Torex Gold Resources Inc. (OTCPK:TORXF) Q1 2022 Earnings Conference Call May 12, 2022 9:00 AM ET

Jody Kuzenko - President and CEO

Dan Rollins - SVP-Corporate Development and IR

Don DeMarco - National Bank Financial

Thank you for standing by. This is the conference operator. Welcome to the Torex Gold Resources Inc First Quarter 2022 Results Conference Call. 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. [Operator Instructions]

I would now like to turn the conference over to Dan Rollins Senior Vice President, Corporate Development and Investor Relations. Please go ahead, Mr. Rollins.

Thank you, operator and good morning everyone on behalf of the Torex team, welcome to our Q1 2022 Conference Call. Before we begin, I wish to inform listeners that a presentation accompanying today's conference call can be found under the Investors section of our website at www.torexgold.com. I'd also like to note that certain statements to be made today by the management team may contain forward-looking information. As such, please refer to the detailed cautionary notes on Page 2 of today's presentation as well as those included in the Q1 2022 MD&A.

On the call today we have Jody Kuzenko, President and CEO, as well as Andrew Snowden CFO.

Following the presentation, Jody and Andrew will be available for the question and answer period. This conference call is being webcast and will be available for replay on our website. This morning's -- last night's press release and the accompanying financial statements and MD&A are posted on our website and have been filed on SEDAR. Also note that all amounts mentioned this call are US dollars unless otherwise stated.

I'll now turn the call over to Jody.

Well, thank you, Dan. Good morning to all on the line.

Welcome to the Torex Gold Q1 2022 results call, I'll open my remarks this morning by saying that we had a very strong start to the year on all fronts, we delivered modestly higher production than anticipated.

The team has done an excellent job in keeping control on cost despite the current inflationary environment. While it's early in the year, we're well positioned to deliver on full-year production and cost guidance and I think probably most notably at the end of the first quarter, we released our updated technical report, which outlines the future of mining the Morelos Gold property, which in turn forms the foundation for future growth for Torex.

In terms of the agenda for the call. It's the same as usual, I'll provide a brief reminder of the strategic pillars that we continue to execute on, then I'll step you through the key business and operational highlights specific to the first quarter, then over to Andrew Snowden for some detail on the financials, and after that, I'll provide a progress update on the Media Luna project and exploration. Dans already touched on the forward-looking statements and the Safe Harbor language. So head straight to Slide 4.

Before we get into the substance of the quarterly update, I wanted to refresh everyone on our strategic pillars, which reflect the long-term vision of Torex and the long-term plan. We're working on all of them, but I would say the three across the top really came to the forefront in this quarter.

If you look at the top left there is demonstrated by the 2021 year end reserve update. We were successful and further extending and optimizing operations at ELG, with the addition of the push back at the El Limon pit, we now have open pit mining out to the end of 2024 and we're looking to extend this even further.

In terms of advancing and derisking Media Luna the technical report was released as planned, tunnel development to access the ore body is progressing and with Board approval secured on March 31, procurement on long lead purchases is moving ahead. And finally on grow reserves and resources in addition to ongoing reserve growth at ELG underground, we delivered our first reserve statement for Media Luna. Effectively tripling the mine life of our Morales asset with the reserves now out to the end of 2033.

Turning to Slide 5. This sets out some key operational and financial highlights. Production in Q1 was just over 112,000 ounces. We had slightly better grades and consistent mill throughput offsetting lower recoveries. Those low recoveries were due to pockets of lower recovery ore mined from the Guajes pit and processed in the quarter.

We delivered adjusted EBITDA of over $110 million with operating cash flow of $47 million. Recall, operating cash flow and free cash flow is subject to annual seasonality, with taxes and royalties paid out in Q1 and the PTU Mexican legislated bonus paid out in Q2.

Andrew will detail some of this in his comments. Even accounting for the large tax payments and CapEx spend, we closed the quarter with $237 billion in cash and still no debt. And I've already mentioned that we delivered the updated technical report as planned. Certainly Q1 was an intensive work quarter for our small team, but the work all got done somehow and it was done exceptionally well.

Moving to Slide 6. The theme here is that we're well positioned to deliver on full-year operational guidance. Three key areas of note on this slide first, we're on track to deliver a full-year production guidance, we expect the levels of production over the remaining three quarters to be higher than the 112,000 ounces delivered in Q1 just part of the mine sequencing plan. Second, total cash costs and ASIC are also tracking to the plan with both expected to decline over the remainder of the year driven by higher production and continued cost discipline, and cost control.

