Orezone Gold Corporation (ORZCF) Q2 2023 Earnings Call Transcript

Orezone Gold Corporation (OTCQX:ORZCF) Q2 2023 Earnings Conference Call August 10, 2023 11:00 AM ET

Company Participants

Patrick Downey - CEO

Peter Tam - CFO

Conference Call Participants

Jeremy Hoy - Canaccord

Ron Stewart - IA Capital Markets

Don Blyth - Paradigm Capital

Operator

Ladies & gentlemen thank you for standing by. My name is Feathery and I will be your conference operator today. At this time, I’d like to welcome everyone to the Orezone’s Second Quarter 2023 Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions].

I would now like to turn the conference over to Patrick Downey, President and CEO. Please go ahead.

Patrick Downey

Thank you and welcome to the Orezone Gold Q2 results conference call. With me today I have Peter Tam, Chief Financial Officer, who will run through the detailed financial and operating data later in the presentation.

First of is our forward-looking statement and I encourage you to read them. Health and safety, we had a very, very solid safety record and we continue to do so. 10.1 million -- sorry 9 million hours worked without an LTI Q2 of this year we had zero LTIs with over a million person hours worked during the quarter. This is a fantastic achievement for a young team and a well-deserved milestone for the group.

Turning to the quarter. So, the operational financial highlights, we had gold production of 35,482 ounces, gold sales of 33,608 ounces at an all-in sustaining cost of $1,109 per ounce. Our plant operated 7% above nameplate. Our cash at quarter end was $32.3 million. And we also paid back over $19 million of principal senior loans.

We also advanced in all growth initiatives including our expansion study, our grid power connection, and our next stages of our resettlement action plan. I will review these in more detail later in the presentation.

I'll now hand over to Peter Tam. Peter?

Peter Tam

Thank you, Patrick. On the financial and operating highlights. We had another profitable quarter in the second quarter following a strong first quarter of the year. In the second quarter we produced $35,482 gold ounces and sold $33,608 gold ounces at a realized gold price of $1,970 per ounce. Cash cost was $924 per ounce, and all-in sustaining costs was $1,109 per ounce for a cash margin per ounce gold of $861 or 44%. The company's gold sales remain unhedged. Revenue was $66.4 million with earnings from mine operations of $27.5 million after deducting costs of sales of $38.9 million.

Pre-tax income was $19.7 million and income tax expense was $6.7 million, resulting in net income of $13 million. Net income attributed to Orezone shareholders was $11.4 million after deduction for non-controlling interests of $1.6 million. Basic and diluted earnings per share attributable to Orezone shareholders were $0.3 per share.

With respect to cash flows, operating cash flow before working capital changes was $25.2 million and after working capital was $20.2 million. Cash flow use in investing activities included our growth projects for the grid power connection, and resettlement construction and compensation totaled $12.4 million. This resulted in free cash flow of $8 million for the quarter.

For the first six months of the year gold production was 76,783 gold ounces, while gold sales were only a few ounces lower at 76,747 ounces. The average realized gold price was $1,926 per ounce, and cash cost was $854 per ounce, and all-in sustaining costs was $1,006 per ounce. Earnings for mine operations was $67.2 million and net income was $38.6 million. Basic earnings per share attributable to Orezone shareholders was $0.10 per share. Cash stood at $32.3 million at June 30, after the $19.1 million of principal repayments on the course bank senior loans in the second quarter.

On to Slide six, I'll be talking about production and unit costs. On the mine fronts, we mined 5.1 million tonnes in the second quarter at a waste-to-ore ratio of 1.64. Ore tonnes process was 1.4 million tonnes, which continues to exceed nameplate performance but down slightly from the first quarter as maintenance for the mill re-line and sizer shaft change-outs were undertaken.

