Oceana Group Ltd

Good morning and afternoon, ladies and gentlemen, and welcome to the Oceana Gold Q1 2020 Financial Results Webcast and Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require needed assistance, please press star 0 for the operator. Note that this call is being recorded on Thursday, May 14th at 5.30 p.m. Eastern Time. And I would like to turn the conference over to Sanpazuki. Please go ahead, sir.

Good evening. Morning. Welcome to Oceana Gold's third quarter 2020 results webcast and conference call. I am Sanpazuki, the Vice President of Investor Relations for Oceana Gold. I am joined today by Michael Holmes, President and CEO of Oceana Gold, along with Scott McQueen, Chief Financial Officer, and Jim Whitaker, our Executive General Manager of the Hale operation. We turn over to slide two in the cautionary statements. Before we proceed, note that references in this presentation adhere to international financial reporting standards, and all financial figures are denominated in U.S. dollars unless otherwise stated. Also note that the presentation contains forward-looking statements, which by their very nature are subject to some degree of uncertainty. There can be no assurances that our forward-looking statements will prove to be accurate as future results and its events could differ materially. It's also important to note that although we have maintained our formal 2020 guidance, the current situation related to the COVID-19 virus is still fluid and could impact the current state of our business. However, we have strict protocols in place to safeguard the health and well-being of our workforce. I refer you to the disclaimers on the forward-looking statements in our presentation. I now turn it over to Michael Holmes, our President and CEO.

Thank you, Sam, and good morning, good evening to all.

