Transcript: Equinox Gold (EQX) - Rationalisation & Optimisation in Sharp Focus

Morgan Leighton
October 5, 2021

Led by Ross Beaty as Chair, Equinox Gold is a well-financed, multi-asset mining company and one of the only gold producers of scale operating entirely in the Americas. The company has 7 operating mines and is advancing 4 growth projects that will significantly increase production in the near term. Equinox Gold has the properties, the people and the plan to rapidly achieve its vision of producing more than one million ounces of gold annually.

We Discuss:

0:00 – Company Overview

0:29 – Share Price Dive: Acquiring Lea Gold, Blockades & Covid

2:22 - Cost, Investments, Asset Building, Production Sites

4:30 – Operational Mindset, Team Building, Balance & Portfolio Effect

8:12 – Problems, Resolving Long-term Issues & Execution Upon Large Projects

10:02 – Local Communities Asking More, Viewing, & Tackling the Situation

13:00 – Financials: Cash, Revolving Credit, Investments & Maturing Capital Structure

16:03 – Cashflow Allocation, Possibility of Dividend, Conversions, & Different Mines Analysis

19:30 – Timeline: Allocation, Hit Score, Targets, Worth, & Selling Options

24:04 – Trails & Tribulations: Growth Story, Focusing Time, Balance & Challenges

27:37 – Outro

Christian Milau: Hi I'm Christian Milau here, CEO of Equinox Gold and we're probably the fastest growing intermediate Gold company out there and we have 7 producing mines and 4 growth projects and moving our way towards a 1Moz of Gold production in the next couple of years so exciting times and now maybe turn it over to you for questions.

Matthew Gordon: Christian good to have you back on, haven't seen you for about 18 months you've been busy building a company and as you say but share price, where's it all gone wrong?

Christian Milau: Yeah it's been definitely a tough, I'm going to say a year or so, maybe a little over a year and you know, you can blame a little bit on the general markets and a lack of interest in Gold but we've had one specific issue for sure that we've been dealing with and ever since we acquired Leagold which happened, I guess it was closed on March 12th I think it was in 2020.  Since then we've really struggled with Los Filos in Mexico and that mine, it's really not had one full operational quarter I think uninterrupted.  We had COVID hit it and it was down for Quarter 2 last year and then we had a blockade after that and then we had another kind of blockade and a half this year as well so, it just sort of seems to have gone terribly difficultly.  Hopefully we've resolved that and we definitely stepped in and we did change some of the Senior Management to an experienced Spanish speaker who worked only in Mexico pretty much their whole career versus what we had in there.  That probably was a little less experienced in that area and since then we've been kind of building that relationship back up but we've had to take a fairly hard stance and view on a couple of these issues around the blockades and we just can't accept that kind of behaviour as the way to resolve call it disputes or issues.  And it really stemmed from call it 2 communities particularly wanting more of the economics of the new areas that we're investing in, the 2 new ore deposits.  So we're willing to share jobs and contracts and things like that but we can't do that to the detriment of other communities and other workforce members and so in a way that's been the crux of trying to stabilise the relationship.  Get sort of an understanding of that there's 3 communities here not just one in each of these areas and I'm happy to dive into more detail on that but we've come to resolution I think with these groups I hope and we don't go back there.  But it'll take time to rebuild that trust and it won’t happen over a quarter or 2.

Matthew Gordon: Okay, yeah I wouldn’t mind a bit more detail but in a minute, I want to start at the top and work my way down.  So it's been a tough you can blame the markets, Filos is a contributing factor but your costs are still high.  When are you going to be able to reduce those costs because obviously I think people saw that you did well when Gold was shooting up towards 2,000 Gold is 1,700 we're still not bad but compared to the average ASIC number here, people are looking and going, well actually this is a bit close.  Something else goes wrong, these guys aren’t making as much money they're, I'm a little bit nervous.  Is that too simplistic a way to look at this?

