Fortuna Mining Corp (FSM) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Fortuna Silver Mines' Third Quarter 2017 Financial and Operational Results Conference Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to your host, Investor Relations manager, Carlos Baca. Sir, the floor is yours.

Thank you, [Kath]. Good morning, ladies and gentlemen. I would like to welcome you all to Fortuna Silver Mines and to our Third Quarter 2017 Financial and Operations Results Call. Today, we'll 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 and then click on Financials and, under Q3, 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 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. I'll give you a brief introduction to the third quarter results and then turn the call to Luis who will take you through the financial statements results. After that, we'll open the call for questions and answers.

Our results in the third quarter showed strong performance when compared to what was a historic record quarter in Q3 2016. Production was 2 million ounces of silver and 13,400 ounces of gold, 4% or 5% below the same quarter prior year as we show in Slide 4 of the presentation. On a consolidated basis, 9-month production is 6.2 million ounces of silver and 41,200 ounces of gold, well in line with our annual guidance.

On Slide 5, 71% of provisional sales were comprised by precious metals while 29% were base metal byproducts. We're seeing an increased contribution of byproduct lead and zinc compared to 19% contribution a year ago. This is mainly explained by a 32% higher zinc and 24% higher lead prices.

On Slide 6, we show a strong financial performance. Sales were $64 million, net income $10 million, with earnings per share of $0.06. In terms of cash generation, cash flow from operations before changes in working capital was $26.2 million with a margin over sales of 41%, highlighting the strong margins of our business.

In Slide 7, we achieved a consolidated all-in sustaining cash cost per ounce of silver net of byproducts credits of $6.10, a reduction of 20% compared to the same quarter of prior year and also a reduction of 38% compared to our 2017 guidance. Our all-in sustaining cost benefited mainly from higher byproduct base metal prices. Our business operates within the bottom cost quartile for primary precious metals producers.

Moving on to capital investments in Slide 8. Our consolidated CapEx was $39 million for the first 9 months of the year. This includes $11.2 million of non-sustaining CapEx from Lindero Projects and Greenfields Explorations, $7.8 million of Brownfields explorations and almost $20 million of sustaining CapEx.

On Slide 10. As you are aware, we announced a positive construction decision for our Lindero Project in South Argentina this past month of September. At Lindero, we're fully permitted by the provisional authorities for the construction of a 18,750 tonne per day open pit heap leach gold mine. We have already launched detailed engineering work and plan for initial site activities to start in late November with a phased construction of camp facilities that will hold a big headcount of approximately 600 people during construction. We plan to release a comprehensive update on project activities and construction milestones in the coming days.

Under our Brownfields exploration programs at the Caylloma and San Jose Mines, we have carried 40,000 meters of drilling in the first 9 months of the year at a cost of roughly $8 million. At Caylloma, we have been enjoying substantial success expanding mineralization to the Northeast and to depth on ore shoots 4 and 3 of the Animas Northeast vein. We expect this exploration success will provide for a robust resource increase for this mine.

At San Jose, the drill program continues focused on 3 areas to the north beyond the limits of the resource shale. These areas are the far north target under a silica outcrop, the intermediate North zone and the Victoria vein, which is a blind discovery of a new vein we made in 2015, late 2015, where we're working to develop resources currently. 90% of underground infrastructure for the execution of the drilling program at San Jose in designated targets in the North is in place, so the program is gaining speed, and we look forward to updating the market with results as the program advances.

So for now, with that, I'll take -- I'll let Luis take you through the financial results.

Thank you, Jorge. So on Slide 12, for the third quarter of 2017, we recorded net sales of $64 million, down 2% from the prior year, driven mostly by lower silver prices and slightly lower silver and gold sales.

We reported net income of $10.3 million compared to $10.2 million in 2016 and earnings per share of $0.06 compared to $0.08. Adjusted net income was $13.1 million compared to $10 million in 2016.

Cash provided by operating activities was $20.4 million, 30% below the comparative period in 2016, mostly as a result of changes in working capital items. Cash provided by operating activities before changes in working capital, as Jorge had mentioned, was $26.2 million, just 1% below the prior year.

Cash equivalents and short-term investments as at the end of September, 2017, was $195.8 million, where most of the increase over year-end 2016 comes from the proceeds from the equity financing closed on February 9, 2017.

On Slide 13, when breaking down our sales performance, we see the negative price effect from silver was offset to a large extent by the positive effect from zinc and lead prices. Lower sales related to lower silver and gold sold was $2.6 million under volume effect in our graph. Worth highlighting is the impact year-over-year of improved treatment and refining charges of $3.2 million. We expect these trends to continue into 2018.

On Slide 14, our operating income was $18.9 million, 11% below Q3 of 2016 as a result of slightly lower sales, higher unit costs at both our operations when compared to 2016 and higher depletion at our San Jose Mine. In spite of lower operating income, adjusted EBITDA of $30.6 million showed no variation over 2016 as a result of lower share-based compensation charges. Adjusted EBITDA margin over sales remained at similar levels at 48%.

