SSR Mining Inc. (SSRM) Earnings Call Transcript

Hello, everyone, and welcome to SSR Mining's conference call to discuss the recently announced acquisition of an up to 40% ownership interest and operatorship in the Hod Maden gold-copper project. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Alex Hunchak from SSR Mining. Please go ahead.

Thank you, operator, and hello, everyone. Thank you for joining today's discussion on SSR Mining's acquisition of the world-class Hod Maden gold-copper project through an earn-in structured transaction. To accompany our call, there is an online webcast featuring presentation materials, and you will find the information to access the webcast in our news release relating to this call. The presentation materials can be found on our website. Please note that all figures discussed during the call are in U.S. dollars unless otherwise indicated. Today's discussion will include forward-looking statements, so please read the disclosures in the relevant documents. Unless otherwise disclosed, all product level figures discussed during this call are sourced directly from the 2021 Hod Maden Feasibility Study, which is available on SEDAR. Today's call will be led by Rod Antal, President and CEO of SSR Mining. Edward Farid, Chief Corporate Development Officer; and John Ebbett, Executive Vice President of Growth and Innovation, are also available during the question-and-answer period at the end of the call. Now I will turn the call over to Rod for his opening remarks.

Great. Thanks, Alex, and hello to you all, and thanks for joining us. I'm thrilled to be discussing an extremely attractive transaction that we feel will deliver significant value to our shareholders and provides us the opportunity to participate in one of the best undeveloped gold-copper projects in the world. As you will have seen, we announced the acquisition of a 40% ownership and operatorship in the world-class Hod Maden project in Northeastern Türkiye. This is an on-strategy transaction in an asset we have been closely monitoring for years. We believe this acquisition not only enhances the quality of our portfolio but leverages our core strengths and competitive advantages to deliver sector-leading economic returns and cash flows to our shareholders in a region where we have a clear track record of success. Hod Maden is one of the best quality and highest returning near construction projects in the sector. On a 100% basis, Hot Maden features over 3 million ounces of gold equivalent mineral reserves and an impressive reserve grade of more than 11 grams per tonne. It averages approximately 200,000 ounces of gold equivalent production annually at first quartile all-in sustaining cost below $600 an ounce over a 13-year mine life, with the further upside likely from exploration and optimizations. At feasibility study commodity prices of $1,599 gold and $3.19 copper, the project represents an after-tax IRR above 30% and generates more than $160 million in free cash flow annually. In aggregate, these metrics are truly remarkable. We believe Hod Maden perfectly complements our diversified portfolio of high quality, long-life assets and reinforces our commitment to generating strong free cash flow. The deal structure provides in aggregate an earning consideration of $270 million to Lidya Mines. This includes $120 million, which was paid today to acquire the initial 10% ownership in the project as well as operatorship and control. The remaining $150 million is structured as milestone payments to acquire the additional 30%, taking our overall ownership up to 40% by the time the asset is operational. Based on our due diligence outcomes, the transaction consideration implies a 0.5x price to net asset value and delivers SSR Mining an all-in internal rate of return, inclusive of the $270 million consideration above 15%. An important point to note is all Türkiye regulatory approvals have been received and the transaction is now closed. Over the next 12 months, we will work to optimize the project and prepare for a formal construction decision later in 2024. With the EIA granted in 2021, Hod Maden is significantly derisked from a permitting standpoint, and we currently expect to bring the asset into production in 2027. Our proven project development team, the team who successfully built the $700 million Çöpler Sulfide Plant on time and under budget, will take stewardship and are very keen to get started. So with that overview, let's turn to Slide #4. Before diving into more granular details of the transaction and the value proposition, I want to start here by reiterating the unique and world-class nature of the project. Amongst its peer group, Hod Maden features an unparalleled mineral reserve grade above 11 grams per tonne on a gold equivalent basis. Those grades helped drive the industry-leading life of mine costs, as shown on the right-hand side of this slide. And note, these costs are on a co-product basis, so this is simply not a result of copper byproducts, representing an artificially low-cost profile. This slide also demonstrates how Hod Maden positively sets itself apart from others, and we're thrilled to bring a project of this quality into our portfolio as it will supplement our free cash flow and shareholder returns for decades to come. Let's walk through the strategic rationale on Slide #5. Given our expertise and track record in Türkiye, Hod Maden has been of interest to us for several years. Amongst the strategic opportunities we have reviewed, I can confidently say that no other project has subsequent to our extensive due diligence process presented returns on this magnitude across our core geographies. So with that in mind, let's walk through the strategic rationale. With this transaction, we're adding a near-term and significantly derisked project to our excellent development pipeline that provides us with superior returns. The staged and risk-mitigated nature of this earn-in structured transaction represents a compelling acquisition price at approximately 0.5 attributable NAV, which maintains our peer-leading balance sheet strength. The transaction is complementary to our focus on free cash flow generation, and Hod Maden is one of the lowest capital intensity projects in the gold sector. With respect to development capital, we will be accountable for our pro rata 40% share of total preproduction spend over a 3-year construction period. Given Hod Maden's robust economics, we believe the project could support a project finance facility, and this is something we will evaluate. With our proven track record in Türkiye, we expect considerable synergies between Hod Maden and our Çöpler Mine. Our expertise in country and our track record of success was an attractive driver of this deal for our joint venture partners. We completed an extensive due diligence process on Hod Maden, including multiple site visits and came away impressed with the quality of the work completed at the project to date. At the same time, we see potential to surface additional value from Hod Maden. We will work to begin on an updated technical