Fortuna Mining Corp (FSM) 2010 Q4 法說會逐字稿

Greetings and welcome to the Fortuna Silver Mines 2010 year-end financial results. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Carlos Baca, Investor Relations Manager.

Good morning, ladies and gentlemen. My name is Carlos Baca. I would like to welcome you all to Fortuna Silver Mines and to our 2010 year-end financial and operations results call. We are hosting the call from Lima, Peru.

Joining me on the call are Jorge Ganoza, President, CEO and Director of the Company, and Luis Dario Ganoza, Chief Financial Officer. There will be a question-and-answer session after Jorge and Luis are done presenting our results.

Thank you for your support and for joining us this morning. I would like now to turn the call over to Jorge Ganoza, President, CEO and Director of the Company.

Thank you, Carlos, and good morning to all. I will initiate the conference and with the assistance of Luis will be giving a summary of our operations, construction activities and financial results for 2010. Once concluded, we will address your questions.

Fortuna produced 1.9 million ounces of silver in 2010. This was 13% above 2009 production and 12% above our 2010 guidance. The average silver price realized for the year was $19 per ounce.

We continue to be one of the companies with the lowest operating costs and better margins in the silver producer space. Cash costs for the year averaged negative $7.73 per ounce of silver, net up by product credits, compared to negative $4.86 per ounce in 2009.

Our operating and EBITDA margins for 2010 are 41% and 50%, respectively. Fortuna is also one of the companies with better short- to medium-term production expansion plans in the sector. In January the Company issued production guidance for 2011 of 2.4 million ounces of silver and 7,500 ounces of gold or approximately 2.7 million silver equivalent ounces, plus additional by-product base metals.

The Company continues to successfully execute mine and construction plans at Caylloma and San Jose. Based on the 43 million silver equivalent ounces we carry on proven and probable reserves to incrementally reach a target production of 4 million ounces of silver and 22,000 ounces of gold by 2013, and 4.8 million ounces of silver and 25,000 ounces of gold by 2014.

Silver in 2010 accounted for 48% of revenue, gold contributed 3%, copper 4% lead, 23% and zinc 22%.

At our Caylloma Mine the processing plant treated 434,656 metric tonnes of ore in 2010, an increment of approximately 10% with respect to 2009. Silver grade for the year averaged 159 grams per tonne and metallurgical recovery averaged 85.6% Silver grade was 3% higher and recoveries saw no significant variation when compared to 2009.

During 2010 investments at the Caylloma mine totaled $14.7 million, of which 60% was allocated to mine development and exploration, and the balance to various infrastructure projects.

At our San Jose Project in Mexico construction continues advancing according to schedule and budget, where we plan to be in commercial production in the third quarter of this year. The 2011 capital budget to bring San Jose into operation is $33 million. The Company is adequately funded to meet its capital projects with approximately $90 million in cash and short-term investments as of December 31, 2010.

The San Jose operation is planned to start production at an initial rate of 1,000 tonnes per day, ramping up to 1,500 tonnes per day over the course of the following 18 months. For 2011 San Jose's plan is to contribute 0.5 million ounces of silver and 5,000 ounces of gold.

And for 2012, the first full year of production, metal output is targeted at 1.7 million ounces of silver and 16,000 ounces of gold, or 2.4 million silver equivalent ounces.

At optimum design capacity San Jose is scheduled to produce approximately 3 million ounces of silver and 22,000 ounces of gold.

At the project's processing plant major equipment have been mounted and are in advanced stages of installation, including the course and fine ore storage facilities and conveyor belts; primary, secondary and tertiary crushers; ball mill, floatation cells and thickeners.

The construction and commissioning of the 8 megawatt power substation for the project is concluded. The substation is now interconnected to the national power grid and in operation.

The tailings facility construction has been concluded and the facility has been commissioned. Underground development and preparation of the three initial production stopes is advancing according to schedule.

To December 31, the mine had built an initial ore stockpile of 6,500 metric tonnes. The plan is to increment the stockpile to 30,000 metric tonnes by the start of the third quarter.

The research and reserve models show consistency with respect to the grade and [furnishing] the areas being developed.

