Feb 19, 2015
Executives
James R. Porter - Chief Financial Officer John A.
McCluskey - Chief Executive Officer, President, Director and Member of Technical & Sustainability Committee Manley R. Guarducci - Chief Operating Officer and Vice President
Analysts
Andrew C. Quail - Goldman Sachs Group Inc., Research Division Kerry Smith - Haywood Securities Inc., Research Division Duncan Lai - Macquarie Research Jeff Killeen - CIBC World Markets Inc., Research Division Michael Parkin - Desjardins Securities Inc., Research Division Michael J.
Gray - Macquarie Research
Operator
Good afternoon. I'll now turn the meeting over to Mr.
Jamie Porter, Chief Financial Officer. Please go ahead.
James R. Porter
Thank you, operator. And thanks to everyone for attending Alamos' Fourth Quarter and Year-End 2014 conference call.
In addition to myself, we have on the line today John McCluskey, President and Chief Executive Officer and Manley Guarducci, Vice President and Chief Operating Officer. I'd like to remind everyone that our presentation will be followed by a Q&A session.
Before we begin, please note this disclaimer concerning forward-looking statements. We refer all participants to our forward-looking statements and resources disclosure in our press release and MD&A and caution that mining and exploration are subject to a number of risks and uncertainties, particularly with respect to the mining and processing of ore, recovery rates, operating plans and the conversion of mineral resources to proven and probable reserves, to name a few.
There can be no assurance that forward-looking statements made in the press release and conference call, based on information on hand today, will prove to be accurate. Future results and events could differ materially from those anticipated in such statements and should not be relied upon.
Also, please bear in mind that all the dollar amounts mentioned in this conference call are in U.S. dollars unless otherwise noted.
Now John will provide you with an overview.
John A. McCluskey
Thank you, Jamie. Good afternoon, everyone.
Hopefully, most of you have had a chance to read our fourth quarter and year-end 2014 results issued earlier today. We produced 42,500 ounces of gold in the fourth quarter, bringing full production to 140,500 ounces for the year.
Production in the fourth quarter was impacted by 2 issues, both of which we expect to resolve in the first half of 2015. First, our open-pit, heap-leach production was impacted by an unusually heavy and long rainy season, which deferred some 2014 production into the first quarter of 2015.
Secondly, a slower-than-anticipated commissioning of the high-grade mill resulted in lower-than-expected fourth quarter production. We will install additional grinding capacity and expect the mill to operate at design levels by mid-2015.
Despite the lower production, our full year cash cost of $703 per ounce came in at the low end of guidance of $700 to $740 per ounce. This was driven by another strong performance from the open-pit, heap-leach operation at Mulatos with grades stacked coming in 15% above budget for the year.
In 2015, we are guiding to production of 150,000 to 170,000 ounces at total cash costs of $865 per ounce. Our operating costs per ounce are expected to increase in 2015, though it is important not to lose sight of the fact that the 2 biggest contributors to this increase, namely a decrease in grade and increase in strip ratio, are temporary.
Looking ahead to 2016, we expect our open-pit, heap-leach grades to rebound closer to our current reserve grade of 0.93 grams per tonne. Further, we expect a substantial decrease in our strip ratio from 1.27:1 budgeted in 2015 to our remaining life-of-mine average of 1:1 in 2016 and beyond.
Both will have a significant impact on reducing our open-pit, heap-leach costs in 2016. We also expect the first of our 2 higher-grade satellite deposits, La Yaqui, to come online in the fourth quarter of 2016, setting the course for lower-cost production growth at Mulatos and further cost improvements in 2017.
Complementing the improvements at Mulatos, we are focusing on advancing our strong low-cost pipeline of development projects. In Turkey, we continue to work with the Ministry of the Environment towards a positive legal resolution to the challenge against the previously approved Kirazli EIA.
To support the ministry's appeal, we have completed and filed a cumulative impact assessment, which the Ministry has approved and provided to the High Court. We expect a ruling from High Court within the next 2 or 3 months.
I've just returned from Turkey and I'm very encouraged by several recent developments, including the passing of the new mining law earlier this week. With a clear framework now in place, we believe this will accelerate the permitting process.
