Alamos Gold Reports Third Quarter 2020 Results Record free cash flow of $76 million supports 33% increase in dividend
Alamos Gold Inc.
Brookfield Place, 181 Bay Street, Suite 3910, P.O. Box #823 Toronto, Ontario M5J 2T3 Telephone: (416) 368-9932 or 1 (866) 788-8801
All amounts are in United States dollars, unless otherwise stated.
Alamos Gold Reports Third Quarter 2020 Results
Record free cash flow of $76 million supports 33% increase in dividend
Toronto, Ontario (October 28, 2020) - Alamos Gold Inc. (TSX:AGI; NYSE:AGI) (“Alamos” or the “Company”) today reported its financial results for the quarter ended September 30, 2020.
“We had an excellent third quarter financially and operationally with strong performances at all three operations driving costs significantly lower. This included another record quarter at Island Gold, and Young-Davidson starting to demonstrate its full potential following the completion of the lower mine expansion. We previously outlined our expectation to transition to strong free cash flow generation in the second half of 2020, and we delivered with record free cash flow of $76 million in the quarter,” said John A. McCluskey, President and Chief Executive Officer.
“We remain focused on operating a sustainable business model that can support growing returns to shareholders over the long term. Given our strong free cash flow outlook, we are pleased to announce a 33% increase in our dividend, which has now grown by 300% since 2018. We expect to continue to generate strong free cash flow while reinvesting in high-return projects like La Yaqui Grande and the Phase III Expansion at Island Gold which will support further growth and returns to shareholders,” Mr. McCluskey added.
Third Quarter 2020
- Generated record quarterly free cash flow1 of $76.0 million driven by higher margins at all operations
- Announced a 33% increase in the dividend to an annual rate of US$0.08 per share, starting with the dividend payable in December 2020. The increase is supported by the record free cash flow in the quarter and strong outlook. With the December dividend, the Company will have returned $31.0 million to shareholders in the form of dividends and share repurchases under the Company's Normal Course Issuer Bid ("NCIB") in 2020
- Produced 117,100 ounces of gold, a 49% increase from the second quarter of 2020 with production returning to budgeted levels following the temporary suspension of operations at Island Gold and Mulatos in the second quarter due to COVID-19
- Year-to-date the Company has produced 306,400 ounces of gold and remains well positioned to achieve revised full year guidance of 405,000 to 435,000 ounces of gold
- Island Gold produced a record 39,600 ounces of gold and generated record mine-site free cash flow1 of $40.8 million, benefiting from higher grades mined in the quarter
- Mulatos produced 41,100 ounces of gold and generated mine-site free cash flow1 of $30.9 million, driven by lower total cash costs
- Following the completion of the lower mine expansion at Young-Davidson in July, underground mining rates increased to average 6,713 tonnes per day ("tpd") for the quarter and remain on track to achieve 7,500 tpd by the end of 2020
- Sold 116,035 ounces of gold at an average realized price of $1,882 per ounce for revenues of $218.4 million
- Generated record cash flow from operating activities of $130.8 million ($130.0 million, or $0.33 per share, before changes in working capital1), a 62% increase from the third quarter of 2019
- Consolidated total cash costs1 of $681 per ounce and all-in sustaining costs ("AISC")1 of $949 per ounce both decreased significantly from the first half of the year and were lower than revised guidance. The Company remains on track to achieve full year cost guidance
- Reported record adjusted net earnings1 of $56.9 million, or $0.15 per share1, which includes adjustments for unrealized foreign exchange gains of $10.7 million recorded within deferred taxes and foreign exchange, and other one-time gains of $0.3 million. Adjusted net earnings increased 143% compared to the third quarter of 2019
- Realized record net earnings of $67.9 million, or $0.17 per share
- Ended the quarter with cash and cash equivalents of $274.1 million and equity securities of $40.0 million. Subsequent to quarter-end, the Company repaid $100.0 million outstanding on its revolving credit facility and is currently debt-free
- Reported results of the Phase III Expansion Study conducted on Island Gold, which is expected to drive a 72% increase in average annual production to 236,000 ounces and a 30% decrease in mine-site AISC to $534 per ounce starting in 2025
- Announced a construction decision on the low-cost, high-return La Yaqui Grande project. The project has a 58% after-tax internal rate of return ("IRR") at a $1,750 per ounce gold price and is expected to significantly reduce Mulatos District costs with mine-site AISC expected to average $578 per ounce over the life of the project
.(1) Refer to the “Non-GAAP Measures and Additional GAAP Measures” disclosure at the end of this press release and associated MD&A for a description and calculation of these measures.
