Torex Gold Resources Inc. (TXG) Earnings Call Transcript

Thank you for standing by. This is the conference operator. Welcome to the Torex Gold Second Quarter 2026 Results Conference Call and Webcast. [Operator Instructions] The conference call is being recorded. [Operator Instructions] I would now like to turn the conference call over to Laura Totan, Manager, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. On behalf of the Torex team, welcome to our Q2 2026 conference call. Before we begin, I wish to inform listeners that a presentation accompanying today's conference call can be found under the Investors section of our website at www.torexgold.com. I would also like to note that certain statements to be made today by the management team may contain forward-looking information. As such, please refer to the detailed cautionary notes on Page 2 of today's presentation as well as those included in the Q2 2026 MD&A. On the call today, we have Andrew Snowden, President and CEO; and Dan Rollins, CFO. Following the presentation, Andrew and Dan will be available for the question-and-answer period. This conference call is being webcast and will be available for replay on our website. Last night's press release and the accompanying financial statements and MD&A are posted on our website and have been filed on SEDAR+. Also note that all amounts mentioned in this call are U.S. dollars unless otherwise stated. I will now turn the call over to Andrew.

Thank you, Laura, and good morning, everyone, and welcome to the Torex Gold Q2 results call. And first results call for me in the role as President and CEO following Jody's retirement last month. And the main takeaway from the quarter is that our Morelos operation is performing to plan with production very much on track to achieve our annual production guidance. For those of you following along on the slides, I'm talking first to Slide 4, which summarizes our second quarter results. And this tracks to expectations as we mined through planned lower-grade and lower-gold-recovery stopes in the quarter, producing just over 96,000 ounces, putting us at around 197,000 ounces gold equivalent year-to-date. I expect Q2 to be the lowest production quarter of the year as we return to higher-grade areas of the mine in Q3 and Q4. And we are already seeing the benefits of these improved grades with production of over 43,000 ounces of gold equivalent in the month of July, which is setting us up well for a good step-up in production here into Q3. All-in sustaining costs of $2,459 an ounce were elevated, in part, due to this lower production quarter. But, importantly, our margins remained robust at 46%. We also continue to generate strong free cash flow of $94 million, supporting about $55 million in capital returns to shareholders during the quarter. Most importantly, we delivered yet another safe quarter with no lost time injuries for the fifth consecutive quarter, maintaining a 0 lost-time injury frequency rate per million hours worked for both our employees and contractors. Turning next to Slide 5, you can see our all-in sustaining costs on a year-to-date basis at $2,165 an ounce, which is elevated compared to our typical run rate due to 3 key factors. Firstly, the impact of the lower grades on production and sales. And as I mentioned, these grades will, though, pick up and improve costs in the second half of the year. Secondly, we saw higher plant reagent costs, and that was due to both consumption rates and unit pricing. And this was required to process the lower recovery ore we were working through in the quarter and in the first half of the year. Thirdly, a stronger peso, which year-to-date has averaged about 17.5:1, and that compares to our original guidance of 19:1, and that's created a meaningful impact given about 50% of our operating costs are peso-denominated. Although production is expected to step up over the coming quarters and, accordingly, costs will decrease significantly, we have revised our year -- full year all-in sustaining cost guidance to a range of $2,000 to $2,100 an ounce. Note that these costs are based on the updated full year guided metal prices of $4,500 an ounce gold, and that used to be $4,000 gold in our original guidance, as well as updates to our silver and copper assumptions of $72.50 silver for the year and $6 a pound copper for the year, which are more reflective of the metal prices we've seen year-to-date. Sustaining capital guidance has also been revised upwards to $135 million to $145 million, and that primarily reflects the impact of the peso as well as some additional equipment leases at Media Luna. Importantly, we're still tracking to plan for our original full year production guidance of 420,000 to 470,000 ounces, and we'll be generating significant free cash flow through the course of the year. Operationally, Q2 was a very strong quarter, as you can see here on Slide 6. Mining rates at both Media Luna and ELG continue to outperform at 7,700 tonnes per day at Media Luna and nearly 3,100 tonnes per day at ELG. And we're expecting rates at each mine to stay around these levels through the remainder of the year. On the processing side, throughput in Q2 was also ahead of design at nearly 10,800 tonnes per day, and you can see this shown on Slide 6 on the left-hand chart here. This is a level we expect we'll be able to continue to achieve through the remainder of the year. Copper and silver recoveries both saw meaningful improvements in Q2. And while gold recovery showed some improvements quarter-over-quarter, it remains slightly below the targeted 90% set out in the technical report. As noted earlier, we are expecting an improvement in recoveries through the remainder of the year and have already begun to see better recoveries in July, where we saw about 88%. Turning next to Slide 8 for an update on our projects. Media Luna North continues to progress on schedule with first production still expected by the end of the year. A few milestones in the quarter. Notably, we broke through on the North vent adit in June, which will enable installation of our ventilation fans, which will support first ore production and mine-level development. We also broke through on the 1-kilometer haulage drift, which is connecting the Media Luna North deposit into the existing Media Luna ore handling system, another key milestone for the project. Our focus now is on expediating the procurement and construction contracts to commence construction activities in the underground mine. At Los Reyes, with the compelling results of the preliminary economic assessment that we walked through on the call we had last month and with that PEA now in hand, work has commenced on the PFS, which is expected to be completed by late 2027. Drilling is also well underway with 4 rigs on site now actively working and the 20,000 meters of drilling planned for this year and we'll be focused on derisking and upgrading the resources across the 3 main trends. I was down in Los Reyes myself last month visiting the team at the property and the ramp-up of activities is going exceptionally well there at the Los Reyes site. On the subject of drilling, we also recently released our quarterly Morelos drilling and exploration update, which is summarized on Slide 9. And I'm very pleased to say that with the exceptional results we've seen to date to the east and south of Media Luna, we're accelerating the program in this area with an additional over 13,000 meters of drilling planned for this year. We're targeting to add new resources in this area with our year-end MRMR update expected to be released in March of next year. As a result, our overall budget for exploration has increased from $77 million to a record $85 million across our portfolio of assets. This acceleration program will begin to explore the potential of the San Miguel corridor between Media Luna and Luna West may be mineralized with the San Miguel fault likely acting as the main source of mineralizing fluid. ELG Underground continues to return strong results that demonstrate potential both at depth and along strike of the main mineralized trends and second-order structures. The program continues to support our target of replacing reserves and resources with our year-end update in March. And with that, I'll turn the call over to Dan to walk us through the financial results.

