EXHIBIT 99.2
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the three and six months ended June 30, 2018 and 2017
The following Management’s Discussion and Analysis (“MD&A”) for Alio Gold Inc. together with its wholly owned subsidiaries (“Alio” or “the Company”) is prepared as of August 8, 2018, and relates to the financial condition and results of operations for the three and six months ended June 30, 2018 and 2017. Past performance may not be indicative of future performance. This MD&A should be read in conjunction with the condensed interim consolidated financial statements (“interim financial statements”) and related notes for the three and six months ended June 30, 2018 and 2017, which have been prepared in accordance with International Accounting Standard 34 - Interim Financial Reporting using accounting consistent with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS” or “GAAP”). As such, the interim financial statements do not contain all the disclosures required by IFRS for annual financial statements and should be read in conjunction with the Company’s audited consolidated financial statements for the years ended December 31, 2017 and 2016 (“consolidated financial statements”).
The first, second, third and fourth quarters of the Company’s fiscal years are referred to as “Q1”, “Q2”, “Q3” and “Q4”, respectively. The three months ended June 30, 2018 and 2017 are also referred to as “Q2 2018” and “Q2 2017”, respectively. All amounts are presented in United States dollars, the Company’s presentation currency, unless otherwise stated. References to “C$” and “MXP” are to Canadian dollars and Mexican pesos, respectively.
On May 12, 2017, the Company filed articles of amendment to complete an approved share consolidation (the “Consolidation”) of the Company’s issued and outstanding common shares on the basis of ten pre-consolidated common shares for one post-consolidated common share. The Consolidation affects all issued and outstanding common shares, options and warrants. All information relating to basic and diluted earnings (loss) per share, issued and outstanding common shares, options, warrants, and per share amounts have been adjusted retrospectively to reflect the share consolidation.
On May 25, 2018, the Company acquired Rye Patch Gold Corp. (“Rye Patch”). All financial and operational information contained within this MD&A includes the period from May 25, 2018, to June 30, 2018, unless otherwise stated.
Statements are subject to the risks and uncertainties identified in the “Risks and Uncertainties”, “Cautionary Note to U.S. Investors” and “Cautionary Note Regarding Forward-Looking Statements” sections of this document. The Company has included the non-GAAP performance measures of cash cost per gold ounce on a by-product basis, all-in sustaining cost per gold ounce on a by-product basis, and adjusted earnings per share throughout this document. For further information and detailed calculations of these measures, see the “Non-GAAP and additional GAAP Measures” section of this document.
Q2 2018 OPERATIONAL OVERVIEW AND RECENT DEVELOPMENTS
| - | Completed the acquisition of Rye Patch on May 25, 2018, whereby each common share of Rye Patch was exchanged for 0.48 common shares of Alio Gold and one tenth of one cent (C$0.001) per Rye Patch common share held. The transaction diversifies the Company’s asset base by adding a second operating mine, Florida Canyon, in the well-established jurisdiction of Nevada. |
| - | The Company restructured the existing Rye Patch debt facility, with Macquarie Bank Limited, which was required to be repaid in December 2018. As of June 30, 2018, the outstanding principal of $15.0 million will be repaid in twelve quarterly payments of $1.25 million in principal together with accrued interest, ending in June 2021. The first principal and interest payment will be made September 30, 2018. The facility has an interest rate of LIBOR + 8% and is secured by a general security agreement and guarantee by the Company. |
1
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
San Francisco Mine Overview
| - | During Q2 2018, the San Francisco Mine (“San Francisco”) produced 14,466 ounces of gold at cash costs and all-in sustaining costs(1) (“AISC”) of $950 per gold ounce and $1,172 per gold ounce, respectively. |
| - | The dual cut-off strategy deployed in January 2018 to increase the grade of crusher feed ore has not been successful as crusher feed grade averaged 0.43 g/t gold during the period compared to a plan of 0.59 g/t gold. As a result, cash flow from operations was insufficient to fund the on-going capital stripping requirements to open up Phases 6 and 7 of the deposit. |
| - | In June, waste stripping on Phases 6 and 7 was suspended while a new mine plan was developed which slows stripping rates and focuses mining on more profitable ounces. As a result, the Company is not expecting to meet its annual production guidance of between 90,000 and 100,000 ounces of gold. |
| - | An interim mine plan with reduced stripping rates is currently being negotiated with the San Francisco mining contractor. |
| - | An updated Mineral Reserve statement as of July 1, 2018, shows San Francisco’s Proven and Probable Reserves totalled 55.5 million tonnes of ore with an average grade of 0.49 g/t containing 854,472 ounces of gold. |
Florida Canyon Highlights
| - | Subsequent to the completion of the acquisition on May 25, 2018, the Florida Canyon Mine (“Florida Canyon”) produced 4,724 ounces of gold. Due to the recent acquisition of Florida Canyon, cash costs and AISC do not represent quarterly results and will be provided in future quarters. |
| - | Commenced work on an updated 43-101 technical report that is expected to be completed by the end of 2018. The report will include an update to the reserves and resources, a new life of mine plan and recommendations on improvements to increase cash flow through increased production and lower costs. |
Ana Paula Highlights
| - | On August 8, 2018, a decision was made to temporarily suspend all exploration activity at Ana Paula including construction of the 1,200 metre underground decline. With the recent decline in the gold price and the integration of Florida Canyon, the Company’s focus in the near-term will be on achieving consistent operating results from its two operating mines. |
| - | Advanced the underground exploration decline to 269 metres and included the first remuck bay as of June 30, 2018. Geological mapping and sampling of the decline was undertaken. |
| - | Completed diamond drilling of two 300 metres surface holes to explore the southern extension of the hydrothermal breccia with positive results received. |
| - | Reinterpreted the existing geophysical data for the Ana Paula Project (“Ana Paula” or the “Project”). Targets were identified in the Jacaranda Zone (south of the proposed pit), North Zone (north of the proposed pit) and Tejacote Zone (west of the proposed pit) in near proximity to the current mineral reserves. Geological mapping at a scale of 1:2,000 as well as re-logging of historical drill core to align with the proposed pit lithology was completed in the Jacaranda and North Zones. Field checking mapping and sampling of the Jacaranda and North Zone targets was undertaken. |
(1) | Refer to the “Non-GAAP and Additional GAAP Measures” section of the MD&A. |
2
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
Q2 2018 CONSOLIDATED FINANCIAL HIGHLIGHTS
| - | Net earnings of $3.3 million or $0.05 per share for Q2 2018. |
| - | Cash used in operating activities was $8.3 million or $0.14 per share for Q2 2018. |
| - | Cash and cash equivalents and short-term investments at June 30, 2018, of $29.7 million total ($19.7 million and $10.0 million, respectively). |
| - | Working capital, current assets less current liabilities, at June 30, 2018, of $78.2 million. |
OVERVIEW OF THE BUSINESS
Alio Gold Inc. is a gold mining company engaged in the operation, development and exploration of gold mines. Alio Gold’s vision is to create a leading precious metals company by leveraging its existing platform of assets and people to maximize value for all its stakeholders.
Alio Gold operates two open-pit heap leach operating mines: The San Francisco Mine in the state of Sonora, Mexico, located approximately 150 kilometres north of Hermosillo and 120 kilometres south of the United States/Mexico border via Highway 15 (Pan-American Highway) and the Florida Canyon Mine, in Nevada, United States (“US”), located approximately 210 kilometres north of Reno. In addition, Alio Gold has a portfolio of exploration stage projects in Mexico and the US.
The Company’s development stage Ana Paula Project is located in the north central part of the State of Guerrero in southern Mexico, 180 kilometres from Mexico City and 250 kilometres away from the port city of Acapulco. The Project is located on the highly prospective Guerrero Gold Belt, approximately 7.5 kilometres northwest of Torex’s El Limon-Guajes mine. Ana Paula is comprised of two mineral concessions totalling approximately 4,200 hectares, with approximately 52,000 additional hectares in the surrounding area. Ana Paula currently has estimated Proven and Probable Mineral Reserves based on a Pre-Feasibility Study (“PFS”)(1) of 13.4 million tonnes grading 2.36 gram per tonne gold (1.0 million ounces of gold contained). The Project has been temporarily suspended as the Company focuses on improving its operations to generate cash flow.
The Company’s current sources of operating cash flows are primarily from the sale of gold and silver. Alio Gold's principal product is refined gold doré sold primarily in the London spot market. As a result, Alio Gold is not dependent on a particular purchaser with regard to the sale of the gold doré.
Macroeconomic and Commodity Price Environment
Continued price volatility and support for gold prices could be influenced by the relative strength or weakness of the US dollar, global geo-political events and supply/demand fundamentals. The gold price was $1,250 per gold ounce on June 29, 2018 and reached highs of $1,351 during Q2 2018. The average realized gold price for Q2 2018 approximated $1,293 per gold ounce. During the last quarter of 2017 and early in 2018, the company executed a risk management program for approximately 60% of the monthly production that extends to the end of 2018, with bought put prices of $1,250 per gold ounce and sold call prices ranging from $1,400 to $1,469. Upon the acquisition of Rye Patch, the Company assumed fixed gold forward sales contracts covering 127,371 gold ounces for settlement through 2021.