2 | Alamos Gold Inc
Highlight Summary
| Three Months Ended September 30, | Nine Months Ended September 30, | ||
|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 |
Financial Results (in millions)
| Operating revenues | $218.4 | $172.9 | $521.5 | $497.1 |
| Cost of sales(1) | $122.6 | $127.3 | $346.2 | $385.4 |
| Earnings from operations | $88.0 | $37.5 | $146.3 | $84.4 |
| Earnings before income taxes | $85.9 | $37.4 | $132.4 | $85.1 |
| Net earnings | $67.9 | $17.7 | $67.3 | $58.1 |
| Adjusted net earnings(2) | $56.9 | $23.4 | $96.2 | $51.4 |
| Earnings before interest, depreciation and amortization(2) | $130.5 | $78.4 | $248.1 | $208.0 |
Cash provided by operations before working capital and $130.0 $80.2 $256.4 $211.4 cash taxes(2)
| Cash provided by operating activities | $130.8 | $67.9 | $237.0 | $182.6 |
| Capital expenditures (sustaining)(2) | $22.7 | $17.8 | $54.6 | $53.5 |
| Capital expenditures (growth)(2) (3) | $29.2 | $44.2 | $109.3 | $125.5 |
| Capital expenditures (capitalized exploration)(4) | $2.9 | $4.3 | $8.8 | $11.7 |
Operating Results
Gold production (ounces) 117,100 121,900 306,400 372,400 Gold sales (ounces) 116,035 119,392 302,494 367,554
Per Ounce Data
Average realized gold price $1,882 $1,448 $1,724 $1,352 Average spot gold price (London PM Fix) $1,909 $1,472 $1,735 $1,362 Cost of sales per ounce of gold sold (includes $1,057 $1,066 $1,144 $1,049 amortization) (1)
Total cash costs per ounce of gold sold (2) $681 $730 $772 $720 All-in sustaining costs per ounce of gold sold (2) $949 $950 $1,052 $944
Share Data
Earnings per share, basic and diluted $0.17 $0.05 $0.17 $0.15 Adjusted earnings per share, basic and diluted(2) $0.15 $0.06 $0.25 $0.13 Weighted average common shares outstanding (basic)
391,553 390,593 391,325 389,852 (000’s)
Financial Position (in millions)
Cash and cash equivalents (5) $274.1 $182.8 Debt and financing obligations (5) $100.0 $—
(1) Cost of sales includes mining and processing costs, royalties, and amortization expense. For the three months and nine months ended September 30, 2020, cost of sales also includes COVID-19 costs of $nil and $6.5 million, respectively.
(2) Refer to the “Non-GAAP Measures and Additional GAAP Measures” disclosure at the end of this press release and associated MD&A for a description and calculation of these measures.
(3) Includes growth capital from operating sites and excludes the Island Gold royalty repurchase of $54.8 million in March 2020.
(4) Includes capitalized exploration at Mulatos and Island Gold.
(5) Comparative cash and cash equivalents and debt and financing obligations balance as at December 31, 2019. The Company repaid the $100 million debt balance in October 2020.
3 | Alamos Gold Inc
| Three Months Ended September 30, | Nine Months Ended September 30, | ||
|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 |
Gold production (ounces)
| Young-Davidson | 36,400 | 50,000 | 88,200 | 140,000 |
| Mulatos | 41,100 | 32,700 | 119,600 | 107,900 |
| Island Gold | 39,600 | 36,700 | 97,800 | 111,800 |
| El Chanate(1) | — | 2,500 | 800 | 12,700 |
Gold sales (ounces)
| Young-Davidson | 35,548 | 48,430 | 86,893 | 137,091 |
| Mulatos | 41,165 | 31,164 | 118,592 | 107,369 |
| Island Gold | 39,322 | 37,209 | 97,009 | 110,094 |
| El Chanate(1) | — | 2,589 | — | 13,000 |
Cost of sales (in millions)(2)
| Young-Davidson | $50.5 | $57.7 | $140.5 | $171.7 |
| Mulatos | $44.0 | $33.5 | $127.5 | $103.1 |
| Island Gold | $28.1 | $32.0 | $78.2 | $93.0 |
| El Chanate(1) | $— | $4.1 | $— | $17.6 |
Cost of sales per ounce of gold sold (includes amortization)
| Young-Davidson | $1,421 | $1,191 | $1,617 | $1,252 |
| Mulatos | $1,069 | $1,075 | $1,075 | $960 |
| Island Gold | $715 | $860 | $806 | $845 |
| El Chanate(1) | $— | $1,584 | $— | $1,354 |
Total cash costs per ounce of gold sold (3)
| Young-Davidson | $923 | $781 | $1,145 | $813 |
| Mulatos | $746 | $866 | $772 | $772 |
| Island Gold | $394 | $503 | $438 | $490 |
| El Chanate(1) | $— | $1,429 | $— | $1,254 |
Mine-site all-in sustaining costs per ounce of gold sold (3),(4)
| Young-Davidson | $1,196 | $960 | $1,370 | $1,033 |
| Mulatos | $928 | $979 | $928 | $861 |
| Island Gold | $575 | $693 | $653 | $658 |
| El Chanate(1) | $— | $1,506 | $— | $1,277 |
Capital expenditures (sustaining, growth and capitalized exploration) (in millions)(3)
| Young-Davidson | $25.6 | $23.9 | $82.2 | $72.9 |
| Mulatos(5) | $9.1 | $12.9 | $21.6 | $44.7 |
| Island Gold(6) | $15.9 | $13.8 | $53.9 | $44.2 |
| Other | $4.2 | $15.7 | $15.0 | $28.9 |
(1) El Chanate transitioned to the reclamation phase of the mine life in the fourth quarter of 2019. Incremental production is a result of rinsing the leach pad. Gold sales from El Chanate in 2020 are not included in revenue and cost of sales.
