Mr. Richard Young reports
TERANGA GOLD REPORTS SIGNIFICANT IMPROVEMENT IN NET PROFIT AND COSTS
Teranga Gold Corp. has released its financial and operating results for the second quarter ended June 30, 2015. All financial information is in U.S. dollars unless otherwise noted.
Financial and operating highlights for the three months ended June 30, 2015, compared with three months ended June 30, 2014:
-
Net profit increased to $6.7-million (two cents per share) from a loss of
$12.5-million (four-cent loss per share).
- Cash flow from operations increased to $12.3-million compared with a loss
of $9.8-million.
- Free cash flow improved by $365 per ounce and includes $147 per ounce in
new project capital.
- Production increased by 24 per cent to 49,392 ounces.
- Total cash costs decreased by 26 per cent to $602 per ounce.
- All-in sustaining costs decreased to $948 per ounce, including $147
per ounce in new project capital.
- Two thousand fifteen operating and financial outlook has been reaffirmed -- expectation is for
production to be in the top half and costs at the lower end of
guidance.
- The company has a debt-free balance sheet with $38.4-million in cash.
- Subsequent to June 30, 2015, the company closed a $30-million revolver with Societe
Generale.
"With the steps we have taken to reduce our costs and eliminate our debt, we are in a position of financial strength, generating solid cash flows from operations during the quarter to fund new project capital," stated Richard Young, president and chief executive officer of Teranga. "Several growth initiatives are under way, including Gora, our new high-grade satellite deposit, which I am pleased to say, is on track to come into production in the fourth quarter, and is expected to further enhance our production flexibility and to generate significant free cash flow commencing in 2015."
"Maintaining a strong balance sheet and financial flexibility is key to prospering in the current weak gold price environment," added Navin Dyal, vice-president and chief financial officer. "To further augment our financial flexibility and liquidity we recently secured a $30-million revolving line of credit with Societe Generale. This two-year revolver will be used for working capital purposes to smooth out fluctuations in cash flow as we self-fund several new capital projects over the next 18 months. In addition to Gora, such growth initiatives include the optimization of our mill to increase throughput and lower costs, thereby increasing production and further expanding our margins."
REVIEW OF FINANCIAL RESULTS
(In thousands of U.S. dollars, except where indicated)
Three months ended June 30,
2015 2014
Revenue $ 60,064 $ 57,522
Cost of sales (43,094) (62,820)
Gross profit 16,970 (5,298)
Exploration and evaluation expenditures (925) (583)
Administration and corporate social
responsibility (expenses) (4,271) (4,039)
Share-based compensation (1,041) (350)
Finance costs (748) (2,648)
Net foreign exchange gains (losses) 391 (47)
Other income (expense) 247 (248)
Profit (loss) before income tax 10,623 (13,213)
Income tax expense (3,584) -
Profit (loss) for the period 7,039 (13,213)
Loss (profit) attributable to non-
controlling interests (313) 670
Profit (loss) attributable to shareholders
of Teranga 6,726 (12,543)
Basic earnings (loss) per share 0.02 (0.04)
Review of financial results for the three months ended June 30, 2015 and 2014
Revenue
Revenue increased by $2.6-million, or 4 per cent, to $60.1-million in the second quarter 2015 due to a 13-per-cent increase in gold sales, partially offset by a 7-per-cent decline in average realized gold price.
Cost of sales
For the three months ended June 30, 2015, cost of sales decreased by 31 per cent to $43.1-million from $62.8-million due to lower mine production costs, depreciation and amortization, inventory movements, and adjustments to net realizable value.
Mine production costs of $35.5-million (before capitalized deferred stripping) were lower than the prior year period by $5.5-million, or 13 per cent, due to a reduction in mining and processing costs.
Depreciation and amortization declined in second quarter 2015 by $1.7-million, or 12 per cent, to $12.5-million from $14.1-million in the prior year period mainly due to lower depreciation of deferred stripping balances in the current year.