Third spending on Media Luna is noted here at $20.8 million at the end of the quarter and this requires some explanation. It's approximately $26 million lower than what was set out in the feasibility study. This is not a cause for concern. There are two main contributors to the Q1 spend level. First, there has been some redistribution of spend from Q1 to later quarters and we've had slower development rates than plan through South Portal Lower, which I'll touch on when I get to my commentary about the project.

With the project now formally Board approved and the team moving through procurement on some long lead, capital intensive purchases. we're still very much forecasting to deliver on our capital expenditure guidance for 2022.

Turning now to Slide 7, which sets out some highlights on ESG, we had another excellent quarter from a safety perspective, with no lost time injuries and we're now sitting at just over 8 million hours lost time injury free.

Remarkably, in April, we hit one full year without a lost-time injury that's all employees and all contractors and we're now operating with a lost-time injury frequency of zero. There is an adage in the industry that when you get safety right everything else follows and that certainly held true in the case of Torex.

I'd also call your attention to the community relations commentary in the bottom right hand side of this slide. While working with and maintaining mutually productive relationships with our host communities is definitely and all year around job, in quarter one, we started the year with the successful annual renewal of all 11of our community development agreements, this set the stage quite nicely.

Turning now to some details on operational performance. Slide 9 really does illustrate the continued consistency that we've achieved in production across the board and quarter one was no different. The production of 112,000 ounces of gold was up just slightly over the prior two periods, planned performance there is notable at 12,600 tons per day and stable performance for the last four quarters.

Bottom left, you can see process grade came in at 3.47 grams per ton just slightly higher than anticipated, driven by the grade profile out of the open pits. And looking at the top -- the bottom right there the underground mining rate. We said in Q4, that the underground mining rate was impacted by COVID absences and it would come back up in Q1 as we got a handle on that and it has. We're returning to our usual range of just over 1260 tons per day out of that underground.

Slide 10 outlines the unit cost performance through Q1 of 2022 relative to full year 2021. As you can see there, initiatives to hold the line on costs are helping to offset the inflationary pressures we and all of our peers are seeing in the market. Open pits and underground mining costs are relatively consistent with full year 2021 results.

Processing costs were lower given lower cyanide consumption in the quarter we came in at just under three kilograms a ton. The variability in cyanide consumption requires a long and detailed explanation, but it has to do with the mineralogy of the ore we are seeing. This is a bit difficult to predict, but I will say that we expect consumption levels to remain variable over the coming quarters given the variability in the mineralogy.

But we're forecasting it to be somewhere between three and four kilograms a ton. And those last lines at the bottom of the table on PTU require some explanation. The higher level of PTU reflects updated guidance from the Mexican government on the levels to be paid out. As a result, we've accrued an additional $2.6 million of profit share and payments in Q1 related to a true-up required on the 2021 payout. Now that said this year's payout is still substantially less than the payout in 2021.

I will now pass it over to Andrew to review the quarterly financial results.

Thank you Jody and good morning everyone.

I'm starting my commentary here on Slide 12 and consistent with a solid operational quarter which Jody just walked through. We also had a good quarter financially and that's despite Q1 expected to be our lowest quarterly production period of the year. The strong gold price in tandem with stable costs quarter-over-quarter where we've been managing inflationary pressure as well, resulted in a total cash cost margin of 60% and an all-in sustaining cost margin of 44%. These strong margins generated over $110 million in adjusted EBITDA and $47 million in operating cash flow and that's despite $60 million of total tax and royalty payments paid during the quarter that's the highest quarter of these payments in the year.

Just to summarize the breakout of about $60 million that includes $21 million of tax instalments, $30 million paid relating to the annual payment in March of 7.5% royalty, $5 million related to the 2.5% royalty and $4 million related to the 0.5% royalty and so all of those payments were made during the quarter.

This seasonality of tax payments, along with ongoing high capital expenditure resulted in a free cash flow deficiency of $19 million in the quarter. With spending on Media Luna plants increased through the remainder of the year, we do expect free cash flow to be negative over the year with some quarterly variations, although of course an extension of the current gold price environment could help mitigate that.

Turning now to Slide 13 for review of our cash movements during the quarter. You can see from the slide here that we ended the quarter with $237 million in cash and continue to have no debt. I just want to spotlight, some of the key areas on the key uses of cash during the quarter highlighted on this slide.