(1) | Refer to the Ana Paula technical report NI 43-101 Preliminary Feasibility Study, Guerrero, Mexico, dated May 16, 2017, available on the Alio Gold website (www.aliogold.com). |
3
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
OUTLOOK
The Company’s objective following the acquisition and integration of its second producing mine is on generating cash flow from operations, through an increased focus on operations to drive consistent production results and decreased costs.
San Francisco Mine (100%-owned)
The Company provided a revitalization plan for San Francisco on May 11, 2017, which included a significant pre-stripping campaign, and improving and modifying the crusher process to improve recoveries.
A technical report with the May 2017 mine plan was completed and filed on www.sedar.com and the Company’s website on May 25, 2017.
In July 2017, the Company initiated the capital stripping campaign and increased mining rates from 30,000-35,000 tonnes per day (“tpd”) to 90,000-100,000 tpd. During Q3 and Q4 2017, ore delivered to the crusher was lower grade than anticipated, resulting in cash flow from operations that was not sufficient to fund the capital expenditures outlined in the Revitalization Plan. During Q4 2017, opportunities to reduce capital expenditures envisioned in the revitalization plan for San Francisco were investigated. In particular, crushing improvements totaling $4.9 million which targeted improved metallurgical recovery were put on hold to evaluate improvements in recovery obtainable by improvements in blasting in the open pit. In addition, the power upgrade project which commenced during Q3 2017 was put on hold.
During December 2017, a dual cut-off strategy was implemented which involves trucking lower grade run-of-mine (“ROM”) ore to old heap leach pads while higher cut-off grade material is fed to the crusher. ROM ore was placed under leach in January 2018 and as at June 30, 2018, approximately 1.6 million tonnes of ROM ore grading an average of 0.17 g/t gold had been stacked on historical leach pads 1 and 2. Recovery of gold from ROM ore is estimated to be 30% during the first 120 days with 40% as the expected long-term recovery rate. As at June 30, 2018, approximate gold production from ROM ore was 1,696 ounces.
The increased cut-off grade for crusher ore has not led to higher grades and in Q2, crusher feed grade was 26% below plan at 0.46 g/t gold. The underperformance of gold grade is due to higher than expected levels of dilution which may partly be attributable to increased blast movement due to finer blasting, as well as to ore control modeling. In May 2018, an updated resource model was prepared for San Francisco as well as refined ore control modelling techniques. In June and July 2018, crusher feed is tracking closely to grades predicted by the new ore control model. The Company has initiated a full technical review of the pit operations at San Francisco and expects to refine its operations over the remainder of the year.
While the technical review is underway, the Company has developed an interim mine plan which reduces capital stripping and focuses mining more profitable ounces to maintain cash neutral operations. The interim mine plan is currently being negotiated with the mining contractor. As a result of the reduced capital stripping, access to ore will be limited during the second half of the year (if negotiations with the mining contractor are successful). The Company does not expect to meet its annual guidance of between 90,000 to 100,000 ounces of gold in 2018 as a result of the change in focus to reduce capital stripping.
The Mineral Reserve estimates at San Francisco from April 1, 2017, was updated as of July 1, 2018, utilizing the latest available information, including mining depletion over the period and infill and grade-control drilling carried out as part of the mining operations during the period. Mining depletion of Mineral Reserves was partly offset by expansion of the reserves in Phases 6 through 9 of the San Francisco Pit. Total proven and probable mineral reserves totaled 854,472 ounces of gold (55.5 million tonnes at 0.49 g/t) as of July 1, 2018, an approximate decrease of 74,228 ounces of gold or 8% from April 1, 2017. The updated Mineral Reserves are shown in the following table:
| |
| Gold Ounces |
Proven and probable in-situ gold ounces as of April 1, 2017 | 928,700 |
Mined ounces depleted from reserves (April 1, 2017 to July 1, 2018) | (136,000) |
Additions from discovered ounces and converted resources | 74,000 |
Other net changes within resource/reserve estimation | (12,228) |
Proven and probable in-situ gold ounces as of July 1, 2018 | 854,472 |
4
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
Florida Canyon Mine (100%-owned)
The Florida Canyon Mine was acquired in the acquisition of Rye Patch which was finalized on May 25, 2018. During the period of May 25, 2018, to June 30, 2018, the mine produced 4,724 ounces of gold. During YTD 2018, the mine has produced a total of 22,433 ounces of gold.
In June 2018, the Company commenced work on a NI 43-101 compliant technical report that is expected to be completed by the end of 2018. The report will include an update to the Mineral Reserves and Resources, a new life of mine plan and recommendations on improvements to increase production and lower costs.
Ana Paula Project (100%-owned)
Use of proceeds pertaining to November 30, 2016, bought deal financing
On November 30, 2016, the Company closed a bought-deal public offering of 36,400,000 units at a price of C$0.55 per unit for aggregate gross proceeds of C$20.0 ($14.9) million and net proceeds of C$19.0 ($14.1) million. All proceeds have been utilized as disclosed in the Company’s final short form prospectus dated July 12, 2017, apart from the amount remaining to be spent on the El Sauzal Plant refurbishment totalling $3.6 million.
Use of proceeds pertaining to July 20, 2017, bought deal financing
On July 20, 2017, the Company closed a bought-deal public offering of 8,062,000 units at a price of C$6.25 per unit for aggregate gross proceeds of C$50.4 ($40.0) million and net proceeds of C$47.7 ($37.9) million. Proceeds utilized totalling $18.5 million are consistent with the Company’s final short form prospectus dated July 12, 2017.
| | | | |
Use of Proceeds (expressed in millions) (1) | | Intended use of proceeds as disclosed in the 2017 prospectus | | Use of proceeds |
| | | | |
Pre-construction activities | | | | |
Work in support of the feasibility study including engineering
and EPCM, metallurgy, environmental and other studies | $ | 7.5 | $ | 4.0 |
Land acquisitions and change of land use permits | | 4.3 | | 2.4 |
Owners costs including site CSR and concession payments | | 3.6 | | 5.9 |
Exploration of underground, surface potential and hydrology | | 9.0 | | 5.4 |
| | | | |
Early construction activities | | | | |
Equipment refurbishment and access road | | 3.0 | | 0.8 |
Initiating mining pre-stripping | | 4.6 | | - |
Tailings storage facility earthworks | | 4.7 | | - |
Total (2) | $ | 36.7 | $ | 18.5 |
(1) | Refer to the Company’s Final Short Form Prospectus dated July 12, 2017, filed at www.sedar.com. Figures are estimates and have been translated to United States dollars assuming an exchange rate equal to $1.00 = C$1.2941 being the Bank of Canada average daily rate on July 11, 2017. |
(2) | The Company invested $17.3 million on the Ana Paula Project during fiscal 2017. During the six months ended June 30, 2017, $6.0 million was spent on the Project. The $18.5 million in the table above relates to spending from Q3 2017 through to Q2 2018. |
The Company reallocated $2.3 million of the proceeds to support the Rye Patch acquisition. The remaining $15.9 million will be prioritized across the asset portfolio with the intention of supporting San Francisco, Florida Canyon, and corporate general and administrative.
