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Q4 2008 ALAMOS GOLD INC Earnings Conference Call - Final.

Article Excerpt
OPERATOR: Good morning, ladies and gentlemen. Thank you for joining us today. Our presenters this morning will be John McCluskey, President and Chief Executive Officer; Jon Morda, Chief Financial Officer; Manley Guarducci, Vice President and Chief Operating Officer; and Mr. Ken Balleweg, Exploration Manager. Any questions you may have regarding the announcement will be addressed at the end of the presentation.

Mr. John McCluskey please go ahead.

JOHN MCCLUSKEY, PRESIDENT, CEO, ALAMOS GOLD INC: Thank you very much. Thank you for joining us this morning on the call. I will ask Jon Morda, CFO of Alamos Gold to read a disclaimer concerning forward-looking statements. Jon?

JON MORDA, CFO, ALAMOS GOLD INC: Thank you, John. We refer all our participants to our forward-looking statement disclosure at the back of our press release and caution that mining and exploration is subject to a number of risks and uncertainties particularly in respect of mining and processing of ore, recovery rates, operating efficiencies and conversion of mineral resources to proven and probably reserves. Just to name a few. There can be no assurance that forward-looking statements made in this press release and in this conference call made based on information on hand today will prove to be accurate. Due to results and events could differ materially from those events anticipated in such statements and should not be relied upon. John?

JOHN MCCLUSKEY: Thank you. The year-over-year improvement in operations of the Mulatos gold mine is a tremendous achievement for the Alamos operating team. A 46% increase in production to 151,000-ounces for fiscal 2008. We have been watching this unfold quarter by quarter but taking the aggregate measure of production, revenue cash flow and earnings demonstrates just how far we have come this year. Q4 of 2008 marked the fifth consecutive quarter of record revenue and earnings for Alamos.

It is also worth noting that costs have been decreasing in large measure due to productivity improvements but also due to a stronger US dollar as approximately half our costs are denominated in pesos. By the fourth quarter operating costs were $336 per ounce including royalty. Production was also maintained at 39,000-ounces despite the fact that the leach pad was 20 meters higher than the previous period. So the time it takes for the solution to percolate through the heat increased but the production achieved for the quarter stayed the same. Recovery ratios have clearly improved. What is more drilling conglomerations started in late December and this is expected to produce further efficiencies as will closing the crushing circuit. Today you will hear from members of the Alamos management team who will provide a thorough overview of operations, financials and exploration.

Fiscal 2008 has been one of the most tumultuous years in the financial markets for a generation. The Alamos Board and management took a cautious approach as events started to unfold more than a year ago. In order to avoid risk and maximize opportunity. We invested in productivity improvements to reduce costs and increase production. We paid down debt to a zero balance and built cash. An equity financing in February 2009 further increased our position to over $110 million. These results have been gaining attention. In a global and mail article Alamos and several others were tied for a number 1 ranking among PSX listed companies with respect to balance sheet strength. We were also ranked as one of the best performing equities on the TSX for the past fiscal year.

Our objective in 2009 is to follow-through with our plan for growth. Further improvements in operations are expected to increase production, closing the crushing circuit will be the most significant undertaking with the potential to produce the greatest impact on existing production. We also intend to start construction and development of the high grade Escondida zone and gravity mill which should increase annual production by at least 50,000-ounces. The Escondida zone falls within a global pit plan that is nearing completion. The plan calls for the contiguous development of several zones of ventilization and proximity to the Estrella pit including the newly defined Puerto del Aire deposit. Next week we will publish this plan along with a new statement of reserves and resources.

2008 was a record year for exploration activity for the Company with over 36,000-meters of drilling completed on near pit and grassroots exploration targets. This work underpins the objective of expanding the Estrella pit and ultimately extending the life of mining operations. In addition to this targets drilled along trend such as La Yaqui and (inaudible) are demonstrating the greater potential of the district. The advantage of controlling a mineralized system of this vast size is that it gives us the potential and opportunity to identify new resources and make new discoveries for years to come. We consider that market conditions have never presented a better opportunity to make acquisition.

We are actively looking in Mexico and elsewhere in the Americas and jurisdictions we consider safe for investing capital and establishing mining operations. We have taken steps to strengthen management in order to lead this growth. In the past year we have hired Dr. Charles Tarnocai as VP of Corporate Development who is leading the acquisition effort. We have also hired Herve Thiboutot as VP Exploration and Marc Jutras as Director of Resource Development. These individuals are highly capable and have an enviable track record focused on growth and development. They will give us the ability to acquire attractive projects and open new avenues of growth.