(2) Cost of sales includes mining and processing costs, royalties and amortization.
(3) Refer to the “Non-GAAP Measures and Additional GAAP Measures” disclosure at the end of this press release and associated MD&A for a description and calculation of these measures.
(4) For the purposes of calculating mine-site all-in sustaining costs, the Company does not include an allocation of corporate and administrative and share based compensation expenses.
(5) Includes capitalized exploration at Mulatos of $nil and $0.7 million for the three and nine months ended September 30, 2020 (spending of $nil for the three and nine months ended September 30, 2019).
(6) Includes capitalized exploration at Island Gold of $2.9 million and $8.1 million for the three and nine months ended September 30, 2020 (for the three and nine months ended September 30, 2019 - $4.3 million and $11.7 million), and excludes the royalty repurchase of $54.8 million.
4 | Alamos Gold Inc
Management's Response to the COVID-19 Pandemic
The World Health Organization declared COVID-19 a pandemic on March 11, 2020. The Company responded rapidly and proactively and implemented several initiatives to help protect the health and safety of our employees, their families and the communities in which we operate.
Specifically, each of our operating mine sites has activated established crisis management plans and developed sitespecific plans that enable them to meet and respond to changing conditions associated with COVID-19. The Company is adopting the advice of public health authorities and adhering to government regulations with respect to COVID-19 in the jurisdictions in which it operates.
The following measures have been instituted across the Company to prevent the potential spread of the virus:
- Medical screening for all personnel prior to entry to site for symptoms of COVID-19
- Testing of personnel at Mulatos and Island Gold prior to starting their rotation at the camp
- Training on proper hand hygiene and social distancing
- Remote work options have been implemented for eligible employees
- Social distancing practices have been implemented for all meetings, huddles and transportation
- Mandatory use of personal protective equipment for employees where social distancing is not practicable
- Rigid camp and site hygiene protocols have been instituted and are being followed
- Elimination of all non-essential business travel
- Required 14-day quarantine for any employees returning from out of country travel
- In addition, since the COVID-19 pandemic began the Company’s teams in Canada, Mexico, and Turkey have donated their time, medical supplies, food supplies and funds to help combat the effects and spread of the virus
Impact on Operations
In order to protect nearby communities and align with government requirements, two of the Company's mines were temporarily suspended earlier in the year, but resumed normal operations during the second quarter. During the temporary suspensions, indirect production costs that exceeded normal operating capacity were expensed as incurred and not included in the inventory valuation. The Company identified indirect production costs of $5.4 million that were directly expensed as COVID-19 costs as incurred in the second quarter of 2020 and not included in inventory. All operating costs incurred subsequent to the mine sites, returning to planned operating levels have been included in mining and processing costs. As a result, there were no amounts classified as COVID-19 costs for the three months ended September 30, 2020.
In July 2020, the Company provided updated production and cost guidance resulting from the impact of COVID-19 on the operations. With operations at Mulatos and Island Gold having both been suspended for more than a month and the completion of the lower mine expansion at Young-Davidson delayed into July due to COVID-19, consolidated 2020 production guidance was revised to 405,000 to 435,000 ounces.
In the third quarter of 2020, both Island Gold and Mulatos continued to incur additional costs related to testing of personnel, lodging and transportation, which have been included in mining and processing costs rather than COVID-19 costs. These incremental costs have increased total cash costs at these operations by approximately $25 per ounce. These additional costs are expected to be incurred throughout the fourth quarter and into 2021.
5 | Alamos Gold Inc
Outlook and Strategy
| 2020 Updated Guidance | ||||||
| Island Gold | Mulatos | Other (2) | Pre | |||
| Young- | COVID-19 | |||||
| Davidson | Total | Guidance |
Gold production (000’s ounces) 135 - 145 130 - 140 140 - 150 405 - 435 425 - 465 Cost of sales, including amortization (in millions)(4) $209 $113 $165 — $487 $491
Cost of sales, including
$1,490 $840 $1,135 — $1,160 $1,103 amortization ($ per ounce)(4)
$990 - $1,030 $480 - $520 $840 - $880 — $780 - $820 $757 - $797 Total cash costs ($ per ounce)(1)(5)
$1,007 - $1,030 - $1,070 $1,047 All-in sustaining costs ($ per ounce)(1)(5)
$1,180 - $1,220 $740 - $780 $940 - $980 — Mine-site all-in sustaining costs ($ per ounce)(1)(3)(5)
Amortization costs ($ per ounce)(1) $480 $340 $275 — $365 $340 Capital expenditures (in millions)
| Sustaining capital(1) | $30 - $35 | $35 - $40 | $15 - $20 | $— | $80 - $95 | $80 - $95 |
|---|---|---|---|---|---|---|
| Growth capital(1) | $45 - $50 | $35 - $40 | $15 - $20 | $10 | $105 - $120 | $75 - $85 |
| Capitalized exploration(1) | $1 | $15 | $— | $4 | $20 | $25 |
Total capital expenditures and capitalized
$76 - 86 $85 - 95 $30 - 40 $14 $205 - $235 $180 - $205
exploration(1)
(1) Refer to the "Non-GAAP Measures and Additional GAAP" disclosure at the end of this press release and associated MD&A for a description of these measures.
