Torex Gold Resources Inc. (TSE : TXG) Q4 2021 earnings call dated Feb. 24, 2022
Corporate Participants:
Daniel James Thomas Rollins — VP of Corporate Development and Investor Relations
Jody L. M. Kuzenko — Chief Executive Officer, President and Non-Independent Director
Andrew Snowden — Chief Financial Officer
Analysts:
Wayne Lam — RBC Capital — Analyst
Don DeMarco — National Bank Financial — Analyst
Presentation:
Operator
Welcome to the Torex Gold Resources Inc. Fourth Quarter and Full Year 2021 Results Conference Call. As a reminder, all participants are in a listen-only mode. And the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Dan Rollins, Vice President, Corporate Development and Investor Relations. Please go ahead, Mr. Rollins.
Daniel James Thomas Rollins — VP of Corporate Development and Investor Relations
Thank you, operator, and good morning, everyone. On behalf of the Torex team, welcome to our fourth quarter and year-end 2021 conference call. Before we begin, I wish to inform listeners that a presentation accompanying today’s conference call can be found under the Investors section of our website at www.torexgold.com.
I’d also like to note that certain statements to be made today by the management team may contain forward-looking information. As such, please refer to the detailed cautionary notes on page two of today’s presentation, as well as those included in the Q4 and year-end 2021 MD&A.
On the call today, we have Jody Kuzenko, President and CEO as well as Andrew Snowden, CFO. Following the presentation, Jody and Andrew will be available for the question-and-answer period. This conference call is being webcast and will be available for replay on our website.
Last night’s press release and the accompanying financial statements and MD&A are posted on our website and have been filed on SEDAR. Also, please note that, all amounts mentioned in this call are US dollars unless otherwise stated.
I’ll now turn the call over to Jody.
Jody L. M. Kuzenko — Chief Executive Officer, President and Non-Independent Director
Thank you, Dan, and good morning to all on the line. Welcome to the Torex Gold Q4 and Full Year 2021 Results Call. I will open my remarks by saying that underpinned by a solid fourth quarter 2021 was outstanding by all measures, challenging, but outstanding. We delivered on the safe, reliable, low-cost production that investors have come to expect out of the Torex team. We met or exceeded guidance on all production and cost parameters for the third year in a row, and we are well in stride for more of the same in 2022.
Importantly, the Media Luna feasibility study is nearing completion. This is the year we deliver on the present, while building out our future at Morelos. In terms of the agenda for the call, it’s the same as usual. I’ll provide a brief reminder of the strategic plan we are working to then I’ll step you through the key business and operational highlights specific to the fourth quarter and full year 2021 then over to Andrew Snowden for some detail on the financials. And after that, I’ll provide a progress update on exploration at Media Luna.
Dan has already commented on the safe harbor language, so I’ll take you right to slide four. Before I get into the specific results, I wanted to orient you once again on this strategy summary slide. It hasn’t changed, and it won’t change except for the fact that we have made substantial progress. These six strategic pillars continue to reflect the long-term vision of Torex and as important as vision is, we have demonstrated our ability to continue to plan, to execute and to deliver. Q4 in 2021 were no different.
Notable highlights for the year of 2021 are set out on slide five with some key operational and financial metrics. We delivered a new production record in 2021, coming in at 468,000 ounces toured and at the very high end of the range guided for production. This was underpinned by new annual record out of the underground at 1,260 tons per day and a new annual milling record at 12,360 tons per day.
We delivered total cash costs of $674 per ounce and all-in sustaining costs of $928 per ounce, beating and meeting guidance, respectively, solidifying in my view, our position as a low-cost producer and further demonstrating the cash generation capability of our asset. We delivered adjusted EBITDA of $491 million and free cash flow of $98 million, which is a substantial amount given that we invested just over $150 million in non-sustaining capex into the future operations at Morelos. And critically, we bolstered our net cash position.
You can see there on the very right of the bar chart that we closed the year at just over $250 million in net cash and importantly, no debt, add in our undrawn credit facility, and we have over $400 million in available liquidity. Essentially, we’re right where we wanted to be in terms of our plan to cash up ahead of the Media Luna build.
