Equinox Gold Corp. (AMEX:EQX) Q2 2023 Earnings Call Transcript

Equinox Gold Corp. (AMEX:EQX) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: Thank you for standing by. This is the conference operator. Welcome to Equinox Gold’s Second Quarter 2023 Results and Corporate Update. As a reminder, all participants are in listen-only mode, and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Rhylin Bailie, Vice President, Investor Relations for Equinox Gold. Please go ahead.

Rhylin Bailie: Thank you, [Gillian], and thank you, everybody, for joining us this morning. We will, of course, be making a number of forward-looking statements today. So please do visit our continuous disclosure documents on our website, on SEDAR and on EDGAR. I’d now like to turn the call over to our CEO and President, Greg Smith.

Greg Smith: Thanks, Rhylin and good morning, and thanks, everyone, for joining us today, especially at this very early hour on the West Coast here. On the call with me is our COO, Doug Reddy, our CFO, Peter Hardie; our EVP of Exploration, Scott Heffernan and our VP of Investor Relations, Rhylin Bailie, who you just heard from. As a quick introduction to those new to the company, Equinox is a diversified Americas-focused gold producer. We have 7 producing mines across Brazil, Mexico and the United States, and we also have several growth projects, including our large-scale Greenstone Gold mine in Ontario, which is in construction now with our 40% joint venture partner, Orion Mine Finance. So today, we’re discussing our 2023 second quarter financial and operating results.

But before we jump into those results, I just want to acknowledge the fatality at our Santa Luz mine in June. This was a tragic incident, and we extend our deepest sympathies to our employees, family, friends and coworkers. We had a 1-week site-wide suspension of operations at Santa Luz to facilitate the investigation and to refresh safety training. I’ll now start with a broad overview for the quarter, and then I’ll turn over the call to Pete and Doug for more details. We had a solid quarter with sales of just over 138,000 ounces at a cash cost per ounce sold of $13.61 and an all-in sustaining cost per ounce sold of 1502. For the first 6 months of the year, we sold 261,000 ounces at cash costs of $13.54 per ounce and all-in sustaining cost of $15.76 per ounce.

This reflects record sales for the company for the first 6 months of the year, and we remain on track to meet our 2023 production and cost guidance. On Tuesday this week, we issued a press release with a full Greenstone update. For those that didn’t see it, the team at Greenstone has done a great job of continuing to advance the mine on time and on budget for first gold pour in the first half of 2024. As of July 21, we were 85% complete overall at Greenstone. There’s loads of pictures on the website, and you can really see how far the projects come and advance over the course of this year. And Doug will have more to say on Greenstone in a few minutes. During the quarter, we also continued to progress the feasibility study on the addition of an underground mine at Aurizona.

And we’re going to continue to conduct some additional work, including trade-off studies on throughput from the underground mine. This means we’ll complete the study next year. This timing also allows us to proceed with construction of a portal and a decline, which we plan to include in our capital budget for 2024. Our work so far shows excellent potential for a long-life underground mine in Aurizona. So we’re keeping our foot on the gas in terms of development while we progress the feasibility study. And Doug will also comment more on this. We finished the quarter with unrestricted cash balance of $174 million, plus approximately $170 million available from our credit facility for a total of over $300 million in available cash liquidity at quarter end.

With cash flow from operations, this leaves us well funded through the completion of construction at Greenstone. We also published our third comprehensive ESG report in May. And just recently in July, we published our first water stewardship report. These reports summarize our performance during 2022, our targets for 2023 and our long-term strategy across a range of ESG initiatives. They’re both available on our website along with our climate action report, and I encourage everyone on this call to check them out. So with that, I’d like to hand the call over to Peter Hardie to run through our financial results.