5
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
REVIEW OF QUARTERLY RESULTS
| | | | | | | | | | | | | | | | | | | | |
| | Q2
2018 | | Q1
2018 | | Q4
2017 | | Q3
2017 | | Q2
2017 | | Q1
2017 | | Q4 2016 | | Q3 2016 | | YTD 2018 | | YTD
2017 |
FINANCIAL RESULTS | | | | | | | | | | | | | | | | | | | | |
Metal revenues | $ | 26,233 | $ | 23,338 | $ | 20,593 | $ | 25,194 | $ | 27,069 | $ | 32,306 | $ | 30,977 | $ | 31,212 | $ | 49,571 | $ | 59,375 |
(Loss) earnings from operations (1) | $ | (106) | $ | 3,651 | $ | (547) | $ | 5,082 | $ | 7,751 | $ | 9,780 | $ | 6,927 | $ | 29,923 | $ | 3,545 | $ | 17,531 |
Earnings (loss) | $ | 3,284 | $ | 3,230 | $ | (2,853) | $ | 5,197 | $ | 3,512 | $ | 6,042 | $ | 5,957 | $ | 29,719 | $ | 6,514 | $ | 9,554 |
Earnings (loss) per share | | | | | | | | | | | | | | | | | | | | |
-Basic | $ | 0.05 | $ | 0.07 | $ | (0.06) | $ | 0.12 | $ | 0.10 | $ | 0.17 | $ | 0.18 | $ | 0.93 | $ | 0.12 | $ | 0.27 |
-Diluted | $ | 0.05 | $ | 0.07 | $ | (0.06) | $ | 0.12 | $ | 0.10 | $ | 0.17 | $ | 0.18 | $ | 0.91 | $ | 0.12 | $ | 0.26 |
Cash (used in) provided by operating activities | $ | (8,290) | $ | (1,826) | $ | (2,183) | $ | 2,738 | $ | 2,772 | $ | 9,743 | $ | 9,993 | $ | 9,844 | $ | (10,116) | $ | 12,515 |
Cash dividends declared | $ | Nil | $ | Nil | $ | Nil | $ | Nil | $ | Nil | $ | Nil | $ | Nil | $ | Nil | $ | Nil | $ | Nil |
OPERATING RESULTS | | | | | | | | | | | | | | | | | | | | |
Gold sold (ozs) | | 20,126 | | 17,449 | | 16,067 | | 19,601 | | 21,495 | | 26,048 | | 26,012 | | 23,327 | | 37,575 | | 47,544 |
Gold produced (ozs) | | 19,190 | | 17,624 | | 16,070 | | 19,429 | | 22,011 | | 26,048 | | 25,287 | | 24,052 | | 36,814 | | 48,059 |
Silver sold (ozs) | | 13,334 | | 5,826 | | 7,873 | | 8,808 | | 10,332 | | 11,899 | | 12,994 | | 13,868 | | 19,160 | | 22,231 |
Average realized gold price (per oz) | $ | 1,293 | $ | 1,332 | $ | 1,274 | $ | 1,278 | $ | 1,252 | $ | 1,232 | $ | 1,191 | $ | 1,338 | $ | 1,311 | $ | 1,241 |
Average London PM fix gold price (per oz) | $ | 1,306 | $ | 1,329 | $ | 1,275 | $ | 1,278 | $ | 1,257 | $ | 1,219 | $ | 1,221 | $ | 1,335 | $ | 1,311 | $ | 1,238 |
By-product cash cost (1) (per oz) | $ | 1,018 | $ | 884 | $ | 1,041 | $ | 886 | $ | 740 | $ | 735 | $ | 716 | $ | 785 | $ | 956 | $ | 737 |
All-in
Sustaining cost (1) (per oz) | $ | 1,314 | $ | 1,262 | $ | 1,357 | $ | 1,104 | $ | 954 | $ | 848 | $ | 910 | $ | 846 | $ | 1,290 | $ | 896 |
(1) | Refer to the “Non-GAAP and Additional GAAP Measures” section of the MD&A. |
Review of Consolidated Financial Information for Q2 2018 compared to Q1 2018
Earnings for the Company was $3.3 million ($0.05 per share) compared to $3.2 million ($0.07 per share) during Q1 2018 as a result of the following factors:
Metal revenues
Revenues increased 12% or $2.9 million as the Company sold 2,677 more gold ounces at a 3% lower average realized gold price of $1,293 per ounce. The Florida Canyon Mine sold 5,551 ounces for $7.1 million compared to $nil during Q1 2018.
6
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
Cost of sales
Production costs, which comprise the full cost of operations excluding depreciation and depletion, form a component of cost of sales and were $20.7 million compared to $15.5 million during Q1 2018.
Costs of mining were $13.6 million compared to $12.7 million during Q1 2018. Deferred stripping cost capitalization decreased contract mining costs by $2.5 million compared to $2.7 million during Q1 2018 due to a lower strip ratio and lower waste tonnes moved. Total tonnes mined at the San Francisco Mine decreased by 28%. Additionally, an increase in diesel cost at San Francisco of $0.6 million was due to lower diesel credits applied during Q2 2018, offset by lower consumption as lower tonnage was mined. During Q2 2018, the Company applied diesel credits which decreased contract mining costs by $0.2 million compared to $1.6 million during Q1 2018. The Florida Canyon Mine contributed an additional $2.8 million compared to $nil during Q1 2018.
Crushing and gold recovery costs were $11.0 million compared to $8.2 million during Q1 2018. Higher cyanide consumption and unit cost at San Francisco increased costs by $0.3 million. The Florida Canyon Mine contributed an additional $2.5 million compared to $nil during Q1 2018.
Mine site administrative costs were similar at $1.6 million compared to $1.5 million during Q1 2018. At San Francisco, there was a decrease in labour and consulting of $0.3 million compared to Q1 2018. The Florida Canyon Mine contributed an additional $0.4 million compared to $nil during Q1 2018.
Change in inventories decreased cost of sales by $5.9 million compared to $6.9 million during Q1 2018. This is the result of timing differences between when recoverable gold ounces are deposited on the leach pads and when they are recovered for sale. At San Francisco during Q2 2018, more recoverable gold ounces were deposited than recovered, resulting in an increase in costs allocated to inventory compared to Q1 2018. The Florida Canyon Mine contributed an additional $0.7 million compared to $nil during Q1 2018.
Depletion and depreciation costs form a component of cost of sales and were $1.2 million compared to $1.3 million during Q1 2018. The Florida Canyon Mine contributed an additional $0.1 million compared to $nil during Q1 2018.
Corporate and administrative expenses
Corporate and administrative expenses increased to $4.4 million compared to $2.9 million during Q1 2018. The significant cash components of these expenses include salaries, consulting and professional fees, and administration. Salaries were $0.9 million compared to $0.8 million during Q1 2018. Consulting and professional fees were $2.5 million compared to $1.4 million during Q1 2018 due to additional $1.9 million of Rye Patch transaction costs. Administrative and other were $0.4 million compared to $0.3 million during Q1 2018. The significant non-cash component of these expenses includes share-based payments, which was $0.4 million compared to $0.3 million during Q1 2018.
Finance (income) expense
Finance income was $0.7 million compared to $0.4 million during Q1 2018. This is due to a non-cash warrant revaluation gain of $1.0 million compared to $0.5 million during Q1 2018. The warrant liabilities will be settled with common shares of the Company. As the common share price decreased during the quarter, the value of common shares for delivery also decreased, thereby decreasing the value of the liabilities.
7
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
Gain (loss) on the derivative contracts
Gain on the derivative contracts was $7.0 million compared to a loss of $0.1 million during Q1 2018.
Zero cost collars
The Company holds open option contracts whereby the Company purchased the option to sell gold ounces at a set price (“put option”) and financed the purchase price of this put option by selling the right to a third party to purchase a number of the Company’s gold ounces at a set price (“call option”). The carrying value of the derivative asset is based on the valuation of the outstanding gold option contracts using Level 2 inputs and valuation techniques. The unrealized gain on the contracts was $0.5 million during Q2 2018.
Contract Expiry | Counter Party | Ounces | | Put | | Call |
July 27, 2018 | ScotiaMocatta | 5,000 | | 1,250 | | 1,462 |
August 29, 2018 | ScotiaMocatta | 5,000 | | 1,250 | | 1,462 |
September 26, 2018 | ScotiaMocatta | 5,000 | | 1,250 | | 1,462 |
October 29, 2018 | ScotiaMocatta | 5,000 | | 1,250 | | 1,469 |
November 28, 2018 | ScotiaMocatta | 5,000 | | 1,250 | | 1,469 |
December 27, 2018 | ScotiaMocatta | 5,000 | | 1,250 | | 1,469 |
Total ounces | | 30,000 | | | | |
Weighted average price per ounce | | | $ | 1,250 | $ | 1,466 |
At August 8, 2018, 25,000 of these option contracts were unsettled and 5,000 were settled for a realized gain of $0.1 million.
Forward sales contracts
Upon acquisition of Rye Patch, the Company assumed fixed price gold forward sales contracts covering 127,371 ounces to be settled though 2021. A total of 13,019 ounces were settled during Q2 2018 resulting in a realized gain of $0.1 million. At June 30, 2018, the Company had contracts covering 114,352 gold ounces with a weighted average price of $1,277 per gold ounce. The revaluation of the contracts led to an unrealized gain of $6.4 million. The carrying value of the derivative asset and liability are based on the valuation of the outstanding forward sales contracts using Level 2 inputs and valuation techniques.
Income taxes
Income tax expense was $3.8 million compared to $1.0 million during Q1 2018.
The current tax expense was $0.5 million compared to $1.6 million during Q1 2018. This is due to a reduction in earnings from operations.
Deferred tax expense was $3.3 million compared to a recovery of $0.5 million during Q1 2018. During Q2 2018, the depreciation of the Mexican Peso led to a decrease in the tax base of mining assets increasing the deferred tax liability. Additionally, the derivative gain increased deferred tax expense by $1.3 million.
Review of Consolidated Financial Information for Q2 2018 compared to Q2 2017
Earnings for the Company was $3.3 million ($0.05 per share) compared to $3.5 million ($0.10 per share) during Q2 2017 as a result of the following factors:
Metal revenues
Revenues decreased 3% or $0.8 million as the Company sold 1,369 fewer gold ounces offset by an 3% higher average realized gold price of $1,293 per ounce. The Florida Canyon Mine sold 5,551 ounces for $7.1 million compared to $nil during Q2 2017.
8
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
Cost of sales
Production costs, which comprise the full cost of operations excluding depreciation and depletion, form a component of cost of sales and were $20.7 million compared to $16.1 million during Q2 2017.
Costs of mining were $13.6 million compared to $11.2 million during Q2 2017. Deferred stripping cost capitalization decreased contract mining costs by $2.5 million compared to $0.7 million during Q2 2017 due to a lower strip ratio and lower waste tonnes moved. Total tonnes mined at San Francisco increased by 4%. Additionally, more tonnes were mined from the San Francisco pit which has a higher unit mining cost than the La Chicharra pit which was mined during Q2 2017. During Q2 2018, the Company applied diesel credits which decreased contract mining costs by $0.2 million in Q2 2018 compared to $nil during Q2 2017. The Florida Canyon Mine contributed an additional $2.8 million compared to $nil during Q2 2017.