With 2021 behind us, slide six steps you through the outlook for 2022, which can be described as another excellent year ahead of us. The annual production range is a mirror image of 2021, same total ounces really, but lighter in the first half and then picking up in Q4. This just has to do with sequencing out of the pits and grade coming up slightly in Q4. Total cash cost is up slightly over 2021. As is the case with the industry more broadly, we’re experiencing inflationary and COVID pressures. Specific areas of increase for us include reagents, electricity and labor costs. ASIC is planned to be higher in 2022. Now this is driven by the decision to do the pushback at the El Limon Pit and that decision was driven to derisk the production plan in 2024. In order to get those 150,000 ounces and push pit life out, we had to add in select pit equipment rebuilds this year and waste stripping has increased in 2022 to 8:1 from just over 7:1 in 2021. And the last comment I’ll make on this slide is about non-sustaining capital. ELG non-sustaining is down from last year, as we will be completed our Portal three by middle of 2022. That was the key driver in 2021. And the Media Luna capex number, together with the spend plan, will be detailed in the feasibility study to be released in the last week of March. Slide seven sets out some of the key accomplishments on ESG in 2021. There are three callouts on this slide. First, foremost on safety. We closed the year with one contractor lost time injury back in April, werent too many from my perspective, but quite remarkable, nonetheless. And I’m pleased to say that we’re now sitting at just over seven million hours worked lost time injury free. Second, on COVID. Like many regions in the world, we experienced a significant uptick in Omicron cases as at the end of the year and into January. This has driven significant employee absences, which were backstopped by contractors. Thus far, we’ve been able to deliver on expectations in terms of poured ounces, but it certainly has put a strain on production out of the pits on the underground and put upward pressure on costs. Third, our leadership position on ESG was even further enhanced through 2021 as we improved our disclosure to accurately reflect the work that we’ve always been doing on the ground. And you can see some of the scores and ratings there in the top right quadrant, including an A on the MSCI rating, quite impressive progress in one year. Slide eight is a reminder of the multiyear production outlook we issued in mid-2021. You can see there that our 2022 guidance confirmed that we expect 2022 to replicate 2021 production. Under the current plan, Guajes pit comes off in 2023, so we see a slight decrease in production in that year. And the 2024 number you see there at 300,000 to 350,000 ounces does not include any gold equivalent production from Media Luna. These numbers will all be updated with the release of the technical report in late March. Recall that the goal line here is to deliver a smooth transition on production and cash flow during the period between ELG and Media Luna. And as between the contributions from the pit layback the rates we’re seeing out of the underground and our stockpile, which now sits at just over 4.5 million tonnes, I’m confident that we can land on a production plan that delivers just that. Turning now to the usual suite of operational metrics on Slide 10. You can see the bar graphs here on ounces, plant throughput and underground tonnes per day, which I’ve already provided commentary on. The one additional piece of information is on the bottom left, head grade to the mill averaged a healthy 3.65 grams per tonne in the year. I think what impresses me most as I look at these charts is the obvious operational stability we’ve achieved over the last two years. With the exception of the COVID interruption in Q2 of 2020, there is little variation from quarter to quarter, which from an operational perspective shows [Indecipherable] how robust our work systems have become. Slide 11 is our usual confessional about unit cost by area. This slide keeps us accountable. You can see upward cost pressures across the board, most notably in processing costs as pricing and consumption of reagents increased from 2020 to 2021. On that note, I should point out that cyanide consumption actually decreased in Q4 to 3.8 kilograms per tonne, down noticeably from Q3 and quite a bit below our own Q4 forecast. While the levels of soluble copper and iron were roughly the same from quarter to quarter, what changed was the mineralogy of the iron. We saw high levels of hexagonal and pyrrhotite, which is less reactive to cyanide and this makes cyanide consumption newly difficult to predict for us. The range we’re using is between three and four kilograms per ton for Q1 and even in Q2. Thereafter, we’ve got two engineering projects in the plan this year to support cyanide reduction. So we’ll update you on those and review this forecast as we head into Q2. We also had some tailwinds on PTU costs owing to the new legislation. You can see it on the last bar graph there. So that, combined with tight cost control throughout the business got us to the place where we delivered a beat on total cash costs overall for the year. I will now turn the call over to Andrew for a more detailed look at financials.
Andrew Snowden — Chief Financial Officer
Okay. Thank you, Jody, and good morning, everyone. Reflective of the strong operating results that Jody just walked through, we ended the year with another solid financial quarter.
Looking on slide 13. This summarizes some of our key financial metrics and highlights through 2021. And so I want to spend a few minutes just calling out a few items and trends on this slide. Firstly, looking to the top left quadrant here, we continue to benefit from strong cost management and a stable gold price, which supported solid margins through the quarter. For the 2021 year, you can see we achieved healthy TCC margins and had a TCC margin for 2021 at 62% and an ASIC margin of 47%. As noted on our Q3 earnings call back in November, costs trended higher in Q4, and you can see that within this quadrant as well. And that’s due to the expected lower head grade and higher waste tons mined owing to the El Limon pushback that we saw through Q4.