Peter Hardie: Thanks, Greg. We’re now on Slide 6 in the presentation. From a gold sales and revenue perspective, we had our best first half of the year in the company’s history. During the quarter, — for the 138,000 ounces we sold, we received an average realized price of $19.62 per ounce. That’s $19.31 year-to-date, generating $217 million in revenue, $506 million year-to-date. We sold 15,000 more ounces in Q2 as compared to Q1 of this year and about 18,000 more ounces than we did for the 120,000 ounces that we sold in Q2 last year. Our cash cost per ounce of $13.61 for Q2 is similar to that of Q1 of this year and down from Q2 of last year of $14.82. Our all-in sustaining cost per ounce of Q2 this year of $15.02 is down from Q1’s $15.76 and also down from Q2 last year, last year’s $16.57.

As to forward views on input costs, unit prices, we’re now starting to see decreases in particularly diesel and cyanide in Brazil and the U.S. Those unit cost decreases in Brazil are somewhat offset by the strength of the Real against the U.S. dollar. Our EBITDA in Q2 2023 was $64 million or $71 million on an adjusted basis, and we had net income of $5 million for basic and fully diluted earnings per share of $0.02. On an adjusted basis, we had a net loss of $6 million or $0.02 a share. Cash flow from operations before changes in working capital was $81 million or $0.26 a share. Included in that cash flow from operations is a receipt of an additional $10 million from the gold prepaid arrangement. If you back out those funds, we generated $71 million in cash flow from operations or about $0.20 a share.

In terms of liquidity and capital position, we ended the quarter with $174 million of unrestricted cash and $127 million available to draw on our credit facility, giving us total liquidity of a little over $300 million. We did draw the remainder of the revolver on August 1. And — further to the gold sale prepaid transactions entered in Q1. As I mentioned, we did enter into an additional gold sale prepay on June 23, whereby with one of our — one of the members of the syndicate that provided the prepay, we received $10 million in exchange for delivering to the lender, 263 ounces of gold per month from October 24 to July 26 for a total of just under 6,000 ounces. Those terms reflect — and that delivery period reflects that of the prepay that we did earlier in the year.

Concurrent with the execution of the gold prepay sale transaction in June, we entered into financial swap agreements that fixed the gold price relating to that $10 million at $21.09 per ounce. Net debt increased from $113 million at the end of Q1 to $548 million — pardon me, going from $548 million to $661 million at the end of Q2. On Slide 7, what does that mean for Greenstone? Based on progress to date, we believe our share of the remaining construction budget is about $170 million, and we expect to fund that through our cash that we had to the end of the quarter, our operating cash flow and the final draw on the revolving credit facility. Additionally, we still have the $100 million accordion feature in place. And with those sources of liquidity, as Greg mentioned, we believe we’re well funded to complete Greenstone construction.

With that, I will turn the time over for Doug to review the operations.

Doug Reddy: Thanks, Pete. So as mentioned earlier, we had a very good first half of the year, and we are looking at pushing hard to deliver strong production in the second half. We’ve noted before that about 55% of production this year is in the second half of the year. have Mesquite. The Brownie pit provided a majority of new ore, about 90% of the ore going to the leach pad and re-leaching on portions of the pad also contributed significantly to the Q2 gold production. Mining costs at Mesquite benefited from a drop in diesel prices. And just, for example, the current price is about 30% lower than it was in Q2 last year. Process costs were reduced through a reduction of cyanide and lime usage. We don’t see that staying the same in the second half because we plan on stacking more in the second half.

So the overall cost will go up on cyanide mine. At Castle Mountain throughput has increased 40% since the start of the year in the crusher and the crusher run time is up by about 30%. We continue with modifications to the crusher setup and we’re planning for those additional modifications to be implemented in Q3. At Los Filos, productivity improvements were seen in both open pit and underground. Open pit has about 15% higher productivity, along with loading improvements and an increase in effective operating hours. For underground is about 23% increase in the ore tonnes being mined. So although we — but although we have more tonnes going to the leach pad, we did have some challenges on the leach pad that we’ve been addressing. These include some higher copper ore coming from the Guadalupe open pit.

