First Majestic Silver Corp (AG) 2016 Q2 法說會逐字稿

Welcome to the First Majestic Silver Q2 financial results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. (Operator Instructions). I would now like to turn the conference over to Keith Neumeyer, President and CEO. Please go ahead.

Welcome, everyone, to our conference call this morning here in Vancouver. We have a room full of people. We have obviously myself, CEO and President. We've got Ray Polman, our Chief Financial Officer; we've got Connie Lillico, our Corporate Secretary. We also have in the room Todd Anthony, our Vice President of Investor Relations. We also have our VP of Finance, Andrew Poon; and we also have Jill Arias, our VP of Marketing.

First off, I'm going to pass this call over to Connie.

Thanks, Keith. Prior to us beginning today, I will read our disclaimer and forward-looking statements. 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, social or political conditions in the jurisdictions where the Company operates, lack of appropriate funding and other such 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. I'm sure everyone that's on the call has seen our news release this morning. We did preannounce our production numbers some time ago and today, the financial numbers were put out into the market. I'm not going to bother going through the numbers in detail, but just from a highlight perspective, we did produce 4.7 million equivalent ounces in the quarter, which was an increase from the prior quarter in the same year, Q2 2015, but a slight decrease from the previous quarter.

We also have a very, very strong balance sheet now of over $108 million in the Treasury. Interestingly enough, the silver price, as everyone knows, is now creeping up. We are in the $20 range, which is nice to see and Q3 will have much higher silver prices that were currently experienced in both Q1 and Q2. Interestingly enough, Q1 average selling price was $15.08, which was the lowest average selling silver price sales that we experienced in almost five years. At $17.01, average selling price for Q2, was almost identical to the same price of the prior year in Q2, but, of course, the Company was vastly more profitable this quarter compared to the same quarter in the prior year as a result of all the cost-cutting measures that we've been doing.

But as I've been very clear to investors on a worldwide basis throughout my tours with institutions and at conferences, I've told all of you and many others obviously that the mining sector has been starving its assets -- and same as First Majestic -- of investment dollars over this past year. It's been a very challenging five years and as a result of the decreased investment in exploration and development, we had no choice but to start to reduce production at some of the operations in order to produce profitable ounces in order to protect the Treasury because really the main focus of the business over the last couple of years was to protect the Treasury to prevent the Company from having to go to market to finance at very low share prices.

I think we did a great job doing that, but it's now time to go back and start reinvesting capital and that's a very exciting thing for us to start to commence again. But as I've said to investors and shareholders over the last 12 months that there is a delay. From the moment we decide to start increasing investment again, to increase production again, there's a delay of anywhere between 12 and 18 months depending on the mine. And just to throw out some numbers, our development investment increases 51% from H1 to H2. That's a big number. We won't see a benefit right away. This increase of investment dollars in H2 won't start showing up as a benefit, meaning increasing production until the middle of 2017.

The exploration dollars, we now decided to increase our exploration by 46,000 meters, which is a big number. And the benefit of that will be updated resource models, updated 43-101s, increase life of mine and so on so forth. So it's great to see that we are seeing the dynamic or cash flows coming into the business. Our Treasury is going up every single week now as a result of earnings and that is allowing us to start to increase investment again.

Also of note is our investment at Plomosas. This is going to be our next producing asset. It will become our seventh mine in Mexico and it's very exciting for us because this has been in our portfolio since 2012 and we've never spent a dollar on this asset and the money we are putting into this asset at the end of 2016 and all throughout 2017 will start to advance this project to a preliminary economic assessment by the end of 2017, so that's something we are very excited about.

So I'm going to pass -- I'm hoping that people are going to line themselves up for questions. I see a couple of people already on the question queue. Anyone else please get on there and we will try to cover as many questions as we can as time allows. So let's go to questions. Thank you.

Thank you. (Operator Instructions) Heiko Ihle, Rodman & Renshaw.

Congrats on the quarter. I've gotten some questions from some investors regarding the relationship with First Mining Finance. How much do you exactly currently own after you just took down that other $0.5 million. What's the maximum you'd be willing to own? And quite honestly, would you ever just consider taking over the firm as a whole?

No. First, Mining Finance is a completely different business model. It's a different business even though it is in this office here in Vancouver. It's a gold company focused on Canada, so it's a development company. It's got no relationship or no synergy at all. It wouldn't make any sense at all. But First Majestic is a substantial shareholder. We just received another 800,000 shares as a result of a debt settlement that we did with them. I think our share position is somewhere around -- 15.3 million shares we own of that company.

