Orla Mining - Q2 2021

Transcript

Operator (participant)

Welcome to Orla Mining's conference call for the second quarter of 2021. My name is Faith, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad.

If you would like to withdraw your question, press the pound key. Please be advised that this call is being recorded. I would now like to turn the meeting over to Andrew Bradbury, Director of Investor Relations of Orla Mining. Please go ahead, Mr. Bradbury.

Andrew Bradbury (Director of Investor Relations)

Thank you, operator, and welcome everyone to Orla's first quarterly call in anticipation of our transition from a developer to a gold producer. We have the full executive team on the call this morning, including Jason Simpson, President and Chief Executive Officer, Etienne Morin, Chief Financial Officer, Andrew Cormier, Chief Operating Officer, and Sylvain Guerard, Senior Vice President, Exploration. Before we begin, I'd like to remind you that during today's call, we will be making forward-looking statements.

I would invite you to review the cautionary language on the first slide of today's presentation, which describes some of the risks and uncertainties that may affect Orla's performance in the future. I'd also like to mention that unless otherwise indicated, all dollar amounts discussed today will refer to US dollars.

As we've articulated many times before, we believe we have the right formula for creating value through combining a high quality asset base with an experienced management team and board, along with a contingent of supportive, strategic and institutional shareholders. Today, the team will walk you through how we are executing and advancing our projects as we move towards first pour and producer status.

We will provide a progress update of construction activities at Camino Rojo, where work accelerated in the second quarter of the year. Construction remains on budget and on schedule. We also released exciting results earlier this week from the drill program at the Camino Rojo sulfides. The purpose of the drilling was to confirm higher grade zones predicted by our geologists, and it accomplished just that. We identified meaningful intercepts of grade and width that will influence our ongoing development planning.

We also recently announced the results of the pre-feasibility study at Cerro Quema in Panama. Similar to Mexico, this project has modest capital and operating costs, resulting in outsized margins. We view Cerro Quema as a great opportunity for organic growth, and once established in Panama, we believe there is a strong prospect for additional gold and copper discoveries. With that, I'd like to pass the call over to Jason Simpson, Orla's President and CEO.

Jason Simpson (CEO)

Thank you, Andrew. In 2020, we took many great steps toward becoming a gold producer, and we've carried that momentum through the first half of 2021. We believe we have an opportunity to build Orla into a highly valued, geographically diversified, low-cost gold producer. To do so, we must take considered and methodical steps. The team is advancing this strategic plan.

Before I get into the details, I would like to remind everyone of our portfolio. We have assets in Mexico and Panama. Both countries have oxide projects with low capital cost, low strip ratio, open pits, amenable to heap leaching. This produces high margin ounces that can be delivered to market quickly. Both countries also have large sulfide discoveries and great exploration potential, which will prove to be tremendous value generators.

Each year, we outline milestones connected to our strategic plan that will build value for the company. That approach has resulted in us being a top 30 performer on the entire Toronto Stock Exchange over a three-year period. This slide shows our value building milestones for 2021. Construction of the Camino Rojo oxide project is our top priority. Camino Rojo sulfide development planning also continues.

We are updating the engineering for our oxide gold project in Panama, as well as advancing our copper-gold discovery there. Finally, identifying targets for the next phase of exploration in both nations. Project to date, safety and environmental performance has been excellent, and there have been no delays in construction due to COVID-19. The team remains focused on their safety, health, and environmental responsibilities.

At the end of the second quarter, we had over 1,000 people on site, most of which are from the local region and state of Zacatecas. As mentioned, construction at the Camino Rojo oxide project is on schedule and on budget, and we continue to target first pour by year-end, with full commissioning and ramp-up to take place in the first quarter of 2022.

Construction is 61% complete at the end of July, and only the remaining engineering and procurement activities are related to supporting the construction field work. Our early procurement has been paying off, and we have greatly reduced our exposure to current global inflationary pressures. Capital expenditure for Camino Rojo totaled about $27 million in the second quarter and totaled $82 million for project to date as of June 30....

out of a total project capital expenditure estimate of $134 million. At the end of the second quarter, project capital committed totaled $116 million, with expenditures and commitments to date in line with estimates. Sergio Sáenz leads our construction team in Mexico and is supported by M3 Engineering and with many other employees, consultants, and contractors. On behalf of the company, thank you.

