Fortuna Mining Corp (FSM) 2014 Q1 法說會逐字稿

Greetings and welcome to the Fortuna Silver Mines first-quarter 2014 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Carlos Baca, Investor Relations Manager. Thank you, Mr. Baca. You may begin.

Thank you, Rob. Good morning, ladies and gentlemen. I would like to welcome you all to Fortuna Silver Mines and to our first-quarter 2014 financial and operations results call.

Jorge Ganoza, President and CEO, and Luis Ganoza, Chief Financial Officer, will be hosting the call from Lima Peru. Before I turn over the call to Jorge, I would like to indicate that certain information contained or incorporated by reference in this earnings call, including any information as to our strategies, projects, plans or future financial or operating performance constitutes forward-looking statements. All statements other than statements of historical facts are forward-looking statements. The words believe, expect, anticipate, contemplate, target, plan, intend, continue, budget, estimate, will, schedule and similar expressions identify forward-looking statements. Forward-looking statements are necessarily based upon a number of estimates and assumptions that while considered reasonable by the Company are inherently subject to significant business, economic and competitive uncertainties and contingencies. Known and unknown factors could cause actual results to differ materially from those projected in the forward-looking statements. We disclaim any intentional or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. We -- except as required by applicable law.

I would now like to turn the call over to Mr. Jorge Ganoza, President, CEO and co-Founder of Fortuna. Thank you, once again, to everyone for joining us.

Thank you, Carlos, and good morning to all.

Fortuna reported a strong first quarter in terms of production costs and financial results. The Company produced 1.5 million ounces of silver and 8150 ounces of gold, a 55% and 81% increase with respect to the first quarter of 2013. We are on target to meet our annual guidance of 6 million ounces of silver and 32,000 ounces of gold.

Additionally, at the Caylloma mine, we produced 3000 tonnes of zinc and 1700 tonnes of lead byproducts.

The growth in silver and gold production comes from the expansion of San Jose mine from 1150 tonnes per day through to 1800 tonnes per day, achieved last September. When compared against the first quarter of 2013, San Jose processed 61% more tonnage with 24% and 13% higher silver and gold grades respectively. The improvement in grades is consistent with the increasing grade profile of the mine at depth. Reserve tonnage and grade reconciliation for the quarter is within acceptable ranges.

At San Jose, 57% of production tonnage was sourced from the Stockwork zone on level 1200 quarterly under the inferred category. Here grades came in 27% higher for silver and 8% higher for gold when compared to the reserves model.

Costs at our mines were well under control and dropping. Our costs per tonne measured against Q1 2013 dropped by 15% at San Jose and 7% at Caylloma and were in line with budget. Our consolidated all-in sustaining task cost net of byproducts was $16.50 per ounce of silver, aligned with our $17 guidance for the year. All-in sustaining costs for the Caylloma mine were $13 for San Jose $14 per ounce of silver. Both operations recorded drops of $10 for all-in cash costs -- sustaining cash costs compared to the first quarter of 2013. At Caylloma, the main drivers for the all-in sustaining costs per ounce reductions were a 7% drop in costs related to the optimization of mine preparation, headcount, and lower community relation expenses.

On the capital side, the completion of mine count improvements were $2.9 million, reduction in exploration drilling for $900,000, and reduced underground mine development for $1 million. Our all-in cost guidance for the year at Caylloma is $17 per ounce of silver. We expect to be closer to this figure for the year as we catch up with the slow start in the first quarter on our underground development plan due to a change in mine contract.

At San Jose, our all-in sustaining cash cost per ounce compared to the first quarter of 2013, so the benefit of 15% lower costs mainly related to a 61% increase in tonnage throughput and related 102% higher silver and 93% higher gold production. All-in cost guidance for the year at San Jose is $14 per ounce, and we are on target to meet guidance.

On the project side, we have concluded a scoping study for the implementation of dry stack tailings at San Jose. The results of the project is positive. The benefit of implementing this project will be taking storage capacity within company grounds for 10 million tonnes and an additional contribution of water to our balance.

We are moving to develop basic and metal engineering aiming to start construction in 2015. We are also in the process of launching trade authenticity and feasibility studies for a potential expansion of the San Jose mine to 3000 tonnes per day. We want to see a robust economic return. The decision to move forward with this expansion project should be taken in the fourth quarter of this year.

