Fortuna Mining Corp (FSM) 2011 Q2 法說會逐字稿

Greetings and welcome to the Fortuna Silver Mines second quarter 2011 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. Thank you, Mr. Baca. You may now begin.

Good morning, ladies and gentlemen, I would like to welcome you all to Fortuna Silver Mines and to our second quarter 2011 financial and operations results call. We're hosting the call from Lima, Peru. I would like to thank everyone for joining us and I will now turn the call over to the President of the Company, Mr. Jorge Ganoza.

Thank you, Carlos, good morning. I'm joined on the call today by Luis Ganoza, our CFO. I will initiate the conference and, with the assistance of Luis, will be giving a summary of our operations results. He'll start with the San Jose mine and financial results for the second quarter. Once concluded, we will address your questions. Fortuna produced 474,979 ounces of silver in the second quarter. This was 1% above the second quarter 2010 production and in line with our budget.

The average silver price realized for the period was $36.80 per ounce. Silver in the first half of the year accounted for 61% of revenue. Gold contributed 2%, lead 20% and zinc 17% of revenue. Cash cost for the quarter averaged negative $4.42 per ounce of silver net of by-product grades compared to negative $3.83 per ounce in the second quarter of 2010. 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 [cleared] in ounces (inaudible). Our Company continues to successfully execute mine and construction plans. Based on the 45 million silver ounces and 240,000 gold ounces we carry in proven and probably reserves, we incrementally reach a target production of 4 million ounces of silver and [72,000] ounces of gold by 2013 and 4.8 million ounces of silver and [25,000] ounces of gold by 2014.

It is with great pleasure that I report that at our San Jose mine, the mill began operating on July 15, the balance in trade is advancing according to plan and management anticipates we'll be in a position to declare the start of commercial operations on September 1, of this year. The plant is currently operating at a rate of 1,000 tonnes per day with metallurgical recoveries already within 80% of the time parameters. Capital allocated to reconstruction prior to June 30, is $51.8 million, (inaudible) and San Jose has delivered the construction and commissioning within time and budget. For 2011, San Jose plans to contribute 0.5 million ounces of silver and 5,000 ounces of gold to our consolidated production and for 2012, the first full year of production of San Jose, net allowances is targeted at 1.7 million ounces of silver and 16,000 ounces of gold or 2.4 million silver equivalent ounces. Our optimum design capacity of San Jose is scheduled to produce 3 million ounces of silver and 22,000 ounces of gold. I invite you to view the construction and commission and pace of the San Jose mine in the photo gallery available at the Company's website. Moving forward, the Company remains adequately funded to meet its capital priorities with approximately $74 million in cash and short-term investments, as of June 30, 2011.

On the exploration front, we're executing exploration budgets and programs with a budget allocation of $50 million, mainly on brownfield explorations and new business opportunities this year. We're currently drilling with 4 rigs, exciting, high-grade silver targets in both Peru and Mexico, where we control a commanding land position covering 58,000 acres around our mine. In addition, during the quarter, we added to our portfolio of projects in Mario [proper] in Central Peru. Mario consists of highly perfected silver gold based (inaudible) mineralization occurring as massive sulphide replacement, veins, hydrothermal breccias, and disseminations. This project is located in one of the most prolific and productive silver (inaudible) provinces of Peru and our plan is to be drilling on Mario before the end of the year. With that, I will now let Luis take you through the financial statements. Luis?

Thank you, Jorge. In the second quarter of 2011, the Company generated revenue of $24.3 million, an increase of 68% over the same period in 2010, driven mainly by high realized metal prices and higher based metal sold. In particular, a higher realized silver price of 111% and higher lead sold of 19%. In spite of higher unit production costs of 14%, the higher recorded sales drove an increase in mine operating income of 115% to a record amount of $14.9 million. This significant improvement in gross margins compared to 2010 did not translate into a similar improvement in operating income, due mainly to a stock-based compensation charge in 2011 of $1.9 million compared to a credit of $2.4 million in 2010, and a higher gain in commodity contracts in 2010 of $1.5 million. Indeed, recorded operating income in the second quarter of 2011 was $10.7 million, 11% above the amount recorded in the same period in 2010. The new amount recorded of selling and G&A in 2010 is explained by the $2.4 million stock-based compensation credit.

