First Majestic Silver Corp (AG) 2014 Q2 法說會逐字稿

At this time, I would like to turn the conference over to Keith Neumeyer, President and CEO for First Majestic Silver. Please go ahead.

Thank you and welcome, everyone. Thanks for showing up at the conference call today. Our second-quarter financials were announced, as you know. We have in the room with me today Ray Polman, the Company's Chief Financial Officer; Todd Anthony, the Company's VP of Investor Relations; also Connie Lillico, the Company's Corporate Secretary. I will pass the call over to Connie to discuss and explain.

Thanks, Keith. Prior to us beginning today, I will read our disclaimer and forward-looking statement. Certain statements contained in this conference call regarding the Company and its operations constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and Section 21E of the United States Securities Exchange Act of 1934, as amended. 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 cost of goods and services, problems associated with exploration and mining operations, changes in legal or 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. Back to you, Keith.

Thanks, Connie. So I am not going to read the news release or go through it in detail. I am just going to cover some highlights and then I am going to open the call up to questions. So if there are people that would like to be in the queue. I would recommend you start showing yourself now. We can line you up for questions once I just finish my short little introduction.

So obviously, the second quarter, as you know, was our ninth consecutive quarter of record production. Interestingly enough, there was one quarter going back that was a slight dip, but you'd have to go back the previous two years before you actually saw a previous dip. So we've been on quite the growth spur or quite the growth path for the last several years as most of our shareholders are aware.

Revenues increased slightly in the first quarter primarily attributed to the increase in production, earnings per share of $0.06. Cash flows were $0.16, which was a decrease obviously primarily due to the silver price and some other issues, which we can talk about today. The total cash cost came in at $9.63, down 3%, so going in the right direction. All-in sustaining costs, $18.18, also going in the right direction, down a couple of points or 3%. We have a realized silver price in the quarter as the news release pointed out, $19.59, a decrease from the prior quarter. Cash is strong. We have got $66 million in the bank, which is quite good and we continue to buy back stock on a very small basis, but a very opportune basis. So if we see the shares being oversold on a daily basis, we will step in as we did in the second quarter.

So that is really it for me. I think the rest of the news release pretty well speaks for itself and I see that there are a couple of individuals already in queue here. Why don't we pick one? Operator?

(Operator Instructions). Dave Forster, Merrill Lynch.

Good afternoon, guys. My question has to do with the increase in all-in sustaining costs and it was cited that it was the higher sustaining at La Encantada due to the delays in the mine improvements there until the mid-part of next year. Can you give us a little bit of flavor as to what is going on and what you expect the impact is going to be post improvement to the sustaining costs?

Are you referring to the increase in guidance?

Yes, that's right.

Go ahead, Ray.

What is going on at La Encantada is, with the mining from the underground ore, there is a certain amount of development that is required for us to produce at the higher rates. What we anticipate happening is that, as we get through the second half of this year and into next year, we will then begin working on the expansion of the crushing and grinding areas and during this period leading into the first half of next year, we need to ensure that we have sufficient development achieved to be able to produce at the higher feed rate for the mine.

Okay. And what do you expect the improvement is going to be once those improvements have been completed? So is there going to be an impact to sustaining CapEx, that is what I am getting at?

On a per ounce basis, we would anticipate there to be some economies of scale as we scale up. So a minor reduction I would think in the costs on a per ounce basis. Although we are doing a number of things to improve the efficiency through the use of additional automation linefeed, various measures of technology to improve the costs. So we would expect some cost savings in the sustaining costs, as well as production costs going forward.

Okay. So once -- if you just look at where the all-in sustaining costs were before the guidance change and where they are now, what has changed? Is that the new run rate or is that something that is going to be resolved once you have instituted these improvements?

Well, the anticipated run rate that we had when we had originally budgeted the outlook for the year for La Encantada related to a scaling up of operations and a reduction of costs. That scaling up is being delayed into the first half of next year. So that is basically what is occurring is that the scaling up of operations did not occur in the second half and is deferred into 2015.

Okay, that's great. That's it for me. Thanks, guys.

Andrew Kaip, BMO Capital Markets.

Hi, guys. Just focusing in on operating costs, I noticed that the milling costs at Del Toro rose substantially year over year. Can you give us an indication of what that relates to and then also where you see improvements in those costs on a go-forward basis?

The cyanide consumption was very high due to the type of ore that was being used, the transition ore.

Okay.