Royalties in second quarter 2015 were $3.3-million compared with $2.4-million in the prior year period. The increase was due primarily to the amortization of advanced royalties related to production from the OJVG property in the current year period.
During second quarter 2015, cost of sales were reduced by inventory movements of $4.7-million compared with $6.7-million in the prior year period. Approximately 12,000 ounces were added to inventory during the quarter, which increased the total cost of inventory and reduced cost of sales. In second quarter 2014, a non-cash writedown of $13.7-million was recognized. The writedown was due to fewer ounces mined in the period, which resulted in an increase in the average cost per ounce of inventory. The writedown was fully reversed in fourth quarter 2014 as the average cost per ounce of inventory declined with higher mine production.
Exploration and evaluation
Exploration and evaluation expenditures for second quarter 2015 increased to $900,000 from $600,000 in the prior year period. Drilling has been minimized in the current gold price environment.
Administration and corporate social responsibility costs
During the second quarter 2015 administration and corporate social responsibility (CSR) costs rose to $4.3-million from $4.0-million in the prior year period. The 6-per-cent increase reflects higher social commitments related to the advancement of the company's regional development strategy and incorporation of the OJVG commitments.
Share-based compensation
During second quarter 2015, share-based compensation expense increased to $1.0-million from $400,000 in the prior year period due to new grants of share-based awards at March 31, 2015. Under international financial reporting standards the accelerated method of amortization is applied to new grants of stock options and fixed bonus plan units, which results in about 70 per cent of the cost of the stock options and fixed bonus plan units recorded in the first year of grant.
Finance costs
During the second quarter 2015, finance costs decreased by 72 per cent to $700,000 from $2.6-million in the second quarter 2014 due to the repayment of borrowings, which resulted in lower interest expense. The company had $28.7-million in borrowings, net of transaction costs, as at the end of June 30, 2014.
Net foreign exchange gain (loss)
During the three months ended June 30, 2015, $400,000 in foreign exchange gains were realized mainly on the company's euro currency bank balances due to a strengthening of the euro relative to the U.S. dollar during the quarter.
Income tax expense
Effective May 2, 2015, following the expiry of certain tax exemptions provided under the Sabodala mining licence, the company became subject to a 25-per-cent corporate income tax rate calculated on profits recorded in Senegal, as well as customs duties, non-refundable value-added tax on certain expenditures and other Senegalese taxes. The company has recorded an income tax expense of $3.6-million, comprising current income tax of $2.4-million and deferred income tax of $1.2-million. For the three months ended June 30, 2015, deferred income tax expense includes the impact of restating 2013 and 2014 deferred tax expense for temporary differences previously not recorded. The amount of current income tax expense recognized in 2015 will not be paid until 2016.
Net profit (loss)
Net profit attributable to shareholders increased to $6.7-million, or two cents per share, from a net loss of $12.5-million, or a loss of four cents per share, in the prior year period. The increase was mainly due to a 31-per-cent improvement in cost of sales and a 72-per-cent decline in finance costs. In the second quarter 2014, net losses were primarily attributable to a $13.7-million writedown of non-cash inventory to net realizable value. The writedown, which related to low-grade long-term ore stockpiles, was fully reversed during the fourth quarter 2014.
Outlook
for 2015
Over the last 24 months, the company has pro-actively taken steps to strengthen its balance sheet, eliminate debt, increase reserves both organically and inorganically with the acquisition of the OJVG to leverage existing infrastructure, and redesign mine plans to maximize free cash flow. These actions, together with the company's ability to optimize pit sequencing and process stockpiles containing more than 300,000 ounces of recoverable gold, provide the company with operating flexibility to prosper in this current weak gold price environment.
With respect to the current year, assuming all goes as planned in the fourth quarter with respect to Gora, the expectation is for production to be in the top half of guidance range, costs to be at the lower end, free cash flow to be positive and an increase to cash balance, even at $1,100 gold.