Firstly on taxes, you can see of the income tax payments of $51 million that were paid on income taxes and noted on this slide, the remaining $9 million of royalties were included in changes in working capital. And to just provide some go forward guidance I expect the monthly income tax instalment payments to be in the range of $7, $8 million a month for the remainder of the year.

Looking at changes in non-cash working capital. This reflects outflows related to accounts payable built up at year-end and the royalty payments I just referenced. Partially offset by net to VAT receipts of $8 million during the quarter as collections caught up from some government holiday delays at year-end.

Looking ahead at working capital changes through the course of Q2 here, we will be making a $22 million payment later this month. related to the annual mandated profit sharing in Mexico. Finally on capital expenditure, we invested approximately $65 million in capital during the quarter. Media Luna expenditure was different to the amounts that were incorporated in the baseline feasibility study due to the redistribution of certain work primarily civil works and the ability to defer equipment purchases until after project approval on March 31.

I've noted previously Media Luna CapEx is expected to increase quarter-over-quarter through 2022, as development and procurement activities ramp up. Just to briefly make a note on depreciation as well and we are expecting to incur between $175 million and $200 million of accounting depreciation through the course of this year. Tax depreciation in 2022 is expected to approximate $70 to $80 million and that's a similar level to last year. One of the key reasons behind the deferred tax recovery rates the last few quarters.

Turning very briefly now to Slide 14. This is really just a reminder of the seasonality in the number of our payments, I've already made reference to attacks and profit-sharing payments and so we expect this trend to continue through the quarter of 2022 here.

Looking now balance sheet so shown in Slide 15 we exited the quarter with $237 million in cash and available liquidity of $387 million. The current credit facility that we have in place matures in March 2023 with a $25 million step down in capacity each of September 30 and December 31. We have already commenced discussions to extend the maturity of this credit facility as well as advance the broader discussions on additional financing to support the Media Luna build which I've referenced before.

As a reminder, in total, we are looking at raising between $250 and $300 million of debt financing with a focus now on either high yield issuance or term loan with the ultimate decision to be based on the cost of capital and repayment tenure. Depending on market conditions and proposed terms, we're targeting to have the new facility in place in the second half of this year, although we do have flexibility on timing as we don't need this capital until into 2023.

Finally, and just turning now to Slide 16. As noted, when we released the technical report, we have hedged approximately 25% of production between October 2022 and December 2023 through forward sales. We may consider additional hedges going into 2024, we look to minimize price risk during the build out of Media Luna to reduce the hedging of the prudent risk management measure during a period of elevated investment.

And it will support not only the development of Media Luna, but also our ongoing investment in exploration, while maintaining the $100 million of cash on the balance sheet.

So that concludes my remarks and I'll hand the call back over to Jody.

I'll now provide a brief update on both the Media Luna project and exploration. So turning to Slide 18. As mentioned, we delivered the updated technical report for the entire Morelos complex at the end of March, all of the details of the Media Luna project the associated economics, the forward-looking production profile in the reserves and resources can be found in the technical report, which has now been filed on SEDAR.

And the video of the presentation that we did on the Investor Day, held April 1 is also posted on our website for those who are interested in the details. But the key highlights of the project are set out here on the slide first, with the addition of 3.3 million ounces for the inaugural and Media Luna reserve, mine life has tripled to almost 12 years.

Second, we plan to maintain the current production run rate at an average of 450,000 ounces annually through at least 2027 which raises any concerns about a dip or gap in production as we switch from the open pits to Media Luna. Third, when many alumina comes online, we'll now become a sizable copper producer, which is important to us moving forward. Fourth, CapEx is that $848 million for the project. It's realistic, it accounts for inflation, and it is not insignificant.

And lastly, and I think quite Importantly, the results of the Media Luna feasibility study and updated mine plan for ELG forms, what I would describe as the new base case for our Morelos properties. Given the underlying resource potential of the entire land package, we're quite confident in our ability to bolster the overall return of the project by filling the mill beyond 2027 and extending the mine life out past 2033 and we're hard at work on both fronts.

Turning now to Slide 19. This illustrates the progress that we've made on tunnel development, this is a key schedule item for the success of the Media Luna project, which is why we show a quarterly. Starting on the left hand side of this schematic coming from South to North now arrived at the point in South Portal Upper where splits with the top brands now advanced more than 710 meters heading to the top of the deposit, and the bottom ramp at 650 meters heading to middle of the deposit and those progress numbers are as at April month end.