Further, we believe the new sliding scale royalty is fair, balancing the interests of both the state and a sustainable mining industry. At current gold prices, the new gross royalty is 4%.
However, factoring certain deductions, including processing doré on-site, this is reduced to a net 1.5% royalty, consistent with the rate we included in our pre-feasibility study. In Mexico, we'll continue to work on the EIA for our Esperanza project with a planned resubmission later this year.
And in Quartz Mountain in Oregon, drilling continues as a part of an initial 8,000-meter exploration program. All of our development projects are economic in the current gold price environment, and we expect all will be developed, something that we believe is underappreciated in the market.
Despite lower gold prices, we are one of the few gold companies that has never written down or taken impairment charges on our mining assets over our history. This is a testament not only to the strength of our development pipeline, which is comprised of projects that all generate strong economic returns in the current gold price environment, but also our disciplined approach to acquisitions.
Supporting our strong development pipeline, we possess one of the strongest balance sheets in the industry with approximately $360 million in cash and no debt, giving us the flexibility to not only fund this growth internally but also pursue further growth opportunities. Now with that, I'll turn the call back to our CFO, Jamie Porter, to comment on fourth quarter and year-end 2014 financial results.
Jamie?
James R. Porter
Thank you, John. As John mentioned, we produced 42,500 ounces of gold in the fourth quarter and 140,500 ounces for the full year.
Gold sales in the fourth quarter totaled 38,400 ounces at an average realized gold price of $1,200 per ounce for revenues of $46.1 million. For the full year, gold sales totaled 134,600 ounces at an average realized gold price of $1,263 per ounce for revenues of $169.9 million.
Total cash costs were $748 per ounce in the fourth quarter, $703 per ounce for the full year, at the low end of our full year guidance range. All-in sustaining costs were $996 per ounce in the fourth quarter and $1,022 per ounce for the full year.
Our margins and cash flow generation remained healthy during the year with operating cash flow before working capital changes of $11.8 million or $0.09 per share in the fourth quarter and $50.9 million or $0.40 per share for the full year. We reported a loss in the fourth quarter of $3.4 million or $0.03 per share.
This loss was the result of a $2.7 million non-cash charge related to available-for-sale securities and a $2.7 million unrealized foreign exchange loss. For the full year 2014, we reported a loss of $2.1 million or $0.02 per share.
This included a $4.7 million foreign exchange loss primarily related to the weakening of the Mexican peso relative to the U.S. dollar and the above-noted $2.7 million charge related to available-for-sale securities.
Relative to 2013, earnings were impacted by a lower gold price and fewer ounces sold. Amortization of $319 per ounce was high in 2014, reflecting higher amortization from the Escondida Deep zone.
This is expected to decrease significantly in 2015 with the transition to high-grade production from San Carlos. Our balance sheet remains one of our greatest assets with approximately $360 million in cash and no debt.
This represents cash of USD 283 per share, approximately 50% of our current market capitalization. At the current share price, our enterprise value is approximately USD 370 million, a figure that we believe significantly underappreciates the value of our asset base.
We remain well positioned with a strong, low-cost growth profile and the means to fund it internally with ongoing cash flow generation and an industry-leading balance sheet. However, the lower gold price environment has emphasized the strategic importance of financial strength and flexibility, and we will continue to evaluate our capital allocation decisions accordingly.
At this point, I'll turn the call back to John.
John A. McCluskey
Thank you, Jamie. Alamo's COO, Manley Guarducci, will now discuss quarterly operating results.
Manley?
Manley R. Guarducci
Thanks, John. Good afternoon, everybody.
The open-pit, heap-leach operation continued to perform well at Mulatos, contributing more than 90% of the production in 2014. Ore crushed and stacked on the leach pad graded 0.9 grams per tonne in the quarter and 0.98 grams per tonne for the year, 6% and 15% above the annual budget, respectively.
This helped to offset the lower-than-expected production from the mill as we transitioned between 3 different high-grade ore bodies in 2014. Total crusher throughput averaged 18,300 tonnes per day in the fourth quarter, above our annual budget of 17,700 tonnes per day.
For the full year, throughput averaged below the annual budget at 17,200 tonnes per day, reflecting the lower high-grade mill throughput. Fourth quarter production was impacted on 2 fronts, both of which are expected to be resolved by the middle of 2015, as John noted.