On Slide 15, in the case of Caylloma, we recorded higher EBITDA of 43%, driven by strong base metal prices, partially offset by higher unit costs year-over-year of 6%, although only 2% above budget.

In the case of San Jose EBITDA -- or I'm sorry, (inaudible) San Jose EBITDA decreased 20% mostly as a result of a reduction in silver price year-over-year of 13% and higher unit costs of 14%. Compared to budget, however, unit costs were 7% higher. This deviation compared to our budget had to do, to a lesser extent, with certain nonrecurring items as well as a stronger local currency. Excluding these effects, we estimate cash costs were within 4% to 5% of our budget for the quarter, with a increase driven by higher local inflation on certain materials and supplies including energy as well as higher costs related to ground support. We continue to guide for annual cash cost to remain within 5% of our target for 2017.

On expenses, on Slide 16, total selling, general and administrative expenses was $5.1 million, down 29% from Q3 2016 as a result of a lower share-based payments charge. Operating mines SG&A was 18% above 2016 as a result of certain nonrecurring items. Year-to-date, selling and G&A at our mines remain at similar levels as the prior year.

Corporate G&A was 17% higher than in 2016 at $2.7 million. This amount is within the guidance we provided back in the year-end earnings call of May of this year. These higher levels of corporate expenses are as a result of the growth of the company and added demands on meeting internal controls requirements under SART's regulations.

On Slide 17, we closed the quarter with total cash and short-term investments, as has been mentioned before, of $196 million, an increase of $7.8 million over Q2 of this year and $4.6 million over Q1. Under the current price environment, we expect our operations to continue to generate free cash flow that will contribute towards the funding of the Lindero Project construction.

On the right-hand side of the slide, we're pointing out total liquidity available of $276 million including the approved expansion of our credit facility up to a total amount of $120 million. This will be the main additional component of funding for the construction capital requirements at Lindero.

And finally, on Slide 18, we provide a bridge graph of our cash position in the first 9 months of the year, including short-term investments. As we have guided -- as we had guided in the Q2 earnings call, we expect the cash accumulation for the year to take place throughout the second semester 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.

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

(Operator Instructions) And our first question comes from Justin Stevens from Raymond James.

Just a couple of questions from me. And I think things are pretty straight and narrow here at most of the operations, from the looks of it. But just on the San Jose cash costs, those have been trending up on, at least, a per tonne basis. Or should we be expecting those more in that sort of 60 -- low 60s range for the fourth quarter and going forward? Or should those come back down to the high 50s?

So -- this is Luis. We do expect to see cash costs at San Jose to remain, I would say, within the $58-, $52-per-tonne range. That's what we expect today. As we've mentioned, we're seeing some inflation impacting mostly items like cement, fuel, energy and steel. There are other components, more of a structural nature related to operations itself. And so that is a range we should expect to see moving forward and into 2018.

Sounds good. And then just over on Caylloma, I notice you guys keep beating us on zinc. Should we be expecting the zinc grades there to stay north of 4% or back into the -- sort of the high 3s?

With respect to Caylloma for the next year or 2, the mine is centered on an area of reserve, where you should expect similar grade. What we expect is that as we center the mine more towards this Northeast zone on ore shoots 4 and 3, we can start benefiting from higher lead and zinc grades. But for 2018 and -- the expectation is that grades remain similar to what we're seeing today.

Okay, yes. Sounds good. And just on the Lindero side, I noticed you guys sort of revised your CapEx guidance there for the -- like, for the remainder of 2017. Do you have a rough idea of how fast you expect to wrap things up, sort of from a CapEx spending side for start of next year? Like, is it going to be front weighted or back weighted to the year there?

In the highest capital demands, we're expecting right now highest capital demand for Lindero to come in Q4 2018. That's what's in our models.

(Operator Instructions) And our next question comes from [Raugam Jarum] from Credit Investor.

I'm a long-time investor, as you probably aware. I've been dialing in for 5 years now. So I'm calling to again congratulate you, all the team one more time for another solid quarter in all fronts. So today, I wish to make a few comments and ask a couple of general questions. So first comment, I'm very pleased to learn that the credit facility has been increased, so that's a very positive development this quarter. And another item I am very pleased, and extremely encouraging is Caylloma Mine operations as well as the exploration there, the new discovery or extension of the vein. So that's a very, very good development. And most interestingly, all-in sustaining cost, you were budgeting like a $10.80 per ounce and you came at negative $11 per ounce, so that's an improvement of $22 per ounce from that mine alone. And that is extraordinary by any measure. And although you claim you are at the low -- or in bottom 25 percentile, but I believe, in my records and whatever I research, Fortuna is coming bottom of the cost curve everywhere I see it among the public companies. So that's my comments. And then on my question, related to the exploration activities at all the 3 sites in 3 countries, anything you can share, exciting developments quickly? Really appreciate it. And then I have another general question end of your answer about stock valuation. So I appreciate your time.