Thanks, Andrew, and good morning, everyone. Starting on Slide 11. Our all-in sustaining costs were elevated this quarter due to the factors noted earlier on the call. Margins remained robust with an all-in sustaining margin of 46%. Free cash flow of $94 million was net of $39 million in Mexican profit sharing payments, which you recall we paid annually each May. With production and costs expected to improve through the back half of the year and the period of elevated tax and profit sharing payments now behind us, we expect to generate strong free cash flow through the second half of the year. Turning to Slide 12. AISC guidance has increased to a range of $2,000 to $2,100 per ounce from a range of $1,750 to $1,850 per ounce, reflecting both internal and external cost pressures. The main drivers of the increase in AISC guidance are as follows: one, a combined $130 per ounce impact from higher plant reagent consumption and higher reagent prices with the increase in unit pricing, a reflection of increased costs for key inputs such as ammonia in the production of sodium cyanide, a key consumable for us; two, a $70 per ounce impact from continued FX headwinds with guidance now assuming a Mexican peso of 17.5:1 versus original guidance of 19:1; three, a $40 per ounce combined impact from higher mining volumes and lower gold recoveries; and four, a $30 per ounce impact from higher forecast sustaining CapEx, which really is a reflection of the stronger peso and underground development rates and some additional capital equipment leases. We are targeting to reduce reagent consumption rates as we utilize additional strategies to manage cyanide consumption levels within the plant. This includes the recent introduction of lead nitrate, the addition of another MACH Reactor and when we begin to leverage a new GM model that our team has recently completed. If successful, we expect reagent consumption levels to improve in 2027, noting inflationary pressures related to reagent pricing and the Mexican peso may persist. Moving to Slide 13. Despite the higher costs, cash flow during the quarter was robust, and our cash balance increased to $169 million from $130 million, which includes $55 million of capital returned to shareholders and the $39 million in annual profit sharing payments I discussed earlier. During the second half of the year, we expect income tax installments to average around $55 million a quarter. As illustrated on Slide 14, our overall liquidity position continued to improve. We exited the quarter with no debt and now have available liquidity of over $500 million. During the quarter, we also extended the term on our undrawn credit facility by 1 year to June 2030, which along with the $200 million accordion feature provides us with additional financial flexibility should we need it. With the highest cash outflowing quarters now behind us and production at AISC expected to strengthen, we are well positioned to generate strong free cash flow through the second half of the year which will fund our capital allocation priorities, including returning $350 million of capital to shareholders during the year and exiting the year with a minimum cash balance of $200 million. Turning to capital returns on Slide 15. During the second quarter, we returned $55 million to shareholders, including $11 million in dividends and $44 million in share buybacks. On a year-to-date basis, we have returned $176 million of capital, representing approximately 50% of our full year target of $350 million. Before moving to the question-and-answer period, I wanted to reiterate that we are well positioned to deliver a strong half to the year as grades improve and gold recoveries stabilize. These production factors, combined with a strong metal price backdrop are expected to lead to robust free cash flow and strong capital returns. With that, I'll hand the call back over to the operator for the question-and-answer period.