Looking ahead on costs, Jody has already commented on our guided 2022 cost ranges, which are moderately higher than 2021 due to higher labor, cyanide and electricity cost expectations and continue stripping relative to the pushback. To achieve these ranges, are very focused on cost management to offset ongoing inflationary pressures. We continue to see across many areas of the business and across the mining sector in general.
Looking now at the top right quadrant, Q4 adjusted EBITDA of $105 million remained strong in the quarter, with a decrease seen over Q3 reflecting a lower sales volume and the higher costs that I just referred to. I will note though that this adjusted EBITDA excludes a $41 million impairment that we recognized on the company’s monorail-based technology, and that impairment did impact our net earnings and EPS in the quarter.
With our focus on building out Media Luna and the Wahas Tunnel using conventional methods, we no longer have current plans, which should support the ongoing capitalization of these costs and so took this impairment in the quarter. Looking now at capital expenditure on the bottom left of this slide. The spend continued a run rate of about $60 million a quarter with full year sustaining and nonsustaining capital expenditure of $230 million, which included $116 million invested in Media Luna. 2022 capital expenditure will continue to increase as spend on Media Luna ramps up with a longer-term Media Luna project capital to be published later this quarter in the upcoming technical report.
Despite this level of capital spend there, we generated positive free cash flow in each quarter through 2021, including $37 million of free cash flow in the fourth quarter. I will highlight, though, that with the anticipated ramp-up of spend through 2022, I expect we will be reporting a negative free cash flow through the 2022 year. Moving now to Slide 14. The waterfall chart here shows the key drivers behind our $82 million increase in cash through the year.
The main contributor to this increase in cash is a strong operating performance, which generated adjusted EBITDA of almost $500 million in the year. This was offset by four main uses of cash. Firstly and most significantly, we invested $230 million in cash capital expenditure through the year, and that’s across sustaining and nonsustaining activities, including Media Luna. In addition, we saw tax payments of $128 million in the year, which included $18 million of tax installments in Q4.
Thirdly, we paid down the remaining $40 million outstanding on our credit facility in the first quarter and are now debt-free. And finally, we saw a negative working capital change of $35 million in the year which is partly due to the buildup in VAT through December where we ended the year with a VAT receivable balance of $62 million, which is above our recent historical balance of approximately $45 million. This buildup of VAT there was just a timing delay with impacts of holiday closures within the Mexican tax authorities, and we have since seen VAT return back to these more normal levels following collections of over $26 million in Q1 to date.
Turning now to slide 15. The positive free cash flow I just talk through that we produced in the quarter continues to improve the Torex balance sheet, with over $250 million of cash on hand at December 31st and a debt-free balance sheet and total liquidity now in excess of $400 million. The strength of the balance sheet, coupled with strong forecast cash flow from ELG puts us in a strong position to be able to advance Media Luna. We do, though, continue to analyze what the optimal capital structure should be. And following finalization of the technical report in March, we will be looking at whether to add a modest level of leverage to the balance sheet to support the Media Luna build, while expanding our exploration efforts and other strategic priorities.
Finally, turning to slide 16. As discussed on previous calls, the seasonality in cash flows played out in the year exactly as we expected. And you should expect a similar seasonal profile in this cash profile through the 2022 year with tax royalty and profit sharing payments to be the highest in the first half of 2022 and lowest in the second half.
In Q1, we will see the annual 7.5% royalty payment, which I expect will be approximately $30 million and also the final 2021 tax payment. The impact on free cash flow will also be heavily influenced in 2022 by timing of production with higher production and sales expected in the second half of the year as well as the overall timing of Media Luna spend, which we expect will ramp up through the course of 2022.
So that concludes my remarks, and I’ll now turn the call back over to Jody to provide an update on Media Luna and exploration.
Jody L. M. Kuzenko — Chief Executive Officer, President and Non-Independent Director
Thank you, Andrew. So turning now to slide 18. I expect that everyone on this call is looking forward to the release of the feasibility study set for the last week of March. As a reminder, that study will contain the technical report for the entirety of the asset. So a resource and a maiden reserve at Media Luna, an updated resource and reserve for ELG, an integrated mine plan and it will detail all of the Media Luna Economics. All of those pieces are coming together nicely with the actual writing of the report itself, and you will soon be invited to an Investor Day, where we will step you through the study.