Crushing and gold recovery costs were $11.0 million compared to $7.3 million during Q2 2017. This increase is primarily due to higher cyanide consumption required by the ore-type processed at San Francisco resulting in increased costs of $1.0 million. The Florida Canyon Mine contributed an additional $2.5 million compared to $nil during Q2 2017.
Mine site administrative costs were $1.6 million compared to $1.3 million during Q2 2017. At San Francisco, there was a decrease in labour costs of $0.1 million compared to Q2 2017. The Florida Canyon Mine contributed an additional $0.4 million compared to $nil during Q2 2017.
Change in inventories decreased cost of sales by $5.9 million compared to $3.9 million during Q2 2017. This is the result of timing differences between when recoverable gold ounces are deposited on the leach pads and when they are recovered for sale. At San Francisco during Q2 2018, more recoverable gold ounces were deposited than recovered, resulting in an increase in costs allocated to inventory. The Florida Canyon Mine contributed an additional $0.7 million compared to $nil during Q2 2017.
Depletion and depreciation costs form a component of cost of sales and were $1.2 million compared to $0.8 million during Q2 2017. The Florida Canyon Mine contributed an additional $0.1 million compared to $nil during Q2 2017.
Corporate and administrative expenses
Corporate and administrative expenses increased to $4.4 million compared to $2.5 million during Q2 2017. The significant cash components of these expenses include salaries, consulting and professional fees, and administration. Salaries were $0.9 million compared to $1.3 million during Q2 2017, due to severance payments in Q2 2017. Consulting and professional fees were $2.5 million compared to $0.3 million during Q2 2017, due to additional $1.9 million of Rye Patch transaction costs. Administrative and other were $0.4 million during Q2 2018 and Q2 2017. The significant non-cash component of these expenses includes share-based payments, which was $0.4 million compared to $0.3 million during Q2 2017.
Finance (income) expense
Finance income was $0.7 million compared to an expense of $1.6 million during Q2 2017. This is due to a non-cash warrant revaluation gain of $1.0 million compared to a loss of $1.5 million during Q2 2017. The warrant liabilities will be settled with common shares of the Company. As the common share price decreased during the quarter, the value of common shares for delivery also decreased, thereby decreasing the value of the liabilities.
Gain (loss) on the derivative contracts
Gain on the derivative contracts was $7.0 million compared to a loss of $0.1 million during Q2 2017. The current pricing program is described in the Review of Consolidated Financial Information for Q2 2018 compared to Q1 2018 section above.
Income taxes
Income tax expense was $3.8 million compared to $2.7 million during Q2 2017.
The current tax expense was $0.5 million compared to $3.2 million during Q2 2017. This decrease was due to a reduction in earnings from operations.
9
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
Deferred tax expense was $3.3 million compared to a recovery of $0.5 million during Q2 2017. During Q2 2018, the depreciation of the Mexican Peso led to a decrease in the tax base of mining assets increasing the deferred tax liability. Additionally, the derivative gain increased deferred tax expense by $1.3 million.
Review of Consolidated Financial Information for YTD 2018 compared to YTD 2017
Earnings for the Company was $6.5 million ($0.12 per share) compared to $9.6 million ($0.27 per share) during YTD 2017 as a result of the following factors:
Metal revenues
Revenues decreased 17% or $9.8 million as the Company sold 9,969 fewer gold ounces offset by a 6% higher average realized gold price of $1,311 per ounce. The Florida Canyon Mine sold 5,551 ounces for $7.1 million compared to $nil during YTD 2017.
Cost of sales
Production costs, which comprise the full cost of operations excluding depreciation and depletion, form a component of cost of sales and were $36.2 million compared to $35.4 million during YTD 2017.
Costs of mining were $26.3 million compared to $20.5 million during YTD 2017. Deferred stripping cost capitalization decreased contract mining costs by $5.2 million compared to $0.9 million during YTD 2017 due development of new phases at San Francisco. Total tonnes mined increased by 34%. Additionally, more tonnes were mined from the San Francisco pit which has a higher unit mining cost than the La Chicharra pit which was mined in Q2 2017. During YTD 2018, the Company began applying diesel credits which decreased contract mining costs by $1.8 million compared to $nil during YTD 2017. The Florida Canyon Mine contributed an additional $2.8 million compared to $nil during YTD 2017.
Crushing and gold recovery costs were $19.1 million compared to $14.1 million during YTD 2017. This increase is primarily due to higher cyanide consumption required by the ore-type processed at San Francisco resulting in increased costs of $2.0 million. Additionally, an increase of $0.5 million is attributed to labour costs. The Florida Canyon Mine contributed an additional $2.5 million compared to $nil during YTD 2017.
Mine site administrative costs were $3.0 million compared to $2.3 million during YTD 2017. At San Francisco, there was an increase in consulting costs of $0.2 million compared to YTD 2017. The Florida Canyon Mine contributed an additional $0.4 million compared to $nil during YTD 2017.
Change in inventories decreased cost of sales by $12.8 million compared to $2.0 million during YTD 2017. This is the result of timing differences between when recoverable gold ounces are deposited on the leach pads and when they are recovered for sale. At San Francisco during YTD 2018, more recoverable gold ounces were deposited than recovered, resulting in an increase in costs allocated to inventory compared to YTD 2017. The Florida Canyon Mine contributed an additional $0.7 million compared to $nil during YTD 2017.
Depletion and depreciation costs form a component of cost of sales and were $2.5 million compared to $2.6 million during YTD 2017. The Florida Canyon Mine contributed an additional $0.1 million compared to $nil during YTD 2017.
Corporate and administrative expenses
Corporate and administrative expenses increased to $7.3 million compared to $3.8 million during YTD 2017. The significant cash components of these expenses include salaries, consulting and professional fees, and administration. Salaries were $1.7 million compared to $1.8 million during YTD 2017. Consulting and professional fees were $4.0 million compared to $0.7 million during YTD 2017, due to additional $2.7 million of Rye Patch transaction costs. Administrative and other were $0.7 million compared to $0.7 million during YTD 2017. The significant non-cash component of these expenses includes share-based payments, which was $0.7 million compared to $0.4 million during YTD 2017.
10
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
Finance (income) expense
Finance income was $1.2 million compared to an expense of $1.8 million during YTD 2017. This is due to a non-cash warrant revaluation gain of $1.6 million compared to a loss of $1.7 million during YTD 2017. The warrant liabilities will be settled with common shares of the Company. As the common share price decreased during the quarter, the value of common shares for delivery also decreased, thereby decreasing the value of the liabilities.
Gain (loss) on the derivative contracts
Gain on the derivative contracts was $7.0 million compared to a loss of $1.5 million during YTD 2017. The current pricing program is described in the Review of Consolidated Financial Information for Q2 2018 compared to Q1 2018 section above.
Income taxes
Income tax expense was $4.8 million compared to $4.9 million during YTD 2017.
The current tax expense was $2.1 million compared to $6.0 million during YTD 2017. This decrease was due to a reduction in earnings from operations.
Deferred tax expense was $2.7 million compared to a recovery of $1.1 million during YTD 2017. During YTD 2018, there was more capitalized deferred stripping costs compared to YTD 2017 which are deductible for tax purposes increasing the deferred tax expense. Additionally, the derivative gain increased deferred tax expense by $1.3 million.
11
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
SAN FRANCISCO GOLD MINE - OPERATIONS REVIEW
San Francisco is located in the Arizona-Sonora desert in the north of the Mexican state of Sonora. San Francisco is an open pit operation, with crushing and heap leach processing facilities, and mineral reserves of 794,272 proven and probable contained gold ounces and 60,200 low grade stockpile gold ounces (55.5 million tonnes at 0.49 grams per tonne gold). Total measured and indicated gold resources totalled 1,484,197 ounces as of July 1, 2018.