First, our open-pit, heap-leach production was impacted by an unusually heavy and long rainy season, which lasted well into the fourth quarter. As a result, we were unable to process all of the solution inventory by the end of the year.
This is just a timing issue and we expect to benefit from the recovery of the deferred production in the first quarter. Secondly, production from the mill was lower than planned in the fourth quarter due to a slower-than-anticipated commissioning of the upgraded circuit.
Recoveries were below expectations -- and as a result of a larger grind size than required to achieve design recoveries. To reduce the grind size, we will be installing a vertical grinding mill to complement the existing circuit before the end of the second quarter at a modest capital cost of approximately $1 million.
In addition, to alleviate the bottleneck in the concentrate processing capacity, we will be installing a second ILR by the end of March. With the current mill configuration, we are achieving recoveries of approximately 60%.
With the installation of the vertical grinding mill, we expect recoveries to improve to targeted levels of 75% by mid-2015. We are currently operating the mill at approximately 400 tonnes per day.
The completed mill will have a design capacity of approximately 800 tonnes per day. Underground development of San Carlos remains a priority with 267 meters of development completed in the fourth quarter for a total of 950 meters to date.
Three primary headings have been developed and mining of the first stope commenced in the fourth quarter. The development budget for Mulatos in 2015 is $28.1 million.
This includes $7.1 million for further underground development at San Carlos and $3.7 million for the pre-strip of El Victor and San Carlos open pits, which are expected to supply approximately 25% of the open-pit, heap-leach feed in 2015. This also includes $7.6 million to advance the Cerro Pelon and La Yaqui satellite projects.
We expect initial production from La Yaqui, the first of the 2 satellite deposits, in the fourth quarter of 2016. We are currently undertaking condemnation drilling after encountering mineralization where the leach pad was to be located.
Drilling at Cerro Pelon is also expected to start shortly with the agreement to acquire the surface rights expected to close in the next few weeks. La Yaqui and Cerro Pelon will both be a focus of our 2015 exploration program.
Within the next 2 to 3 months, we expect a ruling from the Turkish High Court with respect to the Ministry's appeal of the lower court's decision to cancel approval of the Kirazli EIA. As John noted, we submitted a cumulative impact assessment for Kirazli in October 2014.
This has been approved by the Ministry, who, in turn, supplied this to the High Court to support their legal appeal. Initial production from Kirazli is expected 18 months from the receipt of the outstanding forestry and operations permits.
Our 2015 development budget at Esperanza is $9.8 million focused on the ongoing baseline work required for the resubmission of the EIA and an internal feasibility study to support the development of the project. One of the critical path items required for the EIA was achieved in the fourth quarter.
We secured agreements to acquire water concession sufficient for all future mining activities for the project. Despite the decrease in the price of gold, we continue to take a long-term view of investment and exploration with a 2015 budget of $25 million.
This includes $17 million at Mulatos focused on San Carlos, Puerto del Aire, El Victor, Cerro Pelon and La Yaqui. This also includes $5 million budgeted at Quartz Mountain focused on completing the initial 8,000-meter program, which began in November of last year.
The program was designed to test the geological model and validate the existing resource. With that, I'll turn the call back to John.
John A. McCluskey
Thank you, Manley. This now concludes our formal presentation.
I'll turn the call over to the operator, who will now open the call for your questions. Operator?
Operator
[Operator Instructions] Our first question is from Andrew Quail from Goldman Sachs.
Andrew C. Quail - Goldman Sachs Group Inc., Research Division
I just got a question on sustaining CapEx at Mulatos. How do you guys see that sort of trending as we go through the year?
And can you give some guidance on what you think is an acceptable rate or targeted rate for sort of -- from even 2016 onwards per ounce?
James R. Porter
Yes, I'll take that, Andrew. So our budget for 2015 is $12.5 million sustaining capital.
I think that's a good run rate to use going forward. I mean, that's dropped from about $17 million in 2014, but I think $12.5 million -- I'd say between $12 million and $15 million is a good range going forward.
Andrew C. Quail - Goldman Sachs Group Inc., Research Division
And you don't see any sort of upcoming sort of -- when you -- how do you guys split between, say, development capital and sustaining CapEx on tonnes?
