Gatos Silver Inc (GATO) 2021 Q1 法說會逐字稿

Good day and thank you for standing by. Welcome to the Gatos Silver Q1 2021 earnings call. (Operator Instructions). I would now like to hand the conference over to your speaker today, Stephen Orr. Please go ahead.

Thank you. Good morning and I'd like to welcome everyone to Gatos Silver's Q1 2021 earnings call. Before I begin, I want to caution our attendees that I'll be making forward-looking statements, and these statements aren't guarantees of future performance. They involve risks, uncertainties and assumptions regarding future events that are quite difficult to predict.

So with that, turning to slide number 3, and for those who are watching this on the screen, you'll be able to navigate the slide yourself. If you just put your mouse cursor over the top of the slide, you'll see the navigation arrows appear. Since Gatos Silver's IPO in late 2020, we've been consistently executing initiatives to achieve expected operating performance at Cerro Los Gatos and to increase the project's financial flexibility and these meaningful exploration within and around the Los Gatos District.

And during Q1, we used about $113 million of proceeds from our IPO to increase our ownership in the entire Los Gatos District to 70% by purchasing another 18.5% from our JV partner, Dowa Metals & Mining. And we concurrently retired the project's working capital facility, thereby delivering on two of the key value-adding initiatives to increase shareholder exposure to this new silver and zinc-rich district and reduce the project's debt.

And as promised, we've also initiated all the near-term exploration programs for which another portion of the IPO proceeds are directed. There are currently five drills actively drilling to expand the resources at the Cerro Los Gatos deposit and the adjacent Esther resource and conduct initial exploration at Gatos Silver's 100% owned Santa Valeria project near to but outside the Los Gatos Joint Venture area of interest.

This is the first time that we've had this many drills active since 2012, and we couldn't be more excited. Phil Pyle, our Vice President of Exploration and Chief Geologist, will be talking about these programs in greater detail later in the presentation. 2021 will be a year of optimization for Gatos Silver where we, one, focus on sustaining budgeted development in ore production rates from the mine and concentrate production from the processing plant; and secondly, adding additional infrastructure to improve the project's operating efficiency.

Turning to slide number 4, all of our achievements at Los Gatos would not have been possible without the support of the regional government in Mexico, regulatory agencies, and foremost, the communities that are impacted by the project. We recognize that it is essential to conduct our operations in a manner that protects our employee safety, doesn't harm the environment, and improves the lives of residents in the local communities. We believe we have an obligation to ensure that those impacted by Los Gatos benefit not only to employment opportunities but also education assistance, medical care support, and provision of sustainable, clean water.

As a priority, we hire our employees locally. 60% are from Chihuahua state and 24% of those are from (technical difficulty). Despite the resource industry's reputation of male employee dominance, we've managed to achieve a workforce where 20% are women and are working in all phases of the project from management to mine production to process plant operators, engineering and operations services.

In terms of community support, we built the first full-time medical clinic in the ejido of San Jose Del Sitio, and it is staffed by doctors from Mexico social services. We also have our own clinic at the Cerro Los Gatos project with our own doctors. And our doctors work collaboratively with the doctors at San Jose Del Sitio's clinic on all sorts of local community health improvement initiatives, with the focus most recently on COVID-19 prevention. And this has involved personal protection seminars, provision of molecular testing, and now the initiation of vaccinations. Our devotion to improving the lives of those impacted by our project has been recognized by the government and local communities, and we have never had any opposition to the project.

Turning to slide number 5, these are the highlights that I covered earlier in my comments. So moving to slide number 6, Cerro Los Gatos achieved its 2,500 tonne per day production target for all operating days during Q1. However, you can see that we lost a few operating days due to grid power loss during the quarter, with the most significant event being the extraordinary winter storm in Texas that interrupted delivery of natural gas upon which Northern Mexico depends to provide power to its electrical grid. The other events were high-wind events that caused arcing between power lines coming into the project. The lines in those areas that are most vulnerable to high winds have now been fairly stabilized to prevent a future occurrence.