The following is a summary of San Francisco’s production statistics:
| | Q2
2018 | | Q1
2018 | | Q4
2017 | | Q3
2017 | | Q2
2017 | | YTD
2018 | | YTD
2017 |
MINING | | | | | | | | | | | | | | |
Ore mined (dry kt) | | 1,621 | | 1,726 | | 1,705 | | 1,646 | | 1,651 | | 3,347 | | 3,593 |
Average ore mined grade (g/t Au) | | 0.43 | | 0.48 | | 0.53 | | 0.47 | | 0.52 | | 0.46 | | 0.50 |
ROM mined (dry kt) | | 543 | | 1,101 | | 53 | | - | | - | | 1,644 | | - |
Average ROM mined grade (g/t Au) | | 0.17 | | 0.17 | | 0.19 | | - | | - | | 0.17 | | - |
Waste mined (kt) | | 4,044 | | 5,853 | | 6,232 | | 5,185 | | 4,301 | | 9,897 | | 7,543 |
Total mined (kt) | | 6,209 | | 8,679 | | 7,990 | | 6,830 | | 5,952 | | 14,888 | | 11,136 |
Strip ratio | | 1.87 | | 2.07 | | 3.55 | | 3.15 | | 2.60 | | 1.98 | | 2.10 |
Average total mined (t/d) | | 68,227 | | 96,437 | | 86,850 | | 74,241 | | 65,407 | | 82,254 | | 61,525 |
Cost per tonne mined | $ | 2.14 | $ | 1.78 | $ | 2.11 | $ | 1.98 | $ | 2.00 | $ | 1.93 | $ | 1.93 |
CRUSHING AND PROCESSING | | | | | | | | | | | | | | |
Ore processed (kt) | | 1,617 | | 1,715 | | 1,724 | | 1,916 | | 1,933 | | 3,332 | | 3,896 |
Average ore processed grade (g/t Au) | | 0.46 | | 0.42 | | 0.46 | | 0.40 | | 0.47 | | 0.44 | | 0.47 |
Ore from stockpile processed (kt) | | - | | - | | 13 | | 130 | | 130 | | - | | 130 |
Average ore stockpiled grade (g/t Au) | | - | | - | | 0.25 | | 0.25 | | 0.25 | | - | | 0.25 |
Average ore processed per day (t/d) | | 17,771 | | 19,051 | | 18,741 | | 20,830 | | 21,245 | | 18,407 | | 21,528 |
Cost per tonne processed | $ | 5.25 | $ | 4.76 | $ | 5.29 | $ | 4.60 | $ | 3.75 | $ | 5.00 | $ | 3.63 |
Gold deposited on pad (ozs) | | 27,075 | | 28,919 | | 25,723 | | 24,665 | | 29,031 | | 55,994 | | 59,146 |
Cost per tonne - administration | $ | 0.73 | $ | 0.87 | $ | 0.95 | $ | 0.84 | $ | 0.65 | $ | 0.80 | $ | 0.59 |
PRODUCTION | | | | | | | | | | | | | | |
Gold produced (ozs) | | 14,466 | | 17,624 | | 16,070 | | 19,429 | | 22,011 | | 32,090 | | 48,059 |
Silver produced (ozs) | | 7,661 | | 8,997 | | 7,873 | | 8,808 | | 10,332 | | 16,659 | | 22,231 |
COSTS | | | | | | | | | | | | | | |
Cash cost per gold ounce on a by-product basis | $ | 950 | $ | 884 | $ | 1,041 | $ | 886 | $ | 740 | $ | 914 | $ | 737 |
All-in sustaining cost per gold ounce on a
by-product basis | $ | 1,172 | $ | 1,137 | $ | 1,153 | $ | 1,018 | $ | 870 | $ | 1,153 | $ | 829 |
Total days in period | | 91 | | 90 | | 92 | | 92 | | 91 | | 181 | | 181 |
12
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
Review of Operations for Q2 2018 compared to Q1 2018
Gold production decreased to 14,466 ounces during Q2 2018 due to lower recoveries achieved on the leach pad. As part of the dual cut-off strategy 0.5 million tonnes at 0.17 g/t gold run-of-mine ore was stacked during Q2 2018. The grade of ore feeding the crusher was 0.46 g/t gold, up from 0.42 g/t gold during Q1 2018, as a result of raising the cut-off grade. Higher dilution continued to be observed in early Q2 2018 due to finer blasting, as a result, ore control techniques were developed to improve the dilution. Lower dilution was observed in late Q2 2018 and work is ongoing to further improve ore control.
Phase 5 was the primary ore source during Q2 2018. Phase 6 and 7 stripping continued during Q2 2018 at a lower rate than expected.
AISC was higher during Q2 2018, as compared to Q1 2018, due to decreased gold production.
Review of Operations for Q2 2018 compared to Q2 2017
The Company produced 34% and 26% fewer gold and silver ounces, respectively, as compared to Q2 2017 due to fewer ounces deposited and lower recoveries of the San Francisco pit ore.
Stripping increased during Q2 2018 compared to Q2 2017 as the mine was preparing future phases.
Total tonnes and grade processed were 16% and 1% lower, respectively, as Phase 5 of the San Francisco pit was the only significant ore source during Q2 2018.
AISC was higher during Q2 2018 compared to Q2 2017 due to increased tonnage mined and lower gold production.
Review of Operations for YTD 2018 compared to YTD 2017
The Company produced 33% and 25% fewer gold and silver ounces, respectively, as compared to YTD 2017 due to fewer ounces deposited and lower recoveries of the San Francisco pit ore.
Stripping increased during YTD 2018 compared to YTD 2017 as San Francisco was preparing future phases.
Total tonnes and grade processed were 14% and 7% lower, respectively, as Phase 5 of the San Francisco pit was the only significant ore source during YTD 2018.
AISC was higher during YTD 2018 compared to YTD 2017 due to increased tonnage mined and lower gold production.
13
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
FLORIDA CANYON GOLD MINE - OPERATIONS REVIEW
The Florida Canyon Mine is located between Lovelock and Winnemucca, Nevada. The Florida Canyon is an open pit operation, with crushing and heap leach processing facilities. Total measured and indicated gold resources totalled 1,127,000 based on the technical report dated January 27, 2017.
The following is a summary of Florida Canyon’s production statistics:
| | Post-
Acquisition (1) | | Q2
2018 (2) | | Q1
2018 (2) | | YTD
2018 (2) |
MINING | | | | | | | | |
Ore mined (dry kt) | | 660 | | 1,625 | | 1,684 | | 3,309 |
Average ore mined grade (g/t Au) | | 0.34 | | 0.34 | | 0.34 | | 0.34 |
Waste mined (kt) | | 747 | | 2,198 | | 1,955 | | 4,153 |
Total mined (kt) | | 1,407 | | 3,822 | | 3,640 | | 7,462 |
Strip ratio | | 1.13 | | 1.35 | | 1.16 | | 1.26 |
Average total mined (t/d) | | 46,889 | | 42,002 | | 40,440 | | 41,226 |
Cost per tonne mined | $ | 2.02 | $ | 1.76 | $ | 1.58 | $ | 1.67 |
CRUSHING AND PROCESSING | | | | | | | | |
Ore processed (kt) | | 719 | | 1,782 | | 1,977 | | 3,760 |
Average ore processed grade (g/t Au) | | 0.33 | | 0.33 | | 0.34 | | 0.33 |
Average ore processed per day (t/d) | | 23,969 | | 19,590 | | 21,966 | | 22,771 |
Cost per tonne processed | $ | 3.44 | $ | 3.67 | $ | 2.81 | $ | 3.22 |
Gold deposited on pad (ozs) | | 7,727 | | 18,966 | | 21,431 | | 40,397 |
Cost per tonne - administration | $ | 0.58 | $ | 0.62 | $ | 0.57 | $ | 0.59 |
PRODUCTION | | | | | | | | |
Gold produced (ozs) | | 4,724 | | 11,587 | | 10,846 | | 22,433 |
Silver produced (ozs) | | 4,142 | | 8,734 | | 5,709 | | 14,443 |
Total days in period | | 36 | | 91 | | 90 | | 181 |
(1) | Information provided is for the period May 25, 2018, to June 30, 2018. |
(2) | Information provided includes Rye Patch pre-acquisition statistics. |
Review of Operations for Q2 2018 compared to Q1 2018
Gold production increased to 11,587 ounces in Q2 2018 as a result of the ramp up of operations in Q1 2018. Delays in leach pad completion during fiscal 2017 adversely impacted Q1 2018 gold production.
Additional carbon columns were added to the processing plant to enhance gold production leading to higher production levels in Q2 2018. These plant enhancements are expected to provide improved results in future operating periods.
LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES
Liquidity
Liquidity risk is the risk that the Company will encounter difficulties in meeting obligations associated with its financial liabilities and other contractual obligations. The Company’s strategy for managing liquidity is based on achieving positive cash flows from operations to internally fund operating and capital requirements.
14
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
Factors that may affect the Company’s liquidity are continuously monitored. These factors include the market price of gold, production levels, operating costs, capital costs, exploration expenditures, the timing of VAT recoveries, and foreign currency fluctuations. In the event that the Company is adversely affected by any of these factors and, as a result, the operating cash flows are not sufficient to meet the Company’s working capital requirements there is no guarantee that the Company would be able to raise additional capital on acceptable terms to fund a potential cash shortfall. Consequently, the Company is subject to liquidity risk.
At June 30, 2018, the Company had positive working capital of $78.2 million. The Company had cash and cash equivalents of $19.7 million, short-term investments of $10.0 million, trade and other receivables of $14.9 million, inventories of $69.2 million, and trade payables and accrued liabilities of $30.7 million.
The current pricing program is described in the Review of Consolidated Financial Information for Q2 2018 compared to Q1 2018 section above.
