Fortuna Mining Corp (FSM) 2015 Q4 法說會逐字稿

Greetings and welcome to the Fortuna Silver Mines 2015 year-end 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 your host, Mr. Carlos Baca, Manager of Investor Relations. Thank you, Mr. Baca. You may begin.

Thank you, Chris. Good morning, ladies and gentlemen. I would like to welcome you all to Fortuna Silver Mines and to our 2015 year-end financial and operations results call. Jorge Roberto Ganoza, President and CEO, and Luis Dario Ganoza, CFO, will be hosting the call from Lima, Peru.

Before I turn over the 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 beliefs. This forward-looking information is subject to a number of risks, 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 or projection as reflected in the forward-looking information.

Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or 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 the call over to Jorge Ganoza, President, CEO and Co-Founder of Fortuna.

Thank you, Carlos, and good morning to all. In 2015 we achieved key objectives to continue unlocking the potential of our assets, creating shareholder value. These achievements were underpinned by yet another year of delivery in accordance to guidance and sound financial performance. When we look at our business, one of the measures we paid close attention to is mine operating and EBITDA margins of our sales, which were 28% and 32% respectively for 2015.

Our San Jose mine achieved margins of 39% and 49% respectively, which speaks to the quality of the assets and our capability to deliver.

For Caylloma mine, vulnerable in low metal price environment, but we still managed to achieve a cash balance year with margins of 7% and 19% respectively.

Our cash costs continue to trend down in line with our budgets and guidelines. Analyzing our cash per tonne at San Jose, we reported $58.08, 7% below 2014 and 6% below annual guidance. Caylloma for the year was $85.80, 5% below 2014 and 5% below annual guidance.

We achieved a consolidated all-in sustaining cash cost net of byproducts of $14.50 for 2015, this being a capital intensive year due to our expansion in Mexico and optimization at Caylloma. All-in was 11% below guidance and flat with respect to 2014.

We have provided guidance of $11 for 2016 as major capital projects end midyear. We expect all-in costs will continue to trend down in 2017 when we operate at sustaining capital levels with higher annual production as a result of the expansion.

The driver for the production growth and cost reduction is expansion, as I mentioned, of the San Jose mine to the new rate of 3,000 tonnes per day. At this rate, San Jose will be in a capacity to produce 7 million to 8 million ounces of silver per year and about 50,000 ounces of gold. The project is advancing according to our schedule and budget, aiming for commissioning in July of this year. At the new rate of production, San Jose will rank among the 13th largest primary silver producers in the world, operating with Tier 1 costs.

I will now let Luis take you through the financial statement.

Thank you, Jorge. So, for 2015, we recorded a net loss of $10.6 million or $0.08 per share compared to net income in 2014 of $15.6 million. The reason for the loss was an impairment charge at the Caylloma mine of $25 million before tax or $17 million after-tax.

The impairment charge reflects a negative impact of lower middle price assumptions on Caylloma's mine plan and free cash flow generation. Adjusted net income for the year was $6.7 million compared to $15.7 million in 2014, a 57% reduction attributable to a lower metal price environment. Adjusted earnings per share was $0.05 compared to $0.12 in 2014.

Sales for the year were $154 million, 11% below the $174 million recorded in 2014. Realized prices on our provisional sales were $15.65 per ounce for silver and $1,150 per ounce for gold. That is 17% and 7% respectively below 2014.

For zinc and lead, which comprised 17% of our total sales in the year, prices were down 12% and 15% respectively, below 2014. These lower prices were partially offset by higher gold sold of 10% and higher zinc and lead sold of 31% and 44%. Mine operating earnings was $43.5 million, 28% below the previous year as a result of the lower sales. Margins came down from 35% to 28%, reflecting the impact of lower metal prices. The negative impact was partially offset by lower unit costs at both San Jose and Caylloma of 5% and 7% respectively.

Selling, general and administrative expenses were $17.9 million. That is $17.2 million below 2014. A large part of the reduction is the result of a lower stock-based compensation charge in 2015 when compared to the previous year, which was in turn due to mark-to-market effects from the performance of our share price.

We also had a $1.5 million reduction of corporate expenses contributing to the lower selling and G&A. Our effective tax rate for the year was 70%, and our effective tax rate at our Mexican operation, which is our main contributor to income today, was 39%.