So that's only 3%. That's really not all that much. Okay, fair enough, fair enough. Like I said, I've gotten -- I'd say at least a half a dozen of people have asked me about this over the last couple of weeks.

First Majestic is silver in Mexico.

I understand. But there's obviously some management overlays and again, the pop-up in the press release, that's why I figured I'd bring it up in the questions.

There is no management overlay. There is some directorship overlay. There is no one that works for First Majestic -- well, actually, Andrew Poon, who is the VP of Finance for First Majestic, is the interim CFO of First Mining Finance, but he's actually giving that position up over the next little while. But there's no management crossover, really.

Fair enough. So you expect to invest a total of $82.5 million in CapEx for full-year 2016. That's obviously quite a big increase from what we were modeling and what you guys expected previously. Can you just walk me through that quarter by quarter for the remainder of the year? My gut feeling, given that $6 million is going to La Encantada and the roasting plant there, I think it's fair to say that Q4 spend is higher than Q3, but could you just quantify it a little bit?

You would be best to really talk to Todd on that directly rather than wasting time on this call, Heiko, because getting into those kinds of details is really not fair. The $20.9 million in increased investment and exploration development is spread throughout the operations and then, of course, with Plomosas being the first money it's going to be receiving, but there is very much a focus on La Guitarra, La Encantada. The mines that are having the largest challenges due to the lack of investment over the last three to four years are the ones that we are really focusing on. But we can give you more detail on a one-on-one call with Todd.

Perfect. Thanks a lot.

Chris Thompson, Raymond James.

I don't want to get into too much detail here and I don't expect any, but obviously you just laid out the focus of the capital spend, but, Keith, can you give me a sense of the development upside at Del Toro and Parrilla? Obviously both these mines have, I guess, produced or not lived up to initial design expectations. So are you going to be revisiting the operating plan for both mines considering you've got a healthier balance sheet now?

Well, I would agree with your statement regarding Del Toro for sure. I wouldn't agree with your statement regarding La Parrilla. La Parrilla has been quite an engine of the business for at least since inception of the business. It was our first acquisition and it's gone through five expansions since 2004. It's really the heart of our business. It's where our ISO 9000 certified lab is. It's where all our due diligence takes place when it comes to looking at other assets or even the metallurgical work that we did at Santa Elena to increase the recoveries from the low 60s to the mid-80s.

All that work was done at La Parrilla, so it's where our training takes place. It's one of our most advanced mills. But like all the mines, it's no different. We did have to reduce the throughput there from 2,000 tonnes to 1,700 tonnes, and the oxide circuits -- the oxide circuit went from 1,000 tonnes a day to 500 tonnes a day, but we did in fact increase the sulfide circuit from 1,000 tonnes a day to 1,200 tonnes a day giving total throughput there of 1,700 tonnes a day. So it was really the oxides that we were having a challenge there, but we are going to refocus some investments into the San Marcos area. With this improved strength in our balance sheet, we hope to see the oxide circuit get back up to traditional levels late in 2017.

Okay. That's what I was indicating about that asset. And Del Toro?

Del Toro is a different animal. It's never reached its throughput capacity. We built this 4,000 tonne a day mill. We stopped -- we were building this mill in 2011 and the market was falling apart. The silver price was dropping like crazy and then in 2012 we decided just to shut down the investment. We never did finish building the shaft. We never got to do all the underground development that we wanted to do. There is a $35 million investment yet to be made there to get all that completed and we stopped it.

So we've been running this mill at under capacity. It's got three circuits. It's got a dore circuit or a cyanidation circuit. It's got a zinc circuit and it's got a lead circuit and the only circuit operating is the lead circuit and the other ones are sitting on care and maintenance. So, yes, we are going to get back to that; and part of this increased investment is starting to increase the development and exploration investment there because we do want to ramp that mill back up to -- we don't have plans to get it to 4,000 tonnes a day anytime soon, but getting it back up to 2,000 tonnes and higher by the end of 2017 I think is a conceivable goal.

Thanks for that, Keith. And then Plomosas, you say that PA is anticipated, I guess, next year? What sort of operating scenario do you envisage there?

