Fortuna Mining Corp (FSM) 2014 Q3 法說會逐字稿

Greetings and welcome to the Fortuna Silver Mines third quarter 2014 earnings conference call. At this time all participants are in a listen only mode. (Operator Instructions) As a reminder this conference is being recorded. I would now like to turn the conference over to our host, Mr. Carlos Baca, Investor Relations manager for Fortuna Silver Mines. Thank you, sir, you may begin.

Thank you, Melissa. Good morning, ladies and gentlemen. I would like to welcome you all to Fortuna Silver Mines and to our third quarter 2014 financial and operational results call. Jorge Roberto Ganoza, President and CEO and Luis Ganoza, CFO, will be hosting the call from Lima Peru.

Before I turn to call to Jorge I would like to indicate that this earnings call contains forward-looking information that is based on the company's current expectations estimates and believes. This forward-looking information is subject to a number of risks and uncertainties and other factors. Actual results could differ materially from our conclusions forecasts or projections in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast for projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusions forecasts or projections in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast for projection as reflected in the forward-looking information is contained in the company's annual information form which is publicly available on SEDAR.

I would now like to turn to call over to Jorge Ganoza, President CEO and cofounder of Fortuna.

Thank you, Carlos and good morning to all. Fortuna had a very robust third-quarter in terms of production and financial results. The company produced 1.8 million ounces of silver and 9700 ounces of gold in the quarter. This represents a 63% and 116% increase respectively when compared to the third quarter of 2013.

Production for the first nine months of the year stands at 4.9 million ounces of silver and 26,400 gold ounces. Based on production results for the first nine months we are in a position to exceed our annual guidance of 6 million ounces of silver and 32 ounces of gold.

During the quarter, precious metals accounted for 82% of sales -- silver representing 63% and gold, 19%. Additionally during the quarter at the Caylloma Mine we produced 7.1 million pounds of zinc and 4.2 million pounds of lead by-products. Both our Caylloma and San Jose mines operated consistently during the quarter. At San Jose the -- San Jose had a rate of 2000 tonnes per day and at Caylloma, 1300 tonnes per day. At both mines, our teams have captured opportunities to quickly adjust to these new lower price levels and big-budget production costs.

At San Jose the mine is adequately developed and prepared ahead of production. This provides enough flexibility to manage grade. As a result grades for the quarter are up 15% and 16% respectively against our budgets for silver and gold. Additionally the great profile of the mine improves with depth, as we know and at level 1200 which currently is the main source of production we are already mining in the upper portion of the (inaudible) grade zone.

At Caylloma we had directed the mine towards level 12 of the (inaudible) vein, our deepest production level where we find higher zinc and lead grades. As a result zinc grade is up 11% against Q3 2013 and 21% against our budget at a time when think prices are up 21% higher than previous years. While doing this we have been able to sustain silver grades at 180 grams per tonne at this mind, in line with the comparable quarter at 7% above budget.

Looking at our costs, our mines remain well under cost at our minds remains well under control with $61.50 per tonne at San Jose and $91 per tonne at Caylloma. Cost per tonne, measured against Q3 2013 dropped 15% at San Jose and at Caylloma we saw a slight increase of 5% at both mines. Our consolidated all in sustaining cash cost net of by-products for the quarter was a low $11.85 per ounce of silver. For the nine months our all-inclusive sustaining costs was $15 per ounce of silver, well below our $17 guidance for the year. All in sustaining cash flows for the quarter at the Caylloma Mine was $13.30. At Caylloma the main driver for the all in sustaining cost per ounce reduction against the budget of $17 for the year was zinc by-product grade and 7% higher silver grade. Are all in costs guidance for the year, as I said at Caylloma was $17 per ounce. We expect to be closer to $15 figure for the year as we continue to catch up with the slow start in the first half of the year on our underground development plan due to a change in mine contractor and also we are experiencing higher energy costs.