In terms of progress on the early works, they are detailed on the section view you see here on this slide. Recall that holding through that tunnel is a key focus for our scheduled derisking. As at January end, we advanced to 1,200 meters through Wahas and 340 meters through South Portal Lower. South Portal Upper is coming along as well. While we made good progress in the rates picking up from Q3 to Q4 in Wahas, notice that the rates more than doubled from Q3 to Q4, going from 214 meters in Q3 to 460 meters of advance in Q4. Bolting continues to remain the bottleneck in the cycle and a new bolter will be deployed at Wahas this week. So we’re looking forward to see what results that brings.
This next slide, slide 19, is not new. In anticipation of the release of the feasibility study, we have been signaling clearly in our disclosure that you can expect an appreciable capex increase from that, which was outlined in the PEA. There are reasons for this. First, the PEA was completed in September of 2018, now more than three years ago and clearly at the level of engineering of a PEA. A decision was taken long ago, not to do a formal public pre-feasibility study, so we are essentially going from a three-year-old PEA to a formal feasibility study. The scope has changed appreciably as has the level of engineering, all of which has had the anticipated impact on capital, and over top of that is the inflationary pressure that the entire industry is experiencing. Good news is that the resource is holding up. We will issue a press release on that imminently. And the other good news is that with the drilling done over the last 18 months, we are very, very excited about the prospectivity we are seeing on the south side of the Balsas River, which takes us to this final slide on exploration as it’s becoming a key strategic focus for us. We have $39 million budgeted in 2022, allocated as described on the right-hand side of this slide.
Areas of particular interest to us this year are EPO, down at the bottom of the slide, South of the Balsas River. Recall that we had one million ounces in inferred in the PEA and EPO, and we want to drill that off to indicated and wrap a mine plan around it. Other areas of interest to the south of the river are to the east and the west of Media Luna. You can see the purple MAG anomaly around the yellow Media Luna deposit there. We’re drilling in both areas this year. In addition, we plan to do further infill and step out in our ELG underground. It’s been a great little asset for us, and we want to continue to exploit that. We also plan to do some mapping and scout drilling on the north side of ELG. And you can see three areas of interest for us there, Esperanza, Tecate and Querenque. We’re determined to lose this moniker of our land package being 75% unexplored. The geology of this asset has demonstrated itself time and time again, and we’re looking to further bolster that as we build out our future at Media Luna and at the same time, deliver the production and cash this year to support the development of Media Luna. All in, 2022 is shaping up to be an exciting year, and we invite you to continue to follow us.
And with that said, I’ll turn the call back over to Therese.
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Wayne Lam with RBC. Please go ahead.
Wayne Lam — RBC Capital — Analyst
Hey, thanks. Good morning, guys. Just a question on Media Luna. You guys have always been very laser-focused on execution and had built in flexibility into the construction time line. Can you give us an idea of how much buffer you still have in terms of planning given how the tunnel rates have progressed over the past year?
Jody L. M. Kuzenko — Chief Executive Officer, President and Non-Independent Director
Yes. Wayne, that’s an excellent question, because Media Luna’s schedule, particularly through that tunnel is something that we’re focused on. We have a credible scenario using 6.5 meters a day through Wahas and six meters a day through South Portal Lower that sees us hold through in Q3 of 2023 through that tunnel. Even if we are experiencing some slowdown in that or have some difficulty and get there in Q4 or Q1 that still gives us time to hang the conveyor through the tunnel concurrently. We can move trucks through the tunnel should we have to once we’re hold through even before the conveyor is hung. And so, I would say we’re well on track for first production out of the Media Luna deposit in Q1 of 2024. Not a lot of room to breathe, but with the stockpile of 4.5 million tonnes on the north side of the river, we believe we’ll be able to deliver a production plan that is quite smooth from the transition from ELG to Media Luna.
Wayne Lam — RBC Capital — Analyst
Okay. Perfect. And then just a follow-up on that. In terms of the timing rates, is 10 meters a day still kind of target internally? Or has that kind of been scaled back a bit?
Jody L. M. Kuzenko — Chief Executive Officer, President and Non-Independent Director
10 meters a day is not a target internally. That was a target based on modeling using the monorail-based equipment. As you know, Wayne, we’ve made the decision not to use that. We think credible rates range between 6.5 and 7.5 meters per day. And so that’s the target internally. It’s all about cycle time for us. Can we get two cycles per 24-hour period, one on each shift, and we’re working hard to get specific individual items within the cycle down to acceptable time frames. I mentioned Baltic on the call, drilling is another.
Wayne Lam — RBC Capital — Analyst
Okay. Great. Thanks. And then of the $50 million in growth capex being spent this quarter, how much of that is budgeted for the Wahas Tunnel? And will that capex be included in the fees estimate?
