Orla Mining - Q3 2021

Transcript

Operator (participant)

Welcome to Orla Mining's conference call for the third quarter of 2021. My name is Christy, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, you may press star followed by the number one 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 like to turn the meeting over to Andrew Bradbury, Director of Investor Relations of Orla Mining. Thank you. Please go ahead, sir.

Andrew Bradbury (Director of Investor Relations)

Thank you, operator, and welcome everyone to Orla conference for the third quarter of 2021. Joining me on the call this morning is the full executive team.

Jason Simpson (CEO)

Mining operations are ramping up and the processing facility is being commissioned, ore is already being stacked on the pad in anticipation of leaching. This is all leading toward first gold pour by year-end. We continue to deliver and appreciate the market's confidence in our ability to execute. We are now on the cusp of transitioning from a developer to a gold producer and the re-rate potential this offers. We also have advanced our other assets in the portfolio that will drive additional value for our shareholders in the future.

Notably, the Camino Rojo Sulfide Project in Mexico, the Cerro Quema Oxide Project in Panama, the Caballito copper-gold sulfide discovery in Panama, as well as advancing work on our large exploration package. Starting with construction of our first mine. On the project so far, safety and environmental performance have been excellent, and there have been no delays in construction due to COVID-19. We continue to support the vaccination of our employees and the various contractors that work on our site in order to maintain a healthy workforce. The team remains focused on their safety, health, and environmental responsibilities. At the end of October, there were 529 workers at the Camino Rojo project as part of construction activities. The number of construction workers on site has been steadily decreasing in the second half of 2021, as many areas of construction have been completed.

Once Camino Rojo reaches commercial production, Orla expects to have approximately 300 workers at Camino Rojo, with most being Mexican nationals. Of note, Orla's employees ratified a collective bargaining agreement in early October. Another important milestone as it solidifies the relationship with our employees and the elected union, while standardizing a set of fair and competitive benefits for all employees. Construction of the Camino Rojo Oxide Project remains on schedule and is 96% complete at the end of October. Mechanical completion and many other employees, consultants, and contractors. In addition to being on schedule, construction remains on budget. Camino Rojo capital expenditures totaled just over $24 million in the third quarter, bringing the project total to $106 million at the end of September. This is out of an initial capital estimate of $134 million.

At the end of October, capital expenditures totaled $111 million. Capital expenditures have been in line with estimates, and we believe a major contributor is due to our early procurement efforts. During the quarter, we closed with a $35 million non-brokered prospectus financing. At quarter end, we had a cash balance of nearly $51 million, and at the end of October, at approximately $42 million. With about $20 million remaining on the project spend and over $40 million in cash, we have sufficient cash to complete the project. From a cash flow timing standpoint, some of the payables for the remainder of the project will be paid in early 2022, when we are producing gold and generating cash. During the quarter, we had a net loss of $9.6 million or $0.04 per share.

Thank you to our financial teams across the business, whose efforts are often unseen but are always appreciated. I'll now pass the call over to Andrew Cormier, our COO, to discuss the construction progress in greater detail. Andrew?

Andrew Cormier (COO)

As Jason mentioned, the project construction is on track and 96% complete at the end of October. The progress made on-site during the third quarter was very impressive, and the project has accelerated, as can be seen in many of the photos shown today. Mining operations commenced during the quarter, and we are ramping up drilling and blasting, loading and hauling. Construction of the primary and secondary crushers was completed and commissioning is currently in progress. On the process side, the installation of the heap leach pad was completed on cell one. Meanwhile, the construction of cell two of the heap leach pad is expected to be completed during the fourth quarter. Construction of the pregnant solution pond and the Merrill Crowe plant are also complete, with commissioning activities currently underway.

We are pleased to announce that in late October, the Camino Rojo site was connected to grid power, and the entire site is now energized and will not require diesel gen sets for operations. The 176-person permanent camp is complete, housing our Camino Rojo employees and contractors. Our permanent offices, medical clinic, and security buildings are also complete and being utilized. We anticipate the addition of cyanide to the heap leach pads in the coming days as we complete the remaining commissioning steps in the Merrill Crowe plant. Year to date, we have mined over 1,100,000 tons of ore at an average grade of 0.75 grams per ton of gold and mined over 1,100,000 tons of waste.