At San Jose at all in sustaining cash cost per ounce came in at nine dollars against a budget of $14 per ounce. The main drivers are 15% and 16% higher silver and gold grades against mine plan and lower unit costs. Our all in guidance for the year at San Jose is $14. We are on target to meet or come below guidance. We continue moving forward with measures to improve productivity across the organization and adjusting are mine plans to sustain low-price environments. Most of this cost and capital allocation measures will be part of our 2015 budget but we have already moved to make some staff reductions at corporate of 20% headcount reduction has been implemented in the last quarter of the year. And at our Peruvian subsidiary in (inaudible) we have made a 7% reduction in headcount.

With respect to our projects -- with regard to the key project we have on hand right now which is the stability work for the expansion of our San Jose mine to 3000 tonnes per day we can report that working with our consultants we have concluded the trade of studies and we are well into the final stages of the feasibility work for the processing client which is the main capital component of this project. We expect to be in a position to make a construction decision by year end. With respect to exploration we continue exploring the North extends of the Trinidad North Discovery. We have concluded the extension of level 1300 from where we have been drilling for the past year from the two drill chambers, so we have extended the drift and concluded two additional chambers from where we are currently drilling with two rigs. From this position we can drill test and extent of 250 meters north from the north limit of existing inferred resources. That's going to be the main focus of the drilling from now until year end and moving forward into 2015. We will have likely a reduce exploration budget but focused on these areas.

With that I'll leave it to Luis so he can take us through the review for financials.

Thank you. So for the third quarter of 2014 we have had record sales of $46.4 million, up 54% from the prior year. Net income of $7.8 million compared to a loss of $0.3 million in Q3 of 2013 and cash flow from operations before changes in working capital and after taxes paid off $17.8 million, which is up 135% when compared to the prior year period.

Silver and gold sold in Q3 of 2014 increased significantly as a result of mainly commissioning of the expansion of the San Jose mine to 1800 tonnes per day in Q4 of last year and to 2000 tonnes per day towards April of this year. Silver sold was 1.8 million ounces, up 63% and gold sold was 8751 ounces, up 116%.

The realized silver price on operational sales for the quarter was $19.14 per ounce compared to $21.20 per ounce in Q3 of 2013. We recorded (inaudible) sales adjustments of $2.6 million in the current quarter compared to nearly $0.5 million in 2013, related to metal price and as an adjustment.

Our mine operating earnings was $16.7 million, 106% above Q3 of 2013 and our gross margins increased from 27% in the comparative period to 36% in the current quarter. The higher margins are solidly grounded on the operation of performance of our minds which more than compensated for the lower silver price.

At San Jose higher grades of 30% and lower unit costs of 15% increase our margin significantly and at Caylloma strong zinc production and improved metallurgical recoveries helped compensate the lower silver price.

On the selling and G&A line item we recorded $3.5 million compared to $5 million in 2013, a reduction of $1.5 million. The breakdown of this line item is provided in page 12 of our MD&A and that increased is related to our credit of $0.8 million in stock-based compensation compared to a charge of $1.3 million in 2013. This credit is related to mark-to-market effects resulting from the performance of the share price during the period. And our G&A, excluding stock-based compensation foreign-exchange effects and workers participation charges within this line item was $4.1 million, in line with what we have guided in the previous quarters.

Our net income for the quarter was $7.8 million as I have already mentioned and earnings-per-share was $0.06. Our effective tax rate for the quarter was 40% and year-to-date the effective tax rate was 47%, which is in line with our expectation for the year.

Cash flow from operations before changes in working capital and after taxes paid was $17.8 million, 155% increase over Q3 of 2013. This same measure of cash flow from operations year-to-date was $49.8 million while total capital expenditures was $31.5 million which gives a free cash flow measure year-to-date of $18.3 million. We need to bear in mind however that our incurred current income tax for the period is $8.9 million above actual taxes paid. We have disclosure on this on page 16 of the MD&A and with this in consideration free cash flow year-to-date is more in the range of $10 million.