(2) Includes growth capital and capitalized exploration at the Company's development projects (Turkey, Lynn Lake, Esperanza and Quartz Mountain).
(3) For the purposes of calculating mine-site all-in sustaining costs at individual mine sites, the Company does not include an allocation of corporate and administrative and share based compensation expenses to the mine sites.
(4) Cost of sales includes mining and processing costs, royalties, and amortization expense, and is calculated based on the mid-point of guidance.
(5) On March 16, 2020, the Company updated total cash cost and AISC guidance to reflect the repurchase and cancellation of a royalty at Island Gold.
The Company’s long-term strategic objective is to generate increasing returns for its shareholders through low-cost production and free cash flow growth from its portfolio of operating mines and development projects. During the third quarter, the Company delivered on several catalysts that form key parts of a transformational year for Alamos and provide the foundation for the Company's strong outlook. These include the announcement of a Phase III expansion at Island Gold, a construction decision on the La Yaqui Grande project, and the completion of the lower mine expansion at Young-Davidson. The latter marked the transition to strong free cash flow growth with all three operations contributing to record free cash flow generation of $76.0 million during the quarter.
The Company expects this strong free cash flow to continue supporting higher dividends while also reinvesting in high return internal growth projects, such as those at Island Gold and Mulatos. These projects will in turn drive free cash flow higher and support growing, sustainable returns to shareholders over the long-term.
The record financial performance in the third quarter reflected higher gold prices and a very strong operational performance with production increasing 49% from the second quarter to 117,100 ounces at significantly lower total cash costs of $681 per ounce. With fourth quarter production expected to be at similar levels, the Company is well positioned to meet 2020 production and cost guidance which had been revised in July given the impact of COVID-19 on the second quarter.
Following the temporary operational suspensions during the second quarter, all of the Company's mines are operating at normal capacity, albeit under strict health and safety protocols. These include regular testing for COVID-19 at a cost of approximately $25 per ounce. These costs are expected to continue through the fourth quarter and into 2021 with the Company's foremost priority being to protect the health and safety of its workforce, their families and communities.
Production increased significantly at Young-Davidson compared to the second quarter following the completion of the lower mine expansion and tie-in of the Northgate shaft. This marked the end of a multi year expansion at Young- Davidson and a step change for the operation. The lower mine infrastructure has been operating as designed since completion in July, with mining rates steadily increasing each month to average over 6,700 tpd for the quarter. The transition to the lower mine infrastructure drove production higher and costs lower, resulting in the operation generating mine-site free cash flow of $10.8 million in the quarter. Mining rates are expected to increase to a rate of 7,500 tpd by the end of 2020, driving strong free cash flow growth from the operation in the fourth quarter and into 2021.
After temporarily suspending operations at Island Gold on March 25, 2020 due to COVID-19, the Company began a phased restart in early May and returned to normal operating levels in June. Strong mining rates continued in the third
6 | Alamos Gold Inc
quarter, averaging 1,200 tpd. Combined with higher grades mined, Island Gold generated record mine-site free cash flow of $40.8 million in the quarter.
The Phase III expansion of Island Gold announced in July has outlined a bigger, more profitable, long-life operation. The expansion is expected to increase throughput rates 67% to 2,000 tpd, driving production significantly higher, at industry low costs over a mine life that has doubled to 16 years. This has driven a substantial increase in value with the expanded operation having an estimated after-tax NPV of $1.02 billion at a 5% discount rate and base case gold price of $1,450 per ounce. At a gold price of $1,750 per ounce, the after-tax NPV is $1.45 billion, more than double the acquisition cost.
Exploration programs at Island Gold resumed in June following the temporary suspension, with the focus on continuing to expand mineralization and adding new near mine Mineral Resources. In the third quarter, Island Gold reported the best surface exploration hole to date, with high-grade mineralization intersected across significantly greater widths down-plunge from existing Mineral Resources in Island East (28.97 g/t Au (26.89 g/t cut) over 21.76 m (MH25-04)). The recent results continue to demonstrate the significant potential for additional growth in Mineral Reserves and Resources at the operation.
Mulatos began ramping up to full operations in the latter part of May 2020 after the suspension of mining activities in early April as mandated by the government due to COVID-19. Following the restart, operations ramped up quickly with mining and stacking rates reaching budgeted levels throughout the third quarter. In addition, the impact of the rainy season was minimal, as Mulatos produced 41,100 ounces in the third quarter at significantly lower costs than guidance, generating mine-site free cash flow of $30.9 million.
As announced in July, 2020, the Company is proceeding with development of the high-return La Yaqui Grande project located within the Mulatos District. With an after-tax IRR of 41% and after-tax NPV of $165 million (assuming a $1,450 per ounce gold price), La Yaqui Grande represents the next low-cost source of production at Mulatos. Construction activities on La Yaqui Grande commenced in the third quarter and are expected to ramp up during the fourth quarter of 2020. Construction is expected to take approximately 24 months to complete with initial production in the second half of 2022. Given its lower costs, La Yaqui Grande is expected to drive combined costs across the Mulatos District lower.
