Alamos Gold - Q3 2024

Transcript

Operator (participant)

Good morning. I'll now turn the call over to Scott Parsons, Alamos Senior Vice President of Investor Relations. Please go ahead.

Scott K. Parsons (SVP of Investor Relations)

Thank you, Operator, and thanks to everybody for attending Alamos's Third Quarter 2024 Conference Call. In addition to myself, we have on the line today John McCluskey, President and Chief Executive Officer, Greg Fisher, Chief Financial Officer, Luc Guimond, Chief Operating Officer, and Scott R.G. Parsons, Vice President of Exploration. We will be referring to a presentation during the conference call that is available through the webcast and on our website. I would also like to remind everyone that our presentation will be followed by a Q&A session. As we will be making forward-looking statements during the call, please refer to the cautionary notes included in the presentation, news release, and MD&A, as well as the risk factors set out in our annual information form. Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Senior VP, Technical Services, and a qualified person.

Also, please bear in mind that all the dollar amounts mentioned in the conference call are in U.S. dollars unless otherwise noted. Now, John will provide you with an overview.

John McCluskey (President and CEO)

Thank you, Scott. The third quarter marks the first quarter with the Magino Mine under our ownership, having completed the acquisition of Argonaut Gold in July. Reflecting the addition of Magino, as well as strong performances from Island Gold and the Mulatos District, we delivered record production in the quarter of 152,000 ounces of gold, and as guided all-in sustaining costs of $1,425 per ounce, increased from earlier in the year, reflecting the inclusion of higher cost production from Magino, with the operation undergoing a transition period. With year-to-date production of 427,000 ounces, we remain on track to achieve our full-year production guidance, which was increased by 13% in September, reflecting the inclusion of Magino and outperformance of Mulatos. We are also on track to meet our full-year cost guidance, with a marginal decrease in costs expected in the fourth quarter.

We achieved a number of new financial records in the third quarter, driven by record production and gold prices. This included our third consecutive quarter of record revenue, as well as record cash flow from operations, before working capital of $193 million. We continue to generate strong ongoing free cash flow, including $88 million in the quarter and $219 million year-to-date, while funding our high-growth, high-return initiatives. These include our latest exploration budget, excuse me, largest exploration budget ever, and the phase III expansion at Island Gold, which will be a driver of significant free cash flow in the years ahead. The third quarter was a transition quarter at the Magino Mine, as we implemented a number of improvements and advanced the integration of the operation with Island Gold.

The combination of the two mines is expected to create one of Canada's largest, lowest-cost, and most profitable gold mines, with significant long-term upside opportunities. This includes a centralized mill that can be expanded to support the significant exploration potential across the Island Gold District. In July, we provided a comprehensive exploration update at Island Gold, highlighting the potential. Based on our ongoing exploration success at Island Gold, we expect high-grade reserves to expand and the resource to increase for the ninth consecutive year. We are also defining opportunities to expand the Magino open pit and other near-mine targets like the North Shear, which could serve as a source of additional mill feed within an expanded mill. In September, we announced the development plan for PDA, outlining an attractive, low-cost, high-return underground project that is expected to triple the mine life of the Mulatos District to at least 2035.

Given the significant exploration upside at PDA and the nearby Cerro Pelon target, we see excellent potential to further extend the mine life and improve already robust economics. Scott will delve into the details of the upside potential later in this call. We were also recognized as a top performer by the Toronto Stock Exchange, with inclusion into the TSX 30, reflecting a 134% increase in our share price over the trailing three-year period. Given the number of catalysts we have coming up over the next year, we expect this strong performance to continue. This includes ongoing exploration updates, a Burnt Timber and Linkwood study later this year, and our mineral reserve and resource update early next year. This will be followed by an updated mine plan for the Island Gold District mid-2025 and a larger mill expansion study outlining upside scenarios for the district later in the year.

Turning to slide five, the addition of Magino complements our strong growth profile and has opened up longer-term upside opportunities. As outlined in our three-year guidance in September, Magino has increased our production rate by approximately 20% to 600,000 ounces per year. Our all-in sustaining costs have also increased approximately 11% but remain well below the industry average and are expected to decrease by more than 10% over the next several years. In 2026, completion of the phase III expansion is expected to push our annual production rate closer to 700,000 ounces of gold per year and decrease our all-in sustaining costs to $1,150 per ounce. Lynn Lake is expected to provide additional growth and takes us to a longer-term rate of 900,000 ounces per year while helping to drive all-in sustaining costs below $1,100 per ounce.