Cash flow
| Three months ended June 30, | Six months ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Cash and cash equivalents, beginning of period | $ | 19,103 | $ | 39,194 | $ | 31,474 | $ | 33,877 |
Cash (used in) provided by operating activities | | (8,290) | | 2,772 | | (10,116) | | 12,515 |
Cash provided by (used in) investing activities | | 11,122 | | (6,150) | | 654 | | (10,992) |
Cash used in financing activities | | (2,202) | | (1) | | (2,202) | | (6) |
Effects of exchange rate changes on the balance of cash held in foreign currencies | | (34) | | 68 | | (111) | | 489 |
Cash and cash equivalents, end of period | $ | 19,699 | $ | 35,883 | $ | 19,699 | $ | 35,883 |
Review of Cash flow Q2 2018 compared to Q2 2017
Cash used in operating activities was $8.3 million compared to cash provided by operating activities of $2.8 million during Q2 2017:
- | Earnings from operations decreased to $4.3 million compared to $10.2 million during Q2 2017; |
- | Movements in trade receivables decreased cash by $1.5 million compared to $3.7 million during Q2 2017 due to: |
| • | Tax instalments applied against VAT receivable was $nil compared to $2.1 million during Q2 2017; and, |
| • | The Company collected $3.4 million VAT compared to $1.3 million during Q2 2017. |
- | Movements in trade payables and other liabilities decreased cash by $4.5 million compared to an increase of $2.0 million during Q2 2017; |
- | Income taxes paid decreased cash by $1.3 million compared to $nil during Q2 2017; and, |
- | Movements in inventories decreased cash by $5.3 million compared to $4.4 million during Q2 2017: |
| • | Movements in ore in process decreased cash by $6.2 million. |
Cash provided by investing activities was $11.1 million compared to cash used in investing activities of $6.2 million during Q2 2017:
- | Expenditures related to the San Francisco Mine were $3.3 million compared to $2.9 million during Q2 2017; |
- | Expenditures related to Ana Paula developments were $4.7 million compared to $3.2 million during Q2 2017; |
- | Expenditures related to Rye Patch transaction costs were $1.9 million compared to $nil during Q2 2017; |
- | Short-term investments of $10.0 million matured; and, |
- | Cash received on the Rye Patch acquisition was $11.0 million. |
Cash used in financing activities was $2.2 million compared to $0.1 million during Q2 2017:
- | Credit facility principal and accrued interest was repaid of $2.0 million. |
15
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
Review of Cash flow YTD 2018 compared to YTD 2017
Cash used in operating activities was $10.1 million compared to cash provided by operating activities of $12.5 million during YTD 2017:
- | Earnings from operations decreased to $10.8 million compared to $21.3 million during YTD 2017; |
- | Movements in trade receivables decreased cash by $5.5 million compared to $2.4 million during YTD 2017 due to: |
| • | Tax instalments applied against VAT receivable was $0.6 million compared to $4.5 million during YTD 2017; and, |
| • | The Company collected $5.3 million VAT compared to $4.9 million during YTD 2017. |
- | Movements in trade payables and other liabilities decreased cash by $1.9 million compared to an increase of $1.4 million during YTD 2017; |
- | Income taxes paid decreased cash by $1.3 million compared to $3.7 million during Q2 2017; and, |
- | Movements in inventories decreased cash by $11.8 million compared to $3.5 million during YTD 2017: |
| • | Movements in ore in process decreased cash by $12.9 million. |
Cash provided by investing activities was $0.7 million compared to cash used in investing activities of $11.0 million during YTD 2017:
- | Expenditures related to the San Francisco Mine were $7.7 million compared to $5.0 million during YTD 2017; |
- | Expenditures related to Ana Paula developments were $10.3 million compared to $6.0 million during YTD 2017; |
- | Expenditures related to Rye Patch transaction costs were $2.3 million compared to $nil during YTD 2017; |
- | Short-term investments of $10.0 million matured; and, |
- | Cash received on the Rye Patch acquisition was $11.0 million. |
Cash used in financing activities was $2.2 million compared to $0.1 million during YTD 2017.
- | Credit facility principal and accrued interest of $2.0 million was repaid. |
Currency risk
At San Francisco, approximately 40% of the operating expenditures are denominated in Mexican pesos, while approximately 89% of the corporate and administrative expenditures are denominated in Canadian dollars. Fluctuations in these currencies affect costs.
During Q2 2018, the Mexican peso averaged MXP 19.37 to $1.00, and the Canadian dollar averaged C$1.29 to $1.00. During Q2 2017, the Mexican peso averaged MXP 18.60 to $1.00 and the Canadian dollar averaged C$1.35 to $1.00. The effect of the difference in average exchange rates decreased costs during Q2 2018 by approximately $0.4 million.
During YTD 2018, the Mexican peso averaged MXP 19.07 to $1.00, and the Canadian dollar averaged C$1.28 to $1.00. During YTD 2017, the Mexican peso averaged MXP 19.49 to $1.00 and the Canadian dollar averaged C$1.35 to $1.00. The effect of the difference in average exchange rates increased costs during YTD 2018 by approximately $0.4 million.
16
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
Capital resources
The capital of the Company consisted of consolidated equity, the credit facility, equipment loan payable, and other financial liability, net of cash and cash equivalents and short-term investments.
| | | | |
| | June 30, | | December 31, |
| | 2018 | | 2017 |
Equity | $ | 274,327 | $ | 196,585 |
Credit facility | | 14,880 | | - |
Equipment loan payable | | 2,375 | | - |
Other financial liability | | 5,000 | | - |
| | 296,582 | | 196,585 |
Less: Cash and cash equivalents | | (19,699) | | (31,474) |
Less: Short-term investments | | (10,033) | | (20,082) |
| $ | 266,850 | $ | 145,029 |
At June 30, 2018, the Company’s credit facility required a minimum cash and cash equivalents balance of $6.5 million. There were no other externally imposed capital requirements.
The capital resources of the Company increased to $266.9 million from $145.0 million at December 31, 2017.
Dividends
No dividends were declared or paid during Q2 2018 or YTD 2018.
Outstanding share data
The total number of outstanding common shares, share options, and warrants at August 8, 2018, are 83,784,066, 4,532,903 and 8,787,282, respectively.
NON-GAAP AND ADDITIONAL GAAP MEASURES
Non-GAAP Measures
Cash cost per gold ounce and cash cost per gold ounce on a by-product basis
Cash cost per gold ounce and cash cost per gold ounce on a by-product basis are non-GAAP performance measures that management uses to assess the Company’s performance and its expected future performance. The Company has included the non-GAAP performance measures of cash cost per gold ounce and cash cost per gold ounce on a by-product basis throughout this document. In the gold mining industry, these are common performance measures but they do not have any standardized meaning. As such, they are unlikely to be comparable to similar measures presented by other issuers.
Management believes that, in addition to conventional measures prepared in accordance with GAAP, certain investors use this information to evaluate the Company’s performance and ability to generate cash flow. Accordingly, presentation of these measures is to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.
17
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
The cash cost per gold ounce is calculated by dividing the operating production costs by the total number of gold ounces sold. The cash cost per gold ounce on a by-product basis is calculated by deducting the by-product silver credits per gold ounce sold from the cash cost per gold ounce. The following table provides a reconciliation of the cash cost per gold ounce and cash cost per gold ounce on a by-product basis to the consolidated financial statements:
| Three months ended June 30, | Six months ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Production costs | $ | 20,700 | $ | 16,071 | $ | 36,214 | $ | 35,443 |
Divided by gold sold (ozs) | | 20,126 | | 21,495 | | 37,575 | | 47,544 |
Cash cost per gold ounce | | 1,029 | | 748 | | 964 | | 745 |
Less: By-product silver credits per gold ounce (1) | | (11) | | (8) | | (8) | | (8) |
Cash cost per gold ounce on a by-product basis | $ | 1,018 | $ | 740 | $ | 956 | $ | 737 |
(1) | Management determined that silver metal revenues, when compared to gold metal revenues, are immaterial and therefore considered a by-product of the production of gold. For the three and six months ended June 30, 2018, total by-product silver credits were $0.2 million and $0.3 million, respectively (three months and six months ended June 30, 2017 - $0.2 million and $0.4 million, respectively). |
For further details on the calculation of production costs, refer to the notes to the consolidated financial statements. Cash cost per gold ounce and cash cost per gold ounce on a by-product basis are not necessarily indicative of earnings from operations or cash flow from operations as determined under GAAP. Other companies may calculate these measures differently.
All-in sustaining cost per gold ounce
The Company has adopted an all-in sustaining cost per ounce on a by-product basis performance measure which is calculated based on the guidance note issued by the World Gold Council. Management uses this information as an additional measure to evaluate the Company’s performance and ability to generate cash.
All-in sustaining costs on a by-product basis include total production cash costs, corporate and administrative expenses, sustaining capital expenditures and accretion for site reclamation and closure costs. These reclamation and closure costs represent the gradual unwinding of the discounted liability to rehabilitate the area around San Francisco at the end of the mine life. The Company believes this measure to be representative of the total costs associated with producing gold; however, this performance measure has no standardized meaning. As such, there are likely to be differences in the method of computation when compared to similar measures presented by other issuers.