It's a little bit too early to really start throwing numbers out at it, but publicly I have stated we are looking to build a 2000 tonne a day operation there and it will be primarily gold/silver -- pardon me -- silver/gold mine. Look, we are going to throw some numbers out hopefully by mid to late 2017 and we will just see how it goes, but we are just excited to get back to it. It's a very high-grade gold/silver -- or should be a reasonably good grade silver/gold mine.

And then, finally, Keith, just obviously Santa Elena, great quarter from that mine. Is that sustainable at these sorts of levels, or do you see it -- maybe the grades dropping back to more normal levels?

What's happened there is a bit of a -- one of these surprises I suppose that's turned out quite positively there. If you were down on-site, it would be easier to explain to you because over the telephone it's kind of hard to explain, but we did run into a high-grade narrow structure, a vein crossing the main Santa Elena vein and it looks like it's got some legs to it. And the silver grades are in the 500 gram range and the gold grades are in the 5 to 6 gram range, and we are blending this high-grade material to the lower grade material, which is really helping out the production there.

And we don't see an end to it quite frankly. The structure on surface looks like it goes for quite some time and it could actually even intersect another parallel structure, which we are just going to start drilling in the second half of this year. So there's a lot going on at Santa Elena that could add to life of mine. It's a little bit early to really start getting too excited about it, but I can tell you some of our technical guys are getting excited.

All right. Great. Thanks, Keith.

Jessica Fung, BMO Capital Markets.

My question is related to La Guitarra. I'm sorry I didn't get to go to site earlier this year. Can you just remind us again about what your plans are there; what the timeline looks like; how much development you guys need to do there to get the expansion up?

Yes. Ray's got the numbers in front of him. La Guitarra is going to become a major focus of ours over the next two years. It's going to become one of our important capital spends. That and Plomosas will be the two most important capital spends over the next two, three years. So regarding some details on increases in investment H1 over H2, Ray, why don't you just throw those numbers out?

Sure. What we are seeing is that sustaining exploration is growing quite significantly. We are moving it from where it was in H1 at roughly $0.43 up to $2.78 as a component of all-in sustaining costs, and we are also seeing sustaining development increasing very significantly from $2.42 to $12.31. And for a sustaining property, plant and equipment, which is really the investment in the fleet, which is preparing us for expansion for next year, we are seeing that go from $1.40 to $4.63. So all of those things are combining to show that the growth in all-in sustaining cost is really quite significant at La Guitarra.

Got it. And do you think you need to maintain these levels through next year?

I think so. I think, Jessica, that's probably a fair statement. We haven't done the 2017 budget yet, but there's a lot of exciting geology at La Guitarra that the guys have been wanting to work on for a long, long time. And the Mina de Agua area, the Rincon area, the Nazareno area, these are areas that have been ignored since 2012 when this asset first came into our portfolio.

And when we bought this Company or this mine, our plan in 2012 was to bulldoze this mill down and rebuild a brand-new modern facility and do all the work necessary to produce a lot more than what it has been producing ever since we bought it, but because of market conditions, we had to keep the production fairly low. As long as it was making a profit, which is all we really cared about, which we achieved, it was fine. But now that the cash flows are coming into the business as they are, it's time to make those investments that we wanted to make originally when we first bought this mine.

Okay. Got it. And then very quickly on Encantada with the roaster, so you guys will gain 1.5 million ounces of silver there. Over what time period is this? I assume this is not an annual figure?

That is in annual figure.

Oh, it is? Okay. Every year. Got it. And for how many years do you guys estimate?

Well, I think it's basically for as long as the mine is producing, Jessica, because we think that if we have 3,000 tonnes a day throughput from the underground, we are producing basically 3,000 tonnes a day of tailings, and this roasting facility is 2,000 tonnes a day. So it will have a constant feed not only of all the above-ground tailings that currently sits there, which is something in the order of, what, 6 million or 8 million tonnes of tailings or something? 5 million tonnes of tailings that are part of the 43-101, plus what's coming out of the mines, so it will go on for as long as the mine exists.

Okay, perfect. Thank you for the clarification. Thanks, guys.

(Operator Instructions). [John Skolnick], Desjardins.

Just a quick question. Most of them have been answered, but just looking at the strategy going forward, wondering if you guys are planning any investment at all in some of those other projects. La Luz and La Joya come to mind, or whether you are just going to be fully committed to Plomosas in the near term.

Yes, the reason why we are focusing on Plomosas is because it's basically already permitted. Here is a mine that was shut down in the mid-1980s by Grupo Mexico and typically -- they had -- very typical to Grupo -- they have a problem with the union, so they just bring in all their flatbed trucks and load [out the middle] and drive away and the mine has never been in production ever since.

