Fortuna Mining Corp (FSM) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fortuna Silver Mines Second Quarter 2017 Financial and Operational Results Call. (Operator Instructions).

At this time, it is my pleasure to turn the floor over to your host, Carlos Baca, Investors Relations Manager. Sir, the floor is yours.

Thank you, Carmen . Good morning, ladies and gentlemen. I would like to welcome you all to Fortuna Silver Mines and to our second quarter 2017 financial and operations results call. Today, we will be using a webcast presentation, which will be controlled by us. You can download the presentation at our website. Please click on the Investors tab, then click on Financials, and under Q2, click on Earnings Call Webcast.

Jorge Alberto Ganoza, President, CEO and Director; 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 a conclusion, forecast or projection 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 that 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 Cofounder of Fortuna.

Thank you, Carlos, and good morning to all. I'll give you a brief introduction to the second quarter results and then turn the call to Luis, who will take you through the financial statements. After that, we will open the floor for questions and answers.

Our results in the second quarter of 2017 keep reflecting the full impact from the San Jose plant expansion in 2016. On a consolidated basis, we expanded our silver production by 36% to 2.1 million ounces and our gold production by 55% to 14,500 ounces compared to the same quarter of prior year.

In Slide 5, we show that 75% of provisional sales were comprised by precious metals, with lead and zinc contributing the balance.

In Slide 6 of our presentation, we show a strong financial performance. Sales increased 44% and net income increased to $8.9 million compared to a loss of $1.4 million from the same quarter of prior year.

In terms of cash generation, we increased cash flow for operations before changes in working capital from $7.4 million to $16.7 million, an increase of 126%.

In Slide 7, we achieved a consolidated all-in sustaining cash cost per ounce of silver net of (inaudible) grades of $8.20, a reduction of 16% compared to the same quarter prior year, and also a reduction of 16% compared to 2017 guidance of $9.80 per ounce. Our all-in sustaining cost benefited mainly from higher production and base metal prices, despite of slightly higher mine operating cost of our subsidiaries in the period.

Moving on to capital investments in Slide 8. Our consolidated CapEx was $23.1 million in the first half of the year. This includes $5.1 million of nonsustaining CapEx from the Lindero Project and Greenfields explorations, $5.6 million of Brownfields explorations and $12.4 million of sustaining CapEx.

In Slide 10, from Brownfields explorations -- here we are. In Slide 10, on Brownfields explorations, we carried 25,000 meters of drilling in the first half of the year, with a cost of $5.6 million. Also in the quarter, we announced the acquisition of the Tlacolula Property within the area of interest of our San Jose Mine in Oaxaca. With respect to Lindero, I can report that we are concluded with all of our geological modeling work, our reserves estimation, update, our optimization of mine plans. Our key metallurgical tests were still pending some results of confirmatory tests only. We are carrying peer reviews on technical work. We are also concluded with the optimization and modifications to the processing site. We're basically concluded as well with the quotes of CapEx and OpEx -- updated quotes on CapEx and OpEx yields. We're now including the result of all the work we carried over the past months together, with the aim of being able to take to our board a construction decision in the month of September. Shortly after that, we'll be updating the market on our construction position.

I'll now turn the call to Luis, who will take you through the financial statements.

Thank you, Jorge.

On Slide 12. For 2016, as Jorge has highlighted, we recorded net sales of $63.9 million, up 44% from the prior year, driven mostly by higher metal volume sold.

We reported net income of 8.2 -- $8.9 million, I'm sorry, compared to a loss of $1.4 million in 2016 and earnings per share of $0.06 compared to a loss of $0.01. The loss in 2016 was driven by mark-to-market effects on stock-based compensation charges related to the performance of share price. Higher cash provided by operating activities is a reflection of strong revenue and margins in spite of elevated costs in the quarter, and cash equivalents and short-term investments as at the end of June 2017 was $188 million, which includes the proceeds from the equity financing closed on February 2017.

On the next slide, Slide 13, when breaking down our sales, our sales performance, we had a higher total sales of $19.4 million. Higher metal volumes sold contributed to both of the increase in sales, with $12.4 million followed by treatment and refining charges with $4.9 million, and zinc and lead metal prices with $4.2 million.

On Slide 14, our operating income and adjusted EBITDA reflect our strong performance and operating results over the second quarter of 2016, and are grounded in solid increases in sales and mine operating incomes. Both operating income and adjusted EBITDA in 2016 were impacted by a higher stock-based compensation charge consisting of $8 million in 2016 compared to $0.7 million in 2017 related for the most part to the mark-to-market effects from the performance of our share price. Excluding this effect, the consolidated -- the increase in consolidated EBITDA would be 46%, with similar margin over sales.

