Kirkland Lake Gold Ltd. Common Shares

Good afternoon, ladies and gentlemen. My name is Sidarius and I will be your conference operator today. I would like to welcome everyone to the Kirkland Lake Gold conference call and webcast to discuss the company's fourth quarter and full year 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 would 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, press the pound key. With that, I would now like to turn the call over to Senior Vice President, Investor Relations, Mark Udding.

Thanks very much, Operator, and good afternoon, everyone. Welcome to our fourth quarter and full year 2020 conference call and webcast. 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, Evan Pelletier, our Vice President Mining for Kirkland Lake, Larry Lozeski, our General Manager of Detour Lake Mines, Ian Hahn, Vice President and Co-Lead of Australian Operations, and Eric Callio, our Senior Vice President of Exploration. There are also several other members of the management team on the phone as well that may participate in the Q&A. After we go through the presentation, we'll then open up the call to questions. We ask each person to limit themselves to two questions for the purpose of this call. The slide deck that we'll be referring to is available on our website, both on the home page and in the events section. Before I get started, I would like to direct everyone to the forward-looking statement slide, slide two on our slide deck. Our remarks and answers to questions may contain and likely will contain forward-looking information about future events affecting our company. Please refer to slide two, as well as the forward-looking information section of our most recent MD&A, dated February 24th, 2021, for more information. Also during today's call, we'll be making reference to non-IFRS performance measures. A reconciliation of these measures is also available in our most recent MD&A. Finally, I'll mention that all figures given today will be in U.S. dollars and less otherwise stated. With that, I'll turn the call over to Tony McCooch, President and CEO of Kirkham Lake Gold. Thanks, Mark, and thanks, everybody, for being on the call. And I guess it's definitely been a different time over the last year in 2020. As we can say, a lot of different things happen, but in terms of the people of Kirkland Lake Gold, which includes the people that directly work for us, our suppliers, our communities where we work, and our partners, everybody really stepped up to the forefront and really put in some good efforts. you know we had we had we had a record year in a lot of different areas and you know in some areas we can be very proud of it in terms of of how people work together and and and achieve these results but when it came to uh COVID-19 and COVID-19 response and our all of the processes that place i think we've had significant success and our sites still remain very safe and operating well, and people can feel pretty good about what we can achieve as a group when we get challenged. Anyway, if I can turn to slide number five, talking about ESG, we've been putting a lot of effort into the difference of components of ESG at Kirkland Lake Gold, and really a big part of it is we want to start ensuring that we communicate better in terms of what we do from an ESG perspective. And if we go to slide number six, as I mentioned, a key area for us is formalizing our processes around reporting and public disclosure. And as I also have said, we've made significant advancements. We published our second consolidated sustainability report in November of this year, sorry, of 2020. And we are on track now to issue our 2020 sustainability report before our annual meeting in May. And we'll be actually issuing our sustainability report every year around the same time and with our normal filings that we would be doing at the end of March. Additionally, we adopted the World Gold Council's responsible gold mining principles in 2020, and we have completed our year one external assurances. We finalized policies and standards on human rights, supplier quota content, conduct, grievance resolution, and workplace diversity. We are an industry leader in minimizing greenhouse gas emissions and invest significant funds in managing water and tailings. And, you know, we're going to actually be increasing our efforts in those areas and going forward. And, you know, the people up at Detour achieved an important recognition in the year with the Tom Peters Memorial Mine Reclamation Award for their Progressive Reclamation Program, which has been going on there for quite some time. Now in Site 7, as you can see, we firmly believe in being socially responsible and in providing support to community organizations and groups that provide essential services. At the beginning of the global pandemic, Kirkland Lake Gold committed to supporting medical, social, and community organizations or areas of operations with a focus on homelessness, mental health, addiction, training, youth training and development, and senior citizen care. Our teams have been actively engaging with public service organizations in both Canada and Australia to help those in