We are operating in very uncertain times and the volatility and the gold price presents challenges. In the past few days Gold has pulled back over $80 per ounce. Where is the price of gold going and why is it going there? In the short term it is impossible to say. Market sentiment is powerful and fickle. But the factors driving the gold price in the short term differ from those that will determine the price in the long term. In our view, the trend for the gold price is pointing higher.

The economic problems the world faces are not going to be solved in the short term. It took years to create the weaknesses and it will take years for these weaknesses to resolve. At the root of the problem is the collapse of the US housing market. And the toxic mortgages it spawned. Now held by financial institutions and investors around the world. The full extent of the liability is not clearly understood but it is inconceivably large. While an all-out collapse has been avoided so far, this has given investors little solace. The trillion dollar bailout plans while inspiring confidence in the short term for investors still have the look of a stop gap measure. How much more is the rescue going to cost? Most investors don't believe what they are being told at this point? Wall Street has undermined their faith in the market and perhaps the financial system. Regulators and politicians are not faring much better.

Do investors have faith in the Obama administration to set things straight with the current plan? I suspect a few are still hopeful but the mainstream has its doubt. The fact is that the root of the Obama plan flies in the face of the market system upon which the American prosperity rests. This makes many Americans doubt the wisdom of the approach and its chances for success. Even the faithful recognize by now that there is no quick fix at hand. A lack of trust is in and of itself a growing problem. If banks no longer trust each other, depositors are asking themselves whether they should trust the banks? This uncertainty has led to an unprecedented demand for gold as an investment while traditional sources of demand have dried up as the gold price climbed beyond the reach of the Indian consumer investors are buying physical gold and DTF more than offsetting the near total collapse in consumer demand for gold jewelry. As the crisis continues to unfold I expect this investment demand will increase and this will ultimately push the price of gold to higher levels. I would now like to turn the call over to Alamos CFO Jon Morda who will provide some financial highlights for the quarter.

JON MORDA: Thank you, John. All recorded amounts unless otherwise stated are in United States dollars. Financial highlights for the fourth quarter of 2008 include revenue of $32.4 million and earnings of $9.1 million or $0.10 per share. Cash from operating activities in Q4 were $16 million after working capital changes or $0.17 per share. Sales in Q4 were 40,176-ounces of gold sold at an average price of $806 per ounce. On a yearly basis revenue was compared with $133.0 million compared with $74 million in 2007. Annual cash flow from operations was $65.3 million compared with $20.9 million in 2007. Earnings for the year were $29.4 million or $0.31 per share. Compared with $3 million or $0.03 per share in 2007. Helped by a favorable effective tax rate of 257%.

The effective tax rate for the year was lower than expected due in part to a decline in the peso exchange rate in Q4 which had the effect of generating a significant deductible foreign exchange loss in Mexico on its US dollar intercompany dominated company debt. Because we had based our quarterly projections on an effective tax rate of 33% for the year, Q4 also benefited from a trueing up in the final tax rate. We currently expect an effective tax rate of about 30% for 2009.

Our balance sheet liquidity has shown steady improvement. Cash at the end of the year was $43.8 million while our working capital position was $63 million. We have a strong balance sheet with no debt apart from noninterest bearing liabilities incurred in the normal course of business. Subsequent to the end of the year our cash position was further improved with the proceeds of a $62 million financing.

A significant portion of our working capital includes in process leach pad and gold inventory. At December 2008 that amount was $14.6 million or $8.1 million lower than the $22.7 million balance at December 31, 2007. This decrease is a result of a number of factors including better leach pad kinetics resulting in improved recoveries and a decrease in the average cost per ounce of in process gold due to cost efficiencies and the effect of a weaker peso on our cost structure.

From an investment perspective we spent approximately $25 million in capital exploration and development in 2008 with a focus on projects designed to improve operating efficiency and gold recovery. Capital spending included the conveying of stacking systems, drama glomeration, improvements to warehousing, maintenance facilities, the lab and ADR plant, exploration and development expenditures at Puerto del Aire and spending related to the high grade mill project.

On the liability side of the balance sheet we eliminated all interest bearing debt in the second quarter of 2008. The Company's operating subsidiary in Mexico became cash taxable in 2008 resulting in a current tax payable liability balance of...