Mandalay Resources Corporation (MND) Earnings Call Transcript

Good morning. My name is Maria, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to Mandalay Resources Corporation's Third Quarter Financial Results Conference Call. Joining us on the call is Dominic Duffy, President, Chief Executive Officer and Director of Mandalay Resources. This call contains forward-looking statements, which reflect the current expectations or beliefs of the company based on information currently available to the company. Forward-looking statements are subject to a number of risks and uncertainties that may cause the actual results of the company to differ materially from those discussed in the forward-looking statements. Factors that could cause actual results or events to differ materially from the current expectations are disclosed under the heading Risk Factors and elsewhere in the company's annual information form dated March 31, 2022, available on SEDAR and company's website. It is now my pleasure to introduce your host, Dominic Duffy. Thank you, sir. You may begin.

Thank you, Maria. Good morning, and thank you, everybody, for joining us today. On the call with me, I have Nick Dwyer, who is Mandalay's Chief Financial Officer; and also joining us will be Chris Davis, who's our Vice President of Exploration and Operational Geology. Mandalay released its third quarter 2022 results at market close yesterday. You can find our consolidated financial statements and MD&A on the Mandalay Resources website or under our profile on SEDAR. I'm very pleased with our progress for the first 9 months of the year. For over 2 years, Mandalay has shown continued success and profitable operations with growing production. Again, during our third quarter, we were able to strengthen our balance sheet while sustaining our net cash position. At the end of third quarter of 2022, the company had $42.6 million of cash on hand and that was while holding $36.7 million of total interest-bearing debt outstanding. Year-to-date, Mandalay has been able to generate a pretty remarkable $35 million in free cash flow, approximately $17 million more earned as compared to the full year results in 2021 and $10 million more earned as compared to full year 2020. This was achieved with a quarter remaining within the year, meaning Mandalay is on track to generate its highest level of positive cash flow annually. The strong cash flow generated allows the company to continue with the ramp-up in growth investment opportunities to strengthen the business. Year-to-date, we have been able to invest more than $7 million in our exploration program and on pace to record the highest-ever annual exploration spend. And that's pretty impressive when you consider our continued cash flow that we are generating. Although before discussing our operations in more detail, I would like to pass the call off to Nick, who will walk through our financial highlights of the company during the third quarter. Nick?

Thanks, Dominic. So Mandalay delivered solid financial results during the third quarter as the company achieved $46 million in revenue and $19 million in adjusted EBITDA, both broadly in line with the previous quarter. Of those total amounts, Costerfield contributed $28 million towards revenue and $15 million toward EBITDA with Björkdal making up the remaining $10 million and $6 million in revenue and EBITDA, respectively. The company generated $8 million in net cash flow from operating activities and also a consolidated net income, which is USD 0.10 per share or CAD 0.13 and this marks our ninth consecutive quarter of profitability. The company works -- continues to work diligently on controlling our costs. And we managed to record declines in both cash and all-in sustaining cost per ounce during Q3 2022 as compared to the previous quarter. At $846 and $1,111 per ounce, this was roughly 17% and 20% less than in Q2 2022, respectively. So tremendous accomplishment owing to the work done on site with the support from an appreciating U.S. dollar as well and that's compared to the sites respective local currencies. For the first 9 months of 2022, the same per ounce costs were $891 and $1,194. When compared to the same period in 2021, cash cost per ounce rose slightly due to production. However, the all-in sustaining costs fell from lower sustaining capital expenditure in the current year. During the quarter, the company repaid $3.8 million toward the syndicated facility, which now stands at $32 million. When considering our lease liabilities, that brings Mandalay's total debt to $36.7 million. So with $42.6 million of cash on hand at the end of the quarter, Mandalay sustained its net cash position of $6 million at the end of the current quarter. Lastly, our free cash flow for the quarter was negatively impacted by one-off, the final 2021 tax payment of $11.5 million at Costerfield. But it's worth mentioning that this -- but for the first 9 months of 2022, the company has managed to generate $35 million in free cash flow, which is approximately 3x the amount earned in the first 9 months of 2021. Given the inflationary pressures, we are pleased with our profitability and continued level of financial success. The company is in a very stable position, affording us optionality with the primary goal in eliminating our debt over the coming years. I'd like to turn the call back to Dominic. Thanks. Dom?

