Gatos Silver Inc (GATO) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Gatos Silver Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to your speaker today, Stephen Orr, CEO. Please go ahead.

Thank you very much. I would like to welcome our attendees to Gatos Silver's Q3 2021 earnings call. Now before I begin, I would like to notify our attendees that I'll be making forward-looking statements, and these statements are not guarantees of future performance. They involve risks, uncertainties, and assumptions regarding future events that's probably quite difficult to predict.

So turning to slide number 3. The subtitle of this highlight slide is quite important. We believe the Los Gatos District has been unique, modern-day discovery, and development story. It is the discovery of an entirely new silver and zinc dominant district in an area that is surrounded by notable polymetallic mines, but the low status area was not considered mineralogically prospective. And as a small exploration company, our success to explore, discover, finance, and develop the first mine in this district, while remaining private and during a decade where the precious metals sector was out of favor with the investment community, we believe is quite unique. But we also recognize that, despite our hard work over the last decade, this achievement depended upon a significant amount of good fortune, as most successes do.

Now we have a mineral district with the first mine that has been built, commissioned, and is now generating significant cash flow to cover its operating and sustaining costs and build a cash reserve. So we believe in the unconstrained value potential in the Los Gatos District and, more importantly, in our responsibility to maximize that value through careful strategic initiatives to create an endearing mining complex, which will provide a foundation for Gatos Silver's growth for decades and it will provide a sustainable contribution to the zinc refining business by joint venture partner, Dowa Metals & Mining. So 2021 has been a year of financial and production optimization, building for the future through sustained capital projects and a return to resource growth through exploration.

On the financial front, during July, Gatos Silver completed a successful follow-on offering, raising 133 million to retire its portion on the Cerro Los Gatos construction term loan. Dowa, a joint venture partner, also contributed its 30% share, extinguishing the entire Cerro Los Gatos term debt facility. This now makes the Los Gatos joint venture net debt free and provides significant liquidity to use cash flow from Cerro Los Gatos' strategic value-adding initiatives. The Company also secured a $50 million revolving credit facility with Bank of Montreal thus increasing our financial flexibility, and we qualified for this facility due to the strength of our Los Gatos District asset base. And due to higher by-product metal prices, we now expect our all-in sustaining costs guidance for 2021 to be between $16 an ounce to $17 an ounce. That's reduced from our previous guidance of $17 to $17.50 per ounce.

On the production front, we again exceeded our 2,500 tonne per day design processing rate, averaging 2,544 tonnes per day. And I'll touch on this later in the later slides, but Q4 is continuing the improvement trend in the processing plant's production rates. During October, the processing plant averaged 2,620 tonnes per today. On the exploration front, 25,000 meters of drilling were completed at Cerro Los Gatos on that exploration program, with another 20,000 meters remaining. This program is converting the remaining 3.7 million tonnes of inferred resource that exists along the northwest and southeast extensions of the Cerro Los Gatos deposit. The program will most likely extend into early 2022. An initial 5,400 meter program was completed at our wholly-owned Santa Valeria project, and we're currently interpreting the results and designing the Phase 2 program. And we're still in relatively early stages of the Esther resource exploration program, with 7,200 meters drilled during Q3. That's just only about 4 kilometers away from Cerro Los Gatos, and it's targeted to be the next development project in the Los Gatos District. By the end of Q3, we had deployed a drill on another district target called Cascabel, and that's located between Esther and Cerro Los Gatos. This is a new target and it's based on surface mapping from our exploration team.

Regarding sustaining capital projects, we expect to spend between 70 million to 75 million in Cerro Los Gatos by the end of this year. These are projects that increased production efficiency and lower cost. And Gatos Silver's President, Dale Andres, will talk about that in some detail later in the presentation. I would now like to introduce Dale to discuss the details of our Q3 performance.

Thanks, Steve, and I'll start on slide 4. At our Cerro Los Gatos mine, we are continuing our strong and unwavering commitment to health and safety and to the surrounding communities. We finished the quarter with no lost time safety incidents, and we continue our constant focus on strengthening our safety culture. Our COVID management protocols are also continuing to work well, and we continue our daily screening and testing program, and the number of vaccinated employees is steadily rising, as the rollout continues in Mexico, and we currently have over 70% of our employees that are either fully or partially vaccinated.

Community engagement remains a major focus. And in addition to our continued focus on local hiring, we are proud to support our local communities, and we've completed various projects that will leave a lasting and positive impact. During the quarter, we completed projects targeting mental health and well-being, education, and critical infrastructure. We will continue to focus on improving the lives of those within our area's influence.

Turning to the next slide on our operations, and I'll talk about this over the next few slides. We are very pleased with another record setting performance in the third quarter. In the mine, we produced a record 242,904 tonnes from underground sources in both the northwest and central zones in Q3, and that's exceeding our second quarter record tonnage by about 1.2%. During August and September, we did have some constraints and had to mine more tonnage from some lower grade areas in the northwest zone as we dealt with water conditions in the higher grade central zone, so there was some sequencing issues during the quarter. However, the mine has consistently delivered expected feed grades to the plant since the shutdown in February caused by the storm-related power outage event that we experienced. We are continuing our development work underground to access deeper and higher grade portions of the mine in both the northwest and central zones. And over the coming months, we will build back significant flexibility into the mine plant as we open up access to new levels, which will allow us to further optimize as well.