Average head grade was 0.87 grams per tonne gold and process recovery was 91.1% resulting again in 35,482 ounces of gold production. Head grades were down modestly from Q1 as a company depleted its stockpile of higher grade or accumulated during construction. While recovery was marginally lower, the Bombore mine begins to encounter a greater quantity of transition ore as mine deepens in certain pit.

Mine site unit cash cost was $20.91 per tonne, which was a 10% increase quarter-over-quarter from Q1 costs of $18.95 per tonne. Higher costs are driven mainly by more maintenance costs and lower throughput and greater unit consumption of lying grinding media and power from the processing of more transition ore in the current quarter.

With that, I'll hand this back to Patrick.

Patrick Downey

Thanks, Peter. So, a little update on our guidance. So, our all-in sustaining costs have been revised modestly upwards. This has been really due to some lower gold production and head grades. Also, higher budgeted fuel prices and budgeted fuel prices, our fuel price in Burkina is significantly higher than other West African countries. And we have not seen any change in that.

Also, our ForEx and our government royalties as we've done our budgets 1700 gold being above that is another 1% royalty on top of that, so that added to our a little to our guidance. Our gold production is expected to be the lower end of guidance, which is mainly due to unaccounted historical artisanal depletion, which were really a contract in Q2. I'll go through that a little bit in the next slide and I'll show some detail there.

And we're really setting the foundation for the future we reduced our debt by $33 million in two quarters, that's quite a significant achievement. Sorry, by $28 million, we have $33 million budgeted for 2023. Our RAP progress is proceeding to allow us to access the remainder of the mining permit including the southern oxides and the hard rock for the next part of the expansion and upgrade power will connection will materially reduce our life of mine power costs going forward.

So, a little bit on the evidence of the historical artisanal activity we really mainly evidence this in the H1 pit area which is the highest-grade pit on the project. Now below 40 meters done depth into that pit so we see less evidence of that but you can see this was something we have not accounted for going forward in that area. So, it did affect our production in that period of time. The model is solid I can tell you that and we had a review by a third party no way she's expected me as we move forward here so really this was a depletion in an area of high grade in one room particular pit.

Onto our expansions current sorry. Growth projects are 130 KV power supply project we're tying into the national grid with a switching station right there. A 19 kilometer transmission line and an on-site substation with stepped on transformers. All major procurement has now been awarded. Deliveries are ongoing. Contractors are in the field and established and progressing well. At the substation more concrete being poured. Our foundations are going in for a power line we expected start the power line erection in late August, and we're trending on schedule and on budget. And this will significantly lower our asset going forward. Our Phase II RAP which is also critical to the growth of the company. We all -- contracts have been awarded to local bidders. We made a particular effort to go locally for this type of work.

We have over 1200 structures to get to build. It was delayed due to community sacred rituals on the ground. Our owner's team and contractors on additional contractors have not been put in place. And this photo shows what we progressed during June and July. So, we really made most of the progress during that period of time we expect an acceleration to ramp up local construction for the rest of the year.

On to the expansion study, which is really the future of the company and the next key value driver, it's on track for completion in late Q3 2023. The resource estimates are now complete, the mining pit optimizations are complete and design is in progress. And mine scheduling is expected to start in mid-August. Our metallurgical test work is complete, which has been a very strong positive for us, you can see the layout of the expansion right there on this photograph.

The process and infrastructure design is completed and costing as well advanced in near completion and we expect the first draft of the capital cost in the coming weeks. We have firm bids received for the SAG mill, and price is in line with expectations. It is the long lead item and the critical path item. And telling stories is just an expansion of what we are doing today. But all the people geotag programs are complete and the design is now complete.

So, it is a simple circuit. Originally, the 2019 feasibility study had us producing around about 134,000 ounces a year for the first 10 years. We are now targeting at greater than 250,000 ounces per year. As a duplicate CIO, exactly the same as we felt in 2022. The CapEx per annual time process, I expect to be probably around 50% of what you would expect to see on a normal CapEx project. So, our return on invested capital will be one of the best in the business.