[Operator Instructions] Our first question today comes from Allison Carson from Desjardins.

My first question is just on costs. Can you just give us a bit more color on which one is the bigger impact to cost? Is it the peso or consumables? And if you're in the higher grade stopes now with better gold recoveries, is there a chance that the cyanide consumption comes down for some cost savings outside of guidance?

Yes, I can take that. So as we said on the call, the bigger driver really is the combined impact on consumable costs with respect to consumption rates and actual pricing. So the consumption rates are at about $100 an ounce to the AISC guidance, while the pricing added around $30 an ounce versus the peso, which has added around $70 an ounce. We are expected to still go through some lower recovery stopes here in the second half of the year, but the recoveries are expected to improve a little bit, but we are definitely seeing the higher grades. So we expect consumption rates for cyanide to be consistent with the first half, so around 6.5 kilograms per tonne. But as we start to deploy some of these new initiatives and we test to see their effectiveness, we expect that as we get into better recovery stopes in 2027, we should see cyanide consumption levels decline and potentially get back to more normalized levels that we experienced through 2025.

Allison, sorry, just to add to that as well and to reiterate some of the comments that Dan made. Our metallurgical team have been working really hard for the first half of the year in working through adjustments to the plant to be able to manage cyanide levels to much more reasonable levels and to maximize recoveries. We've seen a slight improvement in recoveries here through Q2. We expect we'll see some further improvement through the back half of the year. And with that, I think with these changes that are being made, which Dan touched on around adding lead nitrate into the leach circuit in terms of replacing a MACH Reactor in our process as well to increase oxygen and pumping into the process. We're already seeing some signs of that driving improvements in our cyanide consumption. And so we're -- although we'll see some pressure through the course of 2026 here, we are expecting to see some of that pressure being relieved into 2027 and beyond.

All right. Great. That's very helpful additional color there. And just my other question is just on Los Reyes. I know you did touch on it, but I was just wondering, you said drilling is going well. Has everything remained on track? And do you still expect to get through the whole program this year with a slightly later start? And is there any chance you can sort of advance drilling a bit this year to maybe pull forward the PFS next year?

And so look, you're right, Allison, the drilling has commenced back in May. Everything is tracking well so far, and we're very much on track to be able to deliver the 20,000 meters that are planned through the course of this year. I think just given the timing of when we got started and given the drill started turning in May, we've got 4 drills currently turning, being able to achieve anything more than 20,000 meters is probably unlikely at this stage. I think hitting our target for this year would be a good outcome. And then we'll look to continue that drilling both from upgrading and expanding resources, as well as drilling to support our geotech and metallurgical work for the PFS. And so that will also start through this year and into next year and support the PFS coming out kind of late next year. We're kind of thinking late Q3 into Q4. Accelerating something ahead of that is probably unlikely at this stage. We do have a number of trade-off studies that still need to be performed, and we can't undertake those trade-off studies until we've got more results from the geotech and metallurgical testing that we'll be doing from the drilling that's underway at Los Reyes.

Our next question comes from Cosmos Chiu from CIBC.

Maybe my first question is on provisional pricing. I saw that you booked a $8.7 million realized loss in Q2. But I guess my question is more with -- you mentioned there's no more QP hedges in place at the end of Q2. And with the silver prices up today, gold prices up today, copper prices has been up year-to-date. So could we -- if metal prices were to stay where they are, could we see a positive provisional pricing adjustment in Q3? And can you remind me like how long is it between shipment and the final realized price? How long is that going to be -- how long is that period between settlement now that there's no more QP hedges in place?