On the exploration front, we continue with underground drilling at the Trinidad North Discovery with two rigs. Up to the first week of May, we have concluded 23 diamond drill holes for a total of 11,300 meters. The plan for the remainder of the year is to extend our underground exploration another 250 meters from the core northern boundary of drilling. The drill program will continue until the year end.

Additionally we will be using the end of June as a cutoff date to update some resources and reserves at San Jose to be published in October.

Trinidad North remains open in three directions -- to the North, at depth and for 300 meters to surface above level 1300. From our latest results, news release dated April 29, I want to highlight drill hole 364 with 2.5 kilos of silver and 10 grams per tonne gold over an estimated drill width of 3 meters, and drill holes 359 with 880 grams per tonne silver and 4 grams per tonne gold over an estimated true width of 3.5 meters. These two drill holes currently define Trinidad North as being as being open to the north and to depth.

With regard to community permits to advance drill testing of Trinidad from surface to the north, we continue holding advanced conversations with local Aheto authorities. This is a process that takes time, and what I can say at this moment is that we remain optimistic we can obtain a satisfactory agreement with our Aheto neighbors, as we have done in the past.

At Caylloma we continue advancing with our focused exploration drill program targeting veins with potential for [Wanasa]-style silver mineralization. We have tested three targets with 2000 meters of drilling since the beginning of the year, and we continue with the program.

Now, Luis, can you please move on with the review of our financials?

Thank you. For Q1 2014, we reported sales of $45.5 million, up 12% from the prior year; net income of $4.9 million, an decrease of 27% compared to Q1 of 2013; and cash flow from operations before changes in working capital of $16.9 million, up 4% compared to the prior year period. Silver and gold increased significantly as a result mainly of the commissioning of the expansion of the San Jose mine to 1800 tonnes per day in the last quarter of last year. Silver sold was 1.6 million ounces, up 57% compared to the previous year, and gold sold was a bit over 8700 ounces, up 87% compared to the prior year.

The impact of higher metal sold on our sales was offset, though, by a lower price environment when compared to Q1 of 2013. Realized silver and gold prices for Q1 2014 were 33% and 22% lower than the previous year.

Our mine operating earnings was $17.2 million, slightly above Q1 2013 by 3%. The increase in sales did not fully translate into higher mine operating earnings as our gross margins came down from 41% to 38%, reflecting the impact of lower metal prices. This negative impact, however, was offset to a large extent by lower unit costs at both subsidiaries, 15% lower in San Jose and 10% lower at Caylloma and higher head rates at San Jose.

We recorded selling and G&A of $7.9 million, an increase of $2.3 million compared to the prior year period. Out of this incremental amount, $1.7 million is related to share-based payments, which is most explained by mark-to-market effects. About $0.5 million is related to nonrecurring items, mainly incentive performance payments.

Moving forward, on a quarterly basis, we expect general and administrative expenses of around $4.2 million, and a total amount for the selling and G&A line item out of the financials between $5.2 million to $5.5 million.

Our income before tax was $9.1 million. That is $1.7 million below Q1 2013 as a result of the higher G&A items I just described. And our net income for the period was $4.9 million with an effective tax rate of 26%, which is in line with our expectation for the year. Earnings per share was $0.04 compared to $0.05 in Q1 2013.

Cash flow from operations before changes in working capital and after taxes paid was $16.9 million. While total capital expenditures was $10 million, which gives us a free cash flow measure in the quarter of almost $7 million. Our total cash position, including short-term investments as of the end of the quarter, was $62.1 million, an increase of [$30] million over year in 2013.

Thank you and back to you, Carlos.

Thank you very much for listening to us. We would now like to turn the call over to any questions that you may have. Please state your name clearly.

(Operator Instructions). Chris Thompson, Raymond James.

Congratulations on a solid quarter, guys. A couple of quick questions. Just looking at I guess the head grades at San Jose, you know they were pretty good for the quarter, arguably higher than guidance for the year. Do you see this as continuing?

Hello, Chris. Our grades against the budget were 13% higher, and this is explained by the fact that roughly half of the production in the quarter came from an incurred research zone, and this deviation from the annual plan -- this has been accommodated in our short-term planning. And I have to say that this is a bit of a path of least resistance. On level 1200, we have access an area of inferred resources for conversion with underground development, and what we came up with was a zone that in terms of grade has surprised to the upside. And, again, a bit of a path of least resistance on the mine side -- the team accelerated the development of the area and started implementing production panels, and sure enough this area in the model is in the inferred category. Grades, we are finding -- as I explained in the call -- came up 27% higher for silver and 8% higher for gold comparing against the inferred resource model.