Thanks, Nick. Now on our operations. We obtained a consolidated salable production of approximately 80,000 ounces of gold equivalent during the first 9 months of this year. The company did announce last month that due to COVID-related labor shortages during 2022 at both our operations combined with temporary lower grades that our production guidance for the year would be revised downwards from 106,000 to 115,000 gold equivalent ounces from the previous 118,000 to 130,000 ounces. Over the course of this year, absent issues related to COVID resulted in about 30% increase in leave times. This negatively impacted our mining rates as compared to last year at both of our assets. Despite this lower production profile, our cost per ounce metrics remain unchanged due to tight cost control programs being implemented. These actions combined with the support from an appreciating U.S. dollar relative to the Australian dollar and Swedish krona, as Nick did mention earlier, is allowing us to stay on track in achieving our previously stated cost guidance. On a consolidated basis, our cash cost will be in the range of $700 to $900 per gold equivalent ounce, while the all-in sustaining cost will land somewhere between $1,100 and $1,300. We also expect a reduction to our capital spending by approximately $9 million to $13 million due to cost-saving measures and delaying purchases of few capital items resulting in an estimated $41 million to $45 million in capital expenditure for 2023. During the third quarter of this year, we produced a consolidated 27,297 ounces of equivalent gold, up from the previous quarter of approximately 23,000 ounces. Costerfield produced 17,000 ounces of saleable gold equivalent during the third quarter and 49,000 ounces during the first 9 months of the year. This was broadly in line with same period in 2021. Q3 production saw an improvement compared to Q2. However, performance was still below our expectations. That's a lack of personnel impacted our underground mining rates. It's resulted in a higher volume of low-grade stockpile having to be processed through our processing plant. This trend increased during the second quarter and continued since. But we do expect an improvement in the fourth quarter as Australia is moving out of the flu season, and we expect to see more personnel on site. Additionally, mine gold ounces during the quarter were below budget as several development drives continued further than expected. This is similar to Q2. We developed outside of the modeled economic areas within the low level of the extremities of the ore body. Even though this material was at a low grade, it was still economical enough to continue development and not sterilized ore and hinder the long-term benefits of the operation. For the third quarter, these ounces were produced at a cash cost of $669 and an all-in sustaining cost of $838 per gold equivalent ounce. At Björkdal, the site provided 10,291 salable ounces in the third quarter. This was an improvement on our second quarter 2022 results. However, grades were negatively impacted by the reduced haulage rates. So haulage contract that was impacted by COVID-related personnel levels. This resulted in more of the low-grade stockpile material needed to be processed than we would have liked. Moreover, underground grades were slightly below expectations as we continued improving our dilution controls. Reconciliation work continues on better understanding the underperformance of several key stopes relative to the block models. We expect this to turn around and lift us our production rates in Q4 and beyond. Lastly, Björkdal cash cost per ounce of salable gold produced during the quarter was $1,139, while all-in sustaining costs of $1,362. The operation is moving in the right direction as both per ounce metrics were -- has saw improvements as compared to the previous quarters and with the same period 1 year ago. I'd now like to invite Chris to speak a little on our exploration.

