First Majestic Silver Corp (AG) 2011 Q1 法說會逐字稿

Hello, this is the Chorus Call conference operator. Welcome to the First Majestic first quarter 2011 financial results conference call and webcast.

(Operator Instructions).

At this time, I'd like to turn the conference over to Keith Neumeyer, President and CEO. Please go ahead, sir.

Welcome, everyone. Thanks for getting online, and then calling into our call, our conference call. In the room today, we have Ray Polman, our CFO, Connie Lillico, our Corporate Secretary, and Jill Arias, our VP of Marketing. Before we get going, we're going to let Connie have a chance to read our disclaimer.

Thank you, Keith. My name is Connie Lillico. I'm the Company's Corporate Secretary. Prior to us beginning today, I'll read our disclaimer and forward-looking statement.

Certain statements contained in this conference call regarding the Company and it's operations constitute forward-looking statements, within the meaning of the United States Private Securities Litigation Reform Act of 1995. All statements that are not historical facts, including without limitation, statements regarding future estimates, plans, objectives, assumptions or expectations of future performance constitute forward-looking statements. We caution you that such forward-looking statements involve known and unknown risks and uncertainties that could cause actual results and future events to differ materially from those anticipated in such statements.

Such risks and uncertainties include fluctuations in precious metal prices, unpredictable results of exploration activities, uncertainties inherent in the estimation of mineral reserves and resources, fluctuations in the costs of goods and services, problems associated with exploration and mining operations, changes in legal, social, or political conditions in the jurisdictions where the Company operates, lack of appropriate funding and other risk factors as discussed in the Company's filings with the Canadian securities regulatory agencies. Resources and production goals and forecasts may be based on data insufficient to support them. The Company expressly disclaims any obligation to update any forward-looking statements. Now, back to Keith.

Okay, well thanks, Connie. I haven't prepared anything for this call. I thought we would just have an informal discussion. As many of our shareholders know, it's been quite some time since we've had a conference call like this. And since we've been listed on the New York Stock Exchange in December of last year, we decided that we would have this call to discuss the first quarter, and monitor the interest level in such a call. If the interest is there, we'll continue these calls throughout the year, but that will be decided at a later date.

I hope all of you have seen our financial reports for the first quarter ending March 31. It was an absolute bang up quarter, as you can tell by reviewing the news release. We had $0.24 a share in earnings, $0.34 a share in cash flow. We had revenues of $55 million, all quite substantial increases over last year's comparative quarter, and also, of course, the previous quarter. So its been pretty exciting for us, and we expect the excitement will continue going forward as we develop Del Toro and La Parrilla over the next couple quarters. And I'll just open it up to our investors.

Do we have anyone here for questions yet? I see we don't. (Operator Instructions) I see we now have somebody here. Okay, let's go to Burt Egger from Canaccord Capital.

Hi, Keith. Congratulations on the quarter. It was absolutely fantastic. I just was wondering if management has given any thought to dividends in the future?

We have discussed it quite a bit, Burt. The treasury is going up substantially. We have somewhere around just shy of $100 million in the bank right now. And I think that we need to continue to build the assets, La Parrilla and Del Toro, but I would like to see a dividend payment commence in the first quarter of 2012. The Board is on side with that. We just haven't gone through the regulatory process, and then haven't have -- we don't have the final approval of the Board yet. But I think that it's likely that we'll commence that in the first quarter of 2012.

That sounds good, Keith. I've got one more question.

Sure.

When can we expect the next 43-101 resource update?

I'm glad you asked that, because since really about 2009, early 2009, we haven't done a lot of drilling, in our properties. We just didn't think that we were getting real value for the silver we've got defined in the ground. And but as a mining Company, obviously, we have to continue that process. And with today's silver prices and the amount of money we've got in the bank, we decided to dedicate $11.5 million to exploration this year. And that exploration will continue at all of the Company's assets, and it will result in a new 43-101 on each of our properties some time between the fourth quarter of this year and the first quarter of next year.

Excellent.

Yes. We're expecting to see some nice resource growth, as a result of these new 43-101s. Thanks, Burt.

Thank you.

The next question comes from Darren Deminchuk of CIBC Wood Gundy. Please go ahead.