We are adjusting the short-term plan. I would not expect a 50% reduction being sourced steadily through the year from this zone. It will start declining, and grades should start reverting back to our plan. But we had a nice surprise to the upside as we entered this inferred resource zone, and we became a bit, I'll say, greedy with this new stone. We pushed it more than we would have liked, perhaps.

Right. Thank you for that. Just a quick question I guess on the dry stack tailings. Do you see this as providing the adequate water I guess resources to satisfy the jump to 3000 tonnes a day?

Yes. And really the dry stack has two very important angles to it. One is that when we made the decision to built this mine back in 2010, we had in total resources, reserves, everything, 5 million tonnes. Today we have 10 million tonnes in total inventories and growing. The tailings facility we designed for back in 2010 was to hold 5 million tonnes. So we need to address the long-term tailings disposal of the mine. This is the way to do it, and we can dispose of almost 10 million tonnes within ground surface rights that we control where we already have the change of land use, which is the main required permit in Mexico.

So this is really on the technical sustainability side the way to go. An added benefit is that compared to what we do today is that yes, for sure we will be able to gain significantly more water by using the dry stack tailings. We currently have a lot of what we call dead water in the tailings facility, and by going dry stack, we will recover all of that water. It certainly supports the balance for 3000 tonnes per day. That's our initial estimates.

That's great, Jorge. Any idea of capital costs?

We plan to -- we are not doing a feasibility study. We are going from scoping to basic engineering, and what we plan to do -- this is not a project that was budgeted for 2014. So when we intend to -- we budgeted the engineering, but no construction in 2014.

So what we intend to do is develop basic engineering and, with the figures we get from basic engineering, seek budget approval at the board level to start making some equipment orders, placing some equipment orders and whatnot. The initial figure we have right now for the total upfront capital and the initial tailing site facility and everything is in the low to mid 20s -- $20 million -- $20 million, $24 million. That will be good for two or three years of -- it's not upfronts, but for the initial two to three years.

In our life of mines -- just for reference in our life of mines -- in our life of mine budgets, we accounted for $40 million to deal with the fact that we needed additional tailings facilities. So we believe this will over the life of mine models gain a significant savings, although it will be brought closer to the present.

All right. Wonderful. Thank you for that.

Thank you, Chris.

(Operator Instructions). Benjamin Asuncion, Haywood Securities.

Congratulations, guys, on a good quarter here. Some of my questions were already just answered. Just was wondering insofar as Trinidad North, can you give us a sense out of the number of holes drilled how many are released and kind of what we would be looking at for timing on the next batch of exploration results?

We would expect to have a release probably late to mid July. I think that will be where we continue with the drilling. With the through rates, in Trinidad North we have an additional rig in the South, drill testing this stock work zone and new area to the south, on level 1200 that I just talked about. So I would expect that by July -- in 2 months, 2 1/2 months -- we will be releasing our additional results. We are getting good advance -- about 40 meters per day, per rig.

So right now we don't have a large amount of whole spending on priority one or two. So we'll wait until we can make more of a comprehensive release of results.

The other thing worth noting is that we will be making a cut date on the last day of June to start working on our outdated resource, and we service to mention that will likely be releasing in late September or early October.

Okay. And just insofar as the expansion that was completed I guess in early April, can you give us a sense of what April average throughput rates are or maybe even made to date in terms of where you are to hitting the 2000 tonnes a day?

We are not at a steady 2000 tonnes per day yet. Gaining that additional 150 tonnes per day, which is what we are aiming to do, is challenging the team. We believe it is a matter of time. We don't see any material hurdles. Our average throughput for April has been below 2000 tonnes per day.

In May we have already seen a base of 2000 tonnes per day with good recoveries -- you know, in line with what we aim for, which is 89%, 90% for both silver and gold. But we are still having difficulties to keep it steady. But I'm confident that we will get there. There are no material reasons not to do it. It's just balancing -- managing all the parts. It's just keeping good recoveries, having a constant rate -- grade that's also within plan. So it just is going to take us a few more days -- a few more weeks. But no material reasons -- we are already achieving some days -- some steady days 2000 and the recoveries and the quality of concentrate that we expect.

Okay. Perfect. And just one last thing. I might have missed this -- you mentioned that the announcement for the expansion to 3000 tonnes per day was given in the fourth quarter concurrent with a board decision at that point in time?