report summary to incorporate these opportunities, which will lead to a project construction decision next year. We will also take the opportunity to account for inflation and other updated market conditions at the same time. Lastly and more importantly, to our business and our shareholders, this transaction is accretive to SSR on all key per share metrics. Let's turn to Slide 6, and I'll talk more about the expected accretion. On an attributable basis, this transaction adds 1.3 million gold equivalent ounces to our mineral reserves or a 15% increase, and our measured and indicated mineral resources increased by 9%. Annually, the project is expected to contribute approximately 80,000 gold equivalent ounces and $66 million in free cash flow to SSR, implying a more than $800 per ounce in free cash flow generation using the 2021 feasibility commodity prices I mentioned earlier. On a per share basis, the attributable free cash flow from Hod Maden is 14% accretive to our projected annual free cash flow. The transaction is also accretive on a NAV per share, and we see potential additional upside at Hod Maden through asset optimizations and exploration over the longer term. On an attributable basis, Hod Maden's first quartile costs will drive a material improvement to our overall company cost profile, furthering our position as a free cash flow leader over the long term. Overall, it's clear to us that the transaction checks all the boxes and delivers material accretion on all meaningful metrics. So moving on to Slide 7. So moving back to the asset and the plans ahead. On this slide, you will see a number of the metrics reflecting the 2021 feasibility study that reiterates the world-class nature of the Hod Maden project. Our due diligence process supports these metrics, and we continue to see potential pathways to add value to what is already a compelling investment opportunity. Moving on to the next slide. And I'll now take some time to walk through the details of the project and what makes it so attractive. The ore body will be mined underground via long-haul stoping. The mineral reserve grade at over 11 grams per tonne is truly world-class and includes a meaningful copper contribution of about 20% of revenue. The processing plant envisaged in the '21 feasibility study will scale at 800,000 tonnes per annum or around 2,200 tonnes per day, producing a clean gold-rich copper concentrate and the pyrite concentrate. Hod Maden is located just off a major highway and close to the Black Sea, providing multiple options to access port facilities within 200 kilometers of the project site, and work is currently underway at site to connect to the National power grid. Having access to fantastic infrastructure is clearly one of the benefits of working in Türkiye. Combined, these factors drive a first quartile life-of-mine cost profile. Moving to Slide #9. In addition to the opportunities for operational upside, we see significant potential across the district from a geological perspective. The main zone of mineralization at Hod Maden was discovered in 2014, and our joint venture partners work quickly to delineate and prove up the target into a more than 3 million-ounce mineral reserves that are currently defined. However, that focus meant limited exploration was conducted across the broader 3,500-hectare property. Currently, there are a number of existing and untested soil anomalies along the main trend of mineralization. And the property is also conducive to geophysical surveying and exploration technique that has not been extensively utilized at the property and could lead to new targets being identified. In addition, a zone of zinc mineralization exists on a separate structure to the east of the main zone. This mineralization was not targeted or evaluated in the '21 feasibility study and represents another longer-dated upside opportunity. A detail to note here is the transaction also includes an $84 million upside sharing contingent payment to Lidya. This payment will be made upon the delineation of an additional 500,000 ounces of mineral reserves not included in any ounces currently defined in the mineral resources. Overall, we feel very positive about the exploration potential, and our exploration team, working with our joint venture partners, are excited to get boots on the ground. So on to Slide 10, just to outline some next steps. The transaction closed today, and our initial $120 million payment has been made. We now own a 10% interest in the project and have been granted sole operational control. On a 100% basis, there is approximately $30 million in precommitment capital spend that we expect to incur before project construction approval. This expenditure will allow our project development team to advance asset optimization and site establishment activities ahead of that formal construction decision next year. These efforts will be incorporated into a technical report summary in 2024, refreshing some of the project economic assumptions and includes some of the upside opportunities we identified during our due diligence. Once a construction decision is made, the earn-in component of the transaction will commence, and we will pay a total of $150 million to Lidya between the start of construction and the first anniversary of commercial production. So on to Slide #11. To drive home the opportunity, it is important to remember that we have a proven track record of project delivery, execution and M&A. We have shown our ability to deliver projects on time and under budget, most meaningfully with the Çöpler Sulfide Plant, where we've clearly demonstrated our capabilities in Türkiye. Our project execution plan utilizes the same core project team who will leverage our in-country experience and existing market knowledge of delivery partners to derisk the project. We've also built a track record of operating success in the country, furthering our confidence that we are the right party to bring this world-class asset into production. We also have a history of adding value through M&A, and our previous assets and corporate transactions have all resulted in material value creation for our shareholders through free cash flow generation and NAV additions. So moving just to make some concluding remarks before we open up to Q&A. As I've illustrated throughout the call, this is accretive transaction, providing an extremely compelling opportunity to deliver material value to our shareholders. The transaction is well aligned to our long-term strategy with Hod Maden complementing our diversified portfolio of high-quality, long-life assets that will generate strong free cash flow. We are confident in the work completed on the project to date and look forward to leveraging our skills as mine builders and operators to ensure a positive long-term future for the project. Hod Maden checks all the boxes. It's in a core jurisdiction where we have demonstrated a proven track record. It's low capital intensity. And once in production, it will contribute significant free cash flow to SSR. So with that, I'm going to open up the call to Q&A.