We've been underground. We've looked at it. The guys are really excited about it. It was shut down right in the middle of production. There's a lot of ore there. It needs to be defined. It needs drilling, it needs to have an economic study done on it and so on and so forth, but it's going to be an exciting addition to our portfolio. And the reason why it's easy to get up and running is because the water permit is already in place. The explosive permit of all things is still in place. The electrical line is still there. We actually have a camp that is big enough to house 100 people. We've had a family living there since we bought it in 2012 keeping it in care and maintenance, and so it's in very good shape.

You don't need to do the change of land use permit and all the different things that don't need to be done, so the only thing we will have to do is permit the tailings dam because that will be in a different location and that's generally a fairly easy thing to do. So, yes, from a permitting perspective, it's a no-brainer. It's going to be very simple.

The La Luz is a different situation. La Luz is in a much more difficult part of Mexico. As our shareholders are well aware and as disclosed in our financial statements, there is an indigenous issue there with some local people that are anti-mining. The government is fortunately now just in the last year actually starting to say some very positive things to us about getting it up and running. So maybe we will end up getting a permit at La Luz in the next year or two, but we've been working on getting a permit there since 2011 unsuccessfully. It will one day be a great mine, but until it's permitted and until the government gives us the go-ahead, nothing is going to happen there. So that's why the focus is on Plomosas.

La Joya is a different animal. La Joya is a very complex ore body. It's full of all kinds of different metals and they are all low-grade metals. The complexity of that ore is very complex, very complicated. So it needs much, much higher metal prices before it can actually become economic. It's sitting in our portfolio. We haven't decided what to do with it yet. It's an interesting asset geologically, but quite frankly whether it becomes an economic mine, it's hard to really say.

Fair enough. Yes. That strategy sounds like it makes a lot of sense. Thanks. That's my only question.

[Wayne Curtis], Private Investor.

First of all, let me say that I'm very impressed with you and your team. I've been with you guys and First Mining for the longest of when you guys came out here. My portfolio buys a lot with dividends and royalties. What are the plans of that happening in the future? And two, wouldn't that attract more new investors coming in that want to have a portfolio of dividends coming at them?

Yes, I would agree with you 100%, and going back to 2010, 2011, the Board actually was spending quite a bit of time talking about dividends. And back then, I believe our Treasury was somewhere around $110 million, about where it is today, but then the silver price started to fall off and it just didn't make sense to start paying a dividend, so we canceled the idea.

We were very close to actually making a decision to do it. Actually, we just had a Board meeting yesterday and it started to recirculate among the Board. So look, the markets just started to improve. We are only six months into this renewed bull market in the metals. We don't know how long it's going to last or how far it's going to go. I've got my own personal views on it, but that's not always -- my personal views is not always really that important when it comes to what we do with our Treasury.

And we do have a couple of assets that we want to build and I would like to see the Treasury continually build as it is now and get maybe another mine built. We've got Plomosas built and just see how the business looks before we actually pull the trigger on paying dividends. But I'm the largest private investor or shareholder in the Company, so a dividend would do me a lot of good. There is a time and place for everything, but it is something we always do consider.

That's fantastic and I appreciate that. And second, and last, I'm leaving -- I enjoyed First Mining. I'm happy where you guys are at with all that gold content. Have a great year and thank you for the time.

[Greg Pizeski], Private Investor.

Good morning. I had half of my question answered about Santa Elena. I first wanted to say, as a four-year investor, I was pretty impressed by your execution during the bear market and I'm looking forward to such a quality management team doing something with some money. So I just wanted to pass that along. I really was rewarded by hanging in there with four years of this, but, anyway, do you have any --?

I'm glad you hung on, Greg.

Yes, thanks. It's just a first-class company and I hope other people appreciate that as well. Any equity positions other than the one that was mentioned for First Mining Finance?

Yes, we have a portfolio of small things that really aren't even worth mentioning. In the MD&A, we do break it out. We've got a position in PSLV, which is the Sprott silver fund, which is actually going up, which is nice. We are finally seeing some profits there and we've obviously got the position in First Mining Finance, which has done quite well as well.

Okay, thanks. And then on the Santa Elena purchase, the acquisition, I understand obviously what a wonderful asset that is. When you bought it, what did you project as its future growth ability? What's the upside to that besides the obvious good stuff about its costs and production?

