Earnings Transcript for OCANF - Q3 Fiscal Year 2023

Operator: Good morning and afternoon, ladies and gentlemen, and welcome to the OceanaGold 2023 Third Quarter Results Webcast and Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Also note that this call is being recorded on Thursday, October 26, 2023 at 9

Rebecca Harris: Good morning, and welcome to OceanaGold’s third quarter 2023 results webcast and conference call. I’m Rebecca Harris, Director of Investor Relations. We are joined today by Gerard Bond, President and Chief Executive Officer; Marius van Niekerk, Chief Financial Officer; David Londono, Chief Operating Officer, Americas; Peter Sharpe, Chief Operating Officer, Asia-Pacific; and Craig Feebrey, Chief Exploration Officer. Also present is Brian Martin, Senior Vice President, Business Development and Investor Relations. The presentation that we will be referencing during the conference call 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. All dollar amounts discussed in this conference call are in U.S. dollars. I will now turn the call over to Gerard for opening remarks.

Gerard Bond: Thank you, Rebecca, and good morning, everyone. Thank you for joining us today. I’ll begin our overview of our Q3 results with safety. A 12-month moving average total recordable injury frequency rate at the end of September was 4.1 per million hours worked. This is a little above what we’ve reported previously, which would normally be concerned. However, this is coming off industry leading low injury rates and the nature of the injuries that we had have fortunately been low severity. We are committed to creating a safe workplace at OceanaGold. And in support of this, we are rolling out the OurSafe Behaviours program across our business, which is a proven program that focuses on our workforce being empowered to work safely and to mindfully identify risks before performing a task. From a production standpoint, OceanaGold produced just over 99,000 ounces of gold and 3,400 tons of copper in the third quarter. At the start of the year, we did expect Q3 to be our weakest quarter. However, as detailed in our September 14 news release, it turned out to be weaker than expected due to the poor grade reconciliation in the final benches of the Haile Mill Zone pit. Mining in Mill Zone is now complete. So that reconciliation issue is behind us and we have transitioned into a stripping phase at the Ledbetter pit. The third quarter was additionally impacted by disappointing production from Waihi, driven by an increased reliance on remnants stope material in the period. We expect to source more or from fresh stoping areas in the fourth quarter and finish the year with stronger production at Waihi. Despite its lower production, Haile celebrated a number of positive milestones in the quarter, including mining its 1 millionth ounce of gold since startup in 2017. Haile also delivered first development ore from the Horseshoe Underground in the third quarter. Subsequent to quarter end, Haile blasted its first stope and has now begun processing through the mill both stope and development ore. To think we only blasted the portal the beginning of the mine 13 months ago. We’re extremely proud of the team for achieving these milestones with the underground, safely and on schedule. At Macraes, the ball mill was repaired and returned to full operation in August with no further disruptions from this issue expected going forward. The rate of milling at Macraes is now higher than ever before as a result of some of the learnings derived through this repair period. And this high milling rate is why we expect the Macraes to perform strongly for the remaining of the year. During the quarter, we released some excellent exploration drill results at the Didipio [ph] with the results from both representing exciting upside to our current plans at those operations. Craig will share more about this later on the call. Moving on to guidance. Although Haile’s full year production guidance is now lower than originally expected, the strong performance and outlook at both Macraes and Didipio allows us to remain within our original group production guidance range. With three quarters behind us, we're tracking towards the bottom end of the original production guidance range for the year and have narrowed the top end of guidance to reflect these changes at a group level. Consolidated gold production guidance now sits at 460,000 to 490,000 ounces of gold with 347,000 ounces produced year to date. Copper guidance remains unchanged and we’re expecting to be towards the top end of the 12,000 ton to 14,000 ton range with more than 10,000 tons of copper produced so far this year. As mentioned, due to the lower production from Haile, our all in sustaining cost guidance of the year will consequently increase. We’ve updated group cost guidance to be $1,550 per ounce to $1,650 per ounce. Overall, total group CapEx and exploration expenditure is on track to be within our full year guidance of $330 million to $385 million. We know that delivering on production guidance is a key expectation in the market and our focus remains on delivering within original production guidance range while continuing to focus on operational efficiencies to safely and responsibly lower our cost in producing those ounces. Now to turn the call over to Marius who will provide an overview of our third quarter results.