I do note that this is only a portion of the ore, and it represents about 12% of the tonnes being stacked for the remainder of the year. We also had issues with solution management related to some broken pipes in one area of the pad. Those have since been repaired and the pregnant solution in that area where the breakage occurred needs to be drained. That impacts about 8,000 ounces that is slow in coming out of the pad. It will come out. It’s just going to be slower to get coming out than originally anticipated. And we also had one portion of the leach pad, which had to be turned again and leached again after a carbonate precipitation occurred, which was hindered recovery. That impacts about 4,000 ounces. Again, those ounces will come out in the second half of the year.

At Aurizona, — in addition to the current mining contractor, we also mobilized a second contractor with articulated dump trucks. They’ll be in for most of the rest of 2023. They came in during the rainy season. The rainy season is over now. We’re putting a big push on the mining and to establish a larger stockpile in advance of the next rainy season. At Fazenda, we’re currently mining mostly from open pits while the underground also catches up on development, and we’ll work on bringing additional stopes into production. Drilling continues on the reserve replacement program at Fazenda. It’s been successful every year, and we continue doing that to get successful in replacing reserves every year. At RDM, we had good performance from the owner-operated fleet.

That fleet is a combination of our own trucks plus 15, 60-ton rental trucks — the increase in mining of higher grade ore has brought the production up significantly in the quarter. And the mill feed is — I’ll note that mill feed is also being augmented with low-grade stockpile if there is any availability in the mill. At Santa luz, the team continues to gradually bring recovery up, and the plant had an average overall recovery of 67% in the quarter. We are targeting 70% or better for the remainder of the year, and the team continues to work on process and throughput improvements. So moving on to Greenstone. I get the pleasure of being able to speak about a really good story on construction progress, and the team has done a great job. We put out the Greenstone update news release on Tuesday and provided a complete summary of the project status.

Essentially, the project is on budget and on schedule for H1 2024 production. Moving on to the next page, looking at progress. Overall progress at Greenstone is 85% complete, which is comprised of construction at 83% complete, engineering is 100% complete and procurement 87% complete. Capital spend at June 30 is $937 million, which is 76% complete of the budget on a 100% basis. And we have approximately $170 million remaining as Equinox Gold’s share to fund through to project completion. Facilities handed over to operations so far are the permanent effluent water treatment plant, truck shop, warehouse, sewage treatment plant, potable water treatment plant, the pit and plant site fuel stations, reagent storage building and site mix emulsion or explosive plan.

The Ministry of Transport Petrol Yards been turned over to the ministry and the dismantling of the [ Oppatrol ] yard is now complete. Highway 11 realignment is also complete and has now been transferred to the ministry and was open to the public a few days ago. And the natural gas pipeline to site has been commissioned and is now operational. Plant site is 75% complete. The TSF is 80% complete. Operations are now at 240 employees. We’ll get to around 360 employees by year-end. We look forward to hosting an analyst and investor visit in early September. And now moving on to our other expansion projects. At Castle Mountain, the — we continue in permitting. We’ve responded to queries from BLM, and we anticipate permitting being complete in 2025.

In the meantime, it continues with engineering work and with [indiscernible] to support the Phase II of Castle Mountain. At Aurizona, as Greg mentioned, we’ve been advancing the engineering studies, and these incorporate additional drilling and the recent work looked at the underground mining at a higher production rate given the large scale of the underground resource. And we see benefits in continuing to advance our studies on operating with both open pit and underground to concurrently fill the plant. So we are looking — we are planning on developing an exploration decline in H1 2024, which would provide us an opportunity to develop down to one of the ore zones, mine in the ore zone and enable collection of geotechnical and hydrogeological information on ore and Wallrock.