Andrew Snowden — Chief Financial Officer
Wayne, it’s Andrew here. So I’m just taking the second question first. When we issue our technical report at the end of March, we’ll be very clear on the capital we’ve got left to spend and also the capital that we have spent. And so the expenditure we have in Q1 here on the early works will be referenced with our technical report as well all the capital that we spent in prior years. Of the $50 million in Q1, it’s approximately $20 million of that relates to the early works.
Wayne Lam — RBC Capital — Analyst
Okay. Thanks. And then maybe just last question. Have you had any discussions or guidance from the regulators and the progression of the MIA Integral? And do you need that enhanced to commit to a formal ramp-up in construction?
Jody L. M. Kuzenko — Chief Executive Officer, President and Non-Independent Director
Yes. Wayne, we’ve been in extensive discussions with SEMARNAT on the MIA Integral. They submitted a list of detailed questions to us and gave us 60 days to respond. We’ve done that, and now they’re reviewing those. The short answer to your question is no. We don’t feel we need the MIA Integral in hand to make a construction decision. And we can carry on with our existing permitting with all of the early works pending receipt of that permit. And so the MIA Integral is well underway despite narratives you hear from other companies in Mexico about permit delays. I think we stand in pretty good stead there. And I would also say, Wayne, it’s important to note that all of our other permitting is underway with Conagua, the water regulator with CFE, the hydro utility and with IMA, this is the archeological database regulator that we need to get permission from. And our community provisions are well in hand. So we have a pretty tight permitting plan, and I would describe it as being on track.
Wayne Lam — RBC Capital — Analyst
Okay. Perfect. Thanks very much. That’s all for me.
Jody L. M. Kuzenko — Chief Executive Officer, President and Non-Independent Director
Thanks for the questions, Wayne.
Operator
The next question comes from Don DeMarco with National Bank Financial. Please go ahead.
Don DeMarco — National Bank Financial — Analyst
Good morning and thank you operator and congratulations to Jody and team for a strong finish to the year. Just a couple of questions. My first question is on recoveries. I saw that they were down. You had an explanation for that. Do you expect that the recoveries will improve in Q1, rebound in Q1? And what are your thoughts for the rest of 2022?
Jody L. M. Kuzenko — Chief Executive Officer, President and Non-Independent Director
Yes. Thanks, Don. I expect recoveries will continue to be light through Q1. Remember, design recoveries for this process plan are 87%. We’ve been holding quite tightly through 2021 at 89%, so a plus two. The reason for the low recovery is low recovery ore in Wahas. Some of it is wrapped up in pyrite. And so it’s not as though we’ve eased up on the cyanide consumption and taken a hit on recoveries intentionally. It’s just the nature of the ore.
I expect that to continue through Q1. We’re doing everything we can to feather it in, in the blend to minimize the impact to recovery. But I will say, I mentioned quite briefly the two engineering projects we have underway aimed at reducing cyanide consumption. There is also some potential upside on recovery as we land those two projects. We got certain results on the bench. We’ll see if those replicate in real life. So short answer to your question is I’m expecting recoveries to be low again in Q1, maybe picking up in Q2 as we feather in the Wahas material. And then I do expect them to return to this 89% level in the second half of the year as we land those two projects.
Don DeMarco — National Bank Financial — Analyst
Okay. That’s helpful. Thank you for that. And my second question has — maybe it’s directed to Andrew and Jody. So part of the financing of Media Luna might be contingent on or provided by way of cash flows from the mine. So therefore, we see these higher gold prices, and it lends for some de-risking. Are you thinking of hedging gold though? I saw that there was a number of gold cost callers that expired at year-end. What are your thoughts going forward on hedging?
Andrew Snowden — Chief Financial Officer
Yes. So that’s right, Don, that we did have some hedging in place, some zero cost callers that the run off through Q3 of 2021. And so as of December, we didn’t have any hedges in place and neither do we either do today. Obviously, the strength in the gold primes we’re seeing particularly as we’re now in the final throes of finalizing our Media Luna technical report and having clearer line of sight in our capital expenditure over the next couple of years. That discussion on hedging is the real active discussion we’re having internally. So although we don’t have anything in place today, that is something that we are looking at, particularly given the strong gold price that exists today.
Don DeMarco — National Bank Financial — Analyst
Okay. That’s fair. Well, that’s all for me. And good luck in wrapping up the Media Luna technical report. We look forward to looking at it.
Jody L. M. Kuzenko — Chief Executive Officer, President and Non-Independent Director
Thanks, Don.
Andrew Snowden — Chief Financial Officer
Thanks, Don.
Operator
[Operator Closing Remarks]