During the second quarter, we completed the final drawdown of $50 million on our project finance facility, with the funds being used for the Camino Rojo oxide project. By June 30th, the company had cash and cash equivalent of $51 million. Subsequent to quarter end, we announced a $35 million non-brokered prospectus financing, which was priced at market.

The financing was subscribed to by accredited investors, including a large institutional investor, Pierre Lassonde, Agnico Eagle, and Trinity Capital. The net proceeds will be used for development activities at Camino Rojo oxides and Cerro Quema oxides, exploration activities, technical studies on the Camino Rojo sulfide project, and general corporate purposes.

We would like to thank our shareholders for their continued support. Costs at Camino Rojo are tracking to budget, and we still have over half the contingency unallocated, with sufficient cash to complete the project.

Now, with an additional $35 million via the equity financing, we have more cushion for ramp-up and our growth projects. I would like to acknowledge the often unseen efforts of our financial teams across three countries to ensure the business is correctly accounted for.Now I'll pass the call to Andrew Cormier, our COO, who just returned from Camino Rojo, to discuss the construction progress.

Andrew Cormier (COO)

Thank you, Jason. Earthmoving and concrete pouring were largely completed in the first half of the year, and most major equipment has been received on-site. Structural and mechanical installations began to accelerate in Q2, and we have made strong progress on the crushing and conveying circuit, the Merrill-Crowe plant, power line, the heap leach pad, and process ponds.

Drilling and blasting in the open pit has commenced, and overliner material is being placed on the leach pad. Activities for the remainder of the year include: complete the connection of the power line, which is expected to be energized by mid-August.

Complete the heap leach liner and piping installation, as well as the electrical and instrumentation installations. Ramp up the open pit mining, commissioning of equipment, and commence ore crushing, stacking, and leaching. Here we have the explosives magazine on the left to support our production blasting. On the right, we have the site camp that has started to have occupants. A photo of the reclaimed tunnel and freshwater storage. With that, I'll pass it back to Jason.

Jason Simpson (CEO)

Thank you, Andrew. Now an update on the Camino Rojo sulfide project in Mexico. As we know, this project has size and scale as well as a significant amount of historical drilling. To maximize the value for Orla shareholders, we are evaluating the development options in a systematic manner.

The development scenarios being considered to form the basis of a PEA include, 1, an underground mining option with processing at a to-be constructed sulfide facility at Camino Rojo, or 2, an open pit mining option with processing at a to-be constructed sulfide facility at Camino Rojo.

3, an open pit mining option with processing at Newmont's nearby Peñasquito plant. By any measure, this project has tremendous optionality, and the data will lead us toward a development pathway. This week, we released drill results from an infill directional drill program on the resource.

Our team is integrating this data from the drill program into an updated geological model. We will then update the sulfide mineral resource estimate. Metallurgical test work and ore sorting studies have begun and are building on the prior work completed. Timing of the PEA publication will be dependent upon which scenario we select and the data we require to support the study.

The vast majority of historical drill holes at the Camino Rojo sulfide zone had been oriented south to north, intersecting the mineralized zones at a highly oblique angle. This orientation made it somewhat challenging to establish the continuity and geometry of high-grade domains.... Our technical team believes that additional drilling has the potential to outline and better define continuous zones with grades appreciably higher than the average resource grade.

14 holes from the recent drill program were oriented perpendicular to the structure and across the steeply dipping sulfide veins. This yielded numerous significant mineralized drill intercepts and appears to confirm the presence of higher grade portions of the deposit. This additional drilling data will be valuable as we assess all development options, notably the underground mining scenario.

I would like to thank our global technical team, led by Sylvain Guerard, for the impressive results, and Hans Smit for continued advice on the sulfide study work. Exploration in Mexico this year includes existing deposit expansion and regional target identification. We will add ounces from the Fresnillo land we acquired, and we will target additional shallow oxide deposits we can put through the infrastructure being constructed. The regional exploration efforts in 2021 are focused on defining future drill targets.