Progress in South Portal Lower has been slow going through the quarter due to challenging ground conditions encountered in February. We intersected a fault at the 990 level, which had a water see minute.

We expect these conditions to remain variable for about another 400 meters until we reach the granodiorite contract. This 400 meter estimate will be confirmed over the next couple of weeks with the establishment of a drill platform to probe drill, the length of the ramp development. So we know exactly when we're going to be through the variable ground conditions.

So, on the south side were slowed but not stopped, but coming the other way from north to south in the Guajes tunnel we're making up for it as rates continue to increase. As at the end of April. we passed the 1.7 kilometer mark and over the last two weeks we have started to consistently hit a 4.5 meter around in a 12-hour shifts which was always, always the goal now driving a 6 by 6.5 meter heading at 9 meters per day is nothing short of world-class development performance and we're doing it with our own team, not a contractor.

The work now for our team is to achieve that consistently day in and day out until we hit breakthrough and at this point, we're in good shape. In the feasibility study we marked breakthrough in the lower tunnel on the schedule in Q1 of 2024 and today we're tracking ahead of that plan.

Lastly, some commentary on exploration Slide 20, highlights the prospective nature of the entire Morelos property and you can see the details of our aggressive $39 million program for 2022 along the right hand side of the slide, overall exploration and drilling is on track. There are couple of highlights worth noting. First, drilling at ELG underground is targeting ongoing reserve and resource growth as we have look to extend the life of ELG underground out beyond 2027.

Second, infill and step out drilling at EPO is progressing. Now once that program is complete, we will begin evaluating the potential to develop EPO. The goal here is to provide incremental feed to the processing plant over and above that 7500 tons per day planned from Media Luna. We expect to complete an internal first pass Economic Assessment late this year and release the upgraded resource estimate for EPO in early 2023. As exploration has become a key part of our strategy both to fill the mill post 2027 and extend mine life beyond 2033, you can expect to see some standalone exploration news from us in the coming weeks and months.

Overall, I would close by saying, we've had an excellent start to the year. We're well positioned to deliver on full-year operational guidance and continue to execute on Media Luna and our other strategic priorities.

That concludes my commentary for the call. I'll now turn it back over to [Serene] and we're happy to entertain any questions.

[Operator Instructions] First question comes from Trevor Turnbull with Scotiabank. Please go ahead.

Thank you and congratulations on your team's ongoing safety track record. My first question is just a quick one on the potential to hedge into 2024. I wondered if you have a maximum in terms of proportion of gold production that you guys would consider?

Hi, Trevor Andrew here. So the moment is I noticed just in terms of all the hedging we have in place right now, we've been looking at hedging up to 25% through the course of Q4 2022 through to the end of 2023. As I think about additional hedging in 2024, it will be along those sorts of levels and so that's the level we would look at in 2024.

We are also considering whether there is some potential to enter into some additional hedging in the course of 2023. Just given that it's the peak period of our Media Luna spend. We haven't kind of rounded out our views on that yet, but it won't be anything greater than 50% and when we get to those levels we'll, we'll see as we, as we monitor the gold price volatility.

Okay, perfect. Thank you. And then my only other question was about the lower South Portal that you were talking about Jody and the slower progress due to the ground conditions. You mentioned that you expect to get into much better rock, the granodiorite in about 400 meters and you're actually doing some work to determine if that 400 number how, if you can pin that down. That sounds good. But it also sounds like, if it is 400 meters, that could take a while to get that much further along. I know it's just one part of the schedule, but can you just talk a little bit further about why you're not worried it impacts the bigger schedule?

Yes. That's a good question, Trevor. And I would say the 400 meters, the conditions we expect to encounter in that 400 meter length will be variable, and so we have geotechs in their daily this really assessing ground conditions and making rules daily about the nature of the grounding, the nature of the resin whether we need to continue to pull up steel set or whether we can move ahead through a section of that more quickly.

And so some days we had two meters per day, some days we had four meters a day, somedays six. And so I don't want to leave anybody with the impression that we're steadily trickling along here at two meters per day and will be for the next 400meters. It will be variable and we're not at this point sure that it's even going to be 400 meters in length.