The plan is to have a fully dimensioned decline that would serve as a production access and would also enable a rapid start to underground production when we’ve completed our additional studies. And then at Filos, we continue to assess the opportunity to invest in CIL, but we do remain focused on having the right climate in Mexico and within the region before committing to the major investment. And while we also have competing opportunities for capital investment on other projects. So with that, I’m going to hand it back to Greg.

Greg Smith: Thanks, Doug. I think I’ll just make a final comment here to thank the entire Equinox Gold team in Vancouver and at all of our sites as well as our shareholders and other stakeholders for their continued support. And finish up there and pass it back to Rhylin for Q&A. Perfect.

Rhylin Bailie: Thanks. [Gillian], can you please remind people how to ask a question?

Operator: Certainly. [Operator Instructions] We will pause for a moment as callers during the Queue.

Rhylin Bailie: Thank you. Well, there’s no online questions yet. So you can go ahead and take questions from the phone, please.

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Q&A Session

Operator: The first question is from Kerry Smith with Haywood Securities.

Kerry Smith: Thanks, operator. Congratulations on a good quarter. I had a couple of questions, Greg. First one was on Greenstone. There was $177 million of contingency built in to that $1.3 billion CapEx. How much of that have you actually spent so far on the project? Has it been roughly proportionate to the percentage spend that you’ve completed on the project? Or has it been more or less?

Greg Smith: No, it’s roughly proportionate, Kerry. And when we talk about amounts left to spend, we’re assuming that we go through that contingency. So it was included in the initial total budget amount, we think we’re going to come in at that total budget amount.

Kerry Smith: That’s helpful. And then the second question I had, just on the convertible notes, the $140 million that are due next April, what is the plan or the strategy to deal with those notes to try and roll them out?

Greg Smith: Yes. It’s something we’ve been kind of working on recently. I think that there’s a couple of options. Obviously, our first choice would be that they’re well in the money, and we issue that equity. But you can’t always plan for that. So we are talking to the holders Moats, who are very constructive. And of course, we have other options available to us in terms of the market. So it is something that’s on our radar carry and at some point, we’ll report what we’re doing on that specifically.

Kerry Smith: Okay. But do you think you’d have a strategy in place by Q3? Or is that something that’s going to fall into next — early next year?

Greg Smith: Whenever you’ve got debt maturing within a year, and especially when you’re in a large capital program like this, I think it makes sense to be ahead of it rather than too tied up against it. So if we can have something done over the course of the next several months, I think that would be our preference

Kerry Smith: Yes, I agree. Okay. And then the last question I had, how much CapEx do you think they will be left to fund for Greenstone in 2024?

Peter Hardie: Kerry, it’s Pete. We believe $170 million will get us through to the point where we don’t need to fund CapEx anymore. So the budget that we prepared assumes that’s all of the CapEx that the partners are going to have to provide the project before it’s able to take care of itself and support itself.

Kerry Smith: And how much of that $170 million will fall into the next fiscal year, though, roughly?

Greg Smith: We’re on track for the $277 million we were going to spend this year. And sorry, I just — I don’t have that split between this year and next year at my fingertips.

Kerry Smith: Okay. Maybe Rhylin send me a text after and just let me know what that number is, that would be helpful.

Operator: The next question is from Anita Soni with CIBC.

Anita Soni: I’ll just follow up on that. And I believe it’s $180 million that you spent to date or into June 30 up to $277 million. So I assume that’s about $70 million left for next year. Is that correct?

Greg Smith: Yes, Anita. Thanks for clarifying.

Anita Soni: Okay. So my — I have a couple of questions. Just firstly, on the leach inventory. I think there was some buildup in Q1 and then some additional buildup in Q2. Can you just give me an idea of how much is allocated to each one of the assets? I believe the majority is to Los Filos, right? Yes, that’s fair. Yes. Okay. And are there any others? I noticed like San talus and Mesquite, I had to put some inventory adjustments and to get into the cash costs and the ASIC that you were reporting.