[Operator Instructions] The first question comes from Ovais Habib from Scotiabank.

Congrats on the Hod Maden transaction. Just a couple of questions from me. Number one, Rod, SSR is also working on C2 and other kind of organic projects that you guys have on the go. How does Hod Maden change the development time lines or priorities of those other projects?

Look, we're also obviously -- are very excited to be able to talk about it today. It's been a long time coming for us, but it's a terrific project, for sure. I think, look, from a perspective, how does it fit in? It fits in like a glove to what we're doing. There's really no change to our outlook on the C2 development, in particular, which is the one you talked about. And in some ways, it sort of does complement the timeline and the development of C2, given it's really more around the copper extraction for that project, in particular, but fits in quite nicely that we can probably deploy the same team doing the work on Hod Maden into C2 as well. So there will be maybe some synergistic benefits as we think about it in the future.

Sounds good. And then just in terms of the feasibility study, obviously, pointed out the CapEx around $300 million. Any color you can provide on where you see kind of total CapEx kind of settling in with all these inflationary pressures we've been recently seeing across the industry?

Sure. Ovais, I'm going to share these questions around. So I'm going to let Eddy talk to this one.

Ovais, yes, look, our experience in operating in Turkey has indicated to us that, on average, we've seen a 10% to 15% inflation factor to that 2021 feasibility study number. As such, as we kind of work to update that, that will -- that thinking will go into our analysis. And so 10% to 15% over a 2-year time frame.