Thanks, Dom. Our Costerfield drilling continued on the southern and depth extension of testing of Shepherd as well as infill drilling with an update of these ongoing programs released in early September. A highlight of the Shepherd infill drilling within this release was 235 grams per ton gold over an estimated true width of 1.5 meters. Whilst encouraging results also exist in the extensional testing programs, in the near term, drilling will be reduced on Shepherd until a purpose-built drill cuddy has been developed later in the year. Above Shepherd, the Kendal extension program was commenced in Q3, and the Brunswick Deeps drilling program was recommenced. Both projects are expected to continue into Q4. The surface drilling programs at Costerfield ramped up in Q3 with drilling continuing on Robinson and Margaret prospects, along with the commencement of drilling on the MacDonald's True Blue and Taits North prospects. Looking forward, near-mine exploration during Q4 2022 is expected to include further extension drilling on Shepherd, Brunswick Deeps and Kendal programs, along with the commencement of N lode North extension drilling. At Björkdal, drilling continued on the eastern flank of the mine following the exciting drilling results disclosed in Q2. Drilling also continued on the infill and extension of the North Zone as well as the depth testing of Aurora. Surface exploration saw a ramp-up in drilling with the Vidmyran project completed and the drill testing programs of Lapptjärn, Tarsnäs, Granholm and Nyholm commenced. Surface drilling also saw the commencement and completion of the Nylunds confirmation drilling and the Aurora upper extension drilling. Looking ahead, in Q4, we expect to see a continuation of the eastern extension drilling as well as North Zone drilling. The upper -- the Aurora upper program will also recommence from underground. Lastly, we expect the regional programs of Lapptjärn, Tarsnäs, Granholm and Nyholm will be complete during the last quarter of this year. Exploration in both our operations has seen robust progress over the past 9 months and with some exciting programs underway, I look forward to updating the market in the near future. Thank you. I'd like to hand the call back to Dominic. Dom?

Thanks, Chris. Briefly looking ahead, we expect this trend of generating strong positive cash flow to continue as we are seeing major improvements at Björkdal as compared to the second quarter. We will continue mining areas of high confidence ore with improved grades in the lower levels of Aurora and initiate development in several high-grade areas of the Eastern zone, where we have access within the currently permitted. Costerfield, we expect margins to remain healthy and strong as we continue mining the high-grade Youle vein at Costerfield, while working towards bringing online the deeper Shepherd veins, both of which will continue to supply high-grade ore to their processing plant and to extend Youle's Mineral Reserves. Thank you, everyone. This concludes this portion of the call. I would now like opening calls -- line up for questions.

[Operator Instructions] Our first question comes from Kevin Tracey with Oberon Asset Management.

I have a few here. Dom, the number that really jumped out to me that this release was the mine grade at Costerfield at 16.5 grams per ton. And then I noted that you called out that this was actually kind of below the mine plan, given you're mining out some of those extremities at Youle. So even at 16.5, that's well planned. That's I think the highest number we've seen by a wide margin. So is this what we're seeing at Shepherd? And are these the grades we can expect to continue for a while here?

So this is the equivalent gold grade. So it's not the highest we have seen. What we do see at Shepherd as we go down is it's high gold grade than the Youle deposit, but it has lower antimony grade. So we expect equivalent gold grade to remain constant. We were impacted though because there was a slight drop off on the gold grades. But we do anticipate that it will remain pretty constant for the remainder of this year. We did have some throughput issues with the plant being down for a little while, but we were extremely happy with those results.

Okay. So sorry.

I was confusing myself, yes.

No, that's. But just to clarify, so I understand the antimony, what percentage here, I think it's 2.8%. That's a bit below what I guess we've seen in years past. But 16.5% gold grade mine that's 40% better than what the full year 2021 for some examples. So I guess on -- well, you can tell me on a gold equivalent basis, I mean I didn't do the math, but it seems to me to be quite a bit higher than what we've seen, I guess, on average in the past. And -- so yes, should we expect that in the future? Or do you think...

Yes, we do anticipate similar gold grades, but we do anticipate that antimony will drop even further. So again, it's because as we're starting to bring Shepherd online or getting some more ore from there, which is this high gold grade. So I think several years ago, we did have a comparative gold grades when we're in the custody load. But we do hope that those gold grades continue as we understand more of Shepherd and antimony grades do not drop too much. But the antimony price has been going fine over the last year. So that's why it does impact quite heavily our equivalent gold grade as a result of that. But yes, we are extremely happy with how gold is going at the current time.

Okay. All right. Got it. And then on -- happy to hear the cost guidance was reiterated even though the production is coming in a bit lower. Just looking towards next year, I imagine you're hoping for the material improvement in production. And it looks like average FX will be a tailwind. So do you -- is it fair to say, given those 2 things that you -- cost could be lower in 2023 than they are in 2022.

I would hope so because we are anticipating that production gains will be seen at Björkdal, especially as we start to get access to more of this eastern flank of the mine. So yes, I don't think we'll see much cost improvement from Costerfield, but I do expect that from the Björkdal side of the company.