I hope everyone is healthy and safe through this unprecedented time. Moving on to slide three, the results overview. Despite the emergence of the COVID-19 global pandemic creating additional and varied risks across our global operational footprint, we delivered a good quarter of operational performance while safeguarding the health and wellbeing of our workforce. Production and unit costs were in line with our expectations with continued productivity increases at hail, despite the strict protocols we put in place at the beginning of March and a higher than normal rainfall during the first quarter. At quarter end, the New Zealand Government imposed restrictions in the wake of COVID-19, resulting in the retirement of mine operations and limited processing at Macrae, as well as the shutdown of development activities at Waihe. On April 28th, we resumed full operations at Macrae and restarted the development of the Martha Underground project following easing of those restrictions. Revenue decreased from the previous quarter due to the lower gold sale volumes, which was partially offset by a higher average gold price received. EBITDA decreased slightly quarter on quarter from lower sales and margins, but this was partially offset by lower corporate costs. Our adjusted net loss of $10.7 million for the quarter reflects decreased revenue as expected. and a similar quarter-on-quarter depreciation and amortisation costs related to higher push-stripping activities. Our adjusted EPS was negative two cents. Cash flow per share was 19 cents, inclusive of the gold pre-sales, and seven cents without the pre-sales, which was ahead of the consensus. As we manage the near-term risks associated with the COVID-19 virus, we're also advancing our organic growth opportunities. Moving on to slide four, we've operated as a sustainable business for the past 30 years by applying robust ESG practices across our business. We are proud of our ability to discover all bodies, build projects, operate mines and rehabilitate depleted mines. Our overall ESG performance has been recognised by the major ESG rating agencies where we are currently ranked in the top five globally in the gold industry. As an operator for much of my career, I recognise that managing health and safety in mining requires continued and sustained focus. It requires having the right culture in place and strong, committed leadership that reinforces health and safety values across the workforce, whether it's in an operation or in the corporate office. I've always been a believer that there's a direct correlation between health and safety performance and operational performance. As such, the health, safety and wellbeing of our workforce will always be paramount. With the rapid escalation and spread of the COVID-19 virus, we were required to act swiftly to safeguard our workforce. It was nearly two months ago that we implemented very strict protocols at each of our operations and for our corporate staff. The situation remains fluid, however. We have managed this risk effectively, and to date, we have no known cases of COVID-19 anywhere in our business. Overall, our safety performance continues to improve, particularly at hail and the praise, resulting in the company's total risk for double-intrinsicency rate trending lower. Our focus will remain on ensuring that our people understand and manage risks every day, and we continue to achieve this through strong leadership and persistent communications to ensure the trend continues in the right direction. Moving on to slide six and looking at the operational results and assembly of hail. The first quarter of hail saw the implementation of the enhanced safety and health protocols to manage the COVID-19 and more rainfall than forecast with historical averages in the Carolinas. Despite these factors, we managed to deliver on plant production and mine more material quarter-on-quarter and particularly year-on-year. TARL improved its safety performance quarter-on-quarter and significantly improved from the same period last year. TARL had one recordable injury during the first quarter, reducing its tripper to 5.7. This performance reflects the site's ongoing commitment to safety leadership and increased employee engagement. We are pleased with Hale's first quarter operational performance. Production is in line with our expectations while mining rates continue to increase and mining unit costs continue to decrease quarter on quarter and year over year. It was the fourth consecutive quarter of productivity improvements at Hale. Mining costs in the first quarter were 5% lower than in the fourth quarter of 2019 and 60% lower than a year ago. Total mining movements increased 8% quarter-on-quarter and more than doubled year-over-year, reflecting the productivity improvements from our upgraded mining fleet. By the end of this quarter, we had all 15 of the new Komatsu 730E haul trucks operated, and these trucks are supported by six 785 Canceller haul trucks. The process plan continues to operate ahead of expectations, and over the past couple we've achieved record throughput days annualising to 3.8 million tonnes per annum. Mill feed was 16% higher year-on-year and similar quarter-on-quarter, despite an extended shutdown of the regrind surface in the process plant for planned maintenance in January. Recoveries were as expected and in line with the planned process grades. We are seeing year-on-year increases in recoveries at the same relative mine grade and we continue to fine-tune the regrinding circuit. As the year progresses, production will increase and the oil and sustaining costs will decrease at hail. This is simply a function of the mine sequencing where grades improve as the year progresses. Our head grade in the first quarter was 1.36g per tonne. For the second quarter, we expect it to be around 1.4g per tonne, increasing to 2g per tonne in the third quarter and around 2.4g per tonne in the fourth quarter. We also expect our mining unit costs to continue decreasing as the year progresses. With the right leadership team and the workforce in place, we are confident in delivering our full-year guidance at heart. Moving on to slide 7 and the praise. We call it the mine that keeps on giving. However, it is truly the most unappreciated asset in our portfolio. During the first quarter, the operation recorded no reportable injuries and a triple rate of 3.1 per million hours worked. We continue to see a reduction in the number and severity of injuries, reflecting strong site engagement in the behavioural-based safety initiatives implemented last year. In the first quarter, McCrae's produced around 39,000 ounces of gold, down year-on-year and quarter-on-quarter as expected, reflecting a lower head grade and increased total waste movements as pre-strip progressed at the Coronation Raw Stage 4 and Innes Mills Open Picks. Total mill feed decreased quarter-on-quarter and year-on-year due to the hard raw feed from the Coronation Stage 5, and it also reflects some impacts of suspension of a portion of the milling surface in late March due to the COVID-19 restrictions. The all-in-for-same cost of $12.18 per ounce sold includes $113 per ounce related to the purchase of a new Hokachi Excavator, which helps facilitate increased waste movements during the quarter. Looking ahead to the month of the year, we expect production at Macraes in the second quarter to be lower than in the first quarter due to the five weeks of limited processing. We are looking to make up the shortfall in production over the course of the year. The second half of the year is expected to be stronger than the first, with the fourth quarter expected to be the highest quarter of production at the lowest corresponding oil and sustaining cost. It's important to also highlight that McRae's has generated very strong free cash flows over the past few years. The New Zealand denominated gold price has never been this high. which, along with the lower fuel prices and the exchange rate, represent some major parlance for our New Zealand businesses. With the release of the Golden Point Underground Study in the second half of this year, we expect to daylight a mine life extension at McRae's at consistent production levels of 150,000 to 190,000 ounces a year, and an all-in sustaining cost around $1,000 per ounce. We expect McRae's to be a major source of free cash flow generation for many years to come. Moving on to slide 8 and Waihi reported one recordable injury during the quarter, increasing its TRIFA rate to 4.2 from 3.6 million hours worked at the end of 2019. Mining activities at the major veins in the Kalental Underground were completed during the first quarter, producing approximately 12,000 ounces of gold. The processing plant was shut down in February and will restart in the fourth quarter to batch process ore from the Narrowbane mining that will continue for the duration of this year. We're expecting 7,000 to 8,000 ounces of gold production from Waihi in the fourth quarter. During the quarter we completed over 1,500 metres of development for Martha Underground until activities were temporarily curtailed due to COVID-19 related restrictions which were then lifted on April 28th. You will note that as the year progresses the development rates will continue to increase. The dip in development in the second quarter relates to the five-week hiatus And despite this, we remain on track for first production from Martha Underground in the second quarter of 2021. Moving on to slide nine and to DPIO. Currently, all levels of government in the Philippines are responding to the COVID-19 pandemic. Our focus remains on lifting the restraints at the mine and the renewal of the FTAA. The FTAA renewal remains with the Office of the President. and we understand the President was involved in discussions about the renewal with senior government officials at the end of February. We recognise the impact of the uncertainty of the renewal has on our operating and financial results, the shareholders of the company and, importantly, the locals that depend on the DPO's ongoing operation to support themselves and their families. The mine is a significant source of jobs, taxes and revenues that we believe will be critical in contributing to the Philippines' post-COVID-19 recovery. Despite the temporary layoff of non-essential workers in mid-April and the uncertainty around the timing of the COVID crisis, we do remain confident of a positive outcome. I will now turn the presentation over to Scott McQueen to take us through our financial results.