For a better understanding of the selling and G&A line item out of our financial statements, we have provided a breakdown on page 10 of our MD&A. Further down our income statement, we recorded a higher income tax provision of 55% compared to 2010, in proportion to a higher recorded income in our Peruvian subsidiary. As a result of the aforementioned items and in spite of significantly higher gross margins, net income fell 8% to $6.2 million and earnings per share fell from $0.06 to $0.05. Our performance in terms of cash generation, however, was significantly stronger when compared to the previous year. For the first 6 months of 2011, cash flow from operations before changes in working capital, income taxes and interest increased 43% to $23.2 million. More meaningful, however, to assess cash-generating capacity is to consider the operating cash flow before changes in working capital but after income taxes. In this case, the cash flow increased 62% to $15.3 million.

Up to the end of June, 2011, total investment in construction at the San Jose project core convention was $44.1 million, in addition, $10.7 million were carried on the balance sheet and the profits and equipment and the profits paid to contractors for a total of $51.8 million committed to construction up to date. Finally, our cash position at the end of the period, including short-term investments, was $74.5 million and working capital amounted to $76.6 million. Thank you. Back to you, Carlos.

Okay, we would now like to turn the call over to any questions that you may have. Please state your name clearly and try to keep your questions brief.

(Operator Instructions)

Benjamin Asuncion, Haywood Securities.

Congratulations on the quarter. I just have a quick question here relating to production at Caylloma. When do you feel that the lower recovery rates from working through the Level 6 material would dissipate and recoveries return back to historic levels?

We are currently doing some trials at the plant to see if we can improve recovery by adding retention time on the floatation cell. There are some tests being run, as we speak, where we are, just for the testing, using the proper floatation cells which are not in operation now to help us see if with an added floatation cell capacity increases the retention time we can overcome this 2% drop that we are experimenting. Approximately 2% plus or minus drop we are experimenting. We expect to have results this month of August for this test. In the lab, result of capacity now we're making sort of a time trial of the plant.

In the meantime, silver metal production has not been affected by the drop in recovery because we've been able to increment headway and balance for loss in recovery. But we're working diligently to see how we can (inaudible) and recover those 2 points. We are reducing to the [off-sites from Level 6.]

Okay. More broadly speaking, based on the exploration results that you've had at Caylloma, what's the potential there? Or how complex would it be to expand the plant? And whether or not that's something that you're considering at the moment?

Yes. That's a very brilliant question. In fact, at Caylloma, we have built a very substantial reserve base. And we are conducting right now, as well, an optimization study to see what would be the optimum rate of production for Caylloma based on the system repairs that we have. The Caylloma Mine is not easy. It has some complexities to it, so we decided that, at this stage, further expansions would need to be assessed in detail and the first phase of this assessment is a communications study, which is also being concluded in August. So, what we can anticipate is that by the end of 2011, or 2012, we will have in our 2012 budget incorporated some (inaudible) in expanding our operations at Caylloma.

We've been modeling the production at Caylloma flat for the coming years. But we believe it is reasonable to think that we can expand the production at Caylloma from the current 150 to180 tonnes per day to around 1,500 tonnes per day to 1,600 tonnes per day. We already have a permit for that and we already have enough [payments] storage capacity for that with the construction of the new (inaudible) facility. We have secured the power and we are just working to fine tune what is that exact number that we should aim for. Is it 1,600, 1,600, perhaps 1700? We are right now doing those engineering studies and we expect to have them done and in the budget before the end of the year.

Okay. Perfect, thank you. Just last quick question, based on the Q1 results you were talking about, some industry-wide cost pressures that you were facing. Can you comment what your outlook is now in Peru with operating costs and the labor situation?

Yes. With respect to Peru, we are seeing cost pressures across the board that could amount to around 7%. Now, we have to see that due to the elections, some large projects were not placed on hold, but will be accelerated. The projects were slowed down. Some projects were slowed down.

So now with a new confidence, with the new government, we're seeing some of these large projects being accelerated again, which could perhaps brings some more pressure. What we're seeing right now, with information we have to date, is around [10%], mainly on trained personnel, staff and contractors, equipment rentals. That is where the main effects are being felt.

Okay. Perfect, thank you very much, guys.

(Operator Instructions)

Marco LoCascio, Equinox Partners.

Couple of questions here. Firstly, I'm wondering what contact, if any, have you had with the Humala government? What are your expectations for the taxation regime in Peru going forward?