Marius van Niekerk: Thank you, Gerard, and good morning, everyone. As Gerard has mentioned, our Q3 production performance was our weakest quarter of the year. Consequently, we generated negative $30 million of free cash flow during the quarter, which included higher pre-stripping and underground development costs at Haile. However, a strong first half and an improvement expected in Q4 still positions as well to continue to repay debt when appropriate and invest in organic growth opportunities across the business. During the quarter, we repaid $15 million on a revolving credit facility. And in October, we paid our semi-annual dividend of $0.01 per share, totaling $7.1 million. Year-to-date, we have generated $759 million of revenue, EBITDA of $312 million and net profit after tax of $102 million. Our Q3 net loss after tax of $6 million was significantly lower than the previous quarter. When adjusted for the non-cash unrealized foreign exchange loss and other items, this equated to an EPS of $0.00 per share, fully diluted, while operating cash flow equated to $0.08 per share, fully diluted. Our financial position remains strong with $172 million in net debt and liquidity of $175 million at the end of the quarter. At a leverage ratio of 0.41 times, we have the financial flexibility to continue investing in the exciting growth projects across our business. This quarter we accrued $13.9 million for the additional government share per the terms of the FTAA with the Philippines government. This is the first accrual and the final amount due for 2023 will be finalized at year end [ph]. Payable in Q2 of 2024, it was driven by strong operational performance and higher gold prices resulting in higher ounces and profitability. In broad terms, the Philippines government is entitled to a 60% share of net revenue once the company has effectively recovered its capital investment in Didipio. In Q3, we effectively crossed this threshold and expect to pay the additional government share moving forward. Net revenue is essentially a modified EBITDA calculation with all other taxes paid including production, income and withholding taxes forming part of the government share. It is in the nature of an income tax and for that reason excluded from AISC. With the first payment due in 2024 and given that additional government share payments are expected to continue annually thereafter, we will provide annual guidance based on the defined metal pricing assumptions going forward. I will now turn the call over to David to discuss the Haile operation.

David Londono: Thank you, Marius, and hello everyone. Third quarter gold production at Haile was 23,000 ounces. The quarter-on-quarter reduction was driven by lower-than-expected grades in the bottom benches at the Mill Zone pit. Mining from Mill Zone was completed on scheduled during the third quarter and has now transitioned to pre-stripping the next push back to Ledbetter pit, which is Ledbetter Phase 2. This will continue through the fourth quarter and our production from Ledbetter 2, we ramp up through the first half of 2024. As discussed in the recent September news release, Haile's full year production is now expected to be below the original guidance range set out at the beginning of the year. We have revised the range 140,000 to 150,000 ounces to reflect the year-to-date performance and as a result of the lower production we have also increased the 2023 cash cost and All In Sustaining Cost ranges. During the quarter, we continue [indiscernible] Haile, Horseshoe Underground with two rigs focusing on both grade control and resource conversion drilling from which we release some results in September. Craig will discuss more on those shortly. Now moving into Haile expansion; Q3 marked a significant milestone at Haile as we mined first development ore from Horseshoe underground. Ore was mined on two levels and stockpiled on the surface during the quarter. In mid-October, we blasted our first stope from the 1025 [ph] level and have begun processing the stope and the stockpile development ore to the mill. Continue to advance development as we ramp up to full production rates by the middle of 2024. Grade control drilling in advance production has returned results in line with expectations, giving us increased confidence for the three stopes that we plan to mine in Q4. The detailed planning and execution has resulted in delivering ore from the Horseshoe underground in the fourth quarter in line with our guidance to the market set forth at the start of the year. We are delighted to announce that we were able to mine our first stope ore in October and I commend the team for the great work in making this to happen safely. This project will drive production growth and lower All In Sustaining Costs of Haile over the coming years and will make an out-sized impact for the future outlook and free cash flow generation for OceanaGold. I will now turn the call over to Peter to discuss the Didipio and our New Zealand assets.