Thank you, Scott. Thank you Michael and hello everyone.

The next few slides cover some key aspects of our balance sheet and our third quarter financial performance.

Moving to slide 11 which provides a snapshot of our balance sheet.

As at March 31 our cash balance was $177 million and our net debt decreased to $121 million. This reflected steady underlying operating cash flow in the quarter. proactive steps taken to enhance liquidity, as well as re-profiling our 2020 operating cash flow to better align our capital plans and to ensure optimal development timelines at our key organic growth projects. These steps included the sale of our equity position in GSD, which netted $22.7 million, continued engagement with regulators in the Philippines, to secure approval to export and sell just over $11 million of gold borough, which had been on site since mid-2019. And as noted, the re-profiling of our 2020 operating cash flow via the gold prepaids executed in March, bringing forward just over $78 million from late in the second half. In response to the onset of COVID-19 pandemic, We also took the pre-emptive step of drawing down the remaining $50 million from our revolving credit facility, given uncertainty how the crisis would impact global credit markets. We are also seeing downward pressure on input costs across the business, the full benefits of which should start to flow through in the current quarter. This included lower diesel costs, which at Hale were expected to account for up to 15% of operating costs, and at McCrae up to 10%. The weaker New Zealand currency also represents a significant broad-based reduction in US dollar terms in respect to our New Zealand dollar operating costs. Despite the material shift in key inputs, we currently have no plans for additional hedging. Our strategy at McCrae's has always been focused on protecting margins on the downside, so gold price and currency are not seeking to pick the top. Currently stock prices, as well as consensus forward expectations, support continued strong cash margins. Therefore, we are happy to continue to benefit from market prices and current exchange rates and oil price declines on an unhinged basis. We continue to manage the balance sheet to meet whatever short-term challenges arise, while ensuring we have the capacity to deliver our growth projects on the optimal timeline. The quarter-on-quarter reductions in both revenue and EBITDA mostly reflect the planned lower gold production and sales in the quarter. The lower volumes were only partially offset by a 7% quarter-on-quarter increase in the average gold price received, combined with lower G&A costs and indirect taxes, both predominantly related to GDPR. The reported impact for the third quarter was a loss of $26 million. which included an unrealised mark-to-market loss of $21 million on revaluation of the New Zealand dollar gold hedges, which reflected material increases in stock gold prices and declines in the New Zealand dollar exchange rate across the quarter. As noted, the adjusted net profit, excluding unrealised hedge gains and losses, was a loss of $10.7 million, or negative two cents per share, fully diluted. As per the cash flow summary at the bottom, Operating cash flow for the quarter increased from the prior quarter, coming in at $121 million, inclusive of the gold prepay, which equates to $0.19 per share. On an adjusted basis, after removing working capital charges, including the prepayment, the result was $0.07 per share as noted. First quarter investing cash flow decreased 30% from the prior quarter, although capital expenditure increased due to higher pre-stripping which was offset by the sale of our position in Gold Standard Ventures, netting $22.7 million, as previously noted. Financing cash flows, $45 million, reflects the positive impact of the $50 million drawdown from our revolving credit facility, partially offset by quarterly finance charges.

Turning to Flight 13, which provides us some additional detail on our capital expenditure.