There's lots more of exploration as well, we've had lots of targets based on the drilling that we did in 2022. So, we have further targets to drill and future growth. So, this is really only the next stage of expansion, as we see for Bombore.

So that's it for Q2. Thank you for listening, and I'll hand it over for any questions.

Question-and-Answer Session

The floor is now open for your questions. [Operator Instructions]. Your first question comes from Jeremy Hoy with Canaccord. Jeremy, your line is open.

Q - Jeremy Hoy

Hi, thanks for taking my question. I guess we'll start on the switch over to the power grid. Given the full operating quarters that you have had, can you give us a rough idea as to the projected savings for power per ounce? But when Bombore switches over to grid power at the end of the year?

Patrick Downey

Yes, thanks, Jeremy. Well, I think we did operationalize just let me look at the number 76,000, in over an annual period, based on what we're paying for diesel right now versus the what the grid power would be, it's going to be about 20 to 22 million savings per annum. So that would be over Q1 and Q2 that would be roughly $150,000 reduction, $150 per ounce reduction and all in sustaining. So, I would expect going forward, you'll be sort of looking at that range between $100 to $150 per ounce savings all-in sustaining costs per ounce going forward. So quite clear, Jeremy.

Jeremy Hoy

Yes, no, absolutely. Thanks for that. My next question, shifting over to exploration. So, notwithstanding the near-term focus on enhancing the Phase II expansion, what are the company's plans in terms of exploration and moving forward? I do recall there was potentially a new geological understanding emerging a unit associated with potentially higher grades.

Patrick Downey

Yes, so we're actually sending a third-party in, I think it's next month to review all of the results. We've got several targets Jeremy, but we're going to review the structural overall structural setting of the deposit. We're seeing now this unit is now appearing throughout to the length of the deposit. And we really only thought it was confined to the southern end. That is not the case anymore. Particularly we had it in P8/P9, we've had it in Maga Hill now, which is right up at the north.

So, we really want to figure out where is this all tied together, it's wide open and the size that can tell you and there's further exploration to go there. The last hole we drilled to the most northern hole was 12 meters or four grams just below the surface. So, it's quite an exciting exploration project. But it's also really how does it tie in to the rest of the overall structural setting.

And we want to sort of fresh eyes and not to look at it as we identify some of those targets. Some of them are easy targets to identify. We're really trying to figure out on a bigger broader sense what this means for the deposit.

Jeremy Hoy

Okay, great. Well, I'm looking forward to seeing that story evolve for me. That’s it for me, I’ll hand it back to the operator.

Operator

Our next question comes from Ron Stewart with IA Capital Markets. Your line is open.

Ron Stewart

Good morning, Patty. Good morning team. Congrats on the quarter. You guys are doing really well. Patti, I wonder if you can just talk a little bit to us about the situation over in Niger and how it's impacting or if it is having any impact at all on the situation in Burkina Faso, lots of noise, obviously, it's probably impacting the market and market sentiment towards things, any impact at all.

Patrick Downey

We definitely haven't seen it. It's all quiet, where we are. It's nothing in we have an office in Ouagadougou as well nothing there, either. I think there's a lot of background diplomatic discussions going on. We understand and have heard that they're going to appoint a president, which will be a non-military guy. So, we think there is something happening there.

There is noise around it, obviously, for us. I mean, it's West Africa, it's we're in the region, we just have to wait and see how it all ends. But it's not affecting anything we're doing. There's been no delays in deliveries of equipment, supplies, et cetera, as on the project at all, or in the country, as far as I know.

Ron Stewart

Okay, well, that's good. That's kind of what I expected. But certainly, it's kind of noisy. In respect of the project itself, I noticed that the retention time in the tanks is going to drop to about 24 hours to get the recovery. What's the current retention time in the oxide that you're processing right now is that similarly 24 hours or…?