Peter Sharpe: Thank you, David, and good morning, everyone. At Didipio, second quarter gold production of 30,000 ounces and copper production of 3,400 ton were in line with our full year plan. When added to the results of a strong first half, we are tracking ahead of the original 2023 guidance. With that we've increased gold production guidance at the Didipio to between 125,000 and 135,000 ounces of gold and maintain copper production guidance, although we do expect to be at the top of the 12,000 to 14,000 ton range. Similar to year-to-date production, a strong first half cost performance has driven a $100 per ounce All In Sustaining guidance reduction for the Didipio. We are making good progress in our study to increase underground mining rates to at least 2 million ton per annum and positive results suggest that we will advance the study to a PFS level from a scoping study. We hope to be able to provide a summary to the market in the New Year [ph] and include the findings of the work in a fulsome updated NI 43-101 in the first half of 2025. We continued investing on community projects during the quarter in line with our commitments and exploration drilling is also progressing on ore body extensions with targets to the northwest and at depth. I will let Craig speak more about results released during the quarter shortly. Now on to Macraes. Macraes produced 35,000 ounces of gold in the third quarter, 12% lower than the previous quarter due to the additional work undertaken on ball mill 2. I'm happy to say that in late August we completed the full repair of the mill and it was returned to full production levels. Despite the challenges with ball mill 2 at Macraes this year, the team has done a fantastic job with other throughput initiatives that more than offset the losses from the ball mill downtime this year. With that we are increasing Macraes production guidance to 130,000 to 140,000 ounces of gold for the year and expect to be able to continue operating at these higher mill throughput levels going forward. All In Sustaining Costs during the quarter was $1,550 per ounce which is the second quarter in a row that we've been below guidance range. The higher than expected production has helped to drive lower unit costs and as such we are allowing our All In Sustaining guidance by $50 an ounce for the year at Macraes. Our Frasers underground operation was scheduled to be complete by the end of the first half of 2023 with focus shifting to Golden Point underground. We have pleasingly encountered additional remnant ore at Frasers underground, which will allow us to continue mining there into the first quarter of 2024. At the same time we continue to study the options around the Round Hill open pit and expect to be able to update the market as part of our annual R&R update next year. Now to the North Island of New Zealand where our Waihi operation produced approximately 11,000 ounces of gold this quarter. The decrease in production compared to the previous quarter was primarily due to challenging ground conditions encountered in the areas of the mine where fresh ore stopes are located, resulting in us mining more ore from lower grade remnant stope and fill areas instead. We expect to move into higher grade fresh stopes in the fourth quarter and still expect to be within original full year guidance range. All In Sustaining Costs for the quarter was higher than the previous quarter driven by lower gold sales and higher operating costs, namely contract worker costs. We continue to work towards lowering these costs but given the year-to-date cost performance and outlook we are increasing All In Sustaining Costs guidance for 2023 at Waihi. I will now hand it over to Craig to provide an exploration overview.

Craig Feebrey: Thank you, Peter. During the quarter we continued our Brownfield exploration programs across the business focusing on creating value via resource conversion and growth. Starting at Haile during the quarter we released an exploration update, which delivered results from both Horseshoe and Palomino in line with and in some cases better than our expectations. One of our best holes drilled to date targeted the conversion of the lower Horseshoe Inferred Resource and intercepted 74 meters at 13 grams per ton gold and returned better than expected grade. This high grade zone at the bottom of the resource remains open at depth and is an exciting target that we're planning to drill in 2024. Our resource conversion program at Palomino has also been successful with drilling now largely complete. We look forward to updating the market on the progress in 2024. During the quarter we also released exploration results at the Didipio where we continue to convert resources and test depth extensions. Hole 611 for example returned 72 meters at 3.4 grams per ton gold equivalent, which provides further opportunity to extend the resource at least another 100 meters below the current existing inferred resource. Infill drilling continues higher up in the mine with results in line with expectations to date. Further drilling is planned for the remainder of this year and in 2024 to support a technical report in the first half of 2025. Finally at Waihi, drilling continues to extend the high-grade Southern Chute on the EG vein at Wharekirauponga. We're in the process of preparing a new drill platform to continue testing at strike extent. We have the third rig now drilling on site and expect to provide further updates to the market as results come in. I'll now turn the presentation back to Gerard. Thank you.

Gerard Bond: Thank you, Craig. In summary, our third quarter results represent our weakest quarter of the year. We expect to improve in Q4 and deliver production within the bottom end of the original production guidance range. We are focused on safely and responsibly maximizing the free cash flow generation of the company and although Q3 was not a good quarter in this regard, it was a quarter of considerable investment and our outlook for organic growth and free cash flow generation in 2024 and beyond remains strong. Shareholders can be certain we remain focused on running the business well and investing wisely to create shareholder value and higher returns to shareholders. I'll now turn the call over to the operator and open up the line to take any questions.

Operator: Thank you sir. [Operator Instructions] And your first question will be from Ovais Habib at Scotiabank. Please go ahead.