need, both financially and with in-kind donations of hand sanitizer, masks, and other PPE. Our support for our local community goes beyond COVID-19. There's a long list of initiatives highlighted on the slide. In total, what they demonstrated is a company that is deeply committed to and immersed in the communities where we operate. Turning now to fiscal year 2020 on slide 8. We achieved a record year of performance. We reported record production, earnings and cash flow. We also achieved all of our consolidated full year 2020 guidance. We returned almost $850 million to shareholders through share repurchases and dividends. We completed the acquisition of Detour Gold and made considerable progress at Detour Lake Mine, which generated over 40% of our free cash flow and is already realizing some of the substantial upside we saw when we looked at this asset. And speaking of the upside, we achieved significant exploration success in 2020 despite challenges related to COVID-19. And in all three of our cornerstone assets, we've made good progress, right, with our key projects. And that includes the number four project at Macassar, the Robin Hill development over at Fosterville. And, you know, the biggest driver is going to be seen in 2021 at Detour with the expansion of the resource that we – with the exploration success. And that combined with the mill expansion and mine expansion that we're working on right now. And before I leave that slide, again, I mentioned that we had a record year financially, operationally, but we also had a record year for Kirkland Gold from a health and safety perspective, the lowest injury frequency we've had now in five years or ever for the company. Looking closely now at our financial operating results on slide nine, our earnings were very strong. Adjusted net earnings were $923 million or $3.41 per share. This increased 23% from 2019. Operating cash flow totaled just over $1.3 billion, and free cash flow increased 58% to $733 million. The key driver to our strong performance was significantly high revenue and solid increases in gold sales. Looking at our operating results, we had record production of 1.37 million ounces of gold. It was 41% higher than 2019. Obviously, the addition of Detour Lake was a key contributor to the increase. Unit cost performance remained very strong with operating cash cost per ounce of 404, which beat our guidance, and all outstanding costs averaging $800 per ounce. Again, from a cost perspective, we are in the leading end of the pack of our industry. Turning to slide 10, looking at Q4 2020. Again, as I mentioned, we generated record results in the quarter. Production was 369,000 ounces. 32% higher than Q4 2019, and 9% increase from the previous quarter, with all three of our operations having their highest production levels in 2020. Our unit costs were strong, with operating cash costs of $396 per ounce and our own sustaining costs of $790 per ounce. Looking at earnings, adjusted net earnings were $0.98 per share, which increased from $0.88 per share in last year's fourth quarter and $0.92 in Q3. The $0.98 of adjusted net earnings was after a $0.03 per share reduction due to prior period adjustments on depreciation costs. David Storrs will discuss that more in detail in a few minutes. And looking at cash flow, operating cash flow was $421 million, while free cash flow totaled $432 million. Now looking to slide 11. With our record operating and financial results in 2020, we finished the year with a very strong balance sheet. Cash total just under $850 million. It's 20% higher than that at the end of 2019, and that with no debt. A key contributor to our cash growth was our 58% increase in free cash flow to just over $733 million, as I mentioned previously. We also achieved $174 million of proceeds from the sale of strategic investments and $75 million through a strategic alliance with Newmont leading to our whole complex and exploration in Northern Ontario. Offsetting our strong cash generation was a significant capital return to shareholders during 2020. Returned $848 million through a combination of repurchasing shares and growing dividends in the year. Now on slide 12, this provides the details of what we think is one of our very important components of our capital allocation strategy, which is returning capital to shareholders. Of the $848 million returned to shareholders in 2020, $732 million was used to repurchase 18.9 million shares in the year. I should point out that we also repurchased an additional 1.1 million shares in early January of 2021 and have now achieved our goal of buying back 20 million shares. We did that in less than 12 months. We had mentioned before that we would do it between 18, 12 and 24 months. And that was a goal that we announced as part of the closing of the detour gold acquisition in January of last year. We also paid $116 million in dividends in 2020. We tripled the dividend during the year through two dividend increases, and now we're paying 18.75 cents per quarter or 75 cents per year. Moving to slide 13, as mentioned, we achieved all of our full-year consolidated 2020 guidance. I won't go through each component. But if you look at