In Slide 15, in the case of San Jose, EBITDA increased 48% on the back of higher production. Higher head rates and improved commercial terms did not fully translate into higher EBITDA margin at San Jose due to the impact of a foreign exchange charge of $1.1 million and negative sales adjustments. In the case of Caylloma, we recorded higher EBITDA of 30%, driven by stronger base metal prices and partially offset by higher unit costs. Cash costs at Caylloma was 20% higher than the previous year and 13% higher than annual guidance. The higher cost compared to our plan is mostly related to higher ground support, energy and ancillary services at the mine and labor costs. There is a structural component to these increases, which is relatively minor, but there is a medium-term impact in some of these highlights, which we will continue to see for a few quarters.

We expect cash cost per tonne to remain in the range of $80 for the remainder of the year.

On Slide 16, on expenses, total SG&A was $5.9 million, down 52% from Q2 2016 as a result of lower stock-based compensation charges. With respect to the increase in corporate G&A, we have a similar effect as in Q1 as we are still seeing that impact of certain items related to our soft remediation initiatives.

On Slide 17, the company maintains a strong balance sheet position which, as I mentioned previously, includes our total cash and short-term investments of $188 million, which, along with our unused debt capacity, gives us the flexibility required to meet a construction decision at Lindero.

Finally, on Slide 18, we provide a bridge graph of our cash position in the first half of the year, including short-term investments. As can be appreciated, our free cash flow estimates, starting from EBITDA of $56.4 million and excluding changes in working capital of $14.3 million, was in the $10 million to $11 million range. At current metal prices, we expect to see cash accumulation in the second half of the year as some of the items related to changes in working capital are related to payments occurring in the first 2 quarters.

Thank you, and back to you, Carlos.

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

(Operator Instructions) Our first question comes from Justine Stevens.

Most of my questions are to do with Lindero. I was just wondering what the sort of time line for potential construction ramp-up is? I'm assuming things are probably going to be pretty quick. You've probably done a lot of the groundwork ahead of time now?

Yes, with respect to time line, right now, we're working on a construction plan. So our initial estimate still moves around 18 months of construction. Those time lines can be impacted by some work that we still need to fine-tune. And right now, one of the items that needs to be addressed is the ability to initiate construction and the minimum facilities needed at Lindero to start hosting the kind of workforce that's needed. So we need to build -- ramp up the building of camp facilities. And so the long-lead item here would not be equipment, delivering or anything like that to meet our 18 months deadline -- or time line right now, but the ability to start and initiate camp sequencing to hold the construction population, no, Lindero is a remote location.

Yes, that would make sense. But yes, somewhere in that 18 months ballpark is still the plan then?

Right now...

Assuming things go well.

Yes, and as I say, that is -- we're working on the construction plan as we speak, and that is the time line that we have right now.

Sounds good. So the next question I had. So I know you guys are doing some metallurgical optimization tests. Are those expected -- are you expecting those to yield sort of cost per tonne process similar to those seen in the feasibility study? Or are you expecting to sort of spend a little more on reagents or something in order to get those higher recoveries that you guys mentioned?

Our metallurgical tests show the opportunity to capture higher recoveries with not any material increase in cyanide consumption with respect to the feasibility study. The benefit of the HPVR crushing and implementing a cyanide skewer on the ore before placing on the path are opportunities as we are capturing in our work. So those items do not necessarily carry any added radiance cost that are material to the project.

Got it. Yes, the OpEx -- pretty low OpEx impact then, probably just a little more CapEx to pay for the equipment then?

Yes, yes.

Okay. And then -- so following on that, if the Lindero test work does sort of show this -- these improved recoveries, are there any lower-grade halos, I know this is core-free, that might become economic material, given the sort of the better recoveries than stuff that was previously excluded from the mine plan?

Yes, this is a porphyry system, it's a large system. And what Goldrock did, I believe, made sense to us, which was at a point where they had close to 100 million tonnes, decided to move into -- away from the exploration and more into building a case for a mine. And -- but we do see opportunity to grow the reserves beyond what's currently in inventory in the near vicinity. This is a porphyry system, it's a large system, and we have the opportunity in Arizaro, which is a nearby porphyry as well. We are investigating that opportunity. It's not currently even in our reserves, even though Goldrock reported a small resource at Arizaro, we have not included that in current reserves as part of our inventory. We believe it requires further work, not only on exploration, but also on metallurgy. But as you pointed out, and I stress again, porphyry systems are big, and I believe there is a lot of opportunity to capture some of those growth -- organic growth opportunities along the 10 to 14 year mine life that these deposits will potentially have.

Great. And do you guys -- you guys have plenty of room there in order to expand leach facilities, right?

We have no infrastructure limitations.

Our next question comes from [Ragu Gern].

I have 3 simple questions, please bear with me. The first one is regarding new exploration project acquired from Radius. It looks like very interesting. Would you please, kindly, let us know something how it is significant or how close it is to our existing operations?