Construction of ancillary facilities at San Jose is also advancing within schedule, as well as with the commissioning of the assay lab planned for early May. I invite you to follow the construction of the San Jose Mine in the photo gallery available at the Company's website.

And, last but not least, our exploration programs for 2011. We have a budget of $15 million allocated to brownfield explorations and new business opportunities this year. We are starting with the drilling of exciting high-grade silver targets in both Peru and Mexico, where we control commanding land positions covering over 58,000 hectares around our mines. In addition, we continue active in the evaluation of our vast opportunities throughout Latin America.

I would now let Luis take you through the financial statement. Luis, please.

Thank you, Jorge. 2010 has been the strongest financial year to date for Fortuna. The Company generated record sales of $74 million, which represents an increase of 44% over 2009; recorded operating income of $30.1 million, which again represents an increase of 110% over 2009; and net income of $13 million, an increase of close to 2,000% of our previous year.

Operating margin went up from 28% in 2009 to 41% in 2010. And net cash provided by operations increased from $13.7 million to $21.1 million. This material improvement in financial performance was driven by our increased exposure to silver in an environment of rising prices. Silver sold by the Company increased by 15% over 2009, and realized silver prices rose from $13.75 per ounce in 2009 to $19.05 per ounce in 2010.

Base metal prices were also a strong contributor to higher sales and profits for the year. This is reflected in our cash cost per ounce, net of by-product credit, which in spite of higher unit costs, improved from negative $4.86 per ounce in 2009 to negative $7.71 per ounce in 2010 as a result of the higher credits from base metals.

Our unit costs at the Caylloma Mine experienced an increase of 10% with respect to 2009, as the pressure on qualified labor, technical services and equipment costs have been mounting for the past several months in a very similar fashion as the industry cost inflation experienced in 2007 and 2008.

Our corporate general and administrative expenses also recorded a significant increase. To a large extent this has to do with required adjustments to our corporate capacities in order to successfully operate in two different jurisdictions, as we approach the commissioning of San Jose while maintaining higher operating and administrative standards.

However, in spite of this increment in cost and G&A expenses, Fortuna maintains one of the highest operating margins among the silver producers, second only to companies like Silver Wheaton, Fresnillo, and Silver Corp.

With regards to our cash flow balance in 2010 the Caylloma Mine was a strong contributor to our consolidated cash position, providing approximately $14 million of free cash flow after taxes and capital expenditures at the mine.

Total cash committed to the San Jose Mine construction in 2010 was $30.8 million, which consisted of investments and advances for equipment and to contractors of $27.9 million, and net value added tax payments of $2.4 million.

All in all without considering short-term investments nor proceeds from issuances of common shares, the net consumption of cash above and beyond internal generation was $23.6 million. This was in principal covered for by the cash reserves held at the beginning of the year of $30.8 million.

On our financing activities, in order to ensure sufficient funds for the completion of construction at San Jose, as well as to provide additional flexibility to the balance sheet, we raised total net proceeds of $73.9 million in two separate public equity offerings at prices of $2.30 per share in March and $4 per share in November of 2010.

As result of this, at year-end the Company carried a strong cash position of $90.8 million, which not only guarantees adequate funding for construction, but also for the accelerated ramp up of a mine to its assigned capacity of 1,500 tonnes per day that would follow commission, as well as the execution of an ambitious exploration program in our highly prospective exploration grounds surrounding San Jose [de Yuma] that will extend well into 2012. Thank you.

We would now like to turn the call over to any questions or comments that you may have.

(Operator Instructions). Nicholas Campbell, Canaccord Genuity.

I just wanted to see what you had to say about -- you've got San Jose expected to come into production in Q3 2011, and that gives you pretty significant growth over the next year or so. I'm just wondering if you have any comments to make about potential acquisitions, whether or not you're looking to add something in the short term or near term, and what sort of assets you are considering if you are?

Thanks for the question. There are two avenues for growth. One is organic, and this year the Company has a very aggressive budget of approximately $12.5 million allocated to exploration of around our existing mines.