production, we predicted in last quarter's call that Fossaville would beat its targeted range driven largely through higher than planned times process. We also said during the Q3 call that Macassar would not achieve its production guidance, which it didn't, but it had a stronger fourth quarter and we fully expect to show improved results in 2021. You can also see from slide 13 that we were slightly below guidance for both growth and capital exploration. That really involved the timing of ramping work back up after it was suspended due to COVID-19. Moving on to 2021 and then given the 2021 guidance in slide 14. We issued our 2021 guidance and three year production guidance in December. The 2021 guidance includes production similar to 2020 with stronger growth at Detour Lake and La Casa returning to 2019 levels. This will offset lower production at Fosterville. In Fosterville, we expect to continue drilling for new reserves and resources and looking for the next high-grade zone, which will be a big value driver for Fosterville. But as we mentioned previously, we've got to really look at Fosterville not being more of a 325,000 to 425,000 ounce a year producer and really try to create sustainability in that way because of the challenges we're trying to replace The number of ounces we mined very quickly from the swan zone in 2018, 19 and 20. Our unit costs will remain strong with all outstanding cost guidance on change from 2020. We're seeing a shift from sustaining capital to growth capital in 2021, which is largely a Deidre Lake mine. Finally, with exploration guidance of $170 to $190 million, we will be doing more drilling than we've ever done before in our history of Kirkland Lake Gold, and we believe we are one of the more, if not the most, aggressive explorer in our industry. We continue to have substantial exploration upside at all three of our cornerstone assets, and we will plan to go after that upside very aggressively. Before turning the call over to David Soares, I'll just talk slide 15 and briefly look at our mineral reserve estimates for December 31st, 2020, which were released yesterday as part of our year-end results. It's important to note that our drilling programs for 2020 were significantly impacted by disruptions related to COVID-19. We shut down the drills in Q2, ramping back up, took several months in total. We did about 60% of our planned in-mine drilling at Fosterville and even less than that at Macassar. Even with that limitation, our total mineral reserves at operating assets increased 3% to 21 million ounces. The increase reflected reserve growth to 6% at Beecher Lake. Basically, what we did at Beecher Lake was become more selective using variable cut upgrades to help us with ore sorting and grade optimization to the mill. But also, instead of putting some low-grade material into waste piles, we actually said we would be more selective and place that into a low-grade stockpile that we can use to process that end of mine life or end of pit life. We have identified a reserve of 14 million ounces that will feed at similar rates previous years, and we've separated from that an additional 2 million ounce low-grade reserve, which will be a low-grade stockpile, as I mentioned, that will be fed into the mill when the pit is mined up. When we acquired Detour, we saw an opportunity to build an assay lab and optimize the feed to the mill using the stockpiles and really the split of reserves into milling reserves and low-grade stockpile materials is somewhat a part of that exercise. We'll be doing a lot of blast oil sampling, improved rate control management at site over the next few years to help in terms of the operation. And, you know, we did announce that we have the permit to increase mill throughput and we do have capital programs taking place this year and going into next year to increase the mill throughput capabilities. And, you know, we have given guidance showing that we're increasing production to 680 to 720,000 ounces a year for the next four years. at detour under its current form and with the potential to go to over 800,000 ounces by 2025. But all this is still a subset of what we're going to get from the results from the drilling in 2020 and 2021, the saddle zone, etc. And by the way, no new drilling, no new information was used to into the reserve statement for 2020 for detour. So this is all a catalyst and the work that's going to be done in 2021 as part of our exercise. And then at Macassar, we did have a small reduction in reserves, again, which reflected limited drilling. And you see that at Macassar, we did have solid resource growth, which partly reflects the fact that we didn't get the drilling done to convert resources into reserves, as I said, of about 60% of drilling at Macassar. At Fosterville, we depleted 647,000 ounces, and that would create up to 33 grams per tonne. We were able to replace 339,000 ounces, albeit at a lower grade. The reality is to replace the number of ounces we need to find the next high-grade zone with an expiration budget of possible of $85 to $95 million this year. We are going to work very hard at doing that in 2021. And I also want to emphasize that based on