Kirkland Lake Gold Ltd. Common Shares

Good afternoon, ladies and gentlemen. My name is Mariama and I will be your conference operator today. I would like to welcome everyone to the Kirkland Light Gold conference call and webcast to discuss the company's third quarter 2020 financial and operating results. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, you may press the pound key. With that, I would now like to turn the call over to Senior Vice President of Investor Relations, Mark Eding.

Thank you very much, Operator, and good afternoon, everyone. Welcome to our third quarter 2020 conference call and webcast. On today's call, we will be reviewing our results for the three and nine months ended September 30th, 2020. On the call today are many members of the Kirkland Lake Gold senior management team. Speaking today will be Tony McCooch, our president and CEO, David Soares, our chief financial officer, Ian Hahn, co-lead of Australian operations, Evan Pelletier, our vice president of mining, Kirkland Lake, Larry Laziski, our general manager of Detour Lake Mine, and Eric Calio, our senior vice president of exploration. After we go through the presentation, we'll then open the call up for questions. Oh, I should also mention there are several other members of our management team on the phone as well. After we go through the presentation, we'll open up the call to questions. We ask that each person limit themselves to two questions. The slide deck that we'll be referring to is available on our website, both on the homepage and in the events section. Before I get started, I'd like to direct your attention to slide two in the slide deck, which relates to forward-looking statements. Our remarks and answers to questions today may and probably will contain forward-looking information about future events affecting our companies. please refer to slide two, as well as the forward-looking information section of our most recent MD&A, dated November 4, 2020, for more information. Also during today's call, we'll be making reference to non-IFRS performance measures. A reconciliation of these measures is available in our most recent MD&A. Finally, I'll mention that all figures we use today will be in U.S. dollars, unless otherwise stated. With that, I'll now turn the call over to Tony Makuch, President and CEO of Kirk and Lake Gold. Thanks, Mark, and thanks, everyone, for joining. And maybe before I get started, maybe we should acknowledge and thank all the people at Kirk and Lake Gold and their families for what's been going on. I know it's been a very unusual and difficult year for people. We don't take it lightly, the trust you put in us to keep people safe, providing a safe workplace. And in that order, keep the families safe and keep the communities we live in and we work in safe. As well, you know, we acknowledge the fact that the people that do work for Kirkland College, the people that haven't come into work, you know, they've been very, very good on working safely and during this period of time and really, you know, being COVID-free as much as we can at our sites. And, you know, that's an acknowledgement of people that really recognize the importance of things and attention to detail. you know, and also the attention to looking out for everybody else. So anyway, thank you for everybody for what you've done, and let's look forward to continued success as we go forward into Q4 and into 2021. I'll start here now on slide four, and it's This is starting off with discussions on our efforts into environmental and social governance at Kirkland Gold. We've been making a lot of progress with formalizing our approach to document and reporting on all the good things we are doing. In terms of the next slide, slide five, a key area for us, as I mentioned, is formalizing our processes around public disclosure. We have signed on to the World Gold Council responsible gold mining principles and are aligning ourselves to be ready for the Mining Association of Canada towards sustainable mining. We've conducted internal gap assessments and engaged a third party verifier to review our readiness towards these standards. Today, we've made a lot of progress in developing and implementing policies and standards, namely human rights, inclusion, equality, diversity, Supply chain management, stakeholder engagement, and community feedback. Regarding greenhouse gases, we have a great success story in Kirkland Lake Gold. Maybe I'll spend a little time telling you more about that later. We really have been a leader in the industry. Turning to slide six, this is us actually showing you where we are in our greenhouse gas emissions in more detail. This slide shows our performance versus the global gold mining and gold industry. As you can see, we compare very favorably to our peers with Detour Lake, Macassar and Fosterville, all well below the comparable industry averages. In particular, you can see just how low Macassar's greenhouse gas emissions are given the extensive use of battery powered mobile equipment at the mine. Turning now to our financial and operating results as shown on slide seven. We had a strong quarter in Q3 of 2020. Adjusted earnings were $0.91 per share, which increased from $0.80 in last year's third quarter and $0.79 in Q2 of this year. Once again, we generated substantial amounts of cash flow. Operating cash flow totaled $431 million, and free cash flow was $275 million in the quarter. On a year-to-date basis, if you exclude non-recurring items, we generated almost $700 million of free cash flow. The key driver to our strong performance was significantly higher revenue, partly compared to last year's third quarter, particularly compared to last year's third quarter. I'm sorry about that. And, you know, a big part of that will be due to gold price. You know, David will get into it in the details of that shortly. We also benefit, though, from solid growth and gold sales, which largely reflected the addition of Detour Lake. Effectively, we substituted high-volume production at Detour for high-cost, small-scale production at Old Complex, where operations were suspended in April. From a return standpoint, it was a very valuable shift for us and our shareholders. Going to slide 8, we reported significant growth in cash in Q3, increasing