It is something on the order of four or five kilos of cyanide per tonne, which is obviously extremely high. You are going to see that change in the third quarter because of some things we are doing differently now. We are using the flotation circuit more than the cyanidation circuit with this particular type of ore. So the cyanide consumption actually drops. We have also got the electrical consumption as well, which is unusually high and the change from the prior year, the run rate was only 1,000 tonnes a day compared to the current rate of almost 2,000 tonnes. So your electrical consumption is much higher due to the amount of diesel we are burning due to the generators, the seven gen sets there.

So we did hook into the powerline in Q2, but it was only a reduction of two of the gen sets. In Q3, we are hoping in September, we will news release it once it is completed, so September with a question mark. But hoping September will actually get rid of all the gen sets and the new 115 kilowatt line will be completed and you will see the costs again notch down.

And Keith, can you give us a sense of where you see them by year-end?

The actual mining costs?

Processing costs in particular. I mean they were quite high, so given the fact that you are going to see the benefits of the power switch over and you are going to see reduced cyanide consumption, can you give us a sense of where you think those are going to be on a per tonne basis at year-end?

Well, we didn't give guidance on a per mine basis, Andrew. We did give guidance on a per mine basis in January. We decided not to make that adjustment because we felt the changes on a per mine basis weren't really that material. On a global number, which is a number we put in the news release, is basically flat and we didn't want to confuse the market by throwing out a bunch of numbers. So I think we could probably defer that and maybe we can get that to you at a later date.

Okay, thanks.

Ovais Habib, Scotiabank.

Hi, guys. Just quick question on La Guitarra. In terms of you guys providing an updated 43-101, is that still expected in early 2015 and are you still looking to submit a permit for the 1,000 tonne per day cyanidation circuit?

Well, there's lots going on there. The permitting is focusing right now on the [Minera De Acua] and Rincon areas. We think we are close to getting that permit. It is really the future of this operation, at least the short-term future. That is going to dictate what we are going to do at the mill. There is two potentials. One is to expand the current mill and one is to build a brand-new mill down in the Minera De Acua area. And that decision has been made, so we basically put it on hold. Also due to market conditions as well, but we put that final decision on hold until we get resolution with the community and the permits. We are pretty optimistic it will be done in the next couple of months and if in fact that does happen, there is some potential of that mill showing up at Minera De Acua versus the current mill being expanded.

And the 43-101, we will likely put out a PEA on the expansion. At the same time, it will be a combined 43-101 and PEA and our internal target and again, I hate putting these things out to the market because I don't want to be held to them in the future, but I know it is kind of hard to avoid, but our internal goal is to get that out by the end of the second quarter 2015 and that includes the PEA with the 43-101.

Okay, that's great. That's it for me. Thank you.

(Operator Instructions). Andy Schopick, Private Investor.

Thank you very much and Keith, thanks for holding the conference call today. A couple of financial questions. I'm curious to ask you a little bit about the tax provision for the full year and any anticipated changes for next year in overall taxes or tax rates.

I will pass that on to Ray.

Yes, that's a very interesting question. We've had a number of meetings directly with the tax authorities in Mexico. Obviously, we are feeling the effects of the royalty and the environmental duties and the fact that the tax authorities there put in rules with respect to a requirement to deconsolidate your operations. We had established the corporate structure as a consolidated structure and when you do that, you've got the benefit of some tax savings from operations when you are building them and they are getting ramped up to offset the income of other operations that are not taxable.

So in short, the effective rate that we are experiencing right now is somewhere in the range of 30% to 35% and we would expect that to continue, barring any changes. There has been a number of rumors passing around within Mexico about changes that may be coming to modify these. There's a number of injunctions that are in the courts working against the tax authorities. We can't say what the results of them will be, but, for the foreseeable future, expect the effective rate to be in the 30% to 35% range.

Okay, that's helpful. And one follow-up for you. Have you done any kind of modeling on the current financial leverage to the price of silver? I mean for each dollar increase in silver, have you kind of factored in what your overall financial leverage is?

I think the leverage is quite low and we haven't focused on that too much. We have a lot of additional leverage if we so choose to use it, but our preference is not to go there. At present, we are focusing on efficient costs and not on additional leverage.

Okay, thank you very much.

Matthew O'Keefe, Dundee Capital Markets.