Year to date, over 900,000 tons have been crushed, and over 375,000 tons of ore has been stacked on the heap leach pad. To date, the mined gold grades are reconciling well to the block model. Here we have a photo of our primary and secondary crushing circuit and crushed ore stockpile. In the background, we can see the waste dump and the mine maintenance shop. In the photo on the left is our stacker that is placing ore on the heap leach pad. The photo on the right, we have our heap leach pad, with cell one in the foreground and the grasshopper conveyors that carry the ore from the crushed ore stockpile to the stacker. In the background, we have cell two, which is currently in the process of being lined. With that, I'll pass it back to Jason.

Jason Simpson (CEO)

Thank you, Andrew. Now an update on the Camino Rojo sulfide project, also in Mexico. As we know, this project has size and scale, and we are working to maximize value for Orla shareholders by evaluating the development options in a systematic manner. To remind everyone, the development scenarios being considered to form the basis of a PEA include, number one, an underground mining option with processing at a to-be-constructed sulfide facility at Camino Rojo, or two, an open pit mining option with processing at a to-be-constructed sulfide facility at Camino Rojo, or three, an open pit mining option with processing at Newmont's nearby Peñasquito plant. The positive drill results in the sulfide deposit released earlier this quarter confirmed the presence of wide, higher grade gold zones. The recent data will help refine the geological model and guide mining scenario evaluation as part of a PEA.

The positive drill results also demonstrate the need for additional drilling at this more optimal drill orientation to understand the higher grade zones within this large mineralized envelope. This optimal orientation is perpendicular to key structures and across the steeply dipping sulfide vein sets. The drilling also provides material for metallurgical test work. The initial results of the metallurgical program were encouraging, and we are in the process of geo-metallurgical modeling the deposit, to define the distribution and types of mineralization and possible processing options. We will release the results from this metallurgical work shortly. This new understanding of the grade distribution and metallurgical behavior will guide the development planning for this deposit. This project has tremendous potential, and with each step, we are getting closer to unlocking the value within this large resource.

I would like to thank our global technical team, led by Sylvain Guerard, who is supported by Hans Smit and other capable consultants. During the quarter, we announced the results of a pre-feasibility study at our Cerro Quema oxide gold project in Panama. We subsequently filed the supporting technical report. This PFS demonstrated that we had the possibility of another low-cost, high-return heap leach project with an estimated NPV of $176 million and internal rate of return of 38%. Annual average gold production of 81,000 ounces over a six-year mine life, resulting in an annual free cash flow of $62 million at $1,600 gold, all after tax.

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 all-in sustaining cost of $626 per ounce. Another tremendous cash generator like the Camino Rojo oxide project. We understand the mining concession renewal and environmental permit is awaiting final government sign-off. We will continue to advance the project engineering once the necessary government permissions are received, enabling a future construction decision. Like Mexico, our Panama is also multilayered. In the Cerro Quema district in Panama, we have the oxide gold project I just described, coupled with a sulfide copper-gold discovery and significant exploration potential. We are working on an initial resource for our copper-gold discovery, which could provide a second phase to our development plans in Panama.

We are planning regional exploration drilling on the extensions of mineralized intersections, as well as new geophysical and geochemical anomaly targets. The names of such targets include La Pelona and Quemita, as well as La Prieta, which has been defined by our geologist as a highly prospective porphyry target. Cerro Quema Oxide Project remains the priority due to its advanced status, and we are also enthusiastic about the opportunity for new discoveries and the potential to become a copper-gold district. We are now counting down the weeks, not months, until first pour, and we will be excited to share that news with you. While first pour is an important symbol, our next priority is to ramp up operations to a steady state of 18,000 tons per day. Additionally, we will provide updates on the Camino Rojo Sulfide metallurgical testing and next steps towards a PEA for the project.

Finally, we are working on our first copper-gold resource for the company. In September, we were once again acknowledged as a top 30 performer over the prior three years on the Toronto Stock Exchange. And while past performance is not predictive of future success, we believe our formula for generating shareholder value has been effective. As explorers, builders, and operators, we will continue to convert mineral resources into shareholder value. At this point, I'd like to open the call to questions and turn it over to the operator.

Operator (participant)

At this time, ladies and gentlemen, if you would like to ask an audio question, press star, then the number one on your telephone keypad. Once again, that is star, then the number one for any audio questions. Your first question will come from the line of Bryce Adams with CIBC Capital Markets. Please go ahead with your question.