Hi, Keith. Congratulations on an excellent year. My question regards the growth and the production profile, as to what you expect it to be over the next year and a half to three years. Can you outline where your growth is going to come from, and what you expect to be producing two to three years down the road?

Okay, thanks, Darren, for calling in. We haven't put out final numbers yet for 2013, or pardon me, 2012 or 2013. But the number we publish for 2011 is 8 million ounces of silver equivalent, which includes 7.5 million ounces of silver. Now just to give you some ideas where we could be going forward, because everyone knows that we've got La Parrilla being expanded, and we put out numbers for that. We expect that will grow from 1.5 million ounces last year, to approximately 2 million this year, to 3 million next year and then Del Toro will contribute some ounces next year. We just don't know of the exact number, because we've just broken ground there. And we're assuming, we're going to get production commencing in the third quarter, but there's always delays and so on. So it's just -- I'm a little bit reluctant to put a number to 2012, but it will be somewhere around 10 million ounces. And then 2013, with Del Toro kicking in at approximately a 1,000 tonnes a day, which is what we're expecting, we should see about 3 million ounces from Del Toro. So, by 2013, we should be looking around 13 million ounces, and it keeps growing from there.

Sounds good.

Thanks, Darren.

(Operator Instructions)

The next question is from Alex Cernick with BMO Capital Markets. Please go ahead

Hi, gentlemen. I just have two questions. Firstly, at La Parrilla. I understand there's some test work going on in Q1, and that you expected to see some recovery in the grades, and the recoveries. Could you give me an idea of, perhaps what you've seen in April, and how fast we can expect that to ramp back up?

Yes, you'll see an improvement in the second quarter. The mill was designed in the latter part of 2010, and we did some test work in the first quarter. And you're referring to an open pit area, and this is a very large oxide resource. The grade is somewhere around 90 grams to 100 grams silver. The normal head grade coming from the mine is about 220 grams or 225 grams. So, when we put through this lower grade material, it brought the overall head grade down, which was expected. But we needed to do this work, just in order to make sure that this ore can be processed, and it can obviously supply the amount of silver that we're expecting it to supply.

We won't be processing that ore until next year, because the expansion that's going on right now at La Parrilla is doubling the flotation circuit currently. And then the cyanidation circuit, where this particular ore will go through, doesn't kick in until the first quarter. But at the higher volumes, it will be a bit of a wash, or we expect it will be a bit of a wash, because even though the grade will drop on the overall oxide resource in the first quarter of 2012, the throughput will double. So it will be interesting to see exactly what effect that has on our costs, but we expect it would be a wash.

Okay. Okay, great. And then secondly, on the Encantada, on underground development, I think in the MD&A you had mentioned that you expected to be at 1,500 tonnes per day later in 2011. Just to kind of get a better idea on that timeline, is that kind of referencing Q4? Can we expect to see Q4 coming in around that rate, or would that be towards the very end of the year, and maybe falling more into Q1?

Yes, I can't answer that question yet. There's a couple-- and that's why we didn't identify more specifically in the MD&A. There's a couple of things going on the ground. There's some improvements that we have to make, and some equipment that we've ordered. It looks like just last week, we got one of the key components. So, that was quite a major event to be able get that piece of equipment. So, it looks like we're on track to probably hit that number, maybe in the latter part of the third quarter, or maybe early fourth quarter, but just give us a little bit more time to really identify exactly when it's going to happen.

I think it's better to be a little bit conservative, but we expect to -- if we end this year with 1,500 tonnes a day coming from the mine, I think we'll be doing pretty good. Because it's just a precursor of the future, because ultimately we want to continually to improve the mix, and continually to increase the ore coming from the mine. But that will -- that's over the next couple of years.

Okay. So I mean, we can probably expect an update on that when you're -- in August, I think was when you spoke about in the MD&A, giving us better guidance, or revising your guidance on 2011 production, correct?

Yes, that's right. We'll put out our production numbers for the second quarter in the second week of July. It might be a bit early to discuss it at that point, but when you come out of our financial statements in mid August, I think we'll be in a good position -- if not earlier -- if we know earlier, we'll obviously say so.

Okay, great. Well, that's all. Thank you for your help.

Okay, thank you.