Thanks, operator. Good afternoon, guys. I just had a quick question and I apologize if it has already been asked, but on Del Toro, you mentioned the transitional ore as obviously having changed your plans a little bit. Would you mind taking me through again just quickly the extent of that and have you done any drilling or anything to sort of determine which areas you either have to avoid or where you are going to be chasing next?

Well, it's not a matter of avoiding the areas. We've gotten the ore there and we can make money mining it, so that is what we are doing. But it's more of a blending process and we are focusing the current exploration and drilling in areas that would allow for more efficient blending and then so it has changed our exploration program to some degree over the last couple of quarters. And other than that, it's not completely a bad thing; it is just a matter of getting a handle on the metallurgy and it takes time. We are changing some of the plumbing, we are changing some of the circuitry and it's all just a matter of normal course of things, nothing huge in any particular area, but it's just refinements of the mill and that's underway on an ongoing basis and that is included in our whole automization program as well, which we've launched at the early part of this year. We are putting some interesting tools in place throughout all our mines, including Del Toro.

Okay, thanks. That clarifies that for me. I appreciate it.

(Operator Instructions). Stuart McDougall, Jennings Capital.

Thanks, operator. Hi, guys. Just a quick question back to La Encantada. Keith, do you expect these grades to be maintained until you get at the expanded milling rate?

Are you referring to the grades in the second quarter?

Yes, the 300 odd grams.

Yes, the mine has always been around that. If you go back and look at the operation going back five years, you see that the head grades were around 200 grams and that was a combination of blending 300 gram ore from the mine with 120 gram or 140 gram ore from the tailings. So we have now taken that lower grade material out of the process and just mining the underground, which is about 300 grams on average I would expect. And also with the increased recovery, so you have got better grades and better recoveries and you've got pretty well the same production that we've had previously. You've got higher cost per tonne obviously, but your costs per ounce are basically much the same.

And would you expect at this point based on what you know at the higher proposed milling rate that that might have any dilution effect on the grade or is your drilling and so forth still showing the same kind of mineralization and similar grades?

When you mean dilution, do you mean like during mining or during --?

Yes, like is this going to be a case that we might see the grade come down at the expanded rates or are you pretty confident that this historic grade is going to be maintained in the fresh ore?

Well, it depends on what rate you are using. If you go -- we've got some long-term plans at La Encantada, which we don't put in any of our guidance obviously, but I am talking about guidance out to -- or plans out to 2016, 2017 where we envision La Encantada being a much larger operation. And we don't talk too much about it just because of the fact that it's quite far into the future and the market tends not to look that far. But you look at some of the large branches there that contain in excess of 20 million ounces and there is a couple of them and the grades of those branches are in the 200 gram material, but -- or 200 gram range I mean. And the recoveries of that material is quite good. There is virtually no manganese in those branches, but it is going to take a different operation to be able to find those in the future. But that is really the future of this operation and I would just suggest give us some time to give further guidance on that, but I think over the next 12 to 18 months, you will be seeing some changes at La Encantada, which will be quite interesting.

That's great. Thanks a lot, Keith.

Howard Flinker, Flinker & Co.

Hello, everybody. I don't think you understood somebody's question before when he asked about leverage. He didn't mean how much debt would you add; he wanted to know what effect your bottom line would be on an increase in the price of silver of $1 or $2 or $3. I think he meant operational leverage and not financial leverage.

No, reconsidering that immediately upon saying it, I think I agree with you. And yes, I don't know -- it's more of the job of the analyst on the street to do that work and maybe Todd has a better answer because he is closer to that side, but I would say that there's quite a lot of leverage.

Yes, sure. No, I'm not asking. I can make my own faulty guesses too. I just wanted to clarify --.

It comes to purity as well. We are one of the -- I think if not the purest, one of the purest silver companies in the world. So silver has been underperforming the other metals and I think that has hurt us to some degree compared to a Company that has got 50% of their production in gold or whatever the case may be.

If the report is true that there is an impending shortage of silver in China, that underperformance will disappear, but we will have to see in the next intermediate period to see if that report is accurate. We will find out soon enough.

In the meantime, we just have to keep grinding our costs down.

Just keep plowing away at what you can control. You can't control the price. That's right.

That's right.

All right. Thanks, guys.

Anyone else? I see there is no other people in line here. If there is any other questions, this has got to be the easiest conference call we have ever had.

(Operator Instructions). We do not seem to have any more questions.

Everyone is bored to death. Okay, thanks, everyone, for joining us today and hope to see you all on my travels over the coming months.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.