Yes. We have not made a decision to move to 3000 tonnes per day. What we are saying is that we will conduct all the necessary technical and financial analysis to come out with a solid, robust project to take the mine to that level. And we expect we will be concluding with those studies towards the end of the year and that that mine management will present its recommendations to the world.

Okay. And would we still be looking at kind of a modular expansion of the plant?

We are going to be carrying tradeoff studies as part of this feasibility work, and a lot of those questions will be answered throughout the process. But our initial collective thought here is that this should be a chance jump to 3000 tonnes per day. We believe the mine can accommodate it. It's just adding a new flotation line. We could accommodate it -- probably the main changes will take place in crushing and grinding.

Okay. Perfect. Thanks a lot, guys.

John Kratochwil, Canaccord.

Good morning, guys. Congratulations, again, on the quarter. I had a question -- the exploration drift that you are currently driving across, how far advanced is that, and is it still seeming to be on track to be completed? I think the last guidance you gave was kind of an August or September timeline. Is that still on track?

We faced delay due to a ventilation raise work for the start of the drilling. That has been overcome. Basically -- just to give you a bit more color on this -- most of the mining infrastructure we developed is on the foot wall of the structure, and this rate work was done on the hanging wall of the structure, which is the area where we are drilling from. The quality of the rock as we expected was poor, and so the reaming of the raised work longer than originally planned. It had to be done slowly and carefully in order not to lose the raise board.

But that's done -- it's concluded. We have all the services and access and ventilation through the raised work now and we are advancing. So we do not expect any material delays with regard to our end goal of covering those additional 250 meters from the core and boundary of drilling before the end of the year. We have some -- a bit of a comfort zone, and the raised work took that away. But we are still within our timeframes.

Okay. And just to clarify, most of the drill results that we have seen to date since the reserve resource update has been basically from Trinidad North. Is that update in October largely going to be an increase or an update on resources in Trinidad North, or are we expecting something from the Stockwork zone as well?

No. We should expect our conversion from the Stockwork. So what we should expect to see is a growth in inferred resources coming mainly from Trinidad North and a migration from inferred to measured and indicated, mainly from the Stockwork zones in the main deposit.

I see. Okay. And then final question I had -- maybe I misunderstood it on the call, but did I hear you say G&A for the rest of the year, excluding stock-based comp, is going to be in the range of about $4.2 million a quarter?

Yes, that's accurate.

Yes? Okay. Okay. I just wanted to double check that. Thanks a lot, guys.

Thank you.

(Operator Instructions). Chris Lichtenheldt, Dundee Capital.

Good afternoon, everyone. A question again on the development at Trinidad. Irrespective of the studies that you are conducting right now looking at an expansion, do you still expect to be in Trinidad North early next year, bringing ore out, whether it be for 2000 tonnes a day or 3000 tonnes a day mill?

Yes. Yes, we are still working for that. The key development for that, Chris, is the deepening of the main decline. We had some minor delays due to priorities in this position of equipment as we went through the expansion. But we have retaken the priority on the deepening of the decline, and we expect we will be in Q1 starting to source ore from the boundary of Trinidad North.

Okay. Great. Secondly, I just wanted to ask on Caylloma, the all-in sustaining costs for the quarter were quite good in the low [13s]. When you look at this silver price environment and the nature of that ore-body and the cost to you achieving that, can you comment a little bit about how you see next year and maybe even the year after going forward at Caylloma, can you maintain these sort of costs and production levels?

As I stated, we had a particularly good figure of $13 at Caylloma for Q1, but one of the main drivers for that has been a delay in underground development that has occurred throughout the first quarter, mainly due to a change in underground contractors. So we prioritize production, and a lot of the development that had to take place was postponed, as the team there at the mine went through the phase of readjusting changing contract.

So we expect all-in costs to gravitate towards the $17 for the year, and we expect -- what we believe is that in this price environment $17 is reasonable for Caylloma moving forward. We are starting to see some -- we also have to be cognizant that as prices go up, we all face severe cost inflation pressures. But as prices come down, we also see some deflation taking place, and in some cases I'm surprised to see it coming back faster than I would have expected. So we are seeing cost adjustments to the downside. So -- but in this price range, I would believe around $17, $16 is reasonable for this mine.

Sustainable. Okay. That's great. Thanks a lot.

Thank you. At this time, I'll turn the floor back to management for closing comments.

If there are no further questions, I would like to thank everyone for listing to today's earnings call. We look forward to you joining us next quarter. Have a good day.

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