The other reason that I'm not particularly concerned about this at this point is that we've gained such good ground coming from North to south, tracked now for the last few weeks at nine meter per day on quite a few days. If we can achieve that consistently. It just means we'll breakthrough further south in the tunnel than we had expected. So we expected variable ground conditions in South Portal Lower, we knew we were crossing three lithologies there unlike the Guajes tunnel, one lithology, granodiorite contact, and so we're still feeling quite confident about the progress of that lower tunnel overall.

And you mentioned, it sounds like a fall to restructure, is it something that just because of the orientation of the two different portals you don't expect to encounter or you haven't encountered or should say you won't encounter in the upper one as well.

Yes, we don't expect to encounter in the upper portal just given the disparity in depth between those two portals, and so we've done a lot of work to understand the lithologies that we're moving through as you can imagine, this is a key schedule item and so what we found we expected. I think it's fair to say the degree of what we found in South Portal Lower was more than we expected, there was more casting than we expected and more water than we expected and so that has impacted our plans a little bit, but we're progressing quite nicely in South Portal Upper.

[Operator Instructions] Next question comes from Don DeMarco with National Bank Financial. Please go ahead.

Good morning everyone, thank you operator. Hi, Jody and team. Maybe first question to Andrew just continuing on with the debt that you're looking into. Andrew, you mentioned that you're evaluating cost of capital repayment tenure, any preferences on this point with regard to the repayment tenure.. Long dated, medium dated after Media Luna goes into production.

Yes, it's a good question DeMarco. In terms of tenure, what's important to me is obviously making sure that that repayment and timeframe is consistent with cash flow generation for Media Luna. Our key capital investments will be through the course of 2022 through 2024. We expect to start producing for Media Luna at the end of 2024 and so and make which starting to produce good free cash flow in 2025 and beyond. And so, well cannot think about maturity timeline amortization period marrying that up with that free cash flow and looking to repay the debt using the Media Luna cash flow commencing in 2025. That's the type of time horizon, it would be important for me. So looking at a maturity date, somewhere in the '25, '26, '27 timeframe.

Okay. That sounds reasonable. And maybe just a question to switching over to the, the South Portal Upper and lower and the challenging ground conditions that you anticipated. I think your previous answers address both of those, but moving to the Guajes is tunnel Is there any and you're making remarkable progress through it right now. Are there any areas that you would expect challenging ground conditions along the course of the tunnel.

That's the exact right question, Don, thanks for that. And what we did before we made the decision to do the Guajes tunnel under the river was two horizontal drill holes that spans the width of the river. Now they don't track directly to where the planned tunnel is going to be. Think about it as an axe that's through the tunnel area that skewed to about 30%. So we wanted to get a good sampling of the ground conditions under the tunnel.

We also did some boreholes with directional drilling down to the level of where the tunnel will be. All of that information tells us that we're going through one lithology under that river and it's granodiorite rocks that means it's good confident rocks, similar to what we see on the ELG side.

Similar to the vast majority of what the Media Luna deposit is. Does that mean we'll encounter no problematic ground conditions during the Guajes tunnel, I don't think there could be any guarantee on that, but what I will say is we've done some exploratory drilling as best as we can to understand the lithology to understand what we can expect.

And I will say that the team, our own team and Guajes tunnel will be far better prepared for any difficult ground conditions we encounter through Guajes than was the case with our contractor. Part of the reason we were so slow through the quarter is that I would describe us as relatively unprepared for what we encountered there South Portal Lower, new contractor, new work area and not quite ready for what we should have been ready for in my estimation.

Okay, well. That sounds good. Overall encouraging and also just encouraged by the progress in Guajes and good luck getting through that South Portal Lower in the next, this quarter.

And maybe just, you're welcome and so final question. So with Media Luna construction ramping up and so on. Do you have any comments on supply chain, are you seeing any potential risk items or supply chain tightness and any plans to overcome potential issues to keep the schedule on track.

We're very early days in the procurement process Don, we just got Board approval March 31 and so we have some very long lead items that are in various stages of procurement. So our flotation cells or regrind mills. our battery electric fleet and some other materials are conveyors for Guajes, So far, we don't have anything back that causes us concern, but the whole point of getting out early is to mitigate risk associated with supply chain tightness and supply chain concerns.

I mean you don't have to look very far in the news to see that that's impacting projects in the sector broadly. We want to do everything we can to get ahead of that, so far so good, it's early days.

Okay, thank you. Well, congratulations on the strong quarter. And good luck, continuing on track with guidance year ahead thank you.

As there appear to be no more questions, this does conclude today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.