Bryce Adams (Equity Research Analyst)

Yeah. Hi, Jason and team. Thanks for the presentation and for taking my question. The oxide construction project appears well managed, and we look forward to your first gold update in the near term. I wanted to ask about the timing for the Camino sulfide PEA update. In the last update, I think that was targeted for about now in Q4 or somewhere near to year-end, but I didn't see that repeated in the recent disclosure. Maybe I missed it or maybe it's changed. What's the current timing for that sulfide PEA?

Jason Simpson (CEO)

Yeah. Good morning, Bryce, and thanks for the question. The answer is that the PEA for the sulfide project is certainly going to slip into 2022. Our initial timing was hopeful that we'd be able to deliver it by year-end. But with the new drilling information and soon-to-be-released updated metallurgical information, at that time, we're going to reset the timing for the PEA. We have to take into consideration this positive drill results and an upcoming metallurgical information as part of the PEA development planning. So look for that metallurgical update, at which point we'll give you a new update on when you can expect the PEA on this deposit.

Bryce Adams (Equity Research Analyst)

Okay. So when you say it's slipping to 2022, I start thinking early 2022, but then with all the metallurgical work ongoing, maybe it's not early, maybe it's mid to late 2022. Would that be correct?

Jason Simpson (CEO)

Well, the reality is we haven't made the decision yet, and it comes down to a decision we'll need to make, which is, do we want to conduct more of this better-oriented drilling to contribute to the PEA, or are we going to publish the PEA and then enhance it with this additional drilling? As you recall, Bryce, from the drill results, we have 15 intersections into this deposit at the more optimal angle. That information will need to be expanded with a second phase of drilling, probably another 8,000 or so meters.

What the team is also doing, and the reason we haven't made the decision on whether we're gonna wait for that second phase of drilling, is they are using this new drill information to reanalyze the previous drilling. And although it wasn't done at an optimal angle, we can use it to generate some updated geological models, as well as, with the new metallurgical information, a geometallurgical model. So I think it'd be premature for me to be too specific about the timing in 2022. To be clear with you, right now, that can be early to late on that second phase of drilling that I've explained.

Bryce Adams (Equity Research Analyst)

Okay, thanks, Jason. You're breaking up a little bit there, but I think I got most of that. I'll just say that, yeah, we're pretty excited to see the PEA and see which one of the three scenarios you talked about. Interested to see which one of those scenarios becomes the base case scenario. And, and that's it for me. Thanks a lot.

Jason Simpson (CEO)

Thanks, Bryce.

Operator (participant)

Your next question will come from the line of Andrew Mikitchook with BMO Capital Markets. Please go ahead with your questions.

Andrew Mikitchook (Managing Director)

Jason, congratulations on to you and your team for navigating so close to the final first gold pour. We're all looking forward to it. Can you just give us some sense of the trajectory of what you guys are kind of guiding us to expect or what you want to see in terms of a stacking rate onto the heap leach? You've given us kind of the stacked to date, but I don't know if you want to give us a monthly or a run rate or when you want to reach your run rate, just so we have some sense of what you're expecting and what we should expect.

Jason Simpson (CEO)

Yeah. Good, good morning, Andrew. Certainly, in terms of the stacking, I'll use your question to remind everybody that we will be ramping up the operation during Q1 2022. By the end of 2022, to answer your question, is when we would like to hit the steady state stack rate of 18,000 tons per day consistently. So that's the timing for that. We will also be providing guidance, not only on the tonnage stacked for Q2 to Q4, but also the gold production. And before we do that, we need to present and have firm ore as well as gold and costs.

Andrew Mikitchook (Managing Director)

Okay. Well, thanks, thanks for that outline, and we will all look forward to the further guidance that'll come early in the new year. I'll hand the questions over to somebody else.

Jason Simpson (CEO)

Thanks, Andrew.

Operator (participant)

Once again, ladies and gentlemen, that is star then number one for any audio questions. At this time, there are no further questions.

Jason Simpson (CEO)

Thank you, operator. Since there are no further questions, I would like to thank our team for their continued efforts in advancing all of our key projects. Never hesitate to reach out to Orla should you have any follow-up questions. Thank you for your time.

Operator (participant)

Ladies and gentlemen, thank you for participating in today's Orla Mining third quarter 2021 results. You may disconnect at this time.