(Operator Instructions)

The next question comes from Thomas Caruso of Morgan Stanley. Please go ahead, sir.

Hi, Keith.

Hi, Thomas.

Congratulations. You did real well this morning on television.

Oh, you saw that, did you?

Yes, I'm glad that you get to educate Kramer.

The whole three questions from him. Related to those, could you just -- could you talk a little bit about the cost of the operation, because of the oil price and costs, and what efficiencies you are putting in place to make sure that we're not going to -- you're not going to get hurt here? I'll let Ray take over this question. All right.

Well I think -- thanks, Keith. I think the answer to that relates somewhat to the economies of scale, we allude to in the MD&A. Obviously, as we scale out the operation of La Parrilla for flotation, and in double -- or more than double our capacity, we're expecting that the costs which are not of a variable nature, the costs being the overhead costs, will help us bring down the overall cost for mining, milling and overheads. And we'll continue to work to try to find other ways to get additional economies in energy. But obviously, with the other impact being the peso, if the peso remains strong or gets stronger obviously that will have an impact on the equivalent value of the operations denominated in US dollars. So, there's not much we can do about that, just continue to scale our operations, and try to get our overall average cost per unit down.

Thank you. That leads me into, I guess the second question which Keith, you also mentioned a little bit, I think you brought up this morning, was as you become a larger producer in Mexico, like some of the other political risks that other countries have had, or companies have had like [Vale] in Brazil with being taxed, where do you see the Mexican government stand, not only now but in the future?

It's hard to predict the politicians. There's a lot of talk going on, and there's an election coming later next year so, but we think that Mexico is going to stay pretty stable between now and the next election. It looks like even the next government, it looks like there might be a change in government, but I think it's going to be a good thing overall.

There's a lot of optimism about the new government coming in, and taking power for business and then the mining sector. But my comment regarding political risk, was really the fact that we feel very comfortable that the Mexican government is not going to be trying to take away our assets. And then the biggest thing from a mining company is permitting. And I mentioned that on CNBC this morning, and in Canada or the United States, you're lucky to get a mine permitted within five to ten years. And we're looking at six to 12 months for permitting a brand-new mine in Mexico, and that's a huge change. And generally, I think that the governors and then the federal politicians are very supportive of mining in Mexico.

Great. Thank you very much. And again, congratulations to you and your team.

Thanks.

Thanks a lot.

We're going to go to Jill next.

Hi, everyone. We have an e-mail question here from Danny. It's, with the additional cash that has been generated, is there any way to reinvest this to accelerate development of the Del Toro property?

Okay, well we are investing approximately $70 million over the next two years on Del Toro. We also are investing $35 million on La Parrilla this year. We also are investing $21 million in development this year, and $11 million in exploration. So, we're investing a lot of money. And I think that's a pretty good pace to get our production continually growing over the next few years. So, I wouldn't want to go any faster than that. There is a, I think, there's a limit to everyone's growth. And I think that would supply a lot of silver over the next few years, so I'm happy with that expenditure. Did they have a second question? Okay, we are going to go to --

Next question comes from Mike Parkin of Banc of America Merrill Lynch. Please go ahead.

Hi guys, how are you?

Hi.

Just a quick question on your operating cost. What percent of your operating costs falls into being denominated in pesos?

I'll take that question, Mike. It's Raymond Polman, here. We've looked at this a number of times, and obviously it varies over time, but roughly 70% of our costs are denominated in Pesos. There are costs which aren't denominated in pesos, which are denominated mostly in US dollars. Purchases of reagents like cyanide come primarily from the US, and they are already denominated in US dollars. But many of the other costs, notably our workforce is all Mexican, and it's all paid in pesos. As well, there are other variables, consumables that are also denominated in pesos. So, there is a potential impact as the peso strengthens, regarding our overall operating cost denominated in US dollars.

What percent of your cash is currently held in pesos?

We don't carry an awful lot of our cash in pesos. Obviously, 100% of our sales are denominated in US dollars, and we make an attempt to mitigate some of the exposure to the US dollar. We prefer to move it from US into Canadian currency. So, I would say that roughly 40% to 45% of our entire treasury is already denominated in Canadian dollars. And the balance of it would be, perhaps 10% in pesos, and the balance beyond that would be in US dollars.