Christian Milau: Well no it's correct in terms of the actual numbers right now but we really are investing in our assets to get them to that cost base level that really improves them and we sort of said pretty clearly the first half of this year was really about investing in, particularly RDM and Mesquite, through call it major push backs which had, call it less ore, lower grade etc going up to the leach through the mill and in the second half of this year we're starting to see, certainly Mesquite turning that corner as we've invested almost USD$50M in some stripping there.  And RDM has an almost 2 year programme of stripping that, it's still producing actually decent cash flow but it's a 2 year period of getting that ore deposit opened up and then Filos has been overhanging that from a higher level.  With the inconsistent production of a big leach operation, leaching operation the costs have been high and it’s going to take us some time to turn that around in the long term.  We want to put a CIL plant in there that'll bring that cost down but part of the overall strategy here was kind of some base hits, some assets that maybe needed some work or some developmental rebuilding and as you improve those, do some exploration as well as build out these growth projects your average costs come down over time.  So it's an investment phase that we're in and we'll be improving gradually here but the big hits are when you get Santa Luz in production beginning of next year.  You get Greenstone in production 2024, you've got a couple of other mines beyond that as well that'll have improved costs so it's a gradual process here.

Matthew Gordon: But you've moved from an M&A team into one that needs to be an operator, I mean an efficient operator, one that can show the market that you're going to be able to execute your plan right?  So you want to be 1Moz a year producer, that's the goal, that's what you've said to the marketplace okay, so you need to show that you can do that without the hiccups, with the reducing costs, with the increase in production.  You're around whatever, 600,000oz at the moment so you're well on your way there.  Have you got the team to do that, have you lost the M&A mindset and moved into operational mindset and have you had to acquire people to allow you to do that?

Christian Milau: Yeah so it's been evolving and this year we've purposely, since Doug Reddy's taken over as COO, he been building out his skillsetting team here in Vancouver and we've brought in some people's experience in operations on the ground, building bigger projects.  Technical skills that maybe we didn't have to the depth that we needed here in Vancouver and so that's now sitting there in a team that's ready to support, oversee and really be the oversight of these big projects and the growth in M&A and integration of that M&A.  Where in the past you're right, it was a little bit more lean, nimble, entrepreneurial and I'd say we're building that out without trying to be too big and corporate.  We still want to keep a bit of a creative entrepreneurial edge to us and that's Ross Beaty's MO really historically.

Matthew Gordon: Yeah but there's kind of a crossover point where the entrepreneur, entrepreneurial spirit is to the detriment of the consistency to the planning etc, do you know what I mean?  You've got to get the balance right because in a very meaningful way, I don't care what your projects are, I care that you get to this 1Moz number that you're telling me about and I care that you can do that efficiently and making money consistently and you're doing that sort of risk mitigation across the board.  In every single way that that needs to happen, so you know what I mean?  So people start looking at you differently when you're a 2Bn or previously bigger than that, USD$4Bn company, I stop worrying about the kind of detail and worry about the delivery, the bottom line.  I mean have you changed that mentality internally as well? 

Christian Milau: Yeah absolutely, it's more of a portfolio effect now and we've got to manage the overall portfolio and deliver.  We do have to deliver on a quarterly basis but we still have got a view out there for the next few years and as you said, we want to get to that 1Moz of production by, call it run rate sometime in 2024.  That's when you become more of that cash flow machine that ultimately is going to be paying a dividend to shareholders and so we don't want to lose sight of that longer term objective and we still have to deliver on the quarterly results but we don't want to do anything to the detriment of that long term objective and we've really set that pattern and that ambitious growth goal.  And growth at the moment in this sector, yeah it's probably not overly loved because I think people are looking for cash flow and consistency and a dividend being paid but that will come back in due course and very few companies of a scale of ours, sort of mid-Tier and above have much growth and I think you will see some M&A.  You'll see some investment in these smaller assets and we've got that in our portfolio now and it's fully funded so I think it's a really interesting environment to be looking at a company like ours and from a purely personal perspective myself, Ross and the whole management team were buying stock in August.  We were like wow you get to buy this stock at less than USD$8 a share.  We're a bit above that right now but we were going what an incredible opportunity in kind of a decent Gold market but a terrible sentiment market for the equities and so it was a really interesting time this summer.