by over $300 million to about $850 million. The key contributor to cash growth was our $275 million of free cash flow. In addition, we added $108 million of cash from selling our shares in Cisco Mining. This was a good investment for us with a gain of $60 million being recorded on a comprehensive basis. We also gained $75 million in cash from Newmont Canada through a strategic alliance agreement involving the whole complex and exploration opportunities in the region. Offsetting these sources of cash, we continue to invest aggressively in our key assets, and we make further progress returning capital to shareholders. I'll turn to slide nine. Our number one priority in terms of capital allocation is investing in Macassar, Detour Lake, and Fosterville, our three cornerstone assets. So far this year, we have invested about $345 million of capital into these three mines. Our total growth capital year-to-date is $60 million, and that number will go up significantly in Q4. Macasta accounts for over half of that amount, with the number four shaft project being the largest component. The shaft is progressing very well, and you will hear more about that in a few minutes. Growth capital at Fosterville here today is about $15 million. We finished constructing a new ventilation system and a new refinery earlier this year. The new ventilation system was critical in terms of being able to increase tonnage coming out of the mine. And that was the result of it. But the critical aspect of it was significantly improved working conditions in the mine, lowered the heat. and gases and basically improve the working environment for people. At Detail Lake, we had a number of other projects since the acquisition. We're constructing a landing strip to begin bringing people in via air and coming into 2022 as opposed to buses. Sorry, 2021. An assay lab, new welding shop, and other infrastructure as well. We also have tailings and mill enhancement projects underway. We're adding new mobile equipment to support growth as we move forward. Now I'm looking at slide 10. The key part of investing in our assets is exploration. It's been a big driver of value creation in Kirkland Lake Gold since 2016. We've invested year-to-date about $87 million in exploration, and we expect to reach about $130 million by year-end. I don't want to steal Eric's thunder. We will speak shortly about exploration, but we are clearly having significant success this year with the drill bit. Our last announcement was a couple weeks ago at Macasa, and they were some of the best exploration results we have issued in a long time. We have long felt that the area where the self-mine complex comes together with the amalgamated breaks could be extremely interesting. And with results like 254 grams over 15 meters, that view is only intensified. At Detour, we have had considerable success very early on in our drilling program. Our drill results increasingly support our view that there is one very large deposit covering the areas around the Main and West Pits. Finally, at Fosterville, we have put out some very encouraging results during the third quarter. They include better than expected grades from infill drilling in the Swan Zone. also included results to demonstrate the scale and growth potential of mineralized systems at signet robbins hill and harrier now turning to slide 11 we've made great strides with the second component of our capital allocation strategy returning capital to shareholders so far this year we have returned almost 650 million dollars through share purchases and dividends 527 million of that amount has been used to repurchase 14 million shares through our NCID. We have a stated goal of buying back 20 million shares over 12 to 24-month period and doing very well against that goal. In terms of dividends, we have ramped it up considerably. We first doubled the quarterly dividend in Q1 to 12.5 cents per share. That resulted in over $100 million being paid for our Q1, Q2, and Q3 dividend payments. About a month ago, we announced another dividend increase, this time by 50% to $0.1875 per share per quarter. The new dividend takes effect with the Q4 payments in January. As you can see, we are very committed to returning capital to shareholders. Between buybacks and dividends to date, we have returned about $2.35 per share or $643 per ounce of production per year to date, 2020. Moving on to slide 12, the third component of our capital allocation strategy is adding new assets that have transformational potential. Obviously, the most recent example of this is the Detour Gold acquisition. The addition of Detour Lake has been a tremendous transaction for our company and our shareholders. We've already talked about exploration and where results have been very encouraging. In terms of performance, the mine is doing very well. So far this year, Detour Lake has generated $231 million of free cash flow, which is over 40% of our total free cash flow. We expect to see higher levels of production next year and in the process of getting the permit and making the investment needed to increase tonnage on a go-forward basis. Moving to slide 13, redoing well against our guidance. You may recall we reissued guidance on June 30th after withdrawing it due to COVID-19. In terms of production and unit costs, we're in very good shape to achieve a consolidated guidance. Looking at the components of production, we expect Fossaville will beat its target range of 590 to 610. That will be offset by Macassar, which will not get to 210,000 ounces, the low end of its target range. The CAFSA has had a number of challenges this year. It has been impacted by COVID more than any of our other operations. We also were affected by extreme heat and mine during Q3. This impacted our productivity and equipment availability. The result was reduced mining rates and a lower average grade because we didn't have access to many of the higher grade areas we planned to mine. In terms of other consolidated guidance, we are in very good shape. As mentioned, we are adding new projects at Detra Lake, which will result in higher capex in Q4, and we will see a significant step up in exploration expenditures this quarter as well. With that, I'll turn the call over to Dave Soros, our Chief Financial Officer. Thanks.