Our total cash position including short-term investments as of the end of the quarter was $72.3 million, an increase of $23.2 million over year and 2013. Thank you and Carlos, back to you.

Thank you, Luis. We would now like to turn the call over to any questions that you may have.

(Operator Instructions)

Benjamin Asuncion, Haywood Securities.

Good morning, guys, and congratulations on the strong quarter. I've got to questions here. First, relating to the G&A disclosure that you had in terms of the corporate cost reduction can you give us a sense of what your annualized G&A is? And then also just from a modeling perspective if we could get that broken down by corporate -- Mexico and Peru?

Sure. Based on this quarter, been, and as we have been guiding in the previous call, our total G&A including stocks and corporate is in the range of -- has been in the range of $4 million to $4.5 million per quarter. So call it $18 million on a yearly basis. Based on the cost reductions we've implemented, we expect that should come down to around $17 million. So $1 million less of total G&A expenses on a purely basis. And out of that $17 million we subsidiary G&A should be in the range of $6 million-$7 million. So those are the numbers we should expect to see moving forward.

Okay. Perfect. And secondly just following on the taxes just given the fact that as I understand -- correct me if I'm wrong -- you are still in kind of a tax holiday at San Jose in Mexico. Can you give us a sense of -- so the $8 million -- that's taxes accrued. And can you give us a sense of what the tax payment would be to in terms of the advanced tax payment in January or in Q1 of next year?

Yes. So what's happening is that this is the first year that we are incurring current taxes in Mexico because it's the first year we are not yet paying tax installments throughout the year which is what you would typically expect. That will change next year. So by clear and we will close with an income tax payable probably in the range of $10 million and then we will be a lump sum payment in March. So starting in 2015 incurred income tax should be more similar to the actual taxes paid throughout the year. We shouldn't have such a large variation as we are seeing this year.

Okay. Perfect. That's it for me. I'll hopped back in the queue with some other questions. Thanks.

Chris Thompson, Raymond James & Associates.

Congratulations guys on a very impressive quarter. Just a couple of quick questions here. I know this the good -- the low unit costs I guess on a per tonnes basis in San Jose for Q3. Are these sustainable at these levels, Jorge?

Yes. So you know we are always subject to see variation quarter on quarter but we are guiding toward costs in the low to mid 60s per tonnes at San Jose.

Excellent. And just a quick question on the expansion -- obviously details I would imagine would be provided at the end of the year by way of guidance, is that correct when you make the production decision?

Could you repeat that please?

Understanding is you are going to be making I guess a development decision at the end of the year? Now if that is positive would we expect guidance to come along with that?

Yes, of course. It's a key priority for the company and what we expect is that by year end we can go through the formality of having construction approval with the board. Our expectation is that we can do that in early December. If there is a delay we look go into early January but we aim to have for 2015 to be a construction year so that construction decision -- I don't see any major reasons not to be taken towards the end of the year or early January.

Great. Thanks, Jorge. Maybe a bit of a pointed question that obviously you are going to incur CapEx, etc. etc. And I guess the scope of the project is going to be governed by the return on capital. Looking at silver prices at the mine, is there a silver price that really doesn't make sense to pull the trigger on an expansion decision?

You know what we are seeing two months ago when we start the process -- the budgeting process and we had some figures that from the engineering work. We started running our budgets and running -- doing some scenarios one the eventual returns of the project expansion we decided to use -- to R&D budgets and as part of multiple scenarios we run with $14, which at the time sounded ultraconservative. Will today it doesn't seem to be ultraconservative -- barely conservative. But at $14 we are still seeing returns in the mid-20s. So low to mid-20s at $14 silver. So it's a very robust project -- it makes a world of sense. It not only is a good use of our capital but it also certainly has an impact on our all in costs and it helps bring out all in at the San Jose mine well below $10. On a sustained basis -- that's what we are seeing.