Okay. That's fair. And then again, I think, Eddy, in terms of -- or Rod, in terms of opportunity to increase your stake in Hod Maden over time, is that something that you're thinking about it internally? Or are you going to assess that as you kind of go through the development of the project?

Look, I think, firstly, Ovais, we're -- this is, again, an extension of our existing partnership with Lidya, who have done a terrific job on the project to date, and we're very complementary of their work. So that's a natural extension for us. That partnership's evolved over 10-plus years now to enter these type of strategic opportunities. But we welcome having a new partnership with the Horizon/Sandstorm. And going into this, we were comfortable at 40%. And if we remain at 40%, we'll remain comfortable as well. So there's no burning platform for us to increase it. It's still a meaningful contribution to us as a business. It's just because of the quality of it. And we welcome actually having another party, if you like, in our portfolio of partners that we want to work with. So at this stage, we're very happy.

The next question comes from Cosmos Chiu from CIBC.

Maybe my first question is on timeline. I've known Hod Maden for a long time now, and it's always been talked about as a very good project and high grade, and I agree. But in terms of timeline, it still hasn't been built. If I were to look back, I think at one point in time, production was going to start in 2024 and then in 2025. And now I believe, Rod, earlier you said maybe 2027. And so what has happened? Why now? And maybe if you can talk about the timing.

Yes. I'll take this one and then if John wants to pipe in, he can. But I think it's important we -- I can't talk about the past on how it was communicated to the market in terms of its timeline to having it into operations. What I can tell you is since we looked at it and done the DD on it, the important factor for us is to apply the same rigor that we apply to all of our projects to ensure that we're going to be very successful when we bring it to market into operation. So that requires us to do some more work like we've articulated on the existing feasibility study. Some of it is to capture some of the potential upside. But some of it is also to get the fidelity around the actual details to ensure that years 1, 2, 3 are highly successful, and we have a higher level of confidence to be able to bring that into operation. So I think that's sort of the way we do things, Cos. And I think that's the important factor here. We now have control of it. We need to do it the way we want to do it to make it successful. And if it means we take the time to update the feasibility study, I'm sure our partners are happy for us to do that piece of work. And patience is a virtue. But when it comes to market, it will be -- you can trust us, it will be in good shape.

Great. And Rod, how much can we depend on the 2021 technical report at this point in time that highlighted $1.1 billion after tax, $1.3 billion pretax? And as you said, you're not going to make a final decision until 2024. And Eddy mentioned what your experience in Turkey. What do you need to see? Like what do you need to see to go ahead with a positive sort of construction decision and are there circumstances that you might not proceed with your 10% up to sort of 40%? And I guess the other question is you highlight 15% IRR today even with the acquisition costs. What if CapEx goes up and that percentage is kind of you wrote it down, is there a point where, again, you kind of just walk away?

That's a lot of questions there, Cos. So let me try to break them down for you. I'll let Eddy talk about the 15% in a moment. Let's just sort of more talk about what happens between now and project construction approval. The -- what we'll be doing is, again, as I sort of have already mentioned, updating some of the technical assumptions in it and doing the higher level of detail around -- particularly around operational planning and project execution similar to what we did at the Çöpler Sulfide project. When we went through the technical report, which was prepared by Lidya Mines, we're very complementary of the work that they've done. So there wasn't anything in there from a technical perspective that highlighted to us a risk. It was more that we just needed some more time to do some of the work that we want to do to make the project successful. So it's not -- I don't think it's a question of if, it's a question of when next year when we make the project decision. We did factor in elements of inflation. We did factor in elements of opportunities that we saw through the DD process to get to our final consideration before we pulled the trigger to go into the project. And -- but I'll give you a sense also, Cos, we are currently as we start to take over operatorship now continuing with the early-stage site works, which are taking place at Hod Maden with about $30 million to be spent between now and construction approval. So I don't think it's a question, do we have an area of doubt? It's really more a question of getting that fidelity. So we have a high level of confidence in the execution. So Eddy, do you want to just talk about the IRR?