Thank you, Tony, and good afternoon, everyone. I will start on slide 14. As Tony mentioned, we had strong earnings in Q3 2020. Adjusted net earnings totaled $249.3 million, or $0.91 per share. a 49% increase from Q3 2019 and 14% better than last quarter. We had a significant difference between adjusted net earnings per share of $0.91 and net earnings per share of $0.73 in Q3 2020. The difference was mainly related to rehabilitation costs of $32.6 million resulting from an increase in our environmental remediation provision. These costs relate to a new rehabilitation program we have commenced in Northern Territory aimed at addressing legacy environmental issues caused by previous owners. Also excluded from adjusted net earnings in Q3 were $23.6 million of non-cash foreign exchange losses reflecting the strengthening of the Australian and Canadian dollar against the U.S. dollar during the quarter, as well as about $8 million of restructuring and severing costs. mainly related to old complex. Turning to slide 15, as you have heard, the key driver of improved earnings in Q3 was higher revenue. Revenue in Q3 2020 totaled $632.8 million, 66% higher than revenue of $381.4 million in Q3 2019, and higher than the $581 million of revenue reported last quarter. Of the increase from a year ago, $141 million resulted from a $425 per ounce increase in the average gold price to $1,907 per ounce. $112 million of revenue growth came from a 30% increase in gold sales to 332,000 ounces, mainly related to the addition of Detour Lake. Compared to last quarter, we had a $63 million increase in revenue, which resulted from a $191 per ounce increase in the gold price from $1,716 per ounce in Q2. This impact more than offset a $16 million reduction from gold sales, with gold sales of 332,000 ounces in Q3, slightly lower than 341,000 ounces last quarter. The reduction was mainly due to lower sales at McCassa and Fosterville, as well as the suspension of operation at Holt Complex, which had no sales in Q3 versus 3,600 ounces of sales in the second quarter. Looking at EBITDA, as shown on slide 16, Q3 2020 EBITDA totaled $384 million, a 30% increase from $296 million in Q3 2019. Compared to last quarter, EBITDA increased 24% from $310 million. The change from last quarter relates to net earnings, which were higher, driven by revenue growth and lower losses due to FX, $23.6 million in Q3 2020 versus $72.8 million in Q2 2020. The deferred income taxes are higher compared to last quarter, driven by increased earnings before tax. Excluding FX gains and losses, we would have compared favorably to last quarter in terms of EBITDA. Turning to slide 17, it looks at our cash and cash flow. On the slide, you will see that our operating cash flow was very strong. It includes $47 million in cash taxes paid in Q3 2020. Other factors impacting our cash were ongoing investments in our key assets, in which we spent $156 million, which was offset by $109 million from the sale of investments, mainly our Cisco shares, and also $75 million received as part of the Newmont Strategic Alliance Agreement. These items mainly account for the $25 million of net cash from investing activities. Cash used for financing activities of $146 million reflected $107.4 million that were used during the quarter to repurchase 2.1 million shares. Also, as Tony mentioned earlier, we used $34.5 million for our Q2 quarterly dividend payment of 12.5 cents per share in July. Turning to slide 18, it looks at the change in cash in a different way. You can see that the largest contributor to growth in cash was from our operations, which generated about $310 million of cash, which is before interest, income taxes paid, and the impact of changes in working capital. Slide 18 also highlights the impact of key items mentioned in the previous slide, including the sales investments, the Newmont option, cash taxes paid during the quarter, share repurchases, and dividends paid. On the slide, the reference other includes exploration expense and working capital movements, including the build-up of AP at Detour Lake due to timing and increased capital spend and the impact of the Fosterville royalties approval. With that, I'll turn the call over to Ian Hahn, co-lead of our Australian operations.