our new reserve estimates, we are well positioned to achieve our existing three-year production guidance at all of our sites, and we expect that 2021 will be a pretty solid year for reserve replacement and growth as well. And with that, now I'll turn the call over to David Soros, our Chief Financial Officer. Thank you, Tony, and good afternoon, everyone. I will start on slide 16. As Tony mentioned, we had strong earnings in Q4 2020. Adjusted net earnings totaled $265.8 million or $0.98 per share, a 43% increase from Q4 2019 and 5% better than last quarter. The difference between adjusted net earnings per share of $0.98 and net earnings per share of $0.86 in Q4 2020 was mainly related to the add-back of $35 million of non-cash foreign exchange losses, reflecting the strengthening of the Aussie and Canadian dollars against the U.S. dollar during the quarter, and costs related to non-operating sites of $8.9 million incurred at the hold complex M&T, which are not reflective of our operations, as well as severance costs and COVID-related costs, totaling $2.2 million for the quarter. Q4 earnings and earnings per share is impacted by higher depreciation, Depreciation in the fourth quarter included an adjustment of approximately $10 million or $0.03 a share relating to the first three quarters of the year, resulting from purchase price allocation adjustments at Detour Lake. Turning to slide 17, the key driver of improved earnings in Q4 was higher revenue. Revenue in Q4 2020 totaled $691.5 million. 68% higher than the revenue of $412.4 million in Q4 of 2019 and higher than the $632.8 million of revenue recorded last quarter. Of the increase from a year ago, a $393 per ounce increase in the average gold price to $1,875 per ounce accounted for $146 million of the increase in revenue year over year. and 137 million related to a 33% increase in gold sales to 371,000 ounces. Compared to last quarter, we had a 74 million increase in revenue from a 12% increase in gold sales, increasing to 371,000 ounces from 332,000 ounces last quarter, This impact more than offset a $12 million reduction as a result of average price decreasing from $1,907 last quarter to $1,875 in Q4. Looking at EBITDA, as shown on slide 18, Q4 2020 EBITDA totaled $458 million, a 60% increase from $286 million in Q4 2019. Compared to last quarter, EBITDA increased 19% from $384 million. The change from last quarter relates to net earnings, which were higher driven by revenue growth. Depreciation in Q4 was 33 million higher than Q3 2020, partly due to increased sales volume, which accounted for $10 million of the 33. As mentioned earlier, the increase in depletion and depreciation was primarily at detour due to depreciation adjustments on the fair value estimates related to the purchase price acquisition. Allocation, sorry. These adjustments increased depletion and depreciation expense in Q4 2020 by approximately $20 million as compared to Q3. Approximately 10 million of the 20 related to revisions to depletion and depreciation expense during the first three quarters of full year 2020. Turning to slide 19. Adjusted net earnings in full year 2020 totaled $922.9 million or $3.41 per share, a 60% increase from full year 2019. The difference between adjusted net earnings per share of $3.41 and net earnings per share of $2.91 in full year 2020 was mainly related to $58.5 million of non-cash foreign exchange losses reflecting the strengthening of the Australian and Canadian dollars against the US dollars during the year. The environmental mediation provisions at the NP account for $32.6 million and transaction cost of $33.8 million related to the detour acquisition. Turning to slide 20 to look at our cash balance and cash flow. On the slide, you'll see that our operating cash flow is very strong, generating over $490 million of operating cash flow in the quarter before $70 million of cash tax paid. During the quarter, we also invested in our key assets, spending $189 million in capital, as well as $20 million on strategic investments. We also received $65 million from the sale of our investments in DeGray and Noble, accounting for the $147 million of net cash used in investing activities during the quarter. Cash used for financing of $277 million reflected the $245.3 million we used to repurchase 5.7 million shares in Q4, as well as $34.2 million used for dividend payments. Slide 21 looks at the change in cash in a different way. You can see that the largest contributor to growth in cash was our operations, which generated about $401 million of cash which is before income tax paid of $70 million, gross capital investment $33 million, and exploration spending of $36 million. Other cash outflows include costs incurred at our non-operating sites at the NT and Holt Complex, as well as corporate G&A of $12 million. As noted in the previous slide, during the quarter, $279.5 million was returned to shareholders, including $245.3 million used to repurchase just over 5.7 million shares through the company's NCIB, and $34.2 million of dividend payments related to a quarterly dividend of $0.125 per share, paid on October 14, 2020, to shareholders of record on September 30, 2020. Next, I'll