Yes. Thanks, Cos. So for those that aren't aware, the provisional pricing really reflects the fact that we have -- right now, we have a delta of about 1 month between when we sell the concentrate and we finally get the final price on the concentrate. So there's about a 1-month risk on that. Going into last year, we had a bit of a wider period where we had a spread of potentially up to 3 months. But with the new contracts we put in place this year, we've been able to pull that down to 1 month. So that's one of the reasons we're no longer doing QP hedges. We don't have that same exposure. When we do start to sell to one of the smelters later this year, we will see a bit of a longer term between when we ship and when we get final pricing. So we'll likely have some QP hedges in place there. But right now, no QP hedges. The provisional pricing really reflects that material that is unpriced or hasn't had a final price on it. That exposure is mark-to-market at the end of the quarter. And as metal prices were stronger at the end of Q1, where we ended Q2, especially for gold and silver, that's what created that loss. With the return of stronger gold and silver prices here and continued strength in copper, if everything were to stay the same, we would expect to see a bit of a benefit on a provisional pricing gain on the material that was outstanding at the end of June. But again, it would be minor because if everything stays flat, you'd see no provisional pricing going forward on anything shipped August, September or October because metal prices haven't changed. So short, if metal prices stay, we see a provisional price gain, and we'll look to use the QP hedges when we start to see pricing risk of more than a month.

Great. And hopefully, commodity prices stay -- keep going up. And then maybe my next question is on Media Luna North. As you mentioned, production is still on track for late 2026. I think, Andrew, you kind of mentioned the vent shaft, vent raise and also the haulage drift. But could you maybe summarize for us in terms of the key sort of deliverables you need to target and to meet between now and year-end to get to production by the end of 2026?

Sure. So the key things that we're working on right now to support underground development costs would be completing the ventilation system within the North Vent Adit, although we've broken through and we have just received at site the ventilation fans, and so they will now be installed over the next months. And so we've got a contract crew mobilizing to be able to complete the installation of those ventilation fans. As well as now that we've got some of the main drifts and connections in place, we're also looking to install and implement the UDS system to be able to distribute paste into the plant. And so the piping and elbows and all the equipment needed to install the UDS system is being procured. Some of it has been delivered to site already, and that will be installed here over the coming months. And so they're really the big maybe construction activities, which are remaining. Otherwise, it's really just development of the mine that we've obviously been tracking well at. And now we've got at least the ventilation adit open. We've got a passing through the mine, which allows us to stick to plan on first ore in late 2026.

Great. And then maybe one last question. There was a lot of discussion on the strengthening Mexican peso and the impact it's had on cost. I seem to remember, and I checked last night, you do have some hedges, currency hedges in place. There are some puts at MXN 18.50 to $1, so they're kind of in the money. But I guess there's just not enough. There was only about $15 million of exposure as of the end of the quarter. So I guess, in the end, what's your strategy in terms of -- is there a strategy in terms of potentially hedging out that risk, the Mexican peso risk? And how much exposure would you need? Clearly not $15 million, but can you remind me what's your exposure in terms of Mexican peso in cost?

Yes. So on an all-in sustaining cost basis, Cosmos, about 50% of our costs are denominated in peso, and that's direct peso exposure. There has been a lot of volatility within the peso over the last few years. We've seen it from a weak point of north of MXN 20 to during the Media Luna build where we saw it to a strength of low -- high MXN 16 level. So we are going to look to try to mitigate some of the exposure going forward. So you would have seen during this quarter, we've added to -- we've added the -- we've extended the period of hedging. So we've added another quarter. We'll look to have more of a dynamic hedging process going forward where, purely, we'll look to lock in some additional pricing more to balance out future swings in pesos versus trying to take a bet on the peso. We're just trying to minimize the swings that we've experienced in the last few years. I expect the peso will continue to remain strong. It's an economy that's benefiting from a lot of foreign direct investment as a lot of manufacturing starts to move back there for a bit of a nearshoring. So I think that will continue. But we'll look to mitigate that going forward. Obviously, we're not going to hedge 100% of our exposure, but we'll try to target probably up to about 60% of our peso exposure to have hedged at any one time.