These projections exclude current initiatives under way as part of the continuous improvement program to increase productivity, reduce costs and improve cash margins. They also exclude opportunities to reduce certain discretionary capital project spending and other obligations to ensure the maintenance of a strong balance sheet.
2015 GUIDANCE
Year ended Dec. 31, 2015
Operating results
Total material mined (000 t) 28,500-30,500
Ore milled (000 t) 3,600-3,800
Gold produced (oz) 200,000-230,000
Total cash cost (incl. royalties) ($/oz sold) 650-700
All-in sustaining costs ($/oz sold) 900-975
Total depreciation and amortization $/oz sold) 260-275
Mining ($/t mined) 2.75-2.90
Mining long haul (cost/t hauled) ($/t milled) 5.00-6.00
Milling ($/t milled) 15.50-17.50
G&A ($/t milled) 5.25-5.75
Gold sold to Franco-Nevada (oz) 24,375
Exploration and evaluation expense
(regional land package) ($ millions) 1.0-2.0
Administration and corporate social
responsibility costs (excluding
depreciation)
Administration expense ($ millions) 11.5-12.5
Corporate social responsibility
expense ($ millions) approx. 3.5
Mine production costs ($ millions) 155.0-165.0
Capitalized deferred stripping ($ millions) 8.0-10.0
Net mine production costs ($ millions) 147.0-155.0
Capital expenditures
Mine site sustaining ($ millions) 6.0-8.0
Capitalized reserve development (mine
licence) ($ millions) 6.0-8.0
Project development costs
(Gora/Kerekounda)
Mill optimization ($ millions) 5.0-6.0
Development ($ millions) 16.5-17.5
Mobile equipment and other ($ millions) 7.5-8.5
Total project development costs ($ millions) 29.0-32.0
Capitalized deferred stripping ($ millions) 8.0-10.0
Total capital expenditures ($ millions) 49.0-58.0
Three-year outlook (2015 to 2017)
In the current gold price environment, and based only on existing proven and probable reserves, the mine plan that generates the highest free cash flow is a plan that limits material movement. Relative to the guidance in the corporation's existing technical report pursuant to National Instrument filed in 2014, the impact of a reduction in material movement of approximately 12.5 million tonnes per annum over the next three years, and lower associated operating and capital costs in an optimized life-of-mine plan, more than offsets the lower production rate from a free cash flow maximization perspective. Production is expected to average between 230,000 and 240,000 ounces per annum from 2015 through 2017, down from 254,000 in the NI 43-101 filed in 2014. Additional upside to free cash flow is expected from the current productivity initiatives under way, and favourable fuel and currency rates, as well as, resource to reserve conversions from anticipated drilling at Niakafiri, Golouma and Kerekounda on the now expanded Sabodala mine licence.
REVIEW OF OPERATING RESULTS
Three months ended June 30,
2015 2014
Ore mined (000 t) 1,893 974
Waste mined -- operating (000 t) 5,192 5,233
Waste mined -- capitalized (000 t) 1,221 458
Total mined (000 t) 8,306 6,665
Grade mined (g/t) 1.18 1.39
Ounces mined (oz) 71,781 43,601
Strip ratio (waste/ore) 3.4 5.8
Ore milled ('000t) 951 817
Head grade (g/t) 1.77 1.69
Recovery rate (%) 91.4 89.8
Gold produced (oz) 49,392 39,857
Gold sold (oz) 50,074 44,285
Average realized price ($/oz) 1,198 1,295
Total cash costs (incl.
royalties) ($/oz sold) 602 815
All-in sustaining costs ($/oz sold) 948 1,060
Mining ($/t mined) 2.40 2.90
Milling ($/t milled) 12.37 21.29
G&A ($/t milled) 3.89 4.92
Three months ended June 30
Masato Sabodala
Ore mined (000 t) 1,606 287
Waste mined -- operating (000 t) 5,050 142
Waste mined -- capitalized (000 t) 1,221 -
Total mined (000 t) 7,877 429
Grade mined (g/t) 1.13 1.96
Ounces mined (oz) 53,920 17,861
The company is focused on expanding cash margins by reducing operating costs and improving productivity. Both the mine and mill areas continue to make significant strides toward improving productivity and lowering unit operating costs. Key areas of focus to date include improvement to the load/haul cycle, drill and blast efficiencies, reduction of overall energy costs, and lowering costs for reagents used in the mill.