All of this growth is fully funded, and all of this growth is lower cost. What is not illustrated in this graph is the potential to further expand the Magino mill to between 15,000 and 20,000 tons per day, which could support additional growth and take consolidated production closer to 1 million ounces per year. I'll now turn the call over to our CFO, Greg Fisher, who will review our financial performance. Greg.

Greg Fisher (CFO)

Thank you, John. Onto slide six, we sold a record 145,200 ounces of gold in the third quarter at an average realized price of $2,458 per ounce for record quarterly revenue of $361 million. Our gold sales were approximately 4% lower than production in the quarter due to timing, with the sale of these ounces to benefit future quarters. Total cash costs of $984 per ounce and all-in sustaining costs of $1,425 per ounce were both up from earlier in the year, reflecting the inclusion of higher cost production from Magino. All-in sustaining costs were also impacted by higher stock-based compensation driven by the increase in the share price during the quarter. Excluding Magino, our total cash cost for the quarter would have been $118 per ounce lower and all-in sustaining costs $184 per ounce lower.

We expect our consolidated costs to decrease in the fourth quarter, reflecting a significant improvement from Magino. Given our strong year-to-date performance with costs well within the range of guidance, we remain on track to meet our full-year cost guidance. With the closing of the Argonaut acquisition on July 12th, it was a complex quarter from a financial perspective. This included a number of non-recurring items related to the transaction and retirement of Argonaut debt and near-term gold hedges. As part of the acquisition, we inherited 330,000 ounces of gold forward sale contracts between 2024 and 2027, hedged by Argonaut at prices ranging from $1,821 to $1,860 per ounce. In July, we completed a gold sale prepayment agreement for the delivery of 49,400 ounces in 2025 and used the proceeds of $116 million received to eliminate all of the Argonaut hedges in 2024 and 2025, which totaled 180,000 ounces.

This eliminated more than half the hedge book and has provided us with significantly higher exposure to rising gold prices. We continue to review opportunities to eliminate the remainder of Argonaut's hedge book, which is comprised of gold forward contracts totaling 150,000 ounces in 2026 and 2027. Our reported net earnings of $85 million, or $0.20 per share, include an impairment reversal on Young-Davidson of $39 million net of taxes, unrealized losses on hedged derivatives of $21 million net of taxes, unrealized foreign exchange losses of $2 million, and other adjustments net of taxes totaling $9 million. Excluding these items, our adjusted net earnings were $78 million, or $0.19 per share. Operating cash flow before changes in non-cash working capital increased to a record $193 million, or $0.46 per share.

Free cash flow totaled $88 million in the quarter, excluding $29 million of one-time payments related to the Argonaut acquisition, including transaction costs and overdue payables incurred by Argonaut but paid by Alamos post-close. Year-to-date, we have generated $219 million of free cash flow while continuing to invest in high-return growth. This strong performance has been led by the Mulatos District with mine site free cash flow of $187 million year-to-date and Young-Davidson, which is on track to generate record free cash flow of more than $100 million. Capital spending, including equipment lease payments, totaled $112 million in the quarter and included $38 million of sustaining capital and $68 million of growth capital, the majority of which was focused on the phase III+

expansion.

Our cash balance declined slightly quarter over quarter to $292 million, reflecting one-time costs related to the Argonaut acquisition, as well as the repayment of Argonaut debt. In total, we repaid all $308 million of debt inherited from Argonaut using existing cash and by withdrawing $250 million from our credit facility on much more attractive terms. With a strong cash position, more than $540 million of total liquidity, and solid ongoing free cash flow generation, we remain well-positioned to fund our high-return growth initiatives. I will now turn the call over to our COO, Luc Guimond, to provide an overview of the operations.