Focusing on the fourth quarter, we recorded a net loss of $17.2 million as a result mostly of the Caylloma impairment. Adjusted net loss was $0.1 million, driven by a foreign exchange charge of $0.8 million and an adjusted operating loss at Caylloma, which nonetheless recorded an income tax expense, further contributing to the overall adjusted loss for the quarter.

When looking at our segmented results for Q4, the San Jose mine increased operating income by 27% over Q4 2014, and operating margin increased from 28% to 32%, in spite of the lower metal prices. However, in terms of our consolidated results, the weak performance at Caylloma, even after adjusting for the impairment, offset most of these gains. The effective tax rate for the quarter was 100%. The effective tax rate at our Mexican operation was 32%.

Moving forward in 2016, we expect Caylloma to be in a position to contribute to consolidated operating income and net income as the adjustments to the mine plan and costs of restructurings yield results. In the first months of 2016, we are already achieving stronger base metal production compared to the last quarter of 2015.

Moving on to the cash flow statement, total cash provided by operating activities was $54.8 million. This included approximately a $24 million contribution from changes in working capital and cash payments of income tax of $17.8 million.

On the changes in working capital, the largest portion of it comes from -- I'm sorry, an early collection of trade receivables in the month of December and from an increase in accounts payable related to the increased activity on our large CapEx project at the San Jose mine. The $17 million of taxes paid includes $9 million of 2014 taxes paid in March of 2016.

Total cash consumed on capital expenditures was $57.1 million of expenditures, actual expenditures on minimal property, plant and equipment, plus $6.7 million of deposits on long-term assets for a total of $63.8 million. Out of this $57.1 million of expenditures on minimal properties, plant and equipment, $26 million was spent in Q4 of last year.

For 2016 we have a CapEx budget of $59 million of which we expect $40 million to be spent in the first eight months of the year. Beyond that, we should start seeing positive free cash flow as we commissioned the expansion at San Jose in early Q3.

Finally, our total cash balance including short-term investments for year-end 2014 -- I'm sorry, year-end 2015 was $108 million, an increase of $30.9 million over year-end uncertainties, which includes the $40 million draw-down of our term loan in Q2 of 2015.

Thank you. Back to you, Carlos.

We would now like to turn the call over to any questions that you might have.

(Operator Instructions) Rahul Paul, Canaccord Genuity.

Congratulations on a very strong 2015. Actually had a question regarding the net expansion, the San Jose expansion, the 3,000 tonnes a day you mentioned commissioning in July. But how long do you think it would take to ramp up to the 3,000 tonnes?

The mine is -- will be in a position to source or to anneal at a 3,000 tonne per day rate in Q2. Already we have the development ahead, and we don't see any issues with the mine being able to source 3,000 tonnes per day starting as early as May.

Now, the commissioning we expect to be short. We are installing -- this is really a bolt-on expansion. We are bringing in a new ball mill, which is being mounted as we speak, a new bench of flotation cells and a new crusher, and a new screen in the crushing [system].

So, really, we don't expect any complicated or long commissioning. We really expect the commissioning probably to begin in June. So to drive on from June to July, two months of commissioning, and this is actually the third expansion of this nature that we do at San Jose, and the two previous ones have been smooth, and we expect so far a smooth commissioning period as well.

Okay. Thanks. And then I guess, so you would expect it to be operating at sort of 3,000 tonnes a day, by the end of the year, earlier than that? (multiple speakers)

We budget to be operating in Q3, probably a benefit of 3,000 tonnes per day, start seeing the benefit of the 3,000 tonnes per day or a greater part of the benefit of the 3,000 tonnes per day in Q3 of this year.

Perfect. And then just moving on bigger picture looking forward, Fortuna -- the team has done a great job on the operational side of things, and I guess your focus right now is just completing the San Jose expansion going on. But once that's done by mid-year, then you will be generating quite a bit of cash. And I guess the question is what would you look to do? What's next going forward? Are you going to spend toward more efforts to excavation, or are you going to look at growth opportunities going forward?