Well, Tlacolula is a property within the area of influence of our San Jose Mine. It's a property that has significant gold showings and an identified vein actually, that we have explored. It's a property that we held under an option agreement for many years, and we decided to go ahead and just acquire the property. It didn't make any more sense to us to just keep it -- keep holding it under an option. Now we do not have surface access to Tlacolula at this time. We did have an agreement with the community to carry surface work. But when we decided to move into a drill program, the community of Tlacolula refused the permit for us to drill. Since then, we have had several sessions to assemble this with the community. We believe that long term, we remain hopeful that in the medium to long term, we can gain access to carry the work we do need to in Tlacolula. Short term, it is not in our plans to access Tlacolula. But it's just consolidation of our highly prospective target within the area of influence of San Jose and, as I stated, medium to long term, we're going to be working with Tlacolula to gain surface access to carry our drill work. Basically the property is drill-ready from the technical perspective.

Good explanation there. In continuation to the same question, this is my second question is, can you give some color on Brownfield exploration and your mine exploration near San Jose and our other mine in Peru? I -- we are expecting some kind of news past couple of months, but there is nothing. Is there any plans for the company to release exploration data?

Yes, I'll start with Caylloma. We did release a few weeks ago results on the Caylloma drilling. Caylloma, we short-cutted Caylloma exploration funding for the last few years as we focused our funding towards San Jose for its expansion. We are starting to -- over a year ago, we started funding again more aggressively exploration at Caylloma, and results are showing. We published results on -- from the consolidation of a new area in the northeast of the Animas Vein, which is becoming the new center of gravity for the Caylloma operation. We currently have 3 drill rigs turning at Caylloma on exploration, and we look forward to continue publishing results in the year. With respect to San Jose, we have 3 drill rigs carrying work from the underground in the first half of the year, and we were carrying some surface drilling on the south end -- on the very south end of mineralization of the outcropping vein system at San Jose with poor results on the drilling. We did encounter structure, but nothing where we believe could build a resource. So drilling has moved back to the underground to the northeast, where we concluded the underground infrastructure that allow us to carry exploration from the underground and without surface-access limitations. And we currently have 3 drill rigs turning. One is focusing on the Ocotlan vein, which is a blind discovery we made in 2016. It's an exciting opportunity. It's a vein that runs oblique through the main north-south premiere Bonanza system which hosts the resource and the mining at San Jose. This vein is 400 meters due east, and it will eventually run against in the north and with the north-south premiere system. We are currently drilling there, and we look forward to publish results on Ocotlan drilling in the coming weeks. We have another drill rig working on the close proximity of existing resources on the north end of Trinidad from underground as well. This is more conservative drilling, not really getting too bold, but just trying to increase resources in the margin so the existing reserves by tightening grids. And last, we have a third drill rig in the North, very north end of Trinidad, drilling from the underground exploration rigs that we developed through 2016 and early 2017. We have 1 drill rig turning there. And as we come up with results, for sure, we will be publishing them.

That's real exciting. I have a last question. This is regarding dividends. I know -- I am assuming at this time, Fortuna is going to build a new project at Lindero. There is a -- I have no doubt there because I'm a long-term follower of the company and the management, and I have great respect. We do have -- I mean, still we need to differentiate our company from other so-called silver companies, and for that, we need to, I think, address this dividend issue. We have significant free cash flow, and we have cash to build the new mine, and there is no issue there, and we have a strong balance sheet. And I think time has come, in my opinion, that management has to address this dividend issue. Some kind of -- something like $0.05 per share or some nominal is needed, I believe. I appreciate your thoughts on that.

I concur with the view on dividends or a smart way to give back to shareholders. I don't think it's a question of if for us, it's a question of when. I believe that Lindero is strategic for us in many ways. And one of them is that it's a project that will allow us to -- with its long mine life, allow us to better address the question and the issue of giving back to shareholders. And as you clearly pointed out, it's going to be a -- bringing that mine into construction a big financial commitment for the company. So I -- what I would expect is that with the board, the discussion of a dividend becomes current once we conclude the construction of Lindero.

(Operator Instructions) Okay. Our next question comes from Mark Magarian.

I had a question regarding whether there had been any more clarity developed on potential additional funding needed for the Lindero Project, whether you're thinking about getting a credit line or any issuing a small amount, more debt. Just -- I mean, I know it -- between cash flows and your cash on hand, you probably can cover it, but you -- I'm assuming is you're going to want some flexibility there as well without having to tap the equity market.

Yes, thank you. This is Luis. So we do have a corporate facility in place on which we have currently drawn $40 million, which we carry on our balance sheet, and which can be expanded without much difficulty up to around $100 million. And that would still keep us within very conservative leverage ranges or ratios. So that's the component which we will seek to implement as we move towards the funding, the design and implementation of the funding for the construction of Lindero, which along with our cash generation we expect to see over the remaining of 2017 and into 2018, will give us all the funding sources we need.

(Operator Instructions) And it doesn't look like we have any further questions coming in.

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

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.