal is certainly I would have to look to the left of me here and Mike Michaud, our Vice President of Exploration is certainly a big part of that concept because really it's got to be the exploration success of new zones. Maybe Mike, you want to add on how things are proceeding with that? Certainly, we've had a pretty good start to the year. I think we always felt there were parallel zones that would extend across the entire strike length of the diorite. Of course, the gold forms and shoots, so it's not everywhere. But having intersected that now with just the initial drilling, I think that shows the potential for being able to outline additional workplaces on the eastern half of the Dyer, which will be closer to the shaft and away from the sort of the western side at the bottom of the ramp. So that would certainly help us a lot in that quest to bring up the tonnage rate just because you have more workplaces. I think what was really a great surprise was finding these Falcon Zones to the west of the diorite from surface. So we're just really scratching the surface basically. And with additional drilling, we hope that we'll find additional mineralization at depth just west of the direct, which would put us very close to our current workings. And that would be another place that we could access with more separate work areas and that would help with the production rate increases as well. So it's a good start. It's initial drilling, but certainly we have an aggressive drilling program planned for 2019. So we're going to try to convert these into resources by the end of the year. That's our goal. Okay, great. Great job on the release too because you really explained that Falcon Zone really well and I was going to ask you about that. So, yes, thank you very much. Great. Thanks. Thank you. Our next question comes from Ryan Walker with Echelon Wealth Partners. Your line is open. Hi, guys. Congratulations on a great quarter. Just wondering, could you provide a little more color on hole 6438A? It's a brief mention in the press release. Is that a newly released hole? And can you maybe talk about the potential of this zone and future drill plans there? Yes. So this it was a whole this is a really initial hole too. So it's kind of out there by itself and we thought it was important to include it because what we seem to be finding now is as we get more drill information at Kiena, we're finding additional parallel or other structures that are mineralized as well. And we're trying to drill them off at the same time as A Zone so that we can continue to add to the resource base. And I guess our interpretation was that the Upper Quartz vein is along the sort of basalt comatiate contact on the east side of the A Zone. And this more vertical structure has never really been tested down plunge or down dip at all. And we're just starting that program now since we have a drill in the area, and that was one of the initial holes into the zone. They came back 7 meters over sorry, 7 grams over 26 meters. Now that certainly isn't true with by any means. We're not entirely sure because we're still trying figure out the geometry of the zone. It could be a quarter of that 26 meters for true width. But it's very encouraging that we have an intersection kind of at that depth below the upper court. So if we can join that up, that would be a good addition to resources as well. So I think our plan is to drill that off now and then possibly within the next month or 2, have enough holes in it so that we could show that to people and put out a long section so you can get a feel for the size of the stone that's there. But it's just another area where we've had gold mineralization. Obviously, we're still focused on the A Zone. But maybe this upper quartz is it's coming up above the 10.50 level. Maybe the A Zone and this upper quartz more vertical structure do bend towards the 980 meter level where we've had a nice hit of gold in quartz veins. And that certainly is great because now we know we've chased this A zone up where the level we're drilling at and now it's going above that. And if we could continue up towards VC, it really is spectacular. So we have 2 drills drilling that now. We'll probably move a third one over to test that shortly. So things are going pretty well. It's just we have a lot of drilling to do over the next few months to really understand it better. Okay. And probably way too early for that to maybe contribute to the updated resource at all? We're hoping that over the course of the next couple of months, we'd have enough holes that we could bring it into a resource, maybe not indicated because this first pass drilling, the spacings get further apart, but we would certainly love to get it into an inferred resource if it holds together. Okay, great. Thanks very much. Thank you. Our next question comes from George Toppin of Industrial Alliance. Your line is open. Great. Thanks. Hello, everyone. Hi, George. Hi. I was interested in the mill shutdown. You say it was brought forward. Was there any particular reason it was brought forward to Q1? Actually, it was an opportunity to bring to advance the shutdown because we basically execute our plan very well in the Q1 and we were able to free up some time at the mill. The shutdown was planned in April. So we were actually well prepared for that. So when we made that decision, we were basically ready to go. So I would say that we were in favorable condition to advance our shutdown. I see. No, no, it's just by a month. And how is the mill operating now after