We've been actively participating in the meetings held by the private sector for the National Society of Mining and the government. They initially discussed circles around implementing taxation based on operating margins just like they do in Chile. Up to now, the government has been receptive to that, but it's still being discussed.

It appears that we will see a new tax implemented that will help the government capture some of the upside created by this historically high-priced environment. The mining companies here represented by the Mining Society are in often discussions with the government and are very supportive of a new regime that will help the government launch some of the special programs that are much needed here in Peru. And also structuring a way that makes sense to everybody. We think so far that what we see is that the time for (inaudible) on the part of the government and receptive to the initiatives brought by the mining companies.

Okay. The second question would be with San Jose slated to come online and start generating good cash flows in the near term and the strong cash position of the Company at the end of the second quarter, what thoughts are you guys having about how to use that cash position and cash flow going forward? Are there potential changes to the exploration program? Are you looking at capital returns as we're seeing some of the larger players in the industry start to implement or increase?

Yes. Right now we do not have a dividend policy in the Company and we have potentially, just with the activities we have, significant capital projects ahead of us. One, we need to expand San Jose from 1,000 tonnes per day to 1,500 tonnes per day based solely on the research that we have and plans that we're executing.

And then, as I mentioned earlier, at Caylloma we're contemplating, we're scoping right now potential expansion as well. On top of that we have the Mario property, which even though its in the earlier stages of exploration, we are optimistic about what the drilling can come up. The property has been drilled. I refer you to the Press Release that we put out on that property on May 30 of this year and it's an excellent exciting that we believe will be maturing and hopefully we can advance to the production position. Now I'm getting way ahead of myself here with that statement, but we are really optimistic about the prospects for that project and positions.

We are currently evaluating the opportunities in Mexico, Argentina, and we're always looking in Peru, of course. Fortuna is a growth company. We have one of the more significant growth profiles among emerging producers organically and we're working hard to bring a third asset to the Company.

So, right now, we see our cash position in the current price environment at around $150 million at the end of the year, but that is not -- by the end of 2012. But again, that is not taking into account expansions, especially at Caylloma, accelerated expansions in Mexico and the advancement for the Mario property.

Okay. Thank you.

Nicholas Campbell, Canaccord Genuity.

Just wondering if you can go through the potential to put some leaching (inaudible) to reduce on the [TCs and RCs] you have to pay on the precious metal concentrate?

Yes. Nick, hi.

We right now have, just to let you know, we have our allocated our concentrate that will be coming from San Jose with an international trader. We have a secured contract for favorable commercial terms for concentrate. And as we know, the San Jose concentrates are minerals to ionize leaching and what we're planning to do is off-site cyanide leach plant where we can produce (inaudible). We are waiting on delivery of the detailed engineering for that project and we started scouting potential site selections for that plant.

What we anticipate is that we still need to do permitting, environmental studies for this process and whatnot. So we right now are fine. First to get off, the project is viable. We can achieve with very -- I do not have the numbers in front of me, but with very modest cyanide consumption, we can achieve excellent recoveries of up to 98%, 99% for the silver and gold. The concentrated mineral we expect it to cyanide leeching.

Regarding the timing for the project, worst case scenario is that after 2012 we'll still need to sell concentrate. That is worst case. If we can bring it sooner by [week] 2012 we're finalizing the engineering. We're looking at the permitting. We have not launched, yet, the environmental impact study for that as we do not have a site selected. We're working on all of those things right now.

Are you going to have -- is there going to be some news? Are you going to guys going to press release the results for the engineering when it's completed?

Yes. We're going to press release that information and I already received the preliminary advanced reports on engineering of the results of the tests. I have the final report in front of me. We will review that and I expect that it will take place within the next 30 days.

Okay. When do you think we could actually see some exploration results from the San Jose property?

We have been advancing slower than we anticipated. We're drilling with 2 rigs. One is drilling the southern extension of the currently existing reserve resource to the south (inaudible). And the second, the rate has been moved to a [rancho] there, which is located to the northeast of the mine. We're expecting to get results and as soon as we have a different batch, we'll put them out.

Okay. Fair enough, thanks a lot, guys. Cheers.

Thank you.

(Operator Instructions)

Thank you, there are no further questions at this time. I'd like to hand the floor back over to Management for any closing comments.

If there are no further questions, I'd like to thank you 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. Goodbye.

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