Mining
Total tonnes mined for the three months were 25 per cent higher than the prior year period. Mining activities in the current year have been mainly focused on the upper benches of Masato and to a lesser extent, the remainder of phase 3 at Sabodala, resulting in shorter haul distances. Ore tonnes mined for the three months were 94 per cent higher compared with the prior year period while ore grades mined were lower, mainly as a result of mining activities focused on the lower-grade Masato pit. Nevertheless, higher ore tonnes mined resulted in a 65-per-cent increase in ounces mined during three months compared with the prior year period. Total mining costs for the quarter were 3 per cent higher than the prior year period, but were 6 per cent better than planned. Shorter haul distances realized in the first half of 2015, in part due to optimizing mine operations to improve productivity, resulted in lower fuel consumption required to move 25 per cent more material than the prior year period. As a result, the mine department incurred lower fuel costs. In addition to lower fuel and favourable currency movements, the mine department also benefited from increased drill and blast efficiencies, and lower costs due to softer Masato material mined near surface. Unit mining costs for the three months were 15 per cent lower compared with the prior year period due to lower costs and higher tonnes mined.
Processing
Ore tonnes milled for the quarter were 16 per cent higher than the prior year period and 10 per cent higher than the first quarter. During the second quarter 2015, harder ore mined from Sabodala was added to blend with softer, wet ore from Masato to increase crushing and milling rates.
Head grade for the quarter was 5 per cent higher than the prior year period. Mill feed during the current quarter comprised about 60 per cent Masato ore, and the balance was from Sabodala and stockpiles. Total processing costs for the three-month period were 32 per cent lower than the prior year period, mainly due to lower power, grinding and reagent consumption due to the processing of softer material, combined with favourable fuel, reagent and currency prices. Unit processing costs were 42 per cent lower than the prior year period due a reduction in total processing costs and higher throughput rates.
Gold production for the quarter was 49,392 ounces of gold, 24 per cent higher than the prior year period, mainly due to higher processed grades, throughput and mill recovery rates.
General and administrative -- site operations
Total mine site general and administrative costs for the three months were 8 per cent lower compared with the prior year period, mainly due to lower camp costs and favourable currency rates. Unit general and administration costs were 21 per cent lower than the prior year period, mainly due to higher total ore tonnes milled.
Costs per ounce
Total cash costs per ounce for the quarter were 26 per cent lower compared with the prior year period (excluding non-cash inventory writedowns to NRV). The decrease in total cash costs per ounce was mainly due to lower mine production costs and higher gold production.
All-in sustaining costs for the three months were 11 per cent lower compared with the prior year period (excluding non-cash inventory writedowns to NRV). All-in sustaining costs per ounce were lower mainly due to lower total cash costs per ounce, partly offset by higher total capital expenditures. All-in sustaining costs for the quarter includes approximately $147 per ounce of development capital expenditures, compared with approximately $85 per ounce in the prior year period.
Business and project development highlights:
- Gora development: Project development is on plan including completion of
the access road. Ore delivery to the plant is scheduled for the fourth
quarter 2015 as planned.
- Mill optimization: Mill optimization project, which is expected to have
an internal rate of return in excess of 50 per cent at $1,200 per ounce gold, is under way
with procurement packages tendered and detail design at 80-per-cent
completion.
- Heap-leach project: Testwork is complete and an optimized
prefeasibility study to evaluate a stockpile and oxide ore blend is on
track for the third quarter.
- Sabodala mine licence reserve development: The company is focused on growing its reserves by making large-scale discoveries and converting both high- and
low-grade resources to reserves on the company's mine licence. A number of areas
has been revealed as potential sources for reserve additions within the
mining lease.