Patrick Downey

It's exactly the same surrogate Ron and is 24 hours, we do get the leaching occurring a little before that, but it's quite rapid kinetics, so it will be 20, exactly the same retention, we will really have one extra tank, we're duplicating the circuit. So it's 4.4 million tons of -- we placed the tons, we will have capacity for that at the mill performs better than then planned.

And really where that came from, we originally had 42 hours, which was obviously a bigger lead circuit more tanks more equipment, but with the addition of oxygen into the tanks that reduced that the kinetics accelerated. So that's a big savings for us. So, all the equipment like the agitators, the tanks, the pump, at the top of tank steel work, is an exact replica of what we put in 2022.

Ron Stewart

Understood. And you've noticed -- I noticed that you're looking to bump the throughput to about 10.1 million tonnes per annum, is that just optimizing the entire circuit, collectively?

Patrick Downey

That's just a using the current throughput through the oxide. The oxide has radiate but its not really in play the 5.7 loans here, we don't see that being anything below that. So, we can feed it with that with the oxides. So that's what we're going to do. And then the 4.4 on the hard rock. Obviously, we hope the hard drive like every, like every other plant in West Africa also does, 5% to 10% greater throughput, but we'll see -- we' get to that when we build them.

Q – Ron Stewart

Well, listen thanks very much. Keep up the good work doing. And congrats on the quarter. Let’s hope things settle down for you.

Operator

Next question comes from Don Blyth with Paradigm Capital. Your line is open.

Don Blyth

Thanks. Patty congrats on a reasonably good quarter, a couple of start-up bugs but nothing too major. On the unexpected artisanal depletion, first, I assume this is entirely historical from before you start the development and the site is secure. You don't have any current issues with the artisanal?

Patrick Downey

That is correct. Yes. Look, there's nothing current at all. And we've actually -- when we moved all the artisanal off, we moved and they build a village elsewhere, et cetera. But, yes, this is all historic. We had mapped quite a bit of the artisanal workings that we thought were there from when we got on the site. Obviously, there was more than because obviously there's been more going on before we got there.

And it's really in 1 high-grade zone run. It's -- we don't have courts really on the products that are barren of gold but it seems to be right along that course where they were mining. And it was quite a shock to us mining all of a sudden this wood started coming out of the mill, and we realized we weren't getting the proper reconciliation on the grade. But we've mapped all of that now, and we're pretty comfortable where we are, but it's absolutely historical. It's not going forward. There are [indiscernible] there.

Don Blyth

And any incentive. How deep they might have gone, you said the lower benches are showing less artisanal depletion [indiscernible].

Patrick Downey

About 40 meters, it appears based on our benching that now we're into to the bottom. We don't see that now as frequent as we had when we were when we started going down into that one particular area, which is called H1. So the rabbit warrant that they had created in that area, it really doesn't exist below a 40-meter level on average.

Don Blyth

Excellent. And just on the grid power, what is the ultimate source of the grid power? Could there be any cost increases? Or do you have sort of locked in pricing? And how reliable has that grid power being for other operations?

Patrick Downey

Yes. The Burkina have locked in the prices. It's off of hydro and Burkina contribute solar piece to it, which they've built and have tied into the system like actually two solar plants and is tied into two separate grids and will be tied into the Nigerian grid in the next coming years. So it will be a very, very reliable source.

What others are tied into it? Well, if you want to look at Burkina, it would be Hyundai, Wanyana Yaramoko and Mane. If you look at those -- if you really take Hyundai, for example, you see that the overall cost per tonne in the processing plant, which is where you really see it has not really changed in Hyundai over the years, around about $11 and something per -- sorry, dollars per tonne, simply because it's tied into that, and it's not tied to these. If you were on diesel, you would definitely see that cost going up.

And it's very reliable. We have talked to the other users of this. We've done a detailed analysis of this with an outside company that put in all of these connections, called ECG, and it is very reliable in the 98% to 99% reliability. Once it's tied into the Nigeria grid, it would be pretty much 100% reliable.