James R. Porter
Yes, it's -- the split is based on whether or not it results in increased production. So we call something expansion capital if it's going to grow our production.
In 2014, a lot of the spending at San Carlos we referred to as expansion capital because it was delineating our production profile from the underground for the next few years. But that's how we determine that split.
Operator
The following question is from Kerry Smith from Haywood Securities.
Kerry Smith - Haywood Securities Inc., Research Division
Maybe just Manley or Jamie, for the Forestry and the operating permits in Turkey, can you apply for those permits together? Or do you have to get one first then apply for the second one?
I'm just trying to think about the timing it might take to get those 2 permits.
John A. McCluskey
They actually are done sequentially. They're -- the applications are done in 2 different offices.
One goes to the Ministry of Forests, which is a federal body. And the construction permit is applied for at the Governor's office, which is the -- a local body, the provincial body.
So effectively, when the governor goes to review the permit application whether or not to give you your construction permit, he's going to look to see if the forestry permit is in place. So if the EIA is there, all done, if the forestry permit's in place, it's quite normal for him to proceed and give you the construction permit.
And that will -- what will happen...
Kerry Smith - Haywood Securities Inc., Research Division
Yes, so -- okay, John, so you need the forestry permit first effectively and then you would apply for the operating permit then?
John A. McCluskey
Yes.
Kerry Smith - Haywood Securities Inc., Research Division
From the Governor, okay.
John A. McCluskey
We know that -- these are some of the very key issues that we've watched over the 5 years or so we've been in Turkey. For the first 3 years that we were there, forestry permits were really not an issue.
If you needed a forestry permit, you applied for it and you got it. And it was a fairly efficient process.
And then it came to a grinding halt about 2 years ago, and the process became terribly backlogged and it's become very, very difficult to get forestry permits. But based on my last couple of trips to Turkey, and I reiterated quite clearly on the trip I returned from just over a week ago, they are about to change that all again.
It really appears to me, based on all the things I see going on in Turkey right now, that Turkey, if it wasn't so sure over the last 2 years whether it really indeed wanted to follow through and support and develop the mining industry in that country, they seem to have found that direction again. And we can see it through the establishment of this new mining law, which we've been waiting for a long, long time.
We've been particularly curious about where royalties would end up and how that might affect our projects. It ended up as favorably as we could have hoped.
It effectively ended up where they've set a royalty very much in line with what we anticipated and the numbers that we were working with 3 years ago. So there's just a set of things going on.
So when you go to Turkey and you're talking with political officials, you get the impression very much that this is a top priority for the government and these things are being worked on now. And I'm expecting -- fully expecting that by midyear, we're going to see the whole business surrounding the allocation of forestry permits be handed back to the Ministry of Forests itself.
Right now, they're administered by the Prime Minister's office, and that just hasn't proved to be very efficient. But that is going to change.
And there also is a very clear message being telegraphed to me and I believe many other people in the industry that forestry fees are going to be reduced and brought back in line with fees that you would typically pay elsewhere in the world.
Kerry Smith - Haywood Securities Inc., Research Division
Yes, okay. Okay.
John A. McCluskey
All of these things, I think, add up to a much more accelerated view in my mind of what is going to take place in Turkey this year as opposed to this scenario we've been in for the last 18 months, where we just haven't had any indication whatsoever from the government which way things were going. Now we're getting clear indications that things are going to start to happen.
Kerry Smith - Haywood Securities Inc., Research Division
Right, Okay. Okay.
And Jamie, just another question on the cost per tonne by quarter that you showed for 2014 for mining in Mulatos. The number was kind of all over the map by -- on a quarterly basis.
For this year and going forward, would it be appropriate to kind of use an average? Or would Q4 be more typical of what you might see on a go-forward basis?
James R. Porter
Yes, I'd say that Q3, Q4 would be more typical of what we'll see going forward. I mean, in 2014, we were alternating between 3 different sources of high-grade production so that, that caused some of the volatility in that number.
But I think we're targeting -- on a blended basis, our mining costs per total tonne is around $430 for 2015. If you back out the underground at $60 per tonne, it works out to about $360 is our open-pit mining cost per total tonne.
Kerry Smith - Haywood Securities Inc., Research Division
Okay. Okay, great.