Perfect. And then my final question, Jorge, just sort of switching years to Caylloma at the moment and I realize we spoke about this a couple of weeks ago -- could you just outline the sort of operating improvements that might be available for you at Caylloma?

Yes. We have two areas -- one is of course the mine. We have -- the mine -- even though we cut down on development both our minds -- more San Jose today than Caylloma but still I would say both minds have flexibility in terms of the kind of development we have ahead of production. We are not feeding into mouse. So we had been able to year the mine towards a deeper level of the animus vein where we have 7% combined lead zinc resources with 7% combined lead zinc -- zinc being more like 4% -- 4.5%. Still with two to 3 ounce silver over significant weight. So one, we are capturing their opportunity (inaudible) mine and silver is down 20% but think is up 20% and we've been able to improve our zinc grave with respect to last year by 11% and with respect to our annual budget for 2015 which has meant that are zinc production for the quarter is up 25% because as we increase head grade we also improve recovery for zinc. So that is certainly a welcome additional welcome income at a moment like this for the mine. And we will continue to focus on that and at the same time at the viteous vein which is one of the narrow-veins which sources higher grade, we are in a zone where we are mining a kilo of silver per tonnes that has been the contribution of the viteous vein at this quarter has been a modest tonnage of 8000 tonnes in the quarter but with silver grade of almost a kilo. So we are doing smart things I believe but the deposit is also helping. With respect to the plant moving forward we have some opportunities to optimize the processing facility. That will require capital and we are assessing that capital deployment. Basically we can improve metallurgical recoveries for silver expectation is as much as three to four recovery points by improving retention time on the lead floatation circuit and by going to different kind of -- replacing (inaudible) with high rate vibrating screens we could be seeing an increase in throughput capacity from the current 1300 tonnes per day to 1450 tonnes per day. Certainly that would be more of an expansion project. We would receive more as an optimization project. So those are the main two things we have at hand. On the downside we had a dry year this year so our energy costs have gone up higher than budgeted. And we are also looking at a few alternatives with our neighbors to see if we can get our power from the line. But that is already a long story and we are seeing if we can reach a final agreement. But those are the main initiatives at the Caylloma Mine.

Great, Jorge. Thank you very much for that. Thank you. Congratulations, guys.

John Kratochwil, Canaccord Genuity.

Hi. Good morning, guys. Congratulations on the quarter. I have to questions. First related to the G&A announcement in the MD&A -- I noticed that you said that the position of VP Corporate Development has been closed. Does that kind of mean that in the near term we shouldn't expect to look at any M&A activities? I know reflecting the current commodity price probably you are not looking at that so strongly. But you have always said that you are open to opportunities so has that view changed or is that just being taken over by someone else?

No. We have certainly a focus for the next two years you will be seeing us focused on our most accretive project which is the expansion of the San Jose mine and we are fine tuning and sizing the organization and focusing on the two mines we have and the execution of that expansion. Also a reflection of that is that we have made a promotion as well. Our corporate manager for project development has been promoted to the position of vice President of project development and that's also a sign of where the focus will be. Having said that we are not closed for business. Now what you will see us doing over the next months and year is scouting the segments of the market, using the office of vice President of exploration to assess new opportunities. We will see clearly that there has been complete capitulation in the explorers segment of the industry. You know if we were back to the world of $200,000 financings for the explorers -- if you are an explorer with cash, for sure you are trading well below your cash. So we believe there is opportunity fair. We are actively looking at some things in that segment. But it's going to be more on that segment of the industry right now, more than large corporate transactions.

I understand. Okay. About a year ago you had given just a rough view that within a certain period of time you wanted to be at 14 million ounces silver equivalent. Has that you changed then given where we are today?