- Underground reserves: An evaluation of the potential to add high-grade ounces to the company's reserve base from resources that were previously
classified as underground reserves by Oromin will begin in the third
quarter 2015.
- Golouma NW Extension: Three shear zones with varying degrees of
mineralization have been identified from 34 diamond drill holes
completed over the past six months near the existing Golouma
reserves pit design. A portion of existing inferred resources is
expected to be upgraded to indicated resources in this area.
Additional follow-up drilling is being evaluated to determine the
potential for infill drilling to further define resource
classification in specific areas within these shear zones. Further
work would commence in the second half of 2015.
- Masato NE: A 25-hole drilling program following up from a continuous
mineralized shear zone identified through surface trenching was
completed during the first quarter. Intercepts at depth revealed a
number of narrow high-grade gold veins that continued at depth,
however, they appear to be sporadic and widely spaced. No further
work is planned at Masato NE in 2015, however, there remains
potential for further evaluation of soil anomalies and artisanal
workings to the northeast.
- Maki Medina: A 23-hole drilling program was completed during the
second quarter in the Maki Medina resource to test the extents of
mineralization along strike and at depth, as well as infill drilling
to potentially reclassify inferred resources. Assay results are
pending.
- Niakafiri Southwest: A 14-hole drilling program was completed in the
Niakafiri Southwest resource to test the extents and potentially reclassify
inferred resources. Assay results are pending.
Balance sheet review
Cash
The company's cash balance at June 30, 2015, was $38.4-million, $600,000 lower than the start of the quarter, as cash flow provided by operations during the three months ended June 30, 2015, of $12.3-million was more than offset by capital expenditures of $12.8-million.
Deferred taxes
The deferred tax asset of $7.9-million on the balance sheet as at June 30, 2015, includes $5.5-million of deferred tax expense recorded in the current year. On May 2, 2015, the company's tax holiday in Senegal ended and it performed an analysis to update temporary book to tax differences existing as of June 30, 2015, and identified temporary deferred tax differences previously not recorded. Deferred income tax provision includes the $2.7-million impact of restating the first quarter 2015 deferred income tax expense.
Goodwill
On Jan. 15, 2014, the company completed the acquisition of 100 per cent of the OJVG. In allocating the acquisition cost to the underlying assets acquired and liabilities assumed, the aggregate purchase price was compared with the tax basis of the acquired assets resulting in no differences being identified between the tax basis and the accounting basis of the assets and liabilities acquired. During the second quarter 2015, upon completion of local tax filings, it was determined that goodwill on the acquisition had no tax basis and as such a temporary deferred tax difference exists with respect to OJVG mineral property assets. As a result, the purchase price equation has been restated to recognize a deferred tax asset of $13.4-million in relation to the deferred mineral property expenditures and a corresponding reduction in goodwill as at of Jan. 15, 2014, which is reflected in the Dec. 31, 2014, statement of financial position.
Borrowings
During first quarter 2015, the company retired the outstanding balance under the equipment facility with Macquarie.
Deferred revenue
During the three months ended June 30, 2015, the company delivered 5,625 ounces of gold to Franco-Nevada, as a result $6.7-million of revenue was recorded consisting of $1.3-million received in cash proceeds, and $5.4-million recorded as a reduction of deferred revenue. The company is required to deliver to Franco-Nevada 22,500 ounces annually from 2014 to 2019 followed by 6 per cent of production from existing properties.
Liquidity and cash flow
Cash flow
Operating cash flow
The increase in operating cash flow was mainly due to lower mine production costs and lower net working capital outflows during the current quarter.
Investing cash flow
Total capital expenditures for the quarter were $12.8-million, $6.0-million higher than the prior period, mainly due to higher development capital related to Gora and capitalized deferred stripping.