As outlined at the top of the table, total capital expenditure increased 19% quarter-on-quarter to approximately $59 million. The increase reflects higher pre-stripping activity at Hale and McCrae's, partially offset by lower exploration spends, where the focus has been narrowed to our organic growth opportunities.

The increase in general operating capital largely reflects the purchase of the new excavator at McCrae's,

which accounted for $113 per ounce of McCrae's Q1 all-in sustaining cost. We've recently completed an effective salmon reef pack arrangement covering that excavator under a $10 million fleet finance facility with Westpac Bank. We're happy to have yet another leading bank associated with the company. Growth capital was relatively unchanged quarter on quarter. The main areas of investment during the quarter were the hail expansion, which included construction of the TSF wall list and additional TAG storage capacity. Growth spend at Waihi increased, reflecting the development progress at Martha Underground. As already noted, pre-strips at both Hale and McCrae's increased materially in the first quarter as expected and consistent with the respective mine plans. At Hale, we expect the second quarter to include the highest level of capital expenditure for related to the TSF list, which will be completed in the third quarter. The standing capital, which mainly relates to pre-strip, is expected to increase into the second quarter, again into the third, before reducing in the fourth. The raised capital will decrease in Q2 and Q3, before increasing slightly in the fourth quarter. Naturally, we are prioritising investment in exploration as a value creator, and we are focused in our efforts at and around the Waihi, given the positive progress both the MARTA and the WP drilling programs provide.

I will now turn it over to Michael to discuss these opportunities in more detail. Thank you, Scott.

Moving on to slide 14, we have a high-quality management team and high-quality assets, which is a recipe for success. combined with one of the best organic growth pipelines in the gold sector. Over the next several years we expect to build four underground mines in low risk jurisdictions where we have extensive operating expertise. Moving on to slide 15, more specifically we can see here the investment and we are investing in new growth opportunities at each of them at different stages. The majority of our exploration activities as mentioned are in New Zealand, particularly at Waihi where we have significantly increased the resource from 500,000 ounces when we acquired the asset in 2015 to over 2.5 million ounces today. We have invested significantly in the drill bit which has successfully delivered this resource expansion at a discovery cost of less than $30 per ounce. We believe that today's resource at Waihi is really only the beginning, particularly at WKP, which is a new discovery with only 35,000 metres of drilling to date. The Martha Underground development will continue to progress over the course of the next year. At a high level and subject to the results of the Waihi District Study, we expect the Martha Underground to produce approximately 40,000 to 50,000 ounces of gold next year and will ramp up to 90,000 to 100,000 ounces of gold within a few years. The Waihi District Study, which is a preliminary economic study, is expected to be released later this quarter or next quarter. The study will provide only an initial view of the value-creating potential of the opportunities in the Waihi District, including the Marshall Underground and WKP. With a lot of drilling ahead of us, it is important to highlight that the district study will only include the reported resource and thus will only capture what we believe to be a fraction of the value of Martha Underground and WKP. At Macraes we continue to advance the Golden Point Underground study which we expect to highlight a new underground mine replacing the Fraser's Underground and extend the mine life of Macraes at similar production rates. This study is expected to be completed in the second half of this year with an updated 43-101 technical report. At Hale, the SEIS permitting process is in the final stages. Meanwhile, we continue to optimise the Horseshoe Underground mine plan and we expect portal development to begin next year. Once Horseshoe is developed, we will explore more extensively at depth in the one kilometre corridor between Horseshoe and Palomino deposits, where we have fastly drilled and have identified high-grade zones. Moving on to slide 16, we are driving, implementing and looking to achieve Oceana Gold's strategic goals, delivering on the company's commitment and advance our organic growth opportunities over the next several years. Together we are managing the near-term risks and planning for the long term with an acute focus on health, safety and the wellbeing of our workforce. While production was impacted at Macrae's in the month of April due to the COVID-19 restrictions, we believe we can achieve our 2020 production guidance by coming in at the lower end of that range. We will also be looking to make up for lost production throughout the course of this year. We expect lower quarter on quarter production from New Zealand operations as Waihiu is shutting down until the fourth quarter and McRae's had limited production in April. This decrease is partially offset by the high expected production from Hale. We also continue to strictly enforce the protocols and safeguards we have in place at each of our operations. To summarise, we have three key initiatives this year. One is to deliver on the 2020 expectations. Two is to resume our operations at the DPO. And three is to progress our organic growth on time and on budget. Oceana Gold has high-quality operations, a high-quality management team and a strong growth pipeline with a balance sheet to support it. We continue to advance our organic growth opportunities, which again, we believe, represents one of the most significant growth platforms for investors in the gold industry. Thank you very much, and now back to Sam.