Well, we have been focused for -- to put it into context now, our focus for the last decade has been on organic growth. And we saw early on a lot of potential in the assets to be unlocked, and there has been the cheapest way and the most efficient, effective way to create shareholder value. Last time we had to access the market to issue shares was -- issue equity for capital was 2010.

But, right now, I think we see our assets achieving optimum rates of capacity based on the size of resources that we have. We will look to book our expiration efforts on the brownfields. Our expiration budget in 2014 was $4 million. In 2015 it was around $4 million or $5 million as well. 2016 our budget is $8 million. But back in 2011, our budget was closer to [$14 million]. So we have been favoring capital projects, infrastructure projects, further expansions, and in this low price environment, cutting our exploration budgets to minimum levels.

So, one thing, once we come out of this capital-intensive phase, we will start giving more funding to our brownfields explorations. For one, we believe there is tremendous exploration potential in our properties and something that we like to stress is that we own the caps where we operate. [I run their examples in mind], we hold over 60,000 hectares of continuous ground, and there's lots of work to be done there for years to come.

It's a similar situation in Caylloma with a smaller land package, but still we control our commanding lead position in and around our operation. So that presents strong opportunities for growth.

Second, we are looking at new opportunities outside the farm. We are more active. For the past two years, we have been more active, gradually more active I will say than before. We sense a change out there with respect to the willingness of groups to transact. As we all know, and I think has been broadly discussed, we have seen some entrenched groups and really, from one angle, to some degree an absence of the kind of quality assets visible to us and transactable to us.

As I said early in the presentation, something we look at very closely is what is it that we are bringing the new projects or targets that we intend to bring on, what is it doing to our portfolio. And we look at margins very closely. Is it enhancing our margins? Is this a margin neutral transaction? Is it deterring from our margins? And to be honest, we have a very high bar with San Jose.

So, we -- I can say that we are more active than before. I can say that we are starting to see groups more open to discussions and potential transactions. I can say that we are actively looking in Latin America and abroad. And our search is driven by quality of assets, and a key question we ask ourselves, even if it is an early stage project, is what will this do to our margins. It is not just about size, as we all know, and that has been a driving principle for us since the very early days. The question is, what does this do to our margins and the health of our business? We want a business that is strong throughout the cycle.

Perfect. And just to follow up on that, I guess what we've seen in the last year or so has been (inaudible) other civil producers diversifying to increase their rating toward gold dust. Do you see that? Is that something that you are open to doing, or would you rather stay sort of a pure silver company or primary silver?

No, we would look at gold. We will certainly look at gold. We certainly look at gold, gold silver, gold only opportunities, depending on the quality of those ounces will be our key factor. And we will be patient and we will find something that meets our criteria.

Okay. That's all that I have. Thanks a lot.

Jessica Fung, BMO Capital Markets.

Just wanted to touch quickly on Caylloma and what you guys are planning to do there. Do you view a lot of potential there, and how do you expect to get costs down there as well? Thank you.

With respect to Caylloma, we have been shortcut first to talk about exploration. We have been shortcutting Caylloma severely on the exploration front for two or three years now. Now, we were able to do that because in the good days, we were very diligent with our exploration spending, and that exploration spending was quite successful in building a good base of resources and research for the spine.

We have had a change in strategy at Caylloma. We have cut -- refocused the mine and concentrated the mining operations in one sown of the main vein Animas so Caylloma has traditionally, up until last year, operated -- early last year 2015, operated on multiple veins, mainly the Animas vein as a non-core vein, and then sourcing high-grade silver from narrow labor-intensive veins in the north part of the mine. That narrow vein mining made sense with silver is around $19. It doesn't make sense with silver at $15, $14.

So we closed down those areas. That helped bring costs down. In the Animas vein, we were mining on multiple levels. We decided to concentrate mining on levels 13 and 12 for the book of production. Those two levels are integrated, so we can achieve better efficiency with a contractor equipment and supervision. So those are the kind of measures that we are taking. This shift towards the deeper levels of the Animas vein is the reason why silver production in 2015 and in our 2016 budget is down with respect to what historically we have produced at this mine, which is historically 2 million ounces. Now, it is more in the 1.5 million, 1.2 million ounces level. But as you see, our lead and zinc output at this mine has increased significantly. We are producing about 20,000 tonnes of lead and 20,000 tonnes of zinc annually. That is our guidance for 2016. That is 25%, 30% above what we have traditionally produced.