And then just, Manley, on the mill throughput, you're running at 400 tonnes a day now. Would it be correct to assume that it'll kind of be flat at that rate until you actually get the new vertical mill installed, then at that point in time you'd move up to a higher throughput rate?
Or would you be able to sort of slowly incrementally move it up? I'm presuming it's a step change, but just wondering how that should be modeled.
Manley R. Guarducci
It will be step change, Kerry. We believe in running it to get off in the recovery right now, and that seems to be 400 tonnes a day.
And we'll walk that up to the 800 tonnes a day in mid-2015.
Kerry Smith - Haywood Securities Inc., Research Division
Okay. And the timing is sort of, I guess, June, I guess, is it, or June, July to have that mill operational?
Manley R. Guarducci
Yes. Yes, everything is ordered and all delivery dates are established.
And everything will be on site in June, that's correct.
Kerry Smith - Haywood Securities Inc., Research Division
Okay. Okay.
That's great. And then just one last thing, Manley on the -- this drilling you did at La Yaqui where you found some oxide, I guess it was oxide, underneath the leach pad location.
Does that create any problems if you had to move the pad? I just can't remember exactly how much pad room you had there.
But would that be a problem for you if you had to move the pad a little bit to compensate for that?
Manley R. Guarducci
It's not. It's not a fatal flaw.
It's a -- I mean, it's not that we are in a preferred location for construction costs and everything. But if we have to move it, we can move it.
Operator
The following question is from Duncan Lai from Macquarie.
Duncan Lai - Macquarie Research
So just a quick question on the balance sheet. So for the $15 million of tax receivable, what month should we expect the company to collect it?
And also, should we expect to see a similar balance of similarly -- similar in nature being reported going forward?
James R. Porter
So the $15 million receivable balance that you see, that's income tax receivable. What we've done historically is we've offset our VAT receivables, so our value-added taxes, against our income taxes payable.
In terms of the collection timing, I can't give you a specific month. I would think that we collect the majority of it in -- within the first 6 months of the year.
But that number is going to fluctuate as we add to it throughout the year. So I think we'll get that $15 million in throughout the course of 2015, but I can't tell you at this point what the outstanding receivable is going to be at the end of the year.
Operator
The following question is from Jeff Killeen from CIBC.
Jeff Killeen - CIBC World Markets Inc., Research Division
I'm just wondering on San Carlos specifically. You noted a few points in the MD&A with respect to development in Q4.
You had been at 267 meters, I believe, for the quarter. How does that compare to the plan that you had for the quarter?
And how does that number compare to, say, a quarterly rate going forward in 2015?
Manley R. Guarducci
I can tell you that the development that we did in 2014 was on track. We do have development to do in 2015, but we have developed all the areas that we need to develop to do most of our production for the year.
The longer development headings are now started and we just work our way in. And that's what we've been focusing our exploration on, is to fill in the gaps as we go further east, okay?
Jeff Killeen - CIBC World Markets Inc., Research Division
Okay. And then with respect to the overall grade of San Carlo, so you're suggesting a 9.5 gram per tonne grade for the year.
Obviously, that's above the resource -- excuse me, above the reserve grade. So when do you think we would see grades start to gravitate towards that reserve grade?
Would it be in 2016? Or any thoughts there?
Manley R. Guarducci
Yes. Right now we know what we have for this year, 2015.
We've budgeted and have the mine plan and everything. I'm going to wait till we have the new reserve statement because we did a lot of additional drilling in there so we'll have better confidence in what we have going forward.
And at that time, we'll know what the new reserve grade is going forward.
Jeff Killeen - CIBC World Markets Inc., Research Division
Okay, great. And then maybe just lastly for San Carlos.
You had suggested a grade of about 8 gram per tonne for Q4. Just wondering, could you comment on how that compares to what you had expected just in terms of reconciliation?
Manley R. Guarducci
The -- most of the tonnage that we got in Q4 at San Carlos is development tonnage out of drifts. We did start stoping in one of the stopes, but it was very preliminary to tell you.
You have to mine the whole stope out before we get a reconciliation for the stope. But I can tell you the development heading, they all were pretty much bang on to the models and exactly what we expected.