Matthew Gordon: Well yeah, I mean I guess that's a line that most CEOs will throw at it now, our stock is cheap what a buying opportunity but the reality is that people are perceiving the sum of the parts not as valuable as you would want them to be, as they possibly have in the past.  I mean what's the one thing you'd actually put that down to, it's not just the market and Gold price coming off.  Is it do you think that they've lost faith in the management team to deliver this consistency in terms of the oz or the fact that you, there's slight immaturity in the way that you are approaching your communications with the market.  What's been thrown at you, you were at Beaver Creek, you were at Denver, what was being thrown at you there?

Christian Milau: I think the 2 major things and we've already touched on the one is resolving Filos in a longer term manner that ideally doesn't see that come back again, so that's one thing we're needing to get behind us and the other one is really about execution.  That's been the big question, can you execute on these big projects, can you keep them going sequentially, can you fund them and turn these into good cash flow machines essentially.  In a sense it may be a wait and see for some investors and we'll have to just prove it but when you look at the last 3 years and when I include this year, we'll have built a mine per year.  Taking mines that had pre-historical challenges, recapitalising them, getting them up and running and I think we've done a pretty good job of that and Santa Luz will be the next one which will be done around this year end and then Greenstone will be the big one.  Which we'd like to announce in Quarter 4, certainly late this year that we're in full construction, set a really good timeline and that CapEx number and then deliver on it and it's a big Canadian project that I think will be a corner stone to our success as a management team and a Board in terms of delivery and execution.

Matthew Gordon: Are you seeing more, is this more a market commentary from you?  Are you seeing, as now a producer of, well a significant producer are you seeing the local communities taking the opportunity to ask for more and get more from mining companies?  Because we're seeing lots of issues, you've had blockade issues, we've seen that across multiple jurisdictions.  Do you think the ESG narrative is helping their cause, is it something that you mind, do you think it's something that they are entitled to, do you think mining itself is gaining?  How are you as an organisation viewing and tackling that and in fact who's tackling that internally?

Christian Milau: Yeah I mean ESGs become such a prominent important factor in everything we do and I think a lot of mining companies do a much better job then maybe they're perceived to because it is a corner stone part of what we do.  I mean we're in local communities, you need to employ and give contracts and you know, actually give back into those communities and it should just be, sort of like health and safety, something you do on an everyday basis and one the things I think we've been poor at as a mining group, generally as a sector, but maybe even with us as a new company is really communicating it.  So getting your forms of communication, your tools up to speed, building out that team and that's actually then the number one growth area other than the pure technical skills in Vancover is ESG and your cost to capital will go up if you don’t get better so we're going to be looking at that whole Carbon emissions, net zero, all that side of it.  But I think the real crux and basics are, what are we doing on the ground and we had a couple of good examples over the last year and Los Filos being one where I do think the communities are looking for more generally.  Certain ones are definitely more active, they're learning how to harness social media and to work with NGOs and that, probably to get more, call it leverage than they normally had historically and social media's a double edged sword.  It can be good for us, it can be difficult for us as well and an interesting example was at Aurizona.  We had historic floods in the first part of the year and social media and a couple of NGOs were reporting them as tailings dam failures and so for us it was just a terrible social media issue that we had to deal with.  There was absolutely nothing wrong with our tailings dams and all our infrastructure was in good shape but that misinformation, you have to counter it and deal with it and social media, it's a world that once it gets away from you it can be hard to control in that environment and so I think we're also learning how to deal with that and it can make a small group of people very powerful in terms of their voice and so I think us as a company have to get ahead of it.  In terms of all those good things we are doing in these communities.  Communicating them more regularly, making them available to investors but also to those communities and to Governments as well and Governments are taking a very strong interest because a lot of voters are now voting with an ESG hat as well or certainly a green-angled hat for sure.

Matthew Gordon: Well yeah, if you look at the German elections they took a significant slice of the pie there.  Yeah it's an interesting one the sort of two edged sword of social media, it can be your friend and your ally but in equal measure if you don’t have a response to some of the things which are out, misinformation, I think it can be problematic for you guys.  So just sort of coming back to the numbers, you've got, you're sitting on, well talk us through, how much cash are you sitting on?