the repairs and upgrades to the systems? Is it better? I mean, we are actually working on gravity circuit upgrade, which we believe that will increase the recovery at our mill, especially with the high grade from the 303 lens and actually reduce our cost by maybe 10%, we're hoping. So we're working on that upgrade that should happen in late Q2 or late Q3 when our next planned shutdown is scheduled. All right. Then on the stockpile that built up, is the plan to keep a larger surface stockpile going forward? Or is that going to go through the mill? Since I've been at Eagle, we never really had the chance to have a stockpile. So for an operation perspective, it's always nice to have couple of weeks of production ahead. As you know, George, if something happens, so we would like to continue to carry on the stockpile, maybe not as big. But again, from a proportional perspective, it just makes sense to have some ground some rock available just in case something happens. Yes, Fair enough. That's true. The and just lastly on the development pace declining a little bit in the second half. Is there a reason why you wouldn't just carry on full bore on the development given that to get the underground up to say 800 tons per day? Well, you know, George, as we have improved our personnel in the technical work where we stopped looking a much mid term, long term basis. And then like Duncan said, something that we kind of missed in the previous year. So we definitively want to address this doing more development. We basically plan about to do about 500 meters a month. So in our budget, we basically plan to develop a zone, the 311 West zone for 2020. So that's our goal for this year. Right. And then next year, will you accelerate the development? I'm just interested in the when we're trying to estimate when we could see the underground production increase up to that 800 tons per day. Yes. George, I think really what it is for us right now is we need to see these potential zones kind of emerge, especially over to the east side of the mine because as you know, the majority of our reserves are now tied really with the bottom of the ramp system there. So in many ways, we are a little bit bottlenecked at that point. 500 tons per day of ore kind of equals 500 tons a day of waste for us. So it's 1,000 tons of rock coming up the ramp. Anything and we do have some nice prospective areas right now over sort of if you're looking at the long section over by the shaft, Mike's got this potential Eastern extension. We need to flesh that out. So really, I think it's got to be driven a little bit with exploration. On the other hand, too, I mean, if you look at where these Falcon zones may be emerging, we are not really that far away in terms of the upper part of the mine development. And I think that, that also might present an opportunity for us to increase our production. So I have to say right now, I think that we need to keep drilling in order to kind of flush these things out, but it certainly looks positive. So that's why I said near to mid term. So it all depends on how quickly we can kind of define these things. And really, the one thing we do see at Eagle is, our ore is very shooty. It's got more vertical component to it than it does horizontal. So typical Abytivi here, and it's once you get on it, you really have to tighten up your drill spacing in order to define it. So essentially, that's where we are. So it's once we get on it, we'll definitely do that and probably take care of business that way. So we're very optimistic on this happening in the, like I said, near to mid term. Thank you. Our next question comes from Raj Ray of Desjardins Securities. Your line is open. Thank you, operator. Good morning, Duncan and team. Just a quick question from me. I don't know if you already mentioned, but the 303 lens, how long do you expect it to contribute in 2019? All year. We basically plan about 5,000 tons each quarter from that lens and obviously, that will carry on next year. Okay. And what's the total tonnage there, 303? 203, maybe it's a little probably around there. Yes. I think it's over 100,000 tons. It does include the other lenses. We are mining the 203, but we've got the 301, 302. We also have the 311. But the 203, I think, is 30% of our ounces. Okay. And then Duncan, quickly on do you plan to put out a resource on the Eagle River underground this year or is this going to be mostly next year? It will be normal course. So we typically release that with our year end financials. So that would be probably February 2020. So we cut off the data December 31 and then did the calculations. Okay. And then lastly, if I may, do you have a timing for the Kiena next reserves? Generally. I don't want to paint myself in the corner again this year, Raj. So no, I mean, the reality is, with the complexity of Kiena, obviously, this the splitting of the zones and that, it really took us a couple of months to really understand what we have there. So I have to say, we're trying to catch up on the drilling. Like now, we certainly have defined the corridor, which we need to drill in. That's great. But we all recognize that the importance of the up plunge for us to get that into our resources is hugely important. And obviously, the PEA, which follows on that. So I would say certainly second half of the year, we're definitely probably looking at them later in the Q3. Okay. That's great. Thank you, Duncan. Yes. Thank you. I'm showing no further questions at this time. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.