An airborne drone magnetic survey, radiometric and soil geochemical surveys are in progress, and IP is planned to assist with the definition of targets. Shifting to another country and another project, we recently announced the results of a pre-feasibility study at our Cerro Quema oxide gold project in Panama. This PFS demonstrated that we have the possibility of another low-cost, high-return heap-leach project with an estimated after-tax NPV of $176 million and after-tax internal rate of return of 38%.

The previous owner of the project completed a PFS in 2014, and we felt it was necessary to update the engineering and costing. This would allow us to move toward a construction decision once the necessary permits have been received. The most significant design change is a much more thorough evaluation of the water balance and the respective water management systems.

Overall, our team was seeking a more robust engineered environmental control. The new mineral reserve estimate is nearly 22 million tons at a gold grade of 0.8 grams per ton, resulting in 562,000 gold ounces, an increase of approximately 15% from the prior study. The project has an estimated 6-year mine life, based on ore processing rate of 10,000 tons per day. Initial capital expenditures for the Cerro Quema project are estimated at $164 million.

Capital and operating costs have been updated to consider inflation and reflect the additional work completed. Cerro Quema's low stripping ratio of 0.66 to 1, high gold recovery of 87%, and low operating costs all contribute to a low estimated all-in sustaining cost of $626 per ounce.

Like the Camino Rojo feasibility study, the PFS economics were conducted using a gold price of $1,600 per ounce, silver price of $20 per ounce, in line with long-term consensus pricing. Cerro Quema is estimated to produce 81,000 ounces of gold per year and is expected to generate $62 million in annual average free cash flow with base case pricing. Another manageable project for Orla with impressive margin and economics.

Our team in Panama is led by Sean Spraggett, and I would like to thank our team, as well as the independent experts supporting the preparation of the PFS, which includes Kappes, Cassiday & Associates, Moose Mountain Technical Services, Resource Geosciences, Anddes Associates, HydroGeoLogica, and Linkan Engineering, with input from other consulting groups. A NI 43-101 compliant technical report will be filed within 45 days of last week's release.

We understand the mining concession renewal and environmental permit is awaiting final government sign-off. Permit receipt by year-end could dovetail nicely with gold production and cash flow from Camino Rojo. We will continue to advance the project engineering once the necessary government permissions are received, which would provide the basis for a construction decision.

Cerro Quema is underexplored, and there is a potential to discover both additional gold mineralization similar to La Pava and Quemita, and copper gold mineralized zones similar to Caballito.... Our exploration team, led by Sylvain Guerard, is enthusiastic about the opportunities in the country.

While we did not include it in the recent PFS, the Caballito copper gold sulfide discovery is very promising, and we expect to release a resource on Caballito in the near term. The recent exploration efforts have been focused on refinement and prioritization of drill targets.

In addition, the geophysical IP survey completed in early June led to the definition of a significant chargeability anomaly at the La Prieta target. Our team is diligently focused on delivering first gold at Camino Rojo, which will set the foundation to build upon. Future growth opportunities are available through Camino Rojo sulfides, Cerro Quema oxides, and our prospective exploration program.

Successful exploration, building, and mining is how Orla intends to generate value for our shareholders. We will continue to deliver on our plans. Finally, an acknowledgement to Andrew Bradbury, who is doing an excellent job to make sure the company is presented properly. At this point, I'd like to open the call to questions. Operator?

Operator (participant)

Thank you, sir. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Again, that's star one on your telephone. We do have our first question from the line of John Sclodnick from Desjardins. Your line is open.

John Sclodnick (President)

Hey, thanks, guys, and, and thanks for hosting this call. I guess first question is whether the rainy season has been significant this year and if that's had any impact on construction progress?

Jason Simpson (CEO)

Hey, John. Thanks for joining us. Jason here. So, you know, generally, in Latin America, we try and time everything related to rainy season, but that's not always possible. And in this case, the timing was oriented around getting the liners down before the rains fell, and the majority of that work was done. Fortunately for our sites in Zacatecas, Mexico, you know, we do have to manage rain, but it is minimal, and because of the flat terrain, certainly manageable. So no is the answer. The rainy season has not stalled construction due to our preparation for it.