turn it over to Evan Pelletier, VP of Mining at Kirkland Lake, to discuss performance at the CASA. Evan Pelletier Thanks, David. I'm starting on slide 22. For 2020, Macassar produced 183,000 ounces at operating cash costs of 562 and all-in sustaining costs of 922. These are not the numbers that we were expecting on prior calls. We have talked about the impact of COVID-19 on our operations and the excess heat we experienced in Q3. We bounced back in Q4 and had a solid quarter with the average grade up 45% and higher levels of tons processed compared to Q3. Production for the quarter totaled 52,000 ounces at an operating cash cost of 534 and all-in sustaining costs of 941. The all-in sustaining capital numbers were still high, which largely reflected the level of sustaining capital expenditures. As we continue to catch up on some key projects, including capital development, 37% increase in production compared to the previous quarter was due to 45% improvements in the average grade, reflecting a greater portion proportion of higher grade stoves and the SMC being mined during the final quarter of the year. As you have heard, this year we expected to see numbers more like 2019 with productions of 220 to 255,000 ounces and cash costs of 450 to 470. Next slide, please. Turning to slide 23, looking at our major projects for the year, we have made excellent progress on a number of fronts. The foreshaft project is approximately a month ahead of schedule and on target for completion in late 2022. We're tracking well against our capital cost budget of $320 million and have the potential to come in below that level. The total spent to date at December 31st, 2020 was $177 million. During Q4, we sank the shaft 875 feet to a total of 4,250 feet by quarter end. We also continue to make good progress with steel installation and putting in place all required infrastructure. Today, the shaft is down around 4,600 feet. We also have projects in place to improve ventilation. We're currently completing an upgrade project that should increase air to the mine by about 50% to around 300,000 CFMs. This should be done in Q2. We are also expanding our ventilation with two vent raises, which should add another 200,000 CFM by the first half of the year. When the foreshaft is done, we'll go to about 750,000 CFMs or better. We're also doing a number of other projects, underground infrastructure, mill enhancements, and the ramp surface zones along the amalgamated break. Generally, I'll say these projects are all progressing well. I'll now turn the call over to Larry Lazinski, General Manager of Detour Lake Mines.

Thanks, Sahuk. Turning to Detour Lake on slide 24. Before we look at the Q4 2020 numbers, I wanted to call to your attention that the results for the full year 2020 are for the 11 months from January 31st, 2020 to the end of the year. In fiscal year 2020, Detour Lake produced 517,000 ounces. Gold sales were 537,000 ounces for the year. Production for the year was just under the guidance range of 520 to 540,000 ounces, reflecting a slightly lower than planned average grade. Looking at unit costs, operating cash costs averaged $625 for the year, all in sustaining costs per ounce sold averaged $1,171. For Q4 2020, production at Detour Lake totaled 153,000 ounces at an average cash cost of $612 and an all-in sustaining cost of $1,207 per ounce. Looking at 2021, you've already seen the guidance. We expect significant growth in production to 680,000 to 720,000 ounces. which is based on over 24 million tons of throughput at much higher average grade. To support this growth, we have received a revised air permit to support annual production rates up to 32 million tons. Although our current plan does not fully utilize that new limit, we do anticipate reaching 28 million tons as previously spoken about earlier in throughput in the new plan. With the growth in production, unit costs should improve with cash costs of $580 to $600 per ounce and all-in sustaining costs better than $900 per ounce with lower sustaining capital expenditures. Moving to slide 25, Tony mentioned earlier we have a number of projects at Detour Lake. We're investing in significant mill enhancements to improve throughput by adding screens to the crushing circuit adding leach tanks, a detox tank, and capital improvements to the CIP and gravity circuits. We are also continuing with a major tailings expansion project. Surface infrastructure projects include a new assay lab, communications upgrades, core shack, airfield, welding shop, camp expansion, improved access roads, payment of areas around the camp, surface buildings and the front gate, which also includes a new weigh station. Mobile equipment procurement was a key area of capital expenditures as well in the second half of 2020, as we upgraded the fleet in support of planned growth. This will also continue in 2021. We also have significant deferred stripping component in our growth capital this year, which reflects a major stripping campaign we have planned as part of phase four, which will support production in future years. With that, I'll turn the call over to Ian Hahn, vice president and co-lead of our Australian operations.