Christian Milau: Probably about 330M of cash right now, we've got a couple hundred million available in our revolving credit facility, we're sitting on USD$4-USD$500M of investment in Solaris and i-80 generating decent cash flow and so we've got a pretty good balance sheet at this point in time and interestingly when you look at our banking group.  When we originally built this company, kind of around the time of the Leagold acquisition, the company's probably almost doubled in size in terms of scale and asset base but we haven't actually changed our financing structure so part of what we need to think about in 2022 is just maturing our capital structure. Maybe not having as much reliance on a shorter term floating rate revolver, maybe we put a Bond in place that just extends the duration, maybe fix that coupon in a pretty low historic interest rate environment.

Matthew Gordon: Right, that would be interesting, just to understand how you do tidy that up, what you do use that cash for.  Obviously I don't think you're going to cash in any of the equities that you've got at the moment, well are you?  It wouldn't make sense though would it?  The companies wouldn't be happy.

Christian Milau: The way with think of it with Solaris, we spun that out 2 years ago, it probably had a 50M market cap, it's now CAD$1, CAD$1½Bn whatever that number is, I haven't looked recently but they've had a fantastic run and they're showing that they've got potentially a world class portfolio there in Ecuador and you know we've said, and I think Ross has publicly said in some of our webcasts you know, probably within 12-18 maybe 24 months.  Likely that'll have so much interest from the major Copper producers around the world that need scale and growth that it'll get taken out at some point.  I mean there's no guarantees but that's a possibility so we see ourselves with Richard Warke owning 40, 50% of that stock and we're just under 20 and I think he's in the mid-20s if not the high 20s and we can ultimately deliver that, like he's done with most of his big Copper projects in the past.  Haiti's a little different story, you know we own about USD$150M stake in that, when we spun it out and Ewan went off to run it after buying Premier Gold, we bought Premier for I think it was almost USD$½Bn in terms of market cap.  Haiti now has a market cap very similar to that, not quite but very similar and we own 30% of it and that's a Nevada based, he's just done an asset swap with Barrick but essentially a Nevada based growth oriented Gold company so strategically that one is more interesting long-term where it's just in our back yard.  We're just across the Nevada border in California with our operations so if he can turn that into a 3 or 400,000oz plus producer in due course and there's some work to be done there, us owning 30% isn't a bad place to be.

Matthew Gordon: Yeah we've had Ewan on, we also particularly like Solaris, things are great so I think it's still got a lot of growth in it as well.  So let's come back to your growth component so, with the cash that you've got we can clean our balance sheets and so forth and move things around on the spreadsheet but if you go to the cash you've got, how do you allocate that?  Is it all about trying to optimise the projects that you've got now in terms of efficiency in terms of actual oz coming out of the ground?  Is all that money going back into the projects or is there a possibility of a dividend any time soon?

Christian Milau: Yeah, I'm going to say not quite yet.  It's more likely once Greenstone's up and running.  A lot of our capital will go toward finishing off Santa Luz, that's a small project that'll be done this year so most of it will go and we're focussing on Greenstone over the next 2, 2 and a bit years and so I don’t think you're going to see us paying a dividend until that's got clarity and a finish line in site and we're generating the cash flow from that, because that's going to be a massive Canadian mine.  It'll be 3rd or 4th largest in Canada and so we'd like to see our dollars put into the ground there.  We think the return is better by doing that and then eventually once that's done there'll be excess cash flow to start returning to shareholders. 

Matthew Gordon: Okay, fantastic.  Anyway with regards to the kind of extending life at mine with Fazenda, Mesquite, Aurizona, I mean what are we talking about?  You're not going to double life-of-mine here are you?  What's your ambition with those and you know, how do you fill those up when they start running out?  I mean what are the kind of growth profiles?  What I'm interested in. 