Luc Guimond (COO)

Thank you, Greg. Moving to slide seven, Young-Davidson produced 44,200 ounces in the quarter, a slight increase over the previous quarter, with all-in sustaining costs coming in above the top end of the annual guidance range. Mining rates were impacted by lower scoop availability, as well as reduced paste availability during the mill downtime in July for a planned liner change and other maintenance. The lower mining rates impacted access to higher-grade stopes, which have been deferred into the fourth quarter. Mining and milling rates improved in August and September and were back to guided levels of 8,000 tons per day by the end of the quarter. We expect higher mining rates and grades to drive production higher and costs lower in the fourth quarter. Young-Davidson continues to be a significant free cash flow generator, delivering $36 million in the quarter and $91 million year-to-date.

The operation is on track to deliver record free cash flow and more than $100 million for the fourth consecutive year. Over to slide eight, Island Gold produced 40,500 ounces in the quarter at costs consistent with annual guidance, a solid performance with significantly higher grades offsetting lower mining rates. Mining rates were impacted by scheduled downtime in July to upgrade the underground ventilation infrastructure. The ventilation upgrade was completed on schedule. However, the ramp-up of mining rates post-completion took longer than anticipated. Mining rates were back at planned levels by the end of August and increased to average 1,200 tons per day in September and October, where they are expected to remain through the fourth quarter. Grades increased to an impressive 14.6 grams per ton, reflecting the increased contribution of higher-grade stopes from the 1025 mining horizon and positive grade reconciliation.

With mining rates increasing in the fourth quarter, grades are expected to return to guided levels. Given the strong year-to-date performance, Island Gold is well-positioned to achieve its full-year production and cost guidance. The operation generated positive mine site free cash flow for the second consecutive quarter while continuing to fund the phase III plus expansion. At current gold prices, we expect Island Gold to continue self-funding all of the capital for the expansion, which will be a driver of significant free cash flow growth once completed in 2026. Over to slide nine, we close the acquisition of Argonaut Gold on July 12th, and the integration of the Magino and Island Gold mines is well underway.

Magino produced 16,800 ounces in the third quarter, down from the previous quarter, reflecting the partial reporting period, as well as downtime to implement various improvements to the crushing circuit, including replacement of the secondary crusher. Given the downtime and build-up of stockpiles, mining activities were focused on waste stripping, which will benefit future quarters. Mill throughput averaged 6,900 tons per day in the quarter but increased to 8,900 tons per day in September. Milling rates are expected to increase further in the fourth quarter following the completion of additional mill optimization initiatives, including replacement of the grizzly and primary crusher. These improvements are expected to support higher throughput rates of 11,200 tons per day in 2025, sufficient to process ore from both Magino and Island Gold. Increased milling rates and grades are expected to drive production higher and costs lower in the fourth quarter.

Ahead of the planned transition to a single optimized mill within the Island Gold District in 2025, 5,700 tons of lower-grade Island Gold ore was blended with Magino ore and processed through the Magino mill. The batch test was successful, with recoveries from Island Gold ore consistent with expectations and annual guidance of 97%. Furthermore, recoveries from Magino ore continued to exceed expectations, averaging 95% in the quarter, driven by the strong performance from the gravity circuit. With the upgrades to the crushing circuit expected to be completed by year-end, we are on track to begin processing Island Gold ore through the significantly larger and more cost-effective Magino mill in early 2025. Moving to slide ten, work on the Phase III+ expansion continues to advance, including good progress on the shaft sink.

The shaft is currently at a depth of 812 meters, double the 400-meter depth at the end of the second quarter, and more than halfway towards its ultimate planned depth of 1,373 meters. The bin house foundation has been completed, and erection of the bin house is ongoing. Paste plant construction activities are wrapping up, with detailed engineering and earthworks complete and foundations more than 50% complete. Construction on the haul road to the Magino mill is underway and expected to be completed by year-end. In addition, detailed engineering is advancing on the Magino mill expansion to 12,400 tons per day, which is expected to be completed in mid-2026 to coincide with the completion of the Phase III+ expansion. Over to slide 11. In September, we updated our initial capital estimate for the Phase III+ expansion to incorporate the addition of Magino.

Overall, initial capital has increased by 5% to $796 million from the initial estimate announced in the first half of 2022. This reflects ongoing inflationary pressures and scope changes to the project, which were largely offset by synergies from the Magino acquisition, as well as the weaker Canadian dollar. We are well past the halfway point on the project, with approximately 62% of the total initial capital of $796 million having been spent and committed at the end of the third quarter. The Phase III+ Expansion remains on track for completion in the first half of 2026 and will be a significant driver of our expected production growth and declining costs over the next several years.