There is exploration, not only with the purpose of increasing reserves in areas where we already have substantial basis of reserves and areas from where expansions are difficult to derive due to natural bottlenecks of underground operations, but the programs are geared to exploring new areas where we can establish new anchor zones for production. Where we can build reserves -- resources and reserves that can be brought to production on a fast-track basis, therefore, leading to production expansions at our existing operations. So that is for one avenue for growth, and we are putting our money where our mouth is.

The second one is corporate transactions and other opportunities. We are focused on post-discovery, pre-development opportunities, just like what San Jose was back in 2005, or even Caylloma, if you look at it from the right angle. So we find -- we have signed over 2010, and even in the start of 2011 this year, we are very active in both Peru and Mexico looking for opportunities. As you can expect, during the course of business we signed multiple CAs with our companies, public, private exploration companies, producers to conduct technical visits.

And we're immersed in that process. We do believe in growth. We believe right now we have growth ahead of us, as I explained earlier, that is backed by a solid and substantial base of reserves. We have based on reserves mine lives of around 8 to 9 years in our assets, from which we are deriving planned expansions.

We are doing the exploration around the assets to continue fueling growth there, but also looking for new acquisition opportunities. We favor Peru, Mexico, Northern Chile, but we are looking all through the region, being it South America and Mexico.

Great. When do you think we could actually -- when do you think we will see some initial -- the results from your exploration programs at Caylloma and San Jose?

At Caylloma we have one rig turning and the second one joining the effort this week, I believe. In Mexico we started with a platform -- we are concluded with the platforms and we're getting ready to start drilling. So the drill programs will be ongoing for the rest of the year, so we expect a steady news flow that we will probably start coming out within the next couple of months.

Okay, great. That is pretty much it for me. Thanks a lot, guys.

(Operator Instructions). Marco LoCascio, Equinox Partners.

I wanted to ask about the shutdown of the copper circuit at Caylloma. What was deterioration in the terms you were getting from the smelter? And is there any risk of -- in terms of the terms for the lead and zinc concentrates?

Thanks for the question. Treatment charges for -- our product is copper concentrate with high-grade silver, about 7 kilos per ton of silver in the copper [con]. So that is the characteristic of the product.

In 2010 treatment charges for a product like that were about $65 to $70 per tonne of concentrate and the refining charge for the silver in the copper con was at around $0.90.

Most of the copper con is flowing into China. And what we see is deterioration in terms mainly derived from the Chinese smelters' demands for quality product or specifications rather than quality.

This year we are seeing -- sorry, the copper -- the silver content in the copper con what we have is 17 kilos, not 7 -- 17. So we -- treatment charges for 2011 have gone from $65, $70 to about $400 per tonne, and refining charges have jumped from about $0.90 to around $2 per ounce; so a significant deterioration.

We have done our trade-offs analysis and decided to stop the production of the [circuit] and monitor closely the market to see if conditions improve, so we can relaunch the circuit again. Bear in mind that copper in 2010 represented approximately 4% of sales, so it is not that material to our production, but nevertheless --.

So do we expect this could spill over to the lead concentrate? No. Right now we are under a one-year contract with Glencore, who is our client for that product under very competitive terms.

So, again, we are just monitoring the market for copper product with these specifications to see if conditions improve, and we will relaunch the copper circuit if that happens, now we have that [flexibility].

That's it. Okay, thank you.

(Operator Instructions). Thank you, gentlemen, there are no further questions at this time. I would like to hand the floor back over to you.

Actually, we did have another question that came in. Coming from [George Shea], [Cicada Investments].

I know you haven't generally sold forward on silver or gold. But the prices have run up rather quickly and I wonder if you are considering hedging part of your silver, particularly that has had an extremely fast move up into the $30s, as you know, over $35.

Thanks for your question, George. Fortuna has -- as a policy does not hedge precious metals. We are not looking to change that. In the past we have hedged lead and zinc on an annual basis. It was more a tactic hedging rather than strategic. But this year we are unhedged on both silver, precious metals and base metals, and we are not contemplating any hedging of silver at this moment, George.

Okay, thank you very much.

That is the last question. I would like to hand the floor back over to you for any closing comments.

If there are no further questions, I would like to thank everyone for listening in to today's earnings call. We look forward to you joining us next quarter. Thank you very much, and have a productive day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.