Christian Milau: Yeah and you hit the right ones there, we will spend most of our exploration dollars around the mines that half less than a 10 year mine-life, so Mesquite we just added almost ¾Moz to resource just recently, we put our results out this year.  We're still drilling ore there so we see conversion to reserves and ultimately adding resource.  That one you're probably not going to see a big bang doubling of the mine-life, you'll add a year or 2 every year or 2 and maybe in the longer term you can kind of double mine-life when you're across the highway so that one's kind of more of a work in process.  Every year you add a bit.  Aurizona we just put out a study a few weeks ago, that almost doubled the mine-life and it comes from underground and a bit of the open-pit and we see more open-pit deposits potentially along strike there and definitely more coming from the underground as we drill.  So that one you'll see us putting dollars into and continue to advance that and we've done the big-bang sort of almost doubling of mine-life this year.  Now I think it'll be a bit more incremental and it's 11 year mine-life as we speak and then the other one Fazenda.  We think of Fazenda and Santa Luz as almost one complex.  Santa Luz has a 10 year mine-life when it gets up and running at the end of this year.  Fazenda's probably 5 or 6 right now but it's one of those old sort of school underground mines where you kind of drill just a bit ahead of you, you add a year or 2 here and then.  You never kind of add 5 or 10 years unless you get into one solid area where you're going to be able to massively expand but I think what you'll see there is that complex, we've grabbed a bunch of exploration ground between the 2 of them.  We're drilling them right now, there should be drill results out publicly in the next month or 2 and what I think it'll show is that there's a 70km Greenstone belt between the 2 of them, we've grabbed a bunch of exploration concessions that were put up for auction this year and you'll see that whole complex grow and we see it like Aurizona.  We've got 2 core districts in Brazil that have potential to grow and be sort of multi-mine districts and we'll keep investing in that as well.

Matthew Gordon:  So I understand, I'm kind of really intrigued by the kind of hit team that you're putting together in Vancouver to be able to help the different operational teams to do the optimisation because to go from, even to go from 625 up to 1M, that's significant right?  I get Greenstones coming in and you've, hopefully Los Filos comes back on at some point but you're going to have to do some real heavy work on the current assets to kind of you know, move up to that USD$1M mark.  So what sort of timeline are we looking at?  How confident are you though that the efficiencies will come, either this ASIC number will come down because there's a sort of mental block I think.  Certainly with retail they're like if it's above USD$1,000 it's probably not attractive, people are attracted if it gets below that kind of magic number.  Now I know that's not necessarily the real world but that's just perception is reality right?  So how are you going to allocate this sort of hit squad that you've got, you're building up from Vancouver to the various companies and what are you targeting them all with?

Christian Milau: Basically each of our projects will have a dedicated project team because they're also very different regions and cultures and that so Brazil has its own which a lot of them are involved with the Aurizona build 2 years ago.  Ontario we've got a group of, a team that's building up a structure that has ex-Agnico team that helped build some of the northerly Canadian mines and so those will be very discrete and they'll focus on that.  There'll be oversight from Vancouver looking at project controls, capital allocation, cash flow, how they're financed, the technical aspects and challenges that will sort of kind of assist in those processes and review and give the oversight and we'll focus on getting Santa Luz done this year and as that's coming to a finish line, which it's getting pretty close to right now the attention goes to Greenstone and that'll be a 2 year process.  And really you'll be looking at, call it or 7 or 800,000oz of production next year with Santa Luz coming on line and then you've got the next step change will happen in 2024 as you get Greenstone into production and with each of these coming in you have reduced costs because these are more efficient, longer life, high-quality mines and along the way we may sell one or 2 mines as well and that may help.

Matthew Gordon: That's what I want to ask you about, because is that part of the responsibility and remit of the, sorry I'm calling them a hit squad but you know what I mean don't you, the Head Office team are looking at it and saying, example, Mercedes mine come on, 30, 35oz that doesn't touch the sides we need more from you.  Either do that or we sell, you, I mean do you, you're going to have those sorts of conversations on a monthly or quarterly basis about what's the right thing to do here because you could sell, you could always equally buy so are you constantly evolving that discussion, that conversation on a monthly or quarterly basis?