So, even though our silver output is down at the lead, zinc -- even though the silver production is down, the net smelter return value per tonne is higher, and our margins are improving because the Animas vein is highly mechanized, well integrated, we are more effective, more efficient. So we are being able to bring costs down per tonne and getting the margins we need.

We have also achieved the power interconnection to the grid. Caylloma was sourcing 70% of its power from the grid, and the balance was being sourced from self generation with diesel. Now 100% to start in February, 100% of the power comes from the grid. So that will help costs in 2016, and we are also concluding -- we are commissioning, as we speak, the optimization of the plan. We are expecting to, through the optimization, achieve the 1,500 tonnes per day throughput capacity from the current 1,300, and we are also expecting that this optimization will allow us to (technical difficulty) metallurgical recoveries slightly for silver as well.

So, all-in-all, all these changes are reflected in our guidance. We are working -- all of these changes that I just described are reflected in our cost guidance, are incorporated in the guidance, and for this year, we are expecting Caylloma to contribute cash. We are at the prices in our budget. We are today in our budget prices. So with these prices for lead, zinc, silver and the actions we've taken, we believe we are in line with budget, and we should have a cash positive year.

Okay. Perfect. Thank you very much.

Chris Thompson, Raymond James.

Congratulations on a good year. A couple of quick questions here, but let's start off. When do you hope to announce revised reserves resources for your projects?

That should be out by now, but we have had competing tasks with the technical service group. We have given priority to the other tasks. So we have a small delay with what we usually lease our publication time, which is favorite. I expect end of March, mid-April.

Okay. Thanks for that. Just moving on quickly to San Jose, I might have missed this, I apologize. Can you just remind me again on the CapEx remaining for this year by way of what's required I guess on the ramp-up, both the dry stack and the plant?

CapEx for San Jose in 2016 is $46 million. That's the budget. Out of that, the balance for the expansion to 3,000 tonnes per day is $23 million, and sustaining CapEx in general is a bit below [$14] million.

Okay. Great. So $23 million would include the money to be spent on the dry stack. Considering an expansion there, obviously it is an ongoing thing, as well as the plant?

We do have I believe it is $2 million or $3 million of additional CapEx to spend on the dry stack, and it would be within the $23 million, yes.

Okay. Thanks. And just moving on very quickly, could you just comment a little bit on what are you seeing right now as far as grade reconciliation at San Jose? And this is in the context, I guess, of good grade you guys delivered for much of last year and whether you see an opportunity for that to extend into this year.

We are seeing globally good grade conciliation, a consistent grade conciliation globally on the mine operating control level on a the monthly basis. We have gold deposits, so we are exposed to some minor variations.

But globally, we are -- the deposit is conciliating well. And, you know, this is a deposit that is very concentrated. We keep development ahead of production. So we always have good flexibility as well to respond. For example, this year we were able to respond to the shortfall in silver production coming from Caylloma due to the change in my plan, and we were quick to just increase grades at San Jose, not necessarily because of a deviation in reconciliation, but being able to access higher grade stones that we had already developed and increased production in those stones.

Okay, great. And then just a quick comment on recoveries, if you would. I mean obviously you have got recoveries on the gold and the silver in the Q4. Would that be a good proxy to use as an estimate for this year?

That's a good question because we are seeing recoveries inside of 93%. We have budgeted 92%, and that has been a bit of a discussion there with our operating group. But we have budgeted 92%, but we are seeing recoveries as high as 93% already.

All right. Well, that's great. And then just finally, just before we move on to Caylloma very quickly, just a comment on exploration. What is happening right now in the context of permitting and drilling?

With respect to permits and for surface access, I have nothing new to report. With respect to exploration, we have at San Jose three ongoing programs. One is -- one rig is drill testing and between us and trial deposits. The central part, the main part of the deposit is the thing that deep extent. We call it Trinidad Deep. We have mineralization open at the very end, and we are drill testing trying to pursue that.