Over to slide 12, the Mulatos District delivered another excellent quarter with production of 50,500 ounces, a slight decrease over the previous quarter as both tons and grades stacked at El Yaqui Grande declined, as expected. Production is expected to decrease further in the fourth quarter with grades stacked towards the lower end of guidance. Reflecting the strong year-to-date performance of El Yaqui Grande, Mulatos District production guidance was increased by 15% in September to between 185,000 and 195,000 ounces. The operation is well-positioned to achieve the increased production guidance, as well as its cost guidance for the year. With another strong operational performance, Mulatos District delivered $67 million of mine site free cash flow in the quarter and an impressive $187 million year-to-date, net of $75 million of cash tax payments. Over to slide 13.

In September, we announced the PDA development plan outlining an attractive high-return project that is expected to triple the mine life of the Mulatos District to at least 2035. At a $2,500 per ounce gold price, PDA has an after-tax net present value of nearly $500 million and an internal rate of return of 73%. PDA is expected to produce 127,000 ounces per year over the first four years and 104,000 ounces per year over the current eight-year mine life. The project has a low-cost profile with all-in sustaining costs of $1,000 per ounce and low initial capital of $165 million, which can be funded from Mulatos District free cash flow generation. We expect to start development next year, which would put first production as early as mid-2027.

There is also excellent exploration upside in the district that could extend the mine life further and enhance the project's already robust economics. I will now turn the call over to our VP of Exploration, Scott Parsons, to review the exploration success we are having in the Mulatos District.

Scott R.G. Parsons (VP of Exploration)

Thank you, Luc. Moving to slide 14. Over the past two years, mineral reserves at PDA have more than doubled to 1 million ounces, with grades also increasing 20% to 5.6 grams per ton. This growth to the end of 2023 was incorporated into the PDA development plan. As outlined in our exploration update in early September, we see excellent potential for the growth in higher-grade mineral reserves and resources to continue at PDA and other targets like Cerro Pelon. At PDA, we continue to extend high-grade mineralization beyond existing mineral reserves and resources within the relatively untested area between the PDA zones and Gap Victor. This included multiple high-grade intervals such as 5.4 grams per ton over 18 meters and 23.6 grams per ton over 3 meters.

Given our ongoing success at PDA and with the deposit open in multiple directions, we expect its mineral reserve and resource base to continue to grow, which represents upside to the PDA development plan. The addition of a mill to process higher-grade sulfides has also opened up other opportunities for growth within the district. One opportunity is Cerro Pelon, an open-pit mine we successfully operated between 2019 and 2021. Historically, high-grade mineralization was intersected below the pit but was not followed up on. Now that we will be constructing a mill, we are targeting and successfully expanding high-grade mineralization within multiple oxide and sulfide zones at Cerro Pelon. Step-out drilling below the open pit has identified high-grade feeder structures that range in size from 45 to 125 meters in width and up to 170 meters vertically.

Some of the highlights at Cerro Pelon include 5.5 grams per ton over 28 meters, 12.5 grams per ton over 6.5 meters, and 4.8 grams per ton over 15.8 meters. We expect this success to support initial underground mineral resource at Cerro Pelon with the year-end update. With Cerro Pelon well within trucking distance of the planned PDA mill, we will ultimately look to utilize this as an additional source of high-grade mill feed. Cerro Pelon represents an opportunity to not only extend the mine life of the PDA project but also sustain higher rates of production well beyond the first four years. Over to slide 15. In July, we announced one of the best exploration updates to date at Island Gold, reflecting the number of high-grade intercepts across the deposit.

To reiterate some of these exceptional results we are seeing, this included 37 grams per ton over 7 meters in Island West and 17 grams per ton over 10 meters in Island East. We are also seeing significantly higher-grade results from our delineation drilling program in the lower part of Island East, including 102 grams per ton over 17 meters and 135 grams per ton over 8 meters. Since we acquired Island Gold in 2017, we've added more than 5 million ounces of high-grade mineral reserves and resources, which currently total 6.1 million ounces. We've also seen reserve grades increase 12% to 10.3 grams per ton, and inferred grades increase 43% to nearly 15 grams per ton. Based on the success we're having in 2024, we expect another year of growth with a further increase in grades.