John Sclodnick (President)

Okay, thanks. I guess looking ahead a little bit, after you've got that first gold pour, I guess, what concerns you most in terms of the ramp up?

Jason Simpson (CEO)

Yeah, I think, you know, I think the things that we focus on will need to shift in 2022. And the way I describe it is what we should all be watching. You can count on management at Orla to be doing so: the stacking rate and making sure that we can consistently stack 18,000 tons a day. And really, that comes down to proving that the transition points along our conveyor systems are functioning well. So we'll work through, you know, those bottlenecks in the ramp up in Q1 of 2022 and should hit steady state by the end of Q1.

And then following that, what we'll all be watching for is the chemistry of the heap leach and making sure that our homework that was done over many years through metallurgical sampling is playing out in the field, and that the gold output from the heap leach is as expected.

We feel that we engineered the plant well, so those transitions and ability to stack at 18,000 tons a day are in good hands. And then we also feel like we've done our homework correctly with metallurgical testing so that we should have a predictable heap leach production.

John Sclodnick (President)

Right. Okay, thanks. I'll be looking out for that. And, yeah, I guess one more for me to hog the line here, but just that recent sulfide drilling you did, did that influence your thinking at all in terms of the development path for the sulfide project? You know, acknowledging that it's still early days there.

Jason Simpson (CEO)

Yeah, I think the fair answer is it certainly did. And the way I've always described it is, you know, we had a geological theory, and if the drilling did not confirm that theory, then that almost certainly would have taken any underground scenario off the table. So to answer your question, yes, it influenced it.

Now that we have confirmed, you know, what for some time, Hans and our entire global geological team has been proposing, our work ahead of us will need to be proving that that is representative of the entire resource. And so additional drilling will be required. It's great news. I'm glad that they were right.It's exciting, gives us more flexibility, and we look forward to continuing our study work with this new perspective.

John Sclodnick (President)

Right. Okay. Yeah, no, thanks. And, that is exciting. I'll look out for, for more results there. That's it for me, guys, and, thanks, Jason, for, for hosting this.

Operator (participant)

Again, to ask a question, you'll need to press star one on your telephone keypad. Again, that's star one on your telephone keypad. Your next question is from Ron. Ron Hubbard, from, which is a private investor. Your line is open.

Speaker 5

Does Orla have any concern about the drug cartels operating in and around the state of Zacatecas and the safety for our people and our investments? I'm told, but I don't know that it's true, that the state of Zacatecas has the highest murder rate in the country of Mexico. That may or may not be true. Thank you.

Jason Simpson (CEO)

Thanks for the question, Ron. I've been in Mexico for some time. I'm not sure about that statistic. I just came out of Guerrero, Mexico. They might be competing for that number. What I can say is that, you know, when you operate in many nations in the world and Mexico, certainly, we have to take the safety and well-being of all the people that work on our project and make sure that the risk to our investors is protected. And so we take that responsibility very seriously. And so, in...

For those of us who have worked in Mexico for a long time, there are security management processes that we follow that keep us clear of cartels in Mexico. We certainly are aware of them, and we stick to our business and make sure that our people, and by the way, that includes not only employees of Orla, but any contractor, supplier or anybody, a local resident that is supporting our endeavors in the state.

So I think the answer to your question is, you know, that security is something that needs to be managed in Mexico, like many other nations, and we take that responsibility to manage the security for all people that are relying on us very seriously.

To date, we have had zero security incidents on our construction site or related, and I think that is a function of the robust security and risk management plans we have. We understand our responsibility to protect our people and to protect our investors' investments.

Operator (participant)

Again, to ask a question, you may press star one on your telephone. There are no further questions at this time. I'll turn the call back to Orla's President and CEO, Mr. Jason Simpson.

Jason Simpson (CEO)

Thank you, Faith. Since there are no further questions, I would like to thank our team for their continued efforts in advancing our key projects. Never hesitate to reach out to Orla if you have any follow-up questions. We thank you for being present and your time.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.