Ovais Habib: Hi. Good morning, Gerard [indiscernible] me please. Starting off with the Haile Underground, obviously you guys are doing a lot of infill drilling, grade control drilling and into the stopes, you have three stopes prepared for Q4. Can you give us any sort of kind of information on how the grade control drilling has been progressing? I mean you talked about its inline, is it giving you confidence that [indiscernible] and the ore that you were looking for is going to be produced in Q4 and kind of any sort of insight on what 2024 might look like?

Gerard Bond: Yes. Thanks Ovais. Thanks for the question. I'll hand it over to David for detail, but yes I think we have to your point we have said previously that we expect – that we have grade control drilled all the areas that we intend to mine this year, and that gives us a high degree of confidence that what we expect to occur from underground will occur and so far it has performed accordingly. Now that's a couple of weeks of production, but David do you want to supplement that answer with anything?

David Londono: Yes. And also the grade control that the three holes that we drilled so far they're coming a little bit actually higher than the resource model is showing. So we expect that we are going to be at the resource model level or better than we expect. We're also using a little drill and we're drilling the bottom, the middle, and the top of the tunnels and again that information is coming positive. So we're very confident that we can achieve the tons and the grade that they were expecting.

Ovais Habib: That's great David and thanks for that. And just David in terms of underground development rates is that kind of on target you need to be better in terms of opening up the mine on underground development? And also maybe if you can talk about how is kind of CapEx shaping up for going into the end of the year? Is that starting to taper off or should we see some of the CapEx kind of going into 2024 as well?

David Londono: So the development actually we're doing much better than we are forecasting. So we were doing through Q3 about 330 meters per month. October is shaping up to be a little bit of above 400 meters so we're very happy with the performance in the development. So some of the CapEx, so since we start the production now of the underground so we can have some operating costs and obviously the development is going to be capitalized, but the CapEx for the original project is pretty much finished.

Ovais Habib: Excellent. Thanks David for that. And just the last question maybe switching gears to Philippines at the Didipio. Obviously there's an optimized study that's planned to come out in the next couple of months. In terms of how you're looking at that study, maybe there's a question for Gerard, like is this study going to give you enough information to go forward with the project assuming it's a positive study and or do you need to do additional studies to kind of give the green light to the project?

Gerard Bond: Yes. Thanks Ovais. Look I'm highly confident that that the study will take us in some direction towards confirming and perhaps extending the articulated target of being at least 2 million ton per annum. I mean at one level it seems all very simple, it's like mechanical optimization but there is a lot of mine planning associated with that. So the scope and study we expect to move into a pre-feasibility study and so there is a bit of work to it. Peter, do you want to put any color on that answer?

Peter Sharpe: Sure. Hi Ovais how are you? Yes, so we will be entering into a PFS, Ovais, but I mean, I think what we're seeing already is that the outcomes of the scoping study are quite positive. So we'll be taking into a PFS because we need to and we do need to look at the various options around how do we actually take this project forward. But I mean the reality is we will be progressing in parallel any opportunity that's more business as usual around uplifting the underground rate just because we've identified through this process opportunity that we can just get after. Now, so I don't expect it to be a long drawn out two to three year study. I expect that we'll move from PFS quickly into fees and again the target is that NI 43-101 update in March 2025, which by that stage I think we'll have a very firm plan on what we can do and the target to go after.

Ovais Habib: Thanks for the color on that Peter, and Gerard that's all for me. Thanks for taking my questions.

Gerard Bond: Thank you, Ovais.

Operator: [Operator Instructions] And your next question will be from Wayne Lam at RBC. Please go ahead.

Wayne Lam: Yes, thanks. Good morning everyone. Maybe just a follow-up in terms of the grade control drilling, seems like you had some issues at both Haile and Waihi and I recall last year there was a similar issue as well on the reconciliation at Waihi. Just wondering if you could provide a bit more detail on I guess what happened at Haile on the mill pit? And if there's any steps that can be done to kind of help improve this grade control program or anything operationally that can help mitigate those surprises or volatility in grade?