Don Blyth

Excellent. I'm sure you're looking forward to that. And I was the impressed, that's a larger savings than I was anticipating.

Patrick Downey

Yes. Well, diesel prices have remained very high in Burkina. We're around about $1.90 a liter, I think. In the region, it's around about $1.27. So Mali, Cultivar et cetera. We were expecting it to normalize in the coming -- or during the year, it didn't, which really affected our ASX we were predicting a lower cost that did not occur. That's what's really outside of our control. And that also kept our power costs at a higher level than we were expecting to produce. Obviously, we're in dispute with the guys who originally to supply that power and this will be part of our arbitration dispute, this higher cost that we're paying now this year versus what we should have been paying for the power this year.

Operator

[Operator Instructions] We have another question coming in from Eileen Clark with Retire [ph]. Your line is open.

Unidentified Analyst

I'm quite pleased with the second quarter results. I'm just wondering about the royalties, the royalties go up with the price of gold, if they go over $2,000 and what are the royalties now?

Patrick Downey

Yes. So the royalties are capped out at over $1,700. So we had budgeted our 2023 production and cost at a $1,700 gold price, which assumed a royalty I think maximum at that point was 5%.

Peter Tam

The royalties on gold sales or gold production in Burkina is actually 5% maximum. And so we've reached that level. If gold prices exceed $1,300, obviously, we realized the gold price in the quarter above $1,900. So that's the maximum royalty we are paying. And on top of that 5%, there is another 1% local development tax. So overall, it's really 6% royalty on the top line there.

Patrick Downey

So that's the maximum. So -- but the higher the gold price, the bigger the royalty.

Peter Tam

Well, the bigger the dollar amount of the royalty. And so for us, in terms of our guidance in the all-in sustaining cost, we had budgeted $1,700 as the gold price for 2023, obviously, we are well above that for year-to-date. And so that obviously means that the dollar amount of the royalty costs has been higher than what we budgeted for and that obviously has an impact on the all-in sustaining cost that we've reported so far this year.

Unidentified Analyst

Okay. And you don't expect the government to increase the royalties it goes over $2,000 as they need a lot of money.

Patrick Downey

No, we don't. We obviously monitor that the Chimera [ph] mines, which is very active in the country monitor, but we have seen no evidence of that happening at this point in time.

Unidentified Analyst

Okay. And my final question is, so from what I understand, we can expect the fourth quarter profits to be lower because of the previous Orezone mining and the price of diesel. Is that so?

Patrick Downey

I think the third quarter will likely be our probably lowest quarter than we -- that's the rainy season, obviously, and then we ramp back up again in the fourth quarter. So on a quarter-by-quarter basis, you can make what you want, but I think we're pretty confident we're going overall for the year. So that's really the mine plan and you work to your mine plan. So you generally mine in the upper part of the ore body in the third quarter, because you do have rain into the pit, so you don't mind at the bottom of the pit, you can back into the bottom of the pits once you pump them out in the fourth quarter. So all part of the mine plan.

Unidentified Analyst

And what is the expected grade going to be going forward?

Patrick Downey

I think if well, probably what we said we were going to generally average minus a little bit of artisanal depletion. And then we get back into the South in Q -- sorry, in 2024, which allows us to get back into the higher grade in the southern end of the project in 2024. And then 2025, we've got the hard rock expansion, which obviously significantly upticks our grade.

Unidentified Analyst

Thank you very much. I'm quite pleased with the way things are going forward.

Operator

There are no further questions at this time. Mr. Downey, I turn the call back over to you.

Patrick Downey

Thank you very much, and thank you very much to everyone for attending today's call. We obviously looking forward to a few key catalyst events in 2023 going forward. The release of our study expansion study, which we think is a major catalyst for us. Obviously we’re looking forward to our structural review of the project and where we go with exploration targets and obviously connecting to the grid, which is a major part of our all-in sustaining cost reduction going forward. So it should be a very exciting remainder of 2023 and to 2024.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.