Thank you, Michael. That concludes the formal presentation segment of the webcast. I will now turn the webcast over to the moderator to facilitate the Q&A session.

Thank you. Ladies and gentlemen, if you do have a question at this time, please press star followed by 1 on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Should you decide you would like to withdraw your question, you will need to press star followed by 2. And if you are using a speakerphone, we ask that you please lift the handset before pressing any keys. Please go ahead and press star 1 now if you have any questions. And your first question will be from Daniel Morgan at UBS.

Please go ahead, sir. Good morning. Just a question on, you've got various growth projects for Underground Lines you're looking to develop over the next little while, which is quite a big growth platform. Just wondering how that looks versus the balance sheet where, you know, how is it going to fund it? Do you need to Are they competing with each other? How do you think about that and do you need more capital?

Yes, thank you Daniel.

The four underground mines are stagged, so we're currently in the one underground mine in Samartha at this point in time. When you look at the phases underground mine, we're currently in progress and finishing that off at Macraes and that will roll over into the Golden Point underground. So utilising the same equipment, same people and it's a fairly short decline in waste until we're straight back into the ore. So that will be a minimal spend. With the underground at Hale, It's been deferred a year due to the current sort of restrictions with the DPO as well as the COVID and so we're just finalising that and bringing that in line with the production sort of output of hail. So the projects are to be funded within our current cash flow.

Thank you. Materially higher gold price than I think any of us expected maybe 12 months ago. I'm just wondering how you're thinking about that impact to your business vis-a-vis how you think about reserves, how you think about what grades you might choose to mill over the next little while.

Yeah, thanks Daniel.

We're stuck with the currently got our mine plan and the ore bodies are limited to the current cut-off price that we have got. It is the opportunities with a higher golf height to have a look at some of the ore surrounding the current ore bodies and what the opportunities are there for the expansion of pits. Particularly in McRae's, where it is highly leveraged gold price, the rest of the ore bodies are fairly well contained from a hard sort of geological boundary or infrastructure boundary.

Okay. Thank you very much.

Thank you. Next question will be from Chris Thompson at PI Financial. Please go ahead, sir.

Hi guys, congratulations on a good quarter. I've just got a couple of quick questions here. We'll start off with Hale. Nice to see the grades obviously coming up in the Q1 and I guess the question is what should we be expecting by way of an increase in grade in the second half of the year and how does that sort of layer into improvement and recovery? Obviously I understand you guys have been doing a lot of work on the processing side of things and What should we be modelling?

Yeah, thanks. Thanks, Chris.

So what we're looking for is, with the mining schedule, an increase in grade quarter on quarter. So quarter one is around a 1.36, quarter two around about 1.4, quarter three at two grand, and then quarter four, 2.4. And we'll be working with that, looking at the higher recoveries quarter on quarter as we sort of move forward with the now completed regrinding circuit. So first it's the hail, the way it presents itself is that two thirds of the ounces come out in the second half of the year. So the first half of the year, the recoveries are around the high 70s to low 80s and the second half of the year are getting up to the sort of mid to, you know, 84s to 86% recoveries. in the second half and the heart in the fourth quarter.

Great, thanks for that. I appreciate the detail there. And then just quickly moving on to McRae's, I just wanted you to give me a sense of the mil-tons percentage split between the praises on the ground and the open pitch.

Yeah, so forage is coming on March, I guess, about 5.8 million tonnes processed and about 0.9 million tonnes from phrases under that.

Okay, all right. I noticed a bit of a jump there in the underground mining costs. Is that COVID-related or maybe comment on that?

Yeah, the last week of the year.

So, I mean, we basically had almost a full week there without any mining and still covering all the labour and overhead costs.

Great. Thanks, Michael. And, yeah, nice to see you taking the role of CEO and President.

Thank you very much.

Thank you. Ladies and gentlemen, as a reminder, if you do have any questions, please press star followed by one on your touchtone phone. And your next question will be from John Tomasso's.