Okay. Thank you for your comments and words here for the team. On the exploration front, something that -- I can highlight today 2 things. One is that based on the exploration results we've been seeing, and we already published a news release solely on Caylloma results some weeks ago, I believe a reasonable expectation on management's part is that we've never seen Caylloma with the size and quality of resource as we are seeing it today. We plan to release resources in January, February, as we do every year, updated resources for all of our operations. And our expectation would be that a lot of this exploration success we're seeing will translate into resources. It's not -- I wouldn't rate it as transformational, but bear in mind that Caylloma usually is been working for 500 years with a very short mine life ahead of it. And what we have been able to show is that this mine continues to have exceptional potential to not only deal with depletion but add a few more years to its life of mine plan. So the exploration team has been doing a good job. Remember, we've been short funding Caylloma of exploration dollars as we were building San Jose and expanding San Jose. Now that we are sending -- opening the budget for exploration once again, we're seeing the results. So that is very gratifying with respect to Caylloma. And with respect to San Jose, all of our exploration in this North area, which is the highest priority area for San Jose exploration right now, is being carried from the underground. All through 2016 and the early part of 2017, we've been developing the main underground adit that gives access to this North zone, and we have also been developing drilling chambers and auxillary infrastructure that allow us and give us more flexibility to drill -- to reach other targets in this new area, like the Victoria vein. So drilling from the underground compared to surface is painfully slow, and we've been struggling with that, no doubt. But as I mentioned, 95% of all the underground infrastructure that we needed to be in place, is in place. We have 4 drill rigs turning. We are pushing to add a fifth one in this North area. And with that, we expect the flow of results of the different targets we are aiming for speeds up and we can share results with the market as they come. So with respect to exploration in our assets, that's what I can highlight to you. And with respect to our costs, we came with an all-in sustaining cost of around $6. That certainly positions the company in the lowest quartile. Yes, we're benefiting from increased prices in lead and zinc. We're primarily a precious metals producers, but we cannot deny that having a zinc and lead byproduct credit base does provides a nice hedge for -- natural hedge for our production. We're benefiting from that.

(Operator Instructions) And we do have a question from [Raugam Jarum] from Credit Investor.

I just have another last comment or question related to the stock valuation. I know the management has been consistently performing well, have been doing great sort of things with the growth and exploration and program management, cost containment, every -- in all aspects and still, our stock is not behaving [properly]. And this has been my complaint to you in all of my previous calls as well. In addition, as you just alluded to, we are also a cost leader, no doubt about it, even if you do not consider zinc and lead aspects, even otherwise, we were always a cost leader. So in that background, and you've been accumulating cash during bad times and good times and you were positive -- margin was good, EBITDA margin was good all the time. So the question is, what does -- so after all, the management is working for the stockholders as well, in addition to other constituents like employees and governments. We've been suffering, like you are, because management is also holding a significant shares. So we're all suffering for so many years, and I just want to know what would you do to -- so that the market recognizes some kind of a specific action? Because I mean, you can see, I've been participating in these calls for so long. I'm not new. I'm probably one of the largest individual stockholders of the company, outside of institutions and the management. So they're -- definitely frustrates because we are a great company and our stock is not performing as it should. I want to know if there is anything you were contemplating in addition to doing the regular great stuff specific to the stock price improvements.

Okay. Thank you for your question, [Raugam]. I believe the underperformance of the company compared to the peer group is a feature of the last year. No doubt, the company, in a difficult market, had to face with a delay in filing financials at the beginning of the year. We also announced an acquisition. We also carried a financing in the beginning of the year. So in a difficult market, I believe that -- I cannot speak for investors, but from my view is that investors been observing how we bring about Lindero and are observing how we bring about Lindero. Lindero has been a great acquisition for the company for 11% dilution on the acquisition. We are more than doubling our total resources and have the potential bringing this mine into production, taking our current EBITDA from $115 million, which is what you could project using the current price environment and our projected sales, we are in a position to take that EBITDA to roughly $220 million, no? So -- but my view is that it is a project that demands significant capital from us in a difficult market, and investors are -- want to wait and see how we advance and achieve our construction plans and delivery -- and deliver the project within the time lines that we set forth. And as we move and achieve the milestone throughout the next 18 months and bring Lindero successfully into production, the company will unlock that value and our shareholders will be accordingly rewarded. I believe that, that is the catalyst. The big catalyst for the company is successfully bringing Lindero into production which, on the initial years, has the capacity to double EBITDA for the company, to put it very simply, no? And in a difficult market, again, my perception is that investors are watching us to see how we advance the project and de-risk it as we advance it, no? That will be my answer to your question.

(Operator Instructions) And there appear to be no further questions at this time.

Thank you, [Kath]. If there are no further questions, I would like to thank everyone for listening to today's earnings call, and we look forward to you joining our Q4 2017 year-end call next year. Have a good day.

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