Yes. So as Rod said, look, from our perspective, the feasibility study post the extensive due diligence had a high level of fidelity. We were incredibly impressed with the work that was completed on the study, and we did not identify any material flaws in the analysis. And we're going to go away and take our time on optimizing some of the things we've identified in the study as well as update for market conditions. With respect to our returns, the IRR, which is in excess of 15%, already incorporates our views on capital and operating cost inflation in the product. And so while we are going to take our time to reflect that in the updated technical report summaries, our analysis and our returns and our Board approval processes already accounted for this.

I guess, Eddy, in part, that's the reason why the 2021 feasibility study highlighted a plus 30% IRR and you're saying plus 15%. In part, there's the acquisition cost as well.

Yes. So the plus 15% is inclusive of the $270 million nominal acquisition price, which on an NPV basis is around $250 million. But with respect to the project level IRRs, they continue to remain above the 30% threshold post due diligence after accounting for updated commodity prices as well as the improvement optimizations we have found during our due diligence exercise and some of the inflationary pressures and market conditions that we've also reflected.

And maybe one last question, I'll jump back in the queue. Exploration potential. My understanding always -- has always been for Hod Maden. There seems to be a high-grade sort of zone -- the high-grade [ breccia ] zone in the middle, surrounded by like a lower grade halo. Is that sort of still the understanding? Or are you finding better stuff through exploration? Or are you not there yet?

I'll let John take this one, Cos.

Cos, for the main ore body, yes, it's structurally controlled, and it's very well defined and what the project is based on. Around the 3,500 hectares we've got, there are other targets identified and they are similar controlled anomalies that we're seeing in the geochem and it's there along the trend of the main Hod Maden ore body.

Okay. So are you finding more stuff? Or do we need to find more stuff? Or are we really just focused on the 13 years right now and the high-grade core for now is all that you need?

Yes. I think what we're focused on is that defined resource reserves cost as they currently are. But what we also identified during the due diligence was other exploration techniques, which we think are applicable to other areas on the property. And that's really, I think, where we generated the excitement that the previous joint venture was really focused on getting this project to market. And now we'll still do that, but we'll also start looking at some of the other opportunities on the property. So it's certainly a prospective.

The next question comes from Lawson Winder from Bank of America Securities.

Rod and Eddy, a very intriguing transaction. I wanted to ask, first of all, on the synergy comments in the slide. So what are they? Are you able to quantify them? And did you factor those into your IRR analysis at all?

It's simply the synergies around. In fact, we've got an infrastructure and a presence within striking distance to Hod Maden. So we've already got a team, we've already got the anchor structure, we've got a corporate overhead, we've got a supply chain. And all of that will be shared through the operatorship, which I think is important. The presence around the exploration on -- in country, the fact that we've got a project development group still within Çöpler that will be used, et cetera, et cetera, et cetera. So some of these synergies are the intangible ones, I think, Lawson, to think about it like that, but there will be clear tangible benefits that we will enjoy as we execute the project, and we did not build any of that into any of our analysis. I mean that's upside to be had later on.

Okay. Fantastic. Also wanted to ask about the remaining spend. So how much do you guys anticipate spending between today making a final decision in completing your feasibility study? And then rough idea, what have you guys factored in for CapEx from decision to first production?

I'll add -- look, the -- up until construction decision, Lawson, it's 100% basis, it's $30 million, and that will take us up to a construction decision. So that will allow us to continue with the site works that are already underway to connect to the power grid and do some of the roadworks to connect to the freeway and then the work on the actual feasibility study itself. So that takes us up to that decision. And then, Eddy, do you want to answer the next one?

Yes, sure. So two separate, I think, answers to your question. The first is, in terms of our payments that are coming through, the $120 million of acquisition price to gain the 10% ownership and operatorship was paid today. The remaining $150 million will be payable between construction decision in 2024 and commercial production in 2027. And that will be paid pro rata to capital spend. So it's on a very predetermined schedule. In terms of the capital payments, we will fund our 40% share of capital. And as I said earlier on the call to Cosmos' question, the feasibility study in 2021 identified a $309 million capital figure. And what we've seen is approximately a 10% to 15% annual inflation in Turkey since that time.