The Company submitted its Environmental Impact Statement ("EIS") for the Lynn Lake project in the second quarter and continues along the anticipated two-year permitting process. In Turkey, the Company is pursuing renewal of the mine concession for the Kirazli project.
The Company's liquidity position remains strong, ending the quarter with $274.1 million of cash and cash equivalents and $100.0 million drawn on its $500.0 million revolving facility. Given the strong free cash flow outlook, the Company repaid the $100.0 million drawn on its revolving facility in October 2020 and is currently debt-free. The Company expects strong ongoing free cash flow generation in the fourth quarter and into 2021, and remains well positioned to fund its internal growth initiatives.
7 | Alamos Gold Inc
Third Quarter 2020 Results
Young-Davidson Financial and Operational Review
| Three Months Ended September 30, | Nine Months Ended September 30, | ||
|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 |
Gold production (ounces) 36,400 50,000 88,200 140,000 Gold sales (ounces) 35,548 48,430 86,893 137,091
Financial Review (in millions)
| Operating Revenues | $66.7 | $70.2 | $150.1 | $186.2 |
| Cost of sales(1) | $50.5 | $57.7 | $140.5 | $171.7 |
| Earnings from operations | $16.2 | $12.5 | $9.6 | $14.5 |
| Cash provided by operating activities | $36.4 | $27.3 | $51.0 | $73.8 |
| Capital expenditures (sustaining)(2) | $9.6 | $8.6 | $19.3 | $29.8 |
| Capital expenditures (growth)(2) | $16.0 | $15.3 | $62.9 | $43.1 |
| Mine-site free cash flow(2) | $10.8 | $3.4 | ($31.2) | $0.9 |
| Cost of sales, including amortization per ounce of gold sold(1) | $1,421 | $1,191 | $1,617 | $1,252 |
| Total cash costs per ounce of gold sold(2) | $923 | $781 | $1,145 | $813 |
| Mine-site all-in sustaining costs per ounce of gold sold(2),(3) | $1,196 | $960 | $1,370 | $1,033 |
Underground Operations
| Tonnes of ore mined | 617,551 | 607,766 | 1,252,300 | 1,808,613 |
| Tonnes of ore mined per day | 6,713 | 6,606 | 4,570 | 6,625 |
| Average grade of gold(4) | 2.24 | 2.62 | 2.27 | 2.53 |
| Metres developed | 3,231 | 2,817 | 9,326 | 8,594 |
Mill Operations
| Tonnes of ore processed | 591,544 | 655,443 | 1,451,577 | 1,949,316 |
| Tonnes of ore processed per day | 6,430 | 7,124 | 5,298 | 7,140 |
| Average grade of gold(4) | 2.19 | 2.48 | 2.01 | 2.40 |
| Contained ounces milled | 41,598 | 52,233 | 93,959 | 150,409 |
| Average recovery rate | 93% | 92% | 92% | 91 % |
(1) Cost of sales includes mining and processing costs, royalties and amortization.
(2) Refer to the “Non-GAAP Measures and Additional GAAP Measures” disclosure at the end of this press release and associated MD&A for a description and calculation of these measures.
(3) For the purposes of calculating mine-site all-in sustaining costs, the Company does not include an allocation of corporate and administrative and share based compensation expenses.
(4) Grams per tonne of gold ("g/t Au").
Young-Davidson produced 36,400 ounces of gold in the third quarter of 2020, a decrease from the same period in 2019 due to lower grades mined and lower tonnes processed. This reflects the planned downtime of the Northgate shaft in July to complete the tie-in of the lower mine.
Following completion of the lower mine expansion in July, underground mining rates increased through the quarter to average 6,713 tpd. In September, underground mining rates increased to average 8,000 tpd, with the operation benefiting from significant broken ore inventory built up during the shutdown. This strong performance demonstrates the expanded capacity of the lower-mine infrastructure. Underground mining rates are expected to increase to sustainable rates of 7,500 tpd by the end of 2020. The average mined grade was 2.24 g/t Au in the quarter, lower than full year guidance due to mine sequencing. Grades mined and processed are expected to increase in the fourth quarter.
Mill throughput was 6,430 tpd in the third quarter, a decrease from the same period of 2019 with low grade surface stockpiles having been depleted in the second quarter of 2020. Mining rates temporarily exceeded milling rates in the third quarter during which time excess underground ore was stockpiled. These stockpiles will be processed in the fourth quarter. Mill throughput is expected to equal underground mining rates moving forward. Mill recoveries averaged 93% in the quarter, slightly above the prior year period.
Young-Davidson is on track to meet production guidance of between 135,000 and 145,000 ounces, with higher mining rates and grades mined expected to drive a further increase in production in the fourth quarter. Combined with lower mining costs and capital spending, Young-Davidson is expected to generate substantially higher free cash flow in the fourth quarter of 2020.