No. And I think we are in a very clear path to meet our strategic objectives. We believe that we are in a position with the expansion of the San Jose mine, that mine will be in a position at 3000 tonnes per day throughput capacity and the kind of reserves that we have, that mine can be in a position to produce around seven, 7.5 in peak years as much as 8 million ounces of silver annually, plus some 50,000 ounces of gold. And the Caylloma Mine can continue to contribute that's 80 state 2 million ounces of silver. So that can take our silver annual production to broadly 9 million, 9.5 million ounces of silver, plus 50,000 ounces of gold. That takes us on a silver equivalent basis to 13 million ounces of silver. And if we do some alchemy and use our by-products of lead and zinc and convert it to silver, we are at 14 million.

Okay. Fair enough. And my final question has to do with San Jose. Is there any further update on talks with the locals about getting the surface access right there?

Nothing that I can report. I am planning myself and our Vice President of operations to go to Mexico before the end of the year and meet with the governor. We have a good rapport with him. We are just not being able to mobilize them even though we have certain -- I believe the key issues around their support at the local level and state level has been discussed -- everything is understood. We just need to see that the government gets mobilize. I'm sure they have their priorities but what we want is to go through an assembly with the town being in the company of the state government -- a representative of the state government -- and we are getting difficulties getting dates from them. So we are going to go speak with them and understand what their timing issues are.

Okay. But at this point it seems more like a timing issue rather than not having much backing from the locals.

No. We -- our interactions are with the authorities at the municipal level and state level and it's been very supportive and a fluid process. We have good connections I believe with the majority of the town but we have to go through an assembly and we want to be well prepared by the time we do this and that requires -- to be accompanied by the state authorities. So we just have to do it right and it will take time.

Okay. Well I appreciate the update. Thank you very much guys and congratulations again.

Craig Johnston, Scotia Bank.

First just going back to San Jose, thinking about Trinidad North Discovery and thinking about when you are looking at developing the decline in bringing Trinidad North into production and if you're thinking and timing on that has changed?

Yes it has changed somewhat. Two years ago or a year and a half ago the expansion of the San Jose mine was 2000 or 3000 tonnes per day -- was not something in the cards. What we had in front of us was an expansion to 1800, which ended up being 2000 as we captured opportunities. So our main thinking -- what's happened is we has benefited from Trinidad North -- without just having seen it further around the mine plan, how can we impact our annual production? And in fact that is why we moved some of our drilling for resource conversion and that's what we have in preparation for mining in 2015 develop resources and reserves in Trinidad North. We currently report roughly 400,000 tonnes in reserves and grades -- silver equivalent grades close to 500 grams per tonnes, equivalent.

But the expansion then came into the cards. We had some gains from inferred resources as we converted to measures indicated in the upper levels where we are currently mining level 1200. And we have enough developed ore that is good for two to 2 1/2 years in the upper levels right now. So we are debating right now the best use of our capital and that's part of the budgeting process and mine planning -- we are concluding now. Because if we want to bring Trinidad North forward in time that means getting more outlays of capital upfront to develop that when we already have two years of developed ore. So I believe it will be very likely that us mining Trinidad North in this environment will be somewhat delayed probably towards 2016. That's one of the scenarios we are seeing as part of our budgeting process and if we do that at the end it's because it makes good financial sense.

Okay. That's great. I appreciate the clarity there. And inking great buys for 2015 I know you are still in the budgeting process but looking at grades of 239 grams per tonnes in Q3 and looking out over Q4 and into 2015 any kind of clarity for guidance you can provide on that, knowing that say the higher rates from Trinidad North may not be coming until 2016?

With respect to grade, what we are seeing in the areas where we are mining silver grades are in the range of 215 to 220 grams plus gold over a gram and a half -- closer to 1.8. That is the kind of grades we are seeing in the coring sample we are mining. But again what we need to balance -- the financial return of accelerating development today versus the benefit of just advancing with the accelerated consumption of reserves -- we go to 3000 tonnes per day. I mean we will be developing Trinidad North. We will be developing the main access. The question is how meaningful is it going to be to production? I believe that our original plan of the year ago to start seeing as much as 20% of production -- 25% of production coming from Trinidad North in Q1 of 2015 will change. And our reserves great and the upper portion of the (inaudible) stands at around 230 grams. We continue to find opportunities to be the plan. So the visibility we have right now is for around 220 grams for 2015. You know that's a figure that will change and we will provide guidance, but those are the kind of reserves we have in level 1200 today.