With the deposit open laterally and down plunge and multiple high-grade zones being defined in the hanging wall and footwall, we see excellent potential for this pace of growth to continue. This ongoing growth of Island Gold, the exploration potential we see at Magino, and the near mine targets like the North Shear all support longer-term expansion opportunities of the Island Gold District that we'll be evaluating over the next year. With that, I'll turn the call back to John.

John McCluskey (President and CEO)

Thank you, Scott. We've been a strong outperformer over the past three years. A large part of this has been driven by the continued execution on our growth plans, as well as our ability to consistently create value within our asset base through exploration success and expanding and optimizing our operations. Given the catalysts we have coming up over the next year, including a number of opportunities to continue to create value across our assets, we expect our strong performance to continue. This concludes the formal part of our presentation. I'll now turn the call back to the operator, who will open the call for your questions.

Operator (participant)

Thank you. We will now take questions from the telephone lines. If you have a question, please press star one. You may cancel your question at any time by pressing star two. Please press star one at this time if you have a question. The first question will be from Cosmos Chiu from CIBC. Please go ahead.

Cosmos Chiu (Executive Director of Institutional Equity Research Precious Metals)

Thanks, John, Greg, Luc, Scott, and Scott. Maybe my first question is on Magino. Good to hear it. The mill at Magino was successful in processing some of the lower-grade material coming from Island Gold. My question is, when will you start potentially testing out some of the high-grade material as well?

Luc Guimond (COO)

Yeah, hi, Cosmos. It's Luc here. Yeah, our intent is obviously we started with the lower-grade feed with the blending process just to validate obviously our assumptions with regards to a blended feed and not impacting any recoveries, which we validated. In this quarter, in Q4, we're actually looking to actually introduce higher-grade material. Also, again, we're not expecting any issues with regards to the blended process, but we're going to validate that from a plant perspective to validate obviously what we've seen from a lab perspective with regards to overall recoveries for the blended ore streams.

Cosmos Chiu (Executive Director of Institutional Equity Research Precious Metals)

Of course. And on that as well, you kind of touched on it in terms of 2025, but could you remind us in terms of the timeline for the integration of a single milling operation? I think you talked about 2025, also potentially early 2025. I'm just trying to figure out when this integrated single milling operation is going to happen. And at that point in time, would you just shut down the Island Gold, the smaller Island Gold mill?

Luc Guimond (COO)

Yeah. Yeah. Our plans have not changed from what we've communicated previously there, Cosmos. In early 2025, we're just running the Magino facility. So Island ore, as well as Magino ore, will feed into the one mill complex in early 2025. Once we start doing that, yeah, the intent would be to just actually shut down the Island Gold mill and just put it on care and maintenance, basically.

Cosmos Chiu (Executive Director of Institutional Equity Research Precious Metals)

And then in terms of reporting-wise, I think I asked this question in the past as well, but I just want to confirm, are you going to start reporting it as a single integrated operation from an accounting perspective and guidance perspective starting in 2025?

Scott R.G. Parsons (VP of Exploration)

Hi, Cosmos. This is Greg here. Yeah, that's correct. We'll show it as one integrated operation. So production costs will all be shown as one integrated operation.

Cosmos Chiu (Executive Director of Institutional Equity Research Precious Metals)

Perfect. And since I have you here as well, Greg, I guess today reported earnings, adjusted earnings were slightly below street consensus. I chalk that up to the fact that this is the quarter where you acquired Argonaut Gold. And you kind of talked about that as well. There were a number of one-time items that, what I would consider, accounting noise or one-time items. My question is, is this kind of like, is this it? Q3, is that it? Or could we expect any other items that we should consider into Q4 that might be related to this transaction?

Scott R.G. Parsons (VP of Exploration)

I mean, with respect to the Argonaut acquisition, yes, I'd say we've accrued all the P&L-related costs associated with that. I mean, you're always going to have the movement on share-based compensation, which we had a significant impact this quarter as the share price moves. But with respect to Argonaut, I think which is what your question was focused on, yes, we've accrued the cost associated with that acquisition and don't expect anything moving forward.

Cosmos Chiu (Executive Director of Institutional Equity Research Precious Metals)

Great. Thanks once again. Those are all the questions I have. Thank you.