8 | Alamos Gold Inc
Financial Review
Third quarter revenues of $66.7 million were 5% lower than the prior year quarter, reflecting a 27% decrease in ounces sold, partially offset by a higher realized gold price. Ounces sold decreased as a result of lower processing rates and lower grades mined in the quarter. Revenues for the first nine months of 2020 were also lower than the prior year period due to the temporary shutdown of the Northgate shaft to complete the lower mine expansion, which commenced in February and was completed in July 2020.
Cost of sales (which includes mining and processing costs, royalties, and amortization expense) of $50.5 million in the third quarter were lower than the comparative quarter in 2019, due to lower processing rates and lower underground mining costs. Underground mining cost per tonne decreased to $45 CAD per tonne in the quarter, with the operation beginning to realize the efficiencies of operating from the lower mine infrastructure. Cost of sales for the nine months ended September 30, 2020 of $140.5 million were lower than the prior year period mainly due to lower underground mining rates during the tie-in period from February through July 2020.
Total cash costs of $923 per ounce in the third quarter were higher than the comparative period in 2019 due to a 15% reduction in grades mined, but substantially improved from the first half of 2020 when fewer tonnes were mined. In addition, lower grade stockpiled ore, which carries a higher cost per ounce, made up a larger proportion of mill feed compared to the prior year. Mine-site AISC of $1,196 per ounce in the third quarter were higher than the comparative quarter in 2019, reflecting the impact of higher total cash costs. Sustaining capital spending in the quarter was lower than the prior year period, with spending focused on growth projects including the completion of the lower mine expansion and the new TIA-1 tailings facility. Capital expenditures in the quarter included $9.6 million of sustaining capital and $16.0 million of growth capital.
With the transition to the new lower mine infrastructure and the associated reduction in underground mining costs and lower capital, Young-Davidson generated mine-site free cash flow of $10.8 million in the third quarter. Mining rates are anticipated to improve further in the fourth quarter, driving higher production and lower costs which is expected to result in significant free cash flow growth.
9 | Alamos Gold Inc
Island Gold Financial and Operational Review
| Three Months Ended September 30, | Nine Months Ended September 30, | ||
|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 |
Gold production (ounces) 39,600 36,700 97,800 111,800 Gold sales (ounces) 39,322 37,209 97,009 110,094
Financial Review (in millions)
| Operating Revenues | $74.1 | $54.0 | $167.4 | $149.1 |
| Cost of sales(1) | $28.1 | $32.0 | $78.2 | $93.0 |
| Earnings from operations | $45.9 | $21.6 | $88.7 | $55.3 |
| Cash provided by operating activities | $56.7 | $40.6 | $123.5 | $99.3 |
| Capital expenditures (sustaining)(2) | $7.0 | $7.1 | $20.7 | $18.4 |
| Capital expenditures (growth)(2) | $6.0 | $2.4 | $25.1 | $14.1 |
| Capital expenditures (capitalized exploration)(2) | $2.9 | $4.3 | $8.1 | $11.7 |
| Mine-site free cash flow(2) | $40.8 | $26.8 | $69.6 | $55.1 |
| Cost of sales, including amortization per ounce of gold sold(1) | $715 | $860 | $806 | $845 |
| Total cash costs per ounce of gold sold(2) | $394 | $503 | $438 | $490 |
| Mine-site all-in sustaining costs per ounce of gold sold(2),(3) | $575 | $693 | $653 | $658 |
Underground Operations
| Tonnes of ore mined | 111,263 | 89,959 | 298,629 | 277,614 |
| Tonnes of ore mined per day ("tpd") | 1,209 | 978 | 1,090 | 1,017 |
| Average grade of gold(4) | 13.68 | 10.81 | 11.33 | 12.22 |
| Metres developed | 1,430 | 1,211 | 4,313 | 4,200 |
Mill Operations
| Tonnes of ore processed | 101,447 | 102,564 | 281,082 | 307,364 |
| Tonnes of ore processed per day | 1,103 | 1,115 | 1,026 | 1,126 |
| Average grade of gold(4) | 13.62 | 11.12 | 11.52 | 11.49 |
| Contained ounces milled | 44,414 | 36,675 | 104,072 | 113,560 |
| Average recovery rate | 97% | 97% | 97% | 97 % |
(1) Cost of sales includes mining and processing costs, royalties, COVID-19 costs and maintenance costs and amortization.
(2) Refer to the “Non-GAAP Measures and Additional GAAP Measures” disclosure at the end of this press release and associated MD&A for a description and calculation of these measures.
(3) For the purposes of calculating mine-site all-in sustaining costs, the Company does not include an allocation of corporate and administrative and share based compensation expenses.
(4) Grams per tonne of gold ("g/t Au").
Island Gold produced a record 39,600 ounces in the third quarter, an 8% increase from the comparative period in 2019, reflecting higher grades mined and processed. The operation also generated record mine-site free cash flow of $40.8 million driven by a significant reduction in total cash costs to $394 per ounce. For the first nine months of 2020, Island Gold produced 97,800 ounces, and despite the temporary shutdown in the second quarter in response to COVID-19, is well positioned to achieve annual guidance of 130,000 to 140,000 ounces.