The following table provides a reconciliation of the all-in sustaining cost per gold ounce on a by-product basis to the consolidated financial statements:
| Three months ended June 30, | Six months ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Production costs | $ | 20,700 | $ | 16,071 | $ | 36,214 | $ | 35,433 |
Corporate and administrative expenses (1) | | 2,476 | | 1,748 | | 4,589 | | 3,073 |
Sustaining capital expenditures (2) | | 3,344 | | 2,799 | | 7,758 | | 4,360 |
Accretion for site reclamation and closure | | 141 | | 57 | | 217 | | 114 |
Less: By-product silver credits | | (217) | | (172) | | (310) | | (380) |
All-in sustaining costs | | 26,444 | | 20,503 | | 48,468 | | 42,600 |
Divided by gold sold (ozs) | | 20,126 | | 21,495 | | 37,575 | | 47,544 |
All-in sustaining cost per gold ounce on a by-product basis | $ | 1,314 | $ | 954 | $ | 1,290 | $ | 896 |
18
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
| (1) | Corporate and administrative expenses adjusted for the three and six months ended June 30, 2018, to remove Rye Patch transaction costs of $1.9 million and $2.7 million, respectively. |
| (2) | For the three and six months ended June 30, 2018, sustaining capital expenditures includes deferred stripping of $2.5 million and $5.2 million, respectively (three and six months ended June 30, 2017 - $0.7 million and $0.9 million, respectively). |
Cash (used in) provided by operating activities per share
Cash (used in) provided by operating activities per share is a non-GAAP performance measure that management uses to assess the Company’s performance and is included throughout this MD&A. This measure should not be used to assess liquidity as it does not include all required expenditures to maintain existing operations. This measure is intended to provide additional information only and does not have any standardized meaning under IFRS.
| Three months ended June 30, | Six months ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Cash (used in) provided by operating activities | $ | (8,290) | $ | 2,772 | $ | (10,116) | $ | 12,515 |
Divided by basic weighted average shares outstanding | | 60,148,955 | | 35,562,847 | | 52,456,564 | | 35,562,847 |
Cash (used in) provided by operating activities
per share | $ | (0.14) | $ | 0.08 | $ | (0.19) | $ | 0.35 |
Additional GAAP Measures
The Company has included additional GAAP measures which include earnings from mine operations and earnings from operations throughout this document. Management believes that, in addition to conventional measures prepared in accordance with GAAP, certain investors use this information to evaluate the Company’s performance. Accordingly, they are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.
Earnings (loss) from mine operations
Earnings (loss) from mine operations represents the difference between metal revenues and cost of sales (including depreciation and depletion). Management believes that this presentation provides useful information to investors to evaluate the Company’s mine operating performance and to assess the Company’s ability to generate operating cash flow.
(Loss) earnings from operations
(Loss) earnings from operations represents the difference between earnings from mine operations, corporate and administrative expenses, loss on sale of asset, and impairment charges. Management believes that this presentation provides useful information to investors to evaluate the Company’s mine operating performance when also taking into account certain costs not directly associated with production.
The additional GAAP measures described above do not have a standardized meaning prescribed by IFRS. As such, there are likely to be differences in the method of computation when compared to similar measures presented by other issuers.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
The consolidated financial statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”), effective as of June 30, 2018. The Company’s significant accounting policies are described in note 3 of the Company’s consolidated financial statements for the years ended December 31, 2017 and 2016, and note 2 of the Company’s condensed interim consolidated financial statements for the three and six months ended June 30, 2018 and 2017.
19
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
CHANGES IN ACCOUNTING STANDARDS
The accounting policies applied in the preparation of the Company’s condensed interim consolidated financial statements for the three and six months ended June 30, 2018 and 2017, are consistent with those applied and disclosed in the Company’s annual consolidated financial statements, except for the following:
Financial instruments
On January 1, 2018, the Company adopted IFRS 9 - Financial Instruments ("IFRS 9") which replaced IAS 39 - Financial Instruments: Recognition and Measurement (“IAS 39”). IFRS 9 provides a revised model for recognition and measurement of financial instruments and a single, forward-looking 'expected loss' impairment model. IFRS 9 also includes significant changes to hedge accounting. The standard is effective for annual periods beginning on or after January 1, 2018. The Company adopted the standard using the modified retrospective approach. IFRS 9 did not impact the Company's classification and measurement of financial assets and liabilities. The standard also had negligible impact on the carrying amounts of the Company’s financial instruments at the transition date.
The following summarizes the significant changes in IFRS 9 compared to the current standard:
| • | IFRS 9 uses a single approach to determine whether a financial asset is classified and measured at amortized cost or fair value. The classification and measurement of financial assets is based on the Company's business models for managing its financial assets and whether the contractual cash flows represent solely payments for principal and interest. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward in IFRS 9. The change did not impact the carrying amounts of any of the Company’s financial assets on transition date. |
| • | The adoption of the new "expected credit loss" impairment model under IFRS 9, as opposed to an incurred credit loss model under IAS 39, had a negligible impact on the carrying amounts of the Company’s financial assets on the transition date given the Company transacts exclusively with large established commodity trading firms and other organizations with strong credit ratings and the negligible historical level of customer default. |
| • | The new general hedge accounting requirements retain the three types of hedge accounting mechanisms previously available under IAS 39. Under IFRS 9 however, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been replaced with the principle of an "economic relationship". Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an entity's risk management activities have also been introduced. The Company had not designated any of its financial instruments as hedges as at December 31, 2017, or upon adoption of IFRS 9. |
The Company has also adopted a narrow scope amendment to IFRS 7 - Financial Instruments - Disclosures. As a result of applying the amendment, the Company will add disclosure relating to its risk management strategies for which hedge accounting is applied in its consolidated financial statements for the year ended December 31, 2018.
Revenue recognition
On January 1, 2018, the Company adopted IFRS 15 - Revenue from Contracts with Customers ("IFRS 15") which supersedes IAS 18 - Revenue ("IAS 18"). IFRS 15 establishes a single five-step model framework for determining the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. The standard is effective for annual periods beginning on or after January 1, 2018. The Company adopted the standard on January 1, 2018, using the full retrospective approach without applying any practical expedients.
IFRS 15 requires entities to recognize revenue when ‘control’ of goods or services transfers to the customer whereas the previous standard, IAS 18, required entities to recognize revenue when the ‘risks and rewards’ of the goods or services transfer to the customer. The Company concluded there is no change in the timing of revenue recognition of its gold doré sales under IFRS 15 compared to the previous standard as the point of transfer of risks and rewards of goods and services and transfer of control occur at the same time. As such, no adjustment was required to the Company's financial statements.
20
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
Additionally, IFRS 15 requires entities to apportion the transaction price attributable to contracts from customers to distinct performance obligations on a relative standalone selling price basis. The Company has evaluated its sales agreements and concluded delivery of individual gold doré shipments are the only performance obligations in the contracts and accordingly there will be no change in the amount or timing of revenue recognition under the new standard.
Other narrow scope amendments/interpretations
The Company has adopted amendments to IFRS 2 - Share Based Payments and IFRIC 22 - Foreign Currency Transactions and Advance Consideration, which did not have an impact on the Company's interim financial statements.
Changes in accounting policies not yet effective
In January 2016, the IASB published a new accounting standard, IFRS 16 - Leases ("IFRS 16") which supersedes IAS 17 - Leases. IFRS 16 specifies how to recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring the recognition of assets and liabilities for all leases, unless the lease term is 12 months or less or the underlying asset has a low value. The standard is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted if IFRS 15 has also been applied. The Company plans to adopt IFRS 16 for periods beginning after January 1, 2019.
The Company is currently evaluating the potential impact of applying IFRS 16.
CONTROLS AND PROCEDURES
Disclosure controls and procedures
The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) are responsible for establishing and maintaining adequate disclosure controls and procedures. Disclosure controls and procedures are designed to provide reasonable assurance that material information related to the Company, including its consolidated subsidiaries, is made known to the Company’s certifying officers. The Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed under applicable securities regulations is recorded, processed, summarized and reported within the time periods specified.
Management regularly reviews the Company’s disclosure controls and procedures; however, they cannot provide an absolute level of assurance because of the inherent limitations in cost effective control systems to prevent or detect all misstatements due to error or fraud. As of the end of the period covered by this report, under the supervision and with the participation of the Company’s CEO and CFO, management conducted an evaluation of the design and operating effectiveness of the Company’s disclosure controls and procedures.
Based on this evaluation, management concluded that the Company’s disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed under applicable securities regulations is recorded, processed, summarized and reported within the time periods specified as of June 30, 2018.
Internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS.
Internal control over financial reporting includes those policies and procedures that:
| • | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| • | provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with IFRS, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company assets or incurring liabilities or other obligations that could have a material effect on the consolidated financial statements. |
21
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. At December 31, 2017, under the supervision and with the participation of the CEO and CFO, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on its evaluation, management concluded that the Company’s internal control over financial reporting was effective as of that date.
There has been no change in the Company’s internal control over financial reporting during Q2 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
RISKS AND UNCERTAINTIES
For a detailed listing of the risk factors faced by the Company, please refer to the Company’s MD&A and AIF for the year ended December 31, 2017.
For a detailed listing of the risk factors relating to the Rye Patch Plan of Arrangement, please refer to the Company’s Information Circular for the Annual General and Special Meeting of Alio Gold Inc. held on May 18, 2018.
Indicators of impairment
At each reporting date, the Company reviews the carrying amount of its non-financial assets to determine whether there are any indicators of impairment. At June 30, 2018, the Company’s net assets were lower than its market capitalization. The Company perceives the decrease in market capitalization to be short-term in nature and the result of political and project risks in Mexico, weakening spot gold prices, and temporary operating challenges. The Company will continue to monitor net assets and market capitalization deviations in future periods.
Interim mining contract and contractor negotiations
An interim mine plan at San Francisco is currently being negotiated with the mining contractor. If negotiations are unsuccessful there is the risk of financial dispute and disruption in mine operations.