Financing cash flow
Net cash flow from financing activities for the quarter was nil, compared with net cash flow provided by financing activities of $16.3-million in the prior year period. Financing cash flow in the prior year included net proceeds of $25.5-million from an equity offering, partially offset by the repayment of principal and interest on borrowings of $9.2-million.
Liquidity and capital resources outlook
Subsequent to the quarter, on July 15, 2015, the company closed a previously announced $30.0-million senior secured revolving credit facility with Societe Generale. The revolver facility is a two-year facility beginning June 30, 2015, and will be used for general corporate purposes and working capital needs. Closing costs, including legal, security registration and advisory fees, are expected to be approximately $1.7-million.
The company's primary sources of liquidity are its cash position at June 30, 2015, which was $38.4-million, cash flow from operations and the revolver facility.
The key factors impacting financial position and the company's liquidity include the following:
- The company's ability to generate free cash flow from operating
activities;
- The gold price.
Using a $1,100-per-ounce gold price, the company expects to generate free cash flow in 2015. Notwithstanding, the company's cash position is highly dependent on the key factors noted above, and while it expects it will generate sufficient free cash flow from operations combined with its new revolver facility to finance current growth initiatives, the company may explore other value preservation alternatives that provide additional financial flexibility to ensure that it maintains sufficient liquidity. Such alternatives may include hedging strategies for fuel and currencies.
REVIEW OF QUARTERLY FINANCIAL AND OPERATING RESULTS
(In thousands of U.S. dollars, except where indicated)
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
2015 2015 2014 2014 2014 2014 2013 2013
Revenue $60,064 $68,491 $76,553 $56,711 $57,522 $69,802 $58,302 $50,564
Average realized
gold price
($/oz) 1,198 1,217 1,199 1,269 1,295 1,293 1,249 1,339
Cost of sales 43,094 48,155 37,738 52,358 62,820 55,068 48,526 36,825
Net earnings
(loss) 6,726 12,988 27,693 (1,524) (12,543) 4,152 (2,420) 49
Net earnings
(loss) per
share 0.02 0.04 0.08 (0.00) (0.04) 0.01 (0.01) 0.00
Operating cash
flow 12,269 16,631 30,677 13,822 (9,793) 14,303 13,137 16,692
Ore mined
(000 t) 1,893 2,246 2,666 1,272 974 1,262 1,993 537
Waste mined --
operating
(000 t) 5,192 3,619 5,594 4,201 5,233 6,151 6,655 3,321
Waste mined --
capitalized
(000 t) 1,221 2,841 490 524 458 497 420 4,853
Total mined
(000 t) 8,306 8,706 8,750 5,997 6,665 7,910 9,068 8,711
Grade mined
(g/t) 1.18 1.17 1.47 1.71 1.39 1.61 1.61 1.08
Ounces mined
(oz) 71,781 84,379 126,334 69,805 43,601 65,452 103,340 18,721
Strip ratio
(waste/ore) 3.4 2.9 2.3 3.7 5.8 5.3 3.6 15.2
Ore processed
(000 t) 951 861 1,009 903 817 893 860 887
Head grade (g/t) 1.77 1.90 2.44 1.89 1.69 2.01 2.11 1.41
Gold recovery
(%) 91.4 92.6 90.1 88.5 89.8 90.1 89.7 91.6
Gold
produced (oz) 49,392 48,643 71,278 48,598 39,857 52,090 52,368 36,874
Gold sold (oz) 50,074 56,223 63,711 44,573 44,285 53,767 46,561 37,665
Total cash costs
per ounce
sold
(including
royalties) 602 609 598 781 815 696 711 748
All-in
sustaining
costs per ounce
sold
(including
royalties) 948 841 711 954 1,060 813 850 1,289
Mining ($/t
mined) 2.4 2.1 2.6 3.1 2.9 2.8 2.6 2.5
Milling ($/t
mined) 12.4 14.6 13.9 16.0 21.3 18.2 18.0 17.6
G&A ($/t mined) 3.9 5.0 4.3 4.5 4.9 4.8 4.8 4.6We seek Safe Harbor.
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