Turning to slide 6. We also had record-setting performance at our plant operations in the quarter. We processed an average of 2,544 tonnes per day through the plant, and that's per calendar day, and that's above design capacity and our second quarter record. And we know that the plant has capacity on a daily basis to process up to 3,000 tonnes per day. We achieved excellent metallurgical results with recovery of silver at 89% despite the lower feed grades during the quarter, and we continue to focus on driving that higher, as you will see later with our October results, where we achieved the new monthly record at over 90% for silver recovery.

Our site operating cost performance continues to be on-track and, helped by higher by-product prices, we did lower our all-in sustaining unit cost guidance to between $16 and $17 per ounce silver for the full year. We've already recovered from the mine sequencing issues that impacted production in the third quarter, with strong performance achieved on both tonnes and grades for October, and we expect to achieve our revised silver production guidance for the year of 7.4 million ounces. And we continue to expect sustaining capital expenditures to be within our guidance range.

Slide 7 shows a summary of key performance metrics in the third quarter compared to previous quarters. As we disclosed in our production release in early October, we've produced 1.7 million ounces of silver due to the lower grades in the quarter caused by the mine sequencing issues I discussed previously. Looking at the bottom section of the table showing the breakdown of unit costs, you can see the split between operating costs, by-product credits, and sustaining capital. Considering the lower silver production compared to the second quarter, our cost performance with our all-in sustaining cost on a by-product basis averaging $16.71 per payable ounce of silver for the third quarter. This was helped by higher by-product prices during the quarter as well as our continued efforts to control site costs.

Sustaining capital costs are back-end weighted to the second half of 2021, and we do expect these costs to remain relatively high in the fourth quarter, but with overall unit cost for the year is still anticipated and tracking towards the bottom end of our recently updated cost guidance range. On an operating cost basis, unit cash costs after by-product's credits were $3.58 per payable ounce of silver, showing the cash generation potential of this high-grade deposit since we finished some of our key sustaining projects in 2022 and, importantly, as we continue to further optimize the operation.

Turning to slide 8. Our focus in the fourth quarter is to complete our planned sustaining capital projects that are currently in progress, such as the Second Refrigeration Plant and a new Underground Dewatering System, both of which will support mine production and development work as we go deeper in the mine, and together with the third lift of the tailings dam to support future production, which will be complete by the end of this year. The Paste Plant started construction in the third quarter, and this is a key project for Cerro Los Gatos, which will improve flexibility in the mine plant, reduce operating costs, and reduce the amount of tailings sent to the storage facility. The project is expected to be commissioned in the third quarter of 2022.

We are targeting to achieve 2,600 tonnes per day through the plant during the fourth quarter, as we continue to implement various improvement projects and continue to access lower levels in the mine. One of these improvement projects is a geo-metallurgical program to further increase our understanding of the various geological and metallurgical characteristics of our ore, which will help lead optimization efforts.

I'd now like to turn the call over to Roger Johnson, our CFO, to discuss our financial results.

Thank you, Dale, and good morning or afternoon to everyone. Looking at Gatos Silver's financial results on slide 9, I can sum up Q3 as our recapitalization quarter, as we closed out $220 million of debt at the Los Gatos joint venture. The transactions to accomplish this are big reason we had a $15 million net loss for the quarter. Looking at the details, exploration expenses were in line with our plans of $500,000. Our general and administrative costs were slightly higher than our average for the year, as we had higher costs from increased personnel and the cost related to a separation agreement.

Equity income from the LGJV was $1.6 million, significantly below the Q2, as the silver price declined significantly. And as just discussed by Dale, our silver, zinc, and lead production were down due to lower grades. We had some of our one-time [LVJ] costs associated with the debt retirement also were incurred at the LGJV. We incurred a $10 million closing fee to retire our portion of the $220 million term loan provided by Dowa to the LGJV as a result of the $15 million loss for the quarter.

Turning to slide 10. This slide graphically illustrates the changes in Gatos Silver: $13.5 million net income recorded for Q2 to the $15 million loss this quarter. In addition to the one-time $10 million closing fee, our portion of the LGJV earnings were almost $17 million lower due to the lower production already discussed by Dale, the lowest silver prices, and higher costs. The higher costs included a non-recurring charge for costs on the LGJV balance sheet associated with putting Dowa term loan in place and a settlement fee. Our portion was $4 million. We also had the higher G&A costs that are just mentioned.

As noted earlier in this presentation, we completed the following -- the follow-on offering in Q3, netting $126 million. We also borrowed $13 million from our credit facility. We configured these funds and some of our own cash to the LGJV as initial investment in July. Those funds were then used to repay the term loan.