Gerard Bond: Sure. Thanks Wayne. Look I mean it's worth noting that Mill Zone, where we experience this under performance, sorry, Mill Zone 2 for much of its time performed within 1% of expectation as it relates to both grade and tones. So Mill Zone actually performed well but in the in that final quarter and quarter and a bit it actually underperformed because yes we were at the final two benches the grade control drilling was, that's at that deepest point the greatest grade control drilling was sparse. We had two drill holes into that at that depth one was that something like 4 or 5 grams a ton, the other was at 13 grams a ton. The methodology had the team interpolate an estimate of what the grade would be. But of course, that interpolation is a guesstimation and the guesstimation didn't pan out. The actual ore shaped differently to the interpolation. And so we like to think of Mill Zone having performed well. But in the stub – that final stub of the pit, it did not. So we don't think there's any systematic issue as it relates to Haile at all. And Ledbetter has performed well. And of course, we're at the upper benches of Ledbetter now which has a greater degree of grade control drilling. So we remain confident that Ledbetter that we intend to mine in coming years will not experience the same issues that the final two benches of Mill Zone did. At Waihi, that was a different issue. That was in the first quarter of last calendar year. And the issues that we experienced this quarter had more to do with the mix of where we were mining rather than grade control drilling per se. So it was not a grade control issue at Waihi other than when you are mining more in remnant stope areas, the level of grade control drilling that you can do in remnant stope areas is by definition less than you can do in fresh stopes.

Wayne Lam: Okay, great. Thanks for providing that color. Then just maybe wondering if you can comment on some of the cost creep you're seeing at Waihi. And does any of that apply to Macraes in terms of increase in labor costs?

Gerard Bond: Look, I mean, there's labor inflation across the board and universally globally, but the issues at Waihi as it relates to cost on a per unit basis are more due to the smaller number of units than anything else. Three quarters of the increase in the unit cost guidance and performance even in the quarter was due to the lower units. And labor inflation specifically mentioned in relation to Waihi is more due to the fact that we struggled to fill some seats and we had to get contract labor in. And by definition, contract labor is a little more expensive. The site have done a great job at kind of restoring that. But you can get caught short on headcount for certain roles at a point in time. As I said, we supplemented that with contract labor. But that number of contract labor is at Waihi is also reducing now as a result of recruitment efforts that have had effect since.

Wayne Lam: Okay, great. Thanks. And then maybe just last one for me. I just wanted to clarify on that additional government share. Did you guys say it will be paid out annually and next in Q2, and it includes the various local business taxes and excise taxes and then just also curious why that's reported separately and not part of your consolidated income taxes?

Gerard Bond: Yes. It's a form of – what was just that last question, it's a form of income tax, but it's not an income tax. So I think for clarity, we'll break it out and show it separately. The nature of it is it's like an income tax, but it's technically not an income tax. And to your question, the answer resides in your question. We do pay it annually and it is as described by Marius as in essence an EBITDA minus all other government taxes paid. So it's a net revenue calculation. The calculation is actually in the 43-101 statement that we put out in March last year and all taxes paid to government, whether that be income, excise withholding and like are deductions in that calculation.

Wayne Lam: Okay, perfect. Thanks for taking my questions.

Gerard Bond: Thank you, Wayne.

Operator: Thank you. [Operator Instructions] And your next question will be from Mike Parkin at National Bank. Please go ahead.

Mike Parkin: Hi guys. Just one final question for me. Can you just give us an update in terms of water management at Haile in terms of you've got the bigger water treatment plant there and how is that kind of going? And overall, where have you kind of come from versus where you are versus where you kind of expect to be in the next 12 months? From what I remember from the site tour earlier this year, it sounded like you're going to be moving into better and better positioning with water management and that would also kind of help your cost structure going forward?

Gerard Bond: Yes, great recollection Mike. And thanks for the question. I'll let David answer it in detail, but yes, I think water management at Haile is now a success story. David?

David Londono: Good morning, Michael. So the Ledbetter pit, which is where we are mining currently, we're down to the last 80 million gallons on that pit and we're moving about 100 million gallons a month. So we're going to be dry in that pit by the end of this month. Now this next [ph] pit where we have about 250 to 300 million gallons, that's going to be in the next three months. So by February we're pretty much going to be out of the contact water. So we will be pretty much just working as it rains, just pumping any contact water that just comes out of from drains. But we're pretty much out of the woods on that.

Mike Parkin: Great. That's a great update. Thanks very much guys.

Gerard Bond: Thank you Mike.

Operator: Thank you. [Operator Instructions] And at this time it appears that we have no other questions registered.

Gerard Bond: Thanks, operator. Well, that concludes our webcast and conference call today. A replay will be available on our website later today. On behalf of the management team and everyone at OceanaGold, I appreciate you joining us and wish you a very pleasant rest of day. Bye for now.

Operator: Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.