Underground mining rates averaged 1,209 tpd in the quarter, a 24% increase from the prior year period and in line with annual guidance of 1,200 tpd. Underground grades mined averaged 13.68 g/t Au, above full year guidance due to mine sequencing with higher grade transverse stopes mined in the quarter. Mined grades are expected to return to full year guided levels in the fourth quarter.
Mill throughput of 1,103 tpd in the third quarter was consistent with the prior year period, but lower than tonnes mined due to unplanned down time. A bearing on the primary ball mill failed prematurely in mid-September, resulting in approximately 8 days of downtime. The bearing was replaced with the mill operating at budgeted levels before the end of September. Mill recoveries of 97% were in line with the prior year quarter and budget.
Phase III Expansion Study
On July 14, the Company reported results of the positive Phase III Expansion Study conducted on its Island Gold mine. Based on the results of the study, the Company is proceeding with an expansion of the operation to 2,000 tpd. This follows a detailed evaluation of several scenarios which demonstrated the Shaft Expansion as the best option, having the strongest economics, being the most efficient and productive, and the best positioned to capitalize on further growth in Mineral Reserves and Resources. Highlights of the study include the following:
- Average annual gold production of 236,000 ounces per year starting in 2025 upon completion of the shaft. This represents a 72% increase from the mid-point of initial 2020 production guidance
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- Industry low average total cash costs of $403 per ounce of gold and mine-site all-in sustaining costs of $534 per ounce starting in 2025, a 19% and 30% decrease from the mid-point of 2020 guidance, respectively
- After-tax net present value (“NPV”) of $1.02 billion at a 5% discount rate and an after-tax internal rate of return (“IRR”) of 17%, using a base case gold price assumption of $1,450 per ounce and a USD/CAD foreign exchange rate of $0.75:1
- After-tax NPV of $1.45 billion and an after-tax IRR of 22%, at a 5% discount rate using a gold price assumption of $1,750 per ounce and a USD/CAD foreign exchange rate of $0.75:1
- Mine life of 16 years, double the current eight-year Mineral Reserve life. This is based on a mineable Mineral Resource of 9.6 million tonnes grading 10.45 grams per tonne of gold (“g/t Au”) containing 3.2 million ounces of gold
- Lowest combined capital and operating costs of all scenarios evaluated. Total life of mine capital of $1.07 billion including sustaining capital. Higher life-of-mine growth capital of $514 million with the Shaft Expansion is more than offset by the lowest sustaining capital and operating costs of all scenarios evaluated.
For the remainder of 2020, the focus will be on progressing permitting and detailed engineering on the shaft and associated infrastructure. This includes the power supply upgrade and planning for the procurement of long lead time items. All of the Shaft Expansion permitting requirements are expected to be completed in 2022.
Financial Review
Island Gold generated revenues of $74.1 million in the third quarter, a 37% increase compared to the prior year period, reflecting a 6% increase in ounces sold, and a significantly higher realized gold price. For the first nine months of 2020, revenues of $167.4 million were higher than the comparative period as higher realized prices were partially offset by lower sales due to the temporary suspension of operations for part of the second quarter.
Cost of sales (includes mining and processing costs, royalties, COVID-19 costs and amortization expense) of $28.1 million in the third quarter were 12% lower than the comparative period of 2019. The decrease was driven by lower unit mining costs, and lower royalty rates following the repurchase of a third-party royalty earlier in the year. This was partially offset by the inclusion of additional expenses in the quarter related to COVID-19 testing, transportation and lodging costs, which have been included in mining and processing costs. All operating costs incurred subsequent to the mine site returning to planned operating levels have been included in mining and processing costs. As a result, there were no amounts classified as COVID-19 costs for the three months ended September 30, 2020. Cost of sales for the first nine months of 2020 of $78.2 million were lower than the prior year for similar reasons.
Total cash costs were $394 per ounce in the third quarter, a 22% decrease from the comparative quarter in 2019, driven by lower unit mining costs, significantly higher grades, and a lower royalty charge per ounce. Mine-site AISC of $575 per ounce in the third quarter were lower than the prior year period driven by the lower total cash costs.
Total capital expenditures were $15.9 million in the third quarter, including capitalized exploration. Spending was focused on lateral development, camp improvements, tailings construction, and the Phase III study. This included $7.0 million of sustaining capital and $8.9 million of growth capital, inclusive of capitalized exploration. Both capital and exploration spending were lower than planned due to the timing of spending, and are expected to increase in the fourth quarter. For the first nine months of the year, capital spending was $53.9 million including capitalized exploration, higher than the prior year period reflecting spending on tailings construction and Phase III engineering.
Earlier in 2020, the Company acquired and canceled a 3% NSR royalty payable on a majority of production from the Island Gold mine for cash consideration of $54.8 million. The royalty was applicable to all future gold production from the Goudreau Lake claims, which comprise the majority of the Island Gold deposit. As of December 31, 2019, these claims contained 0.9 million ounces of Mineral Reserves, representing 71% of Island Gold’s total Mineral Reserves, and 1.1 million ounces of Inferred Mineral Resources. The acquisition of the royalty has reduced total cash costs by $45 per ounce, and has reduced the effective NSR royalty rate on Island Gold’s Mineral Reserves from 4.4% to 2.2%.