On slide 11, this has the financial results for the LGJV. As I just mentioned, Q3 sales decreased from Q2 on lower silver prices and, as Dale noted, on (inaudible) metals were lower in Q3 than Q2. Q3 operating costs were slightly higher, primarily due to the higher ore tonnage process. In addition, using the funds from the LGJ -- from the Gatos Silver and Dowa Capital contributions, the term loan was retired in late July. As a result, the LGJV is debt free at September 30, 2021, with only $8 million of equipment loans outstanding. In addition, Gatos Silver is essentially net debt free with only amounts due under the credit facility outstanding at $50 million.

With that, I'll turn it back.

Thanks, Roger. Slide 12 shows the 103,000 contiguous hectares of mineral rights controlled by the Los Gatos Joint Venture. We initiated three separate exploration and resource expansion programs, and there are currently five active drill rigs turning, with a sixth drill rig being added this month. Three of these drills are still focused on expanding and upgrading the resources at the Cerro Los Gatos deposits, with one drill currently on the resource expansion program at the adjacent Esther deposit, and one on the nearby Cascabel target.

The initial 5,400 meter program at Santa Valeria, which is 100% owned by Gatos Silver, finished in Q3, and we are still assessing the results before deciding next steps on this target. We have tremendous upside potential with lots of drilling targets and mineralized zones already established, and we're looking forward to drilling these additional targets in 2022. The program of Cerro Los Gatos was expanded from a 27,000 meter program to 45,000 meters, with the focus continuing on both the northwest and even more so on the southeast zones. We've completed 25,000 meters of the Cerro Los Gatos program at the end of the third quarter.

Based on the expanded program at Cerro Los Gatos and the 19,000 meter program, which we still have the majority to complete at Esther, we are looking at bringing in additional drill rigs as we plan for 2022, and so we'll be turning the attention more from Cerro Los Gatos and Esther towards the district targets. We are continuing work on a new resource model and life of mine plan, incorporating drill results from the Cerro Los Gatos program drilled to date.

And just finally for me, overall, we're very pleased with our third quarter performance, particularly on throughputs and costs, and look forward to a return to higher grades and production in the fourth quarter. With that, I'll turn it back over to Steve.

Thank you, Dale. While I earlier referenced the record average process plant throughput in October beginning of the fourth quarter, but there have been improvements on all fronts. The silver grades during the month of October averaged 316 grams per tonne, with zinc at an expected 4.5% and lead at 2.6%. We also achieved a monthly record average silver recovery of just over 90%; that's a record for this project. And so accordingly, our October silver production was just under three-quarters of a million ounces at about 745,000 ounces, and we expect to be at or near our 7.4 million ounces for the 2021 year.

That completes our presentation. We'll now turn it over to the moderator to take questions. Thank you.

(Operator Instructions) Ryan Thompson, BMO.

Thanks for the updates. Just a couple of questions for me. Maybe just starting on the operations, realizing that the third quarter typically coincides with rainy season in Mexico, and you find some water issues, it's caused some issues getting into the higher grade zones there. Those sort of water issues, do they get exacerbated with the rainy season? Is that something that we should sort of be thinking about in Q3? Or was it sort of a one-off? Just how should we be thinking about that?

Yes, I'll take that. It's Dale. There's -- for the rainy season, it recharges the water that's in the underground aquifers and water table, as opposed to seeing a direct and immediate impact in the mine. So we don't see that direct and immediate impact. It really is -- what we're impacted in the third quarter is opening up new areas. And it's really opening up those areas that -- through faults and fractures in the rock. And especially as we first open up those production headings, we have to deal with the water.

I just really want to highlight again the key sustaining project that is going to be finished by December. We're making really good progress on it, and that's targeting one of the major zones of inflow that makes its way through to the northwest and the central zone. So as we're able to drop that water out and drop that water table down -- and that's keeping clean water clean so it doesn't go through the workings -- it's pumped directly to surface and, as soon as the temperature is at a good range, we can discharge that directly. As the water table drops below, where not just our current workings, but our future workings, that's when we'll really start to see the benefit of that project. And so that's what I'm really looking forward to in 2022. But just to directly answer your question, no immediate impact from the rainy season.

Okay, got it. Thanks for that; that's very helpful. And then just a couple of quick ones, more so on the financial side of things. As you guys sort of flagged in your presentation, the third quarter brought quite a few sort of one-time items there. Is there any thought going forward of presenting adjusted EPS number with your earnings results?

This is Roger. Let me take that. You bring up a good point, Ryan. I think that this was an unusual quarter for large items, but we'll take it on board to consider presenting adjusted earnings in the future.

Okay, that's going to be definitely helpful. And then just one quick follow-up. Do you have any sort of projections or can you give any guidance in terms of when you think the JV could potentially be paying dividends to the parent company?

This is Roger also. As you know, we are looking at some fairly significant potential for expansion. We actually don't have that study done, and we don't know what the cost is going to be. What we'd like to do is wait a while to see -- we will be very successful in operations; I'm not concerned about that at all. But if we can see the point where we're going to need to make a significant amount of contribution for additional capital for that, we certainly don't want to go out and raise money again. So I would say we're at least six months away before we'll be making a determination on that.

(Operator Instructions) All right, so there are no further questions. That concludes today's conference. Thank you all for joining. You may now disconnect.