Well, when we looked at it, we didn't actually think -- there's different ways of looking at a mine. So when you buy it, really what improvements can you make, not necessarily can you increase more production. So first off, when we looked at it, we realized that the recoveries were quite low. They were only in the low 60%s, so we did some work there at our lab at La Parrilla and lo and behold with some tweaking, we got the recoveries up into the low 80%s, and that 20% change in recoveries is huge, and that allowed us to actually decrease the throughput slightly in the mill, take a little bit of pressure off the mine, use less reagents and chemicals and so on and so forth and also change some of the chemicals.

And due to the fact that First Majestic is a much larger company, we have better contracts with suppliers so we are able to buy things much more cheaply. Our development costs went from $1,600 a meter to $900 a meter and our cyanide costs went from $2.90 to $2.06 and so on and so forth. So there's a lot of synergies and a lot of work that went on behind the scenes to bring the costs down.

The costs in the Q3, the last quarter that SilverCrest had that in their portfolio, they had a $12.50 all-in sustaining cost. Our all-in sustaining cost is in the $2 range right now, so we had a $10 improvement in all-in sustaining costs and we actually didn't predict that. We expected going into that to save $3 to $4 was our target and we obviously did much, much better than we anticipated.

We didn't expect to run into the high-grade area that we currently are mining, so that was a bonus. The geological upside right now looks quite frankly better than what we actually thought it was when we bought it. So the focus over the next 18 months at Santa Elena is really to increase life of mine. The life of mine there on a 43-101 basis is eight years and our technical team wants to see that number to go up. We want to see it go up obviously as a company, so that's really the focus. So we are going to drill and develop as much as we can over that 18-month period and see if that life of mine can creep up over 10 years.

Thank you for that. It's helping to educate me. Best of luck going forward and congrats to your management team.

(Operator Instructions). [Andy Chopik], Private Investor.

Thank you and thank you, Keith, for allowing us private investors to participate in the call. I want to ask you a question about the current status of taxation in Mexico. I recall a few years ago they imposed additional tax burdens on mining companies and I wondered if there's been any substantive changes to those regulations, or what you anticipate going forward your tax situation on your mines in Mexico will be?

Well, we are not inside government, but the oil and gas sector is being privatized, which I think has helped take some pressure off the mining sector for sure. There has been talk over the last couple of years to actually reduce the taxes for miners. It's hard to believe that governments ever would actually reduce taxes, but I know there's been some lobbying towards the government to do that. They did impose the 7.5% tax, which is basically based on EBITDA, which is approximately 3.5% or 4% actual real tax hit. They did increase the tax from 29% to 30% as well. They have the 0.5% royalty, which is on revenues of precious metals, which we pay.

So, look, when you look at Mexico and compare it to the OECD countries, which I think there's about 130 members, Mexico is about right in the middle of taxation for corporations. They were on the low end of the scale before they did their tax hike, but they increased taxes not just for mining, they increased taxes right across the board for all industries, including individuals. So the individual tax rates went up in Mexico as well. So it put them about in the middle of the pack. I'm not sure, Ray, do you have any additional comments?

No. I guess the only other additional comment that I would have is with respect to what they did at the end of last year. We had a deconsolidation liability that was imposed upon us a couple of years ago and they saw to it to provide a credit so that we could eliminate that liability by 50%, so that was a very positive thing for us. Other than that, the only changes we've seen are basically administrative. It's a very difficult company administratively in that they basically ask for information for everything that we file. They hold onto value-added tax claims for quite a while, as most companies will attest to, and in our case, we've been very good about recovering those value-added taxes, and we still have a very large number of value-added tax to recover for the acquisition of SilverCrest. And we are going to continue to work in that direction and that should show up on our balance sheet in a couple of quarters as well. So other than that, I would say that there are no changes and no expected changes.

All right. Thank you.

Thanks, Andy. I see there's no more calls. If anyone wants to jump on, you've got a couple of seconds to do that.

We have no more questions at this time. This concludes the question-and-answer session. I would like to turn the conference back over to Keith Neumeyer for any closing remarks.

Thanks very much, everyone, for participating. The participation numbers on the call today were probably one of the highest we've seen in the last few years, so it's really nice to see the participation rates being at these levels. If there are any questions that anyone does have that haven't been answered today, please call Todd Anthony, our VP of Investor Relations, at the Company's 1-800 number and we can answer any of your questions. Thanks again for participating. Have a great day.

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