Island Gold generated record mine-site free cash flow of $40.8 million during the third quarter and $69.6 million for the first nine months of 2020 despite over one month of downtime due to COVID-19, driven by strong operating margins. The Company expects strong free cash flow to continue in the fourth quarter, though lower than the third quarter due to planned higher capital spending.
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Mulatos Financial and Operational Review
| Three Months Ended September 30, | Nine Months Ended September 30, | ||
|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 |
Gold production (ounces) 41,100 32,700 119,600 107,900 Gold sales (ounces) 41,165 31,164 118,592 107,369 Financial Review (in millions)
| Operating Revenues | $77.6 | $45.1 | $204.0 | $144.7 |
| Cost of sales(1) | $44.0 | $33.5 | $127.5 | $103.1 |
| Earnings from operations | $32.7 | $10.6 | $73.9 | $38.9 |
| Cash provided by operating activities | $40.0 | $7.2 | $85.9 | $31.0 |
| Capital expenditures (sustaining)(2) | $6.1 | $2.1 | $14.6 | $5.3 |
| Capital expenditures (growth)(2) | $3.0 | $10.8 | $6.3 | $39.4 |
| $— | $— | $0.7 | $— |
Capital expenditures (capitalized exploration) (2)
| Mine-site free cash flow(2) | $30.9 | ($5.7) | $64.3 | ($13.7 ) |
| Cost of sales, including amortization per ounce of gold sold(1) | $1,069 | $1,075 | $1,075 | $960 |
| Total cash costs per ounce of gold sold(2) | $746 | $866 | $772 | $772 |
| Mine site all-in sustaining costs per ounce of gold sold(2),(3) | $928 | $979 | $928 | $861 |
Open Pit Operations
| Tonnes of ore mined - open pit(4) | 1,320,034 | 1,664,898 | 4,370,921 | 5,608,221 |
| Total waste mined - open pit(6) | 2,130,232 | 1,361,660 | 5,621,000 | 5,036,918 |
| Total tonnes mined - open pit | 3,450,266 | 3,026,558 | 9,991,921 | 10,645,139 |
| Waste-to-ore ratio (operating) | 0.76 | 0.63 | 0.70 | 0.66 |
Crushing and Heap Leach Operations
| Tonnes of ore stacked | 1,894,725 | 1,628,401 | 5,338,725 | 5,466,393 |
| Average grade of gold processed(5) | 0.91 | 0.81 | 1.17 | 0.92 |
| Contained ounces stacked | 55,411 | 42,667 | 201,455 | 161,450 |
| Average recovery rate | 74% | 77% | 59% | 67 % |
| Ore crushed per day (tonnes) - combined | 20,600 | 17,700 | 19,484 | 20,000 |
(1) Cost of sales includes mining and processing costs, royalties, COVID-19 costs and amortization.
(2) Refer to the “Non-GAAP Measures and Additional GAAP Measures” disclosure at the end of this press release and associated MD&A for a description and calculation of these measures.
(3) For the purposes of calculating mine-site all-in sustaining costs, the Company does not include an allocation of corporate and administrative and share based compensation expenses.
(4) Includes ore stockpiled during the quarter.
(5) Grams per tonne of gold ("g/t Au").
(6) Total waste mined includes operating waste and capitalized stripping.
Mulatos produced 41,100 ounces in the third quarter, 26% higher than the prior year quarter. The increase is primarily due to the contribution of higher grade ore from Cerro Pelon which commenced operations in the fourth quarter of 2019. Production for the first nine months of 2020 was 119,600 ounces.
Total tonnes mined increased slightly compared to the third quarter of 2019, reflecting increased stripping activities at Cerro Pelon and the El Salto portion of the Mulatos pit. Pre-stripping at El Salto and the excess tonnes of waste mined above the life-of-mine waste-to-ore ratio at Cerro Pelon were capitalized in the period. Tonnes of ore mined decreased compared to the prior year period given the additional stripping requirements in the current year.
Total crusher throughput in the third quarter averaged 20,600 tpd for a total of 1,894,725 tonnes stacked at a grade of 0.91 g/t Au. Tonnes stacked in the quarter exceeded tonnes mined due to the processing of SAS stockpiles, and the minimal impact of the rainy season on crusher performance in 2020. Grades stacked were 12% higher than the comparative period of 2019, reflecting the contribution of higher-grade ore from Cerro Pelon. The recovery rate of 74% in the third quarter was in line with budget bringing year-to-date recoveries to 59%. The decrease in recoveries in the current year reflects both the timing of ore stacked on the leach pad, as well as the stacking of some lower recovery SAS ore. The Company expects full year recoveries to be in line with guidance.
Financial Review
Third quarter revenues of $77.6 million were 72% higher than the prior year quarter driven by a 32% increase in ounces sold and higher realized gold prices. For the first nine months of 2020, revenues of $204.0 million were 41% higher than the prior year.
Cost of sales (includes mining and processing costs, royalties, COVID-19 costs and amortization expense) of $44.0 million in the third quarter were $10.5 million higher than the prior year quarter. Mining and processing costs were higher
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