Christian Milau: Absolutely and you're bang on, the 2 smallest mines will always be kind of in the sights to be discussed, so both Mercedes, which is probably 40-50,000oz producer at the moment, has potential to go to 60, 70, 80 and then you've got RDM which is 65,000oz at the moment and they're looking at a plan to maybe go to 80-100.  So if they can achieve these kinds of levels it becomes more interesting but I do think if someone's willing to pay a reasonable price now, in terms of multiples of cash flow or something it might be interesting to us.  Because that attention we'd spend on even doubling the size of those small mines pales in comparison to looking at Greenstone where you're looking at hundreds of thousands of oz or expanding Filos or getting Santa Luz on stream so I think you could see at least one of those end up being sold.  We did sell Pilar obviously early this year which was even smaller and I think it shows discipline and we had some shareholders saying focus on discreet, decent number of assets with some scalability to them.  Rather than actually spend your time at the lower end of your portfolio and it's a natural evolution we've seen in some of the bigger companies.  I was at Endeavour Mining before and I was leaving we were selling the small mines and focussing on the bigger ones and look where they are today.  In a sense where at an earlier stage of doing that kind of process and analysis as you said. 

Matthew Gordon: It's, you see that's it, when you're talking efficiency it's not just literally at the operational level, it's about, it's through corporate as well.  Because 100,000oz a year producer for A N Other company, single asset go, being valued around 500M market cap.  That just seems to be the norm, for you it's almost like you're getting a discount to that because of everything else and all the other moving parts and perhaps it's a too big a story and these are the trials and tribulations of billion dollar companies.  The growth story gets harder to tell, the ability to focus enough time on all of the moving parts becomes more complicated and you have a whole different set of challenges within your organisation and I think, I kind of, I wonder if you're suffering from a little bit of that and it's not… Like you say it's not just necessarily Los Filos and the market etc.  It's a little bit of that, people going, this needs a lot more focus from you guys.

Christian Milau: I think it's absolutely right, I think we've heard that directly from some of the investors, please sell one or 2 of the smaller assets.  Another option too is we’ve got a few exploration properties in Red Lake and parts of Ontario and right now I bet you don't even know we own them.  So maybe we spin them out like we did Solaris, because actually most people didn't know we owned those and look at it now and that's another way to call in surface value at least.  So I agree, we've got to keep with the discipline at the smaller end of our portfolio, keep our attention focussed on delivering and executing the bigger end and you know, historically if you look at some of the multiples paid in our sector for mid-sized companies.  If you have more than, I don’t know if it's 30, 35% of your portfolio in development assets sometimes you get that reduction in your overall multiple because it's got risk, it's got development risk to it and so part of our job here is to continue to bring these ones in.  Execute on them and make a bigger proportion of our portfolio producing and obviously consistently producing at a good cost.  And the other battle that's coming up today too and something that we haven't touched on yet but inflation's out there and that's something to keep an eye on and we're certainly building some projects and we're seeing some of our on-going operations start to talk about, obviously fuel prices are going up at the moment but some of the reagents, maybe some of the labour and that so it's another area to keep an eye on I think as we move forward into 2022 as well.  Is it transitory, is it permanent, how do you manage it, how do you get discounts?  We're going to go to joint purchasing initiatives across our portfolios and so there's lots of work to be done there as well. 

Matthew Gordon: Yeah I think those are conversations that people have wanted to have or excuses that they've wanted to discuss over the past 3, 4 months but I, I think you're all in the same boat right?  All your costs are going up, equally labour's hard to get a hold of, COVID has impacted costs, transportation, fuel, you know, everything has gone up for you guys.  It's a tough environment for sure, you've got to be as efficient as you can be given that, just like everyone else has to be.  So I'd be fascinated to hear from you the things that you are looking at, the moves that you could make and you've got the options to be able to make.  You've got a lot of cash available to you too so.  Look I've really enjoyed the update Christian, I mean, like I say you're busy being very busy and I think you want to now show the market you've moved from pure M&A through to an operationally successful company but you haven't necessarily, entirely lost the entrepreneurial and M&A thought process in there to keep your options alive.  It's been a good session, thank you.

Christian Milau: It's a fine balance and it's hard work.

Matthew Gordon: Yeah, I bet.  Who would want to be a CEO of a mining company Christian?

Christian Milau: It's a heck of a lot of fun too though I have to admit.    

Matthew Gordon: Okay, okay well I appreciate your time, stay in touch, see you soon.

Christian Milau: Thanks a lot, thank you.

To find out more, go to the Equinox Gold website