Okay.

We also have obviously a fair number of commitments that are in US dollars, so it doesn't trouble us to have some US currency as the commitments we have for investments in our fixed assets are US dollars. So, it in effect hedges us a bit, on the US dollar.

All right. And just one more question. On inflationary impacts, where are you guys seeing biggest impact right now in terms of input cost? I know there was some commentary on oil.

What we've seen for the most part is oil or energy costs. Energy costs are obviously exposed to oil, as well as the cost of oil goes up. The cost of the Mexican government producing electricity, or ourselves generating it from diesel go up. So, that's where we're seeing greatest exposure to inflation, core inflation.

Okay. And then in terms of labor, are you guys operating on fixed union contracts for your operations?

We have a number of union contracts, as well as various contractors that we use in the operations. So, those costs, they're subject to some inflation because of the peso, but otherwise, they're pretty stable.

Okay.

Thank you.

Thanks, guys.

(Multiple speakers) It increases 9%.

Over the prior year.

Yes, in employment costs.

Correct.

(Operator Instructions)

The next question comes from Linda Palmer of San Francisco Sentry. Please go ahead.

Hi, Keith. Congratulations, and I just have some general questions. I'm just interested your comments on the recent volatility in the market. And also, if you're making any projections on the price of silver.

Well, I projected $50 silver by the end of the year, and $35 silver by April, so I hit both of my targets all in April. (Laughter)

Okay.

I'm hoping we'll see a resumption of the bull market. I'm expecting we will, there's just -- we saw some short covering which rallied the market up, probably from low $40s to almost $50 in April. And that was a little unexpected.

Yes.

So, I think -- the regulators, obviously, by them hiking the margin -- I'm -- [eight weeks] -- I just have a little bit of confusion understanding exactly why they do that. Where were they at $28, and $32, and $35, and $38, and $40? And all of a sudden right at the top, they decide to do five margins in eight days.

Right.

And that suggests to me, that there's something strange going on behind the scenes. And but what that also tells me there's -- the market rallied for a reason. The tightness in the physical market is real, and you can't get away from that. I will see a resumption of the price movement north again. We may go into a bit of a quiet period here for May and June, but I think that we'll end the year off around $65 an ounce. That's my current target. And obviously that will be helpful to silver companies like ourselves -- First Majestic is the most leveraged, and purest silver Company in the world, so we will be the most beneficiary to that. But the reverse is true, when you see what's happening right now with silver prices coming off the way they have. Unfortunately, it does hurt us.

Okay. Thank you very much.

Thanks for your question.

(Operator Instructions) Is there an e-mail question?

Hi, we have one other e-mail question that just came in. It says, hi, Keith, could you please talk about your outlook for this year 2011, as far as the earnings, production, et cetera? With the new mine in the second half of the year, will your production estimates slightly go up? Thank you, and congratulations on your quarter results.

Okay. Well, it's difficult to comment on earnings, because earnings have such a -- they're so influenced by the silver price. And then, I'm not going to tell you what we do our internal cash flows at, because at today's metal prices, it looks ridiculous, actually. But we chose that number almost a year ago. And we're -- we far exceeded that expectation. So, at current prices, we averaged about $35 an ounce of -- or $34 an ounce in sales in the first quarter. And if that number is maintained, you're looking at a number, well over $1 a share in earnings. The growth this year is coming from the La Parrilla. As I mentioned we're spending $35 million there, and that's being expanded to about 2 million ounces this year, and then going up to 3 million next year. But Del Toro is the real big one that's under construction now, but it will be about a year before we see any production out of there. We're expecting production in the third, and possibly as late as the fourth quarter out of Del Toro.

Well, it looks like we're done. If there's anyone else that has any questions, please prompt us, e-mail us. Okay. Well, that's it for the conference call. We appreciate all your time. And we appreciate your interest in us obviously, and we look forward to an exciting year ahead. Feel free to call us at any time. We just released our brand new nice annual report, which is electronically on our website. If you'd like a hard copy, please contact us, and we'll be happy to mail you a hard copy of our annual report. Thank you very much.

Ladies and gentlemen, the conference has now concluded. You may dismiss your telephone. Thank you for joining, and have a pleasant day. Goodbye.