Even though most of the development was around the fringes of the ore body, it matched very well to our block models.
Jeff Killeen - CIBC World Markets Inc., Research Division
Okay, great. And maybe just the last question, flipping over to Turkey.
You had noted in the MD&A just around keeping the projects in good standing. With the changes to the mining act that have just been enacted, are there any changes to what you would require to do to hold those projects in good standing?
And does that affect how you look at spending money over the next, let's say, 18 months if permits don't come?
John A. McCluskey
The only significant change that affects us is the -- is a positive one where they have actually extended the amount of time allowed under the mining license to get your mine started. It had formerly been 7 years and they've extended it now to 9 years.
So we're in really good shape from that point of view.
Jeff Killeen - CIBC World Markets Inc., Research Division
And could you clarify then what you would consider -- like what year your project would be considered in...
John A. McCluskey
2019. We've got plenty of time to get -- I think our -- 2019 is the date.
That would be pushed to 2021 now, yes. Yes, it's 2021 now.
So I think we have to go from more or less an exploration status to a mining status, let's say, by 2021.
Operator
The following question is from Mike Parkin from Desjardins.
Michael Parkin - Desjardins Securities Inc., Research Division
Just a couple of housekeeping items probably best for Jamie. For 2015, what should we expect for G&A, like cash component, as well as depreciation per ounce?
I imagine depreciation will be fairly -- or won't be perfectly consistent depending on production, but will G&A be fairly flat quarter-over-quarter? Or will there be a higher period?
James R. Porter
Yes, Mike. Yes, no, the G&A should be pretty consistent quarter-over-quarter.
I mean, with the Canadian dollar, that's helped to some extent. Our head office costs here are down to about $8 million.
If you factor in the G&A at our sites, it's -- $12 million is our budget for the year. And yes, like I said, that should be pretty even over the 4 quarters.
Amortization is expected to go down on a per-ounce basis. San Carlos has a much lower amortization base than Escondida and Escondida Deep did.
So I think we're looking at around $250 for the year.
Operator
[Operator Instructions] The following question is from Michael Gray from Macquarie.
Michael J. Gray - Macquarie Research
Yes, maybe just a little bit more on Turkey. John, you emphasized with the new mining law being passed earlier this week that there's going to be acceleration of the permitting process.
Is that due to the federal Ministry of Energy and mineral resources trumping some of the provincial approval process? Or maybe just give us a little bit more on how this is going to work going forward.
John A. McCluskey
I think that's -- that -- I wouldn't characterize it that way at all. I think it has more to do with the fact that these -- the decision for the development of this industry is really being taken at the highest levels within this government.
It's basically a federal cabinet initiative. So it takes a combination of the Prime Minister, the Minister of the Economy, the Minister of the Environment, the Ministry of Forests.
All these various ministries have to collectively get together and make a decision that starts moving the industry forward. No one of them could do it on their own.
And what I'm gathering, and again this is very anecdotal, but I've been going back to Turkey for 5 years now. And if you'll recall asking me any questions about Turkey over the last 18 months, I've been pretty flummoxed.
I have not really known -- haven't known what to tell the market because there was really no direction being given as to when things were going to start to move. And that started to change over late 2014 and now into 2015.
And one the reasons why I went back to Turkey in January, which is much earlier than I would typically do, is because one could really get a sense that change is afoot. And I met quite a number of government officials when I was there, people not typically associated with this subject at all.
For example, I met with the -- party's party whip, a fairly important person within the government, not somebody necessarily directly related to the mining sector. But I had the opportunity to question him on the mining legislation that was going forward and what he felt the pace of approval was going to be.
And I could just tell by his body language, by his enthusiasm, by everything else that they were getting ready to really push that through hard. And that was about 2 weeks ago.
And as you can see, that has gone through. But it's in speaking with individuals like that, people that are really closely associated with the decision makers, with the very senior people within the cabinet, that are ones required to take the decisions to move this whole industry along.
One got the impression that -- and this was within meetings right across the board, that things were going to change in Turkey and this year we were going to see the industry start to move forward. And I think the new mining law is just a leading indicator of what -- of more positive developments to come.
Operator
Thank you. There are no further questions registered at this time.
This concludes today's conference call. Please disconnect your lines at this time, and we thank you for your participation.