Then, on the Trinidad North, we are drifting. We have around 250, 300 meters advance on the drift. This will be the main exploration drift that will give us access to continued testing the north extent of Trinidad North. We expect to be concluded with the 1500 meters by year end, and we expect to be drill testing the north end of Trinidad North, which has not been tested to date from the drift by year end.

And third, we are drill testing La Noria vein system, which is a parallel vein system to Trinidad. Bonanza, where our mine is, is located approximately 1.8 kilometers due west, and we have there one rig working currently.

Perfect. Excellent. Okay. And a quick question or two on Caylloma. Obviously I was listening to a discussion relating to the change in mine plan. Obviously you are focused more on the base metals rather than the silver.

Jorge, just what sort of silver price would make it -- at what sort of silver price would you consider maybe looking again at mining from some of the high grade silver zones there, and how quickly could that be achieved?

Got that achieved really quickly. The underground workings are accessible. We don't have water problems or anything like that there, just ready to bring it into operation anytime we decide. And I believe that price is closer to $19. In 2014, the average price for the year was $19, and we were happy mining there. The issue is 2015 when we started -- in 2015 prices dropped to $16, $15. So the high grades that we see in those narrow veins do come with high variability.

So, we can be making cuts of a [kilo] silver, and next cuts can be 200, 300 grams silver. So, when you are mining at $19, you are either making a lot of money or you are just making good money. And with $14, you are either making some money or losing money, and we have no tolerance for losing money so we decided to shut it down.

Fair enough. Great. Thanks, guys. Congratulations.

[Ragu Garam], private investor.

The analysts have asked excellent questions, so I have some minor -- some comments and then if you questions. First and foremost, I want to congratulate senior management for doing an excellent job. It is an exceptional job, actually, on all fronts, especially maintaining balance sheet strength during an industry downturn, overall cost control, initiating expansion projects for growth, as well as brownfield exploration successes in the last few months, last couple of years at Trinidad North and elsewhere. It's really remarkable.

And also, thanks for your efforts over many years. Fortuna is the lowest-cost producer in silver space. Fortuna production cash costs, as I see, is the lowest in the industry, and going forward also, our production cost is actually stunningly low, in my opinion. So that is actually unbelievable for me such as the $1.50. Something in that range going forward is really great.

With that, I wanted to ask a couple of minor questions. The first one is how soon you may be able to handle some initial exploration results of La Noria to the market.

Yes, we are currently drilling with one rig. We will slightly be releasing results sometime in April. We are drilling only with one rig, and so the advance is kind of low. So we will have likely a batch of results for -- if not the end of March, April. That is what I would expect.

Yes, thank you. And our next question is, were you able to acquire additional land packages near current operations?

In the immediate area of operations, we -- our land packages have not changed materially over the last years at San Jose. We did add one concession last year, which is on a far, far, far north projection of the system we are currently mining, the Trinidad system. That was our concession we placed for comfort.

We have applied for more ground in other areas, both in Mexico and Peru. We have a new concession in south Oaxaca, southeast Oaxaca. It set an exploration target for carbonate replacement type of deposit. In northern Mexico, northern central Mexico, we have also applied for some large concessions in some historic comp areas.

Now all of that is early, early, early stage work with some official showings, so I will not be inclined to make comments or predictions regarding the potential of that ground until we can do a bit more work.

And actually we -- I think we should also not divulge to the market until the work is done. That is why it should be confidential, I thought, telling where we were trying to acquire.

Lastly, this may sound a little bit ambitious on my part, but however, initiating a small dividend because we have the lowest-cost producer and we have major capital spending done and maybe a small couple of percent of dividend initiation to differentiate Fortuna from the rest of the companies in the space. I think that that will go a long way to state the quality of the Company. I appreciate if you maybe considered that going forward, and I think really appreciate your efforts. Thank you.

Thank you. And to elaborate more on that last point that you brought, for us I think the discussion is not if we pay a dividend but when we start paying the dividend, and I think management and the board view favorably returning to shareholders, and I believe what would be prudent is to end this capital intensive phase and then consider this a way to start returning to shareholders. This is a discussion that has already taken place at some level at the board, and I believe the appropriate time would be the end of this year, start of next.

Excellent. Thank you, again, and congratulations.

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference back over to Carlos for any closing remarks.

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