Okay. That's great. I really appreciate it and that's all for me.

Matthew O'Keefe, Dundee Capital Markets.

Good afternoon. My question really is looking for a bit further ahead that I have. The drop in the silver price here obviously it continue to draw and it's been a challenge for mine planning. Clearly you have done a great job in staying ahead of it. The cost cuts that you announced are obviously coming across as proactive, which is good. The next sort of thing that we are going to see in the silver space is everyone is going to be restating their reserves and I'm just wondering what silver price you expect to be using. What impact if any do you expect it will have on the mine lives and mine plans that come at San Jose?

Well we used in our last reserve estimates, $21 or San Jose. And we have updated reserves are resources for Caylloma, also at $21 -- which as is part of our practice are published once a year, in January and February. We adjust for depletions. We do have reserves and we are seeing our reserves of $21. We can see from the sensitivity of San Jose that the mine is quite resilient to lower prices. We don't use a lot of ounces and read increases significantly moving the cut off from 10 grams 220 grams to 30 grams -- you don't lose a lot of tonnes, but grade improve significantly. So that mine is quite resilient. You know Caylloma, certainly there is risks in Caylloma. Caylloma currently has about 4 million tonnes in reserves which are more sensitive to price of course. We are benefiting from the higher base metal prices. That's also offsetting lower zinc prices in a way -- not completely but it is offsetting some of the net effect of lower silver prices. Bear in mind that 80%, 90% of our resources and reserves are on the animas veins, which is not particularly silver rich. It's a poly metallic vein two to three ounce silver. Depending where you are you can see 4% to 7% combined lead zinc -- as high as 10% combined led think in some areas. So we will be running -- we will wait probably closer to year and to see what prices we are going to use. Because sure enough in this environment whether we are going to end up using $17 or something like that in that range -- $16, $17 is a tough question. We'll try to be conservative. I believe perhaps in the range of $16, $17 is not a discussion we have entertained. We run sensitivities on these always.

I think your point is well taken earlier that these are high-grade mines and pretty resilient to price changes. So thanks for that. And then just one other question on the drilling. Are you still drilling at Trinidad North? And when all the expecting some additional drill results from that?

Yes. We stopped because of the completion of the drill chambers. We restarted a few weeks ago in this new area. We are drilling with TENS rigs from the underground chambers. And again we are going to give coverage to an additional 250 meters from the northern most bountifully of our inferred resource shelf. So you should see perhaps results before the end of the year.

Okay. Great. Thanks very much. That's it for me.

(Operator Instructions)

Benjamin Asuncion, Haywood Securities.

Most of the major things have been answered. I've just got a couple of housekeeping questions here. Just in regards to the capital costs you are talking about at Caylloma with all in sustaining cost trending up, can you give me the latest iteration of what capital guidance is by the infield mind development and sort of plant upgrades or infrastructure?

Four 2015, you mean?

For 2014.

For 2014? Our budget for the Caylloma Mine was for $10 million for the year. We have executed down to the third quarter $7 million.

Okay. Perfect. And then just for modeling on that just from an OpEx perspective in the fourth quarter and try to look at some potential noise in our earnings, any thoughts on what you are going to be looking at for evaluation tests for Caylloma in terms of caring values and what the scope of potential impairment charges would look like the

Not at this stage, then. We will certainly be a writing the usual permit testing and analysis at year end -- in particular given the recent drop in prices. But I wouldn't want to advance anything at this stage.

Okay. Perfect. All right. Thanks, guys.

Thank you. Mr. Baca, there are no further questions at this time. I'd like to turn the floor back to you for any closing or final remarks.

Thank you, Melissa. I would like to thank everyone for listening to today's earnings call. We will look forward to you joining us next quarter. Have a good day.