RESERVES AND RESOURCES
San Francisco Mine as of July 1, 2018 (1)
| | | | | | | | | | | |
| Proven | | Probable | | Proven & Probable |
| Metric Tonnes | Au g/t | Contained Au Ounces | | Metric
Tonnes | Au
g/t | Contained Au Ounces | | Metric Tonnes | Au g/t | Contained Au Ounces |
San Francisco | 17,757,023 | 0.518 | 273,741 | | 23,359,785 | 0.540 | 405,239 | | 41,116,808 | 0.514 | 678,980 |
La Chicharra Pit | 5,328,803 | 0.522 | 89,489 | | 1,835,220 | 0.437 | 25,804 | | 7,164,023 | 0.501 | 115,292 |
Total | 23,085,826 | 0.489 | 363,230 | | 25,195,005 | | 431,043 | | 48,280,831 | 0.512 | 794,272 |
Low-grade stockpile | 7,199,000 | 0.260 | 60,200 | | - | - | - | | 7,199,000 | 0.260 | 60,200 |
| | | | | | | | | | | |
| Measured | | Indicated | | Measured & Indicated |
| Metric Tonnes | Au g/t | Contained Au Ounces | | Metric
Tonnes | Au g/t | Contained Au Ounces | | Metric Tonnes | Au g/t | Contained Au Ounces |
San Francisco | 33,041,153 | 0.547 | 580,545 | | 38,485,816 | 0.557 | 688,856 | | 71,526,969 | 0.552 | 1,269,403 |
La Chicharra Pit | 6,674,718 | 0.550 | 118,028 | | 6,019,509 | 0.500 | 96,766 | | 12,694,227 | 0.526 | 214,794 |
Total | 39,715,871 | 0.547 | 698,574 | | 44,505,325 | 0.549 | 785,621 | | 84,221,196 | 0.548 | 1,484,197 |
| | | | |
| | Inferred |
| | Metric Tonnes | Au g/t | Contained Au Ounces |
San Francisco | | 1,725,608 | 0.528 | 29,293 |
La Chicharra Pit | | 222,238 | 0.462 | 3,301 |
Total | | 1,947,846 | 0.520 | 32,594 |
(1) | Figures may not total due to rounding. |
22
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
Alio Gold Reserve and Resource Reporting Notes as of July 1, 2018:
| 1. | All Mineral Reserves and Mineral Resources have been calculated in accordance with the standards of the Canadian Institute of Mining, Metallurgy and Petroleum and National Instrument 43-101, or the AusIMM JORC equivalent. |
| 2. | All Mineral Resources are reported inclusive of Mineral Reserves. |
| 3. | Mineral Resources which are not Mineral Reserves do not have demonstrated economic viability. |
| 4. | Mineral Reserves are estimated using appropriate recovery rates and US$ commodity prices of $1,250 per ounce of gold. |
| 5. | Mineral Resources are estimated using US$ commodity prices of $1,350 per ounce of gold. |
CAUTIONARY NOTE TO U.S. INVESTORS
The Company is subject to the reporting requirements of the applicable Canadian securities laws, and as a result it reports its mineral reserves and resources according to Canadian standards. Canadian reporting requirements for disclosure of mineral properties are governed by NI 43-101. The definitions of NI 43-101 are adopted from those given by the Canadian Institute of Mining, Metallurgy and Petroleum. U.S. reporting requirements are governed by Industry Guide 7 (“Guide 7”) of the Securities and Exchange Commission (the “Commission”). These reporting standards have similar goals in terms of conveying an appropriate level of confidence in the disclosures being reported but embody different approaches and definitions.
The Company reports “resources” in accordance with NI 43-101. While the terms “Mineral Resource,” “Measured Mineral Resource,” “Indicated Mineral Resource” and “Inferred Mineral Resource” are recognized and required by Canadian regulations, they are not defined terms under standards of the Commission and generally, U.S. companies are not permitted to report resources in documents filed with the Commission. As such, certain information contained in this MD&A describing mineralization and resources under Canadian standards is not comparable to similar information published by United States companies subject to the reporting and disclosure requirements of the Commission. It cannot be assumed that all or any part of Measured or Indicated Resources will ever be converted into Mineral Reserves, and it cannot be assumed that all or any part of an Inferred Mineral Resource exists, or is economically or legally mineable. Under Industry Guide 7, mineralization may not be classified as a “reserve” unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made. In addition, an Inferred Mineral Resource has a great amount of uncertainty as to its existence and as to its economic and legal feasibility, and it cannot be assumed that all or any part of an Inferred Mineral Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of Inferred Mineral Resources may not form the basis of a feasibility study. In addition, the definitions of “Proven Mineral Reserves” and “Probable Mineral Reserves” under CIM standards differ in certain respects from the standards of the Commission.
For detailed technical information related to the Company’s exploration, development, and operating assets, please refer to the Company’s website at www.aliogold.com or the most recent Annual Information Form available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information contained in this MD&A and the documents incorporated by reference in this MD&A constitute “forward-looking statements” within the meaning of applicable U.S. securities laws and “forward-looking information” within the meaning of applicable Canadian securities laws, which we refer to collectively as “forward-looking statements”. Forward-looking statements are statements and information regarding possible events, conditions or results of operations that are based upon assumptions about future economic conditions and courses of action. All statements and information other than statements of historical fact may be forward-looking statements. In some cases, forward-looking statements can be identified by the use of words such as “seek”, “expect”, “anticipate”, “budget”, “plan”, “estimate”, “continue”, “forecast”, “intend”, “believe”, “predict”, “potential”, “target”, “may”, “could”, “would”, “might”, “will” and similar words or phrases (including negative variations) suggesting future outcomes or statements regarding an outlook.
23
ALIO GOLD INC.
Management’s Discussion and Analysis
For the three and six months ended June 30, 2018 and 2017
(In United States dollars, tabular amounts in thousands, except where noted)
Forward-looking statements in this MD&A and the documents incorporated herein by reference include, but are not limited to statements and information regarding: the Company's future mining activities, including mining capacity, recovery, cash costs, production and mine life; the Company's reserves and resources estimates; the Company’s exploration and development plans, including anticipated costs and timing thereof; the Company’s plans for growth through exploration activities, acquisitions or otherwise; and expectations regarding future maintenance and capital expenditures, working capital requirements, the availability of financing and future effective tax rates. Such forward-looking statements are based on a number of material factors and assumptions, including, but not limited to: that contracted parties provide goods or services in a timely manner, that no unusual geological or technical problems occur, that plant and equipment function as anticipated and that there is no material adverse change in the price of gold, costs associated with production or recovery. Forward- looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements, or industry results, to differ materially from those anticipated in such forward-looking statements. The Company believes the expectations reflected in such forward-looking statements are reasonable, but no assurance can be given that these expectations will prove to be correct and you are cautioned not to place undue reliance on forward-looking statements contained herein.
Some of the risks and other factors which could cause actual results to differ materially from those expressed in the forward- looking statements contained in this MD&A and the documents incorporated herein by reference include, but are not limited to: risks and uncertainties relating to the interpretation of drill results, the geology, grade and continuity of mineral deposits and conclusions of economic evaluations; results of initial feasibility, pre-feasibility and feasibility studies, and the possibility that future exploration, development or mining results will not be consistent with the Company’s expectations; risks relating to possible variations in reserves, resources, grade, planned mining dilution and ore loss, or recovery rates and changes in project parameters as plans continue to be refined; mining and development risks, including risks related to accidents, equipment breakdowns, labour disputes (including work stoppages and strikes) or other unanticipated difficulties with or interruptions in exploration and development; the potential for delays in exploration or development activities or the completion of feasibility studies; risks related to the inherent uncertainty of production and cost estimates and the potential for unexpected costs and expenses; risks related to commodity price and foreign exchange rate fluctuations; the uncertainty of profitability based upon the cyclical nature of the industry in which the Company operates; risks related to failure to obtain adequate financing on a timely basis and on acceptable terms or delays in obtaining governmental or local community approvals or in the completion of development or construction activities; risks related to environmental regulation and liability; political and regulatory risks associated with mining and exploration; risks related to the uncertain global economic environment; and other factors contained in the section entitled “Risks and Uncertainties” per above.
Although the Company has attempted to identify important factors that could cause actual results or events to differ materially from those described in the forward-looking statements, you are cautioned that this list is not exhaustive and there may be other factors that the Company has not identified. Furthermore, the Company undertakes no obligation to update or revise any forward-looking statements included in, or incorporated by reference in, this MD&A if these beliefs, estimates and opinions or other circumstances should change, except as otherwise required by applicable law.
QUALIFIED PERSON
Scientific and technical information contained in this MD&A with respect to the Ana Paula Project was reviewed and approved by the Company’s VP Project Development, Paul Hosford, BSc, P.Eng, a “qualified person” as defined by National Instrument 43-101 - Standards of Disclosure for Mineral Projects.
Scientific and technical information contained in this MD&A with respect to the San Francisco Mine was reviewed and approved by San Francisco Mine Manager, Jorge Lozano, BSc, a certified member of the Mining and Metallurgical Society of America and a “qualified person” as defined by National Instrument 43-101 - Standards of Disclosure for Mineral Projects.
Scientific and technical information contained in this MD&A with respect to the Florida Canyon Mine was reviewed and approved by the Company’s Chief Operating Officer, Doug Jones, a Registered Member of SME with a BSc. in Mining Engineering, a “qualified person” as defined by National Instrument 43-101 - Standards of Disclosure for Mineral Projects.
24