The project development achieved an important milestone during Q1. We have now accessed higher grade portions of the deposit in the Northwest and Central Zones, which resulted in meaningfully improved performance during April of the second quarter, and I'll provide further detail on that later in the presentation. The processing plant finished commissioning its on-stream analyzer, and this provides constant data on concentrated metal recovery that can adjust to processing plant operating parameters such as reagent addition to maximize metals recovery.

I would now like to have Adam Dubas, our Chief Administrative Officer, cover the next two slides.

Thank you, Steve. I'll continue here on slide 7 of the presentation. At Q1, we had a solid start the beginning of this year. And with Q1 production, on the payable side, we had 1.3 million ounces of silver, 9,000 ounces of gold, 7.2 million pounds of lead, and 7.4 million pounds of zinc. On the all-in sustaining basis, on a by-product basis, we had approximately $19.76 per silver ounce. It's important to note here, too, this includes an element of -- we've estimated about $250 per silver ounce associated with COVID-19 costs and the less ounces produced due to the power outages that Steve just covered.

On a co-product basis, our cost is $21.29 on a silver equivalent ounce basis for all-in sustaining costs. On the cash cost side, our by-product basis is at $10.44 per silver ounce and our co-product basis is at $15.21 per silver equivalent ounce. Both the sustaining cost and the cash cost by-product basis were calculated on $24.15 for silver, $1.16 for lead -- sorry, $1.16 for zinc, $0.93 from lead, and $18.12 per ounce for gold.

Our operating costs this quarter were in line with our expectations given the temporary suspensions of the power outage and the near-term or the arc-flashing events. We've also were able to successfully sustain the 2,500 tonnes per day for all of the operating days in Q1 with our processing plant.

Moving to slide 8, as we've previously communicated in our Investor Day and in our Q4 earnings call, 2021 was a year of optimization and we are happy to report that it is well underway. Numerous strategic capital initiatives were commenced during this period, including the paste plant engineering, which is expected -- that the construction of that paste plant is expected to be completed in Q2 of 2022. The paste plant will have many efficiencies from a mine operation.

Most notably, it will help with the efficiency of the backfill operation itself, but it will also free up the haulage trucks to be more efficient and streamlined to be only for haulage trucks. They won't have to move -- press rockfill underground on the return leg or crushed ore.

We also commissioned the second mine refrigeration unit construction, which is expected completion in Q3 of this year. The third tailings lift also begun and it's expected completion as early as Q1 2022. We've also been working on underground pumping stations and both of those are currently underway. These pumping stations will allow more efficiency in our pumping operations by extracting clean water underground and pumping it immediate to service. This will help keep the areas for development to be clear of water and to allow more efficiency in such development.

Once that water is pumped to the surface, that's the only treatment that's required. It's just to cool it, given the temperature of the water, prior to being released into the stream. Both of those are expected to be in completion -- are to be completed later this year, one in Q3 and one in Q4 of this year.

With respect to our production guidance of 2021, which we previously communicated, that remains unchanged at this time. And just to recap, that guidance is 7.5 to 7.9 million ounces in recovered and concentrate silver; 4,500 to 5,000 ounces of gold; 40 million to 42 million pounds of lead; and 49 million to 52 million pounds of zinc. Again, also, our AISC guidance also remains unchanged at a $17 to $17.50 per silver ounce, and that is on a by-product basis.

Now with that, I would like to turn it over to our CFO to cover the next few slides on the financial results of the quarter.

Thank you, Adam. I'm looking at slide 10, which is the Gatos Silver financial results. We almost broke even for the quarter. We had a net loss of just 1.6 million ounces, which represents $0.03 per share. Our exploration and general administrative expenses for the quarter were essentially as we had expected. The G&A costs in 2021 are significantly higher than 2020, as you can see. That's due to the fact that we now deal with public company governance and the reporting requirements thereunder. As a reminder, we became a public company near the end of October 2020. Accordingly, the Q1 2021 costs reflect these increased responsibilities.

Earlier, Steve talked about our significant financial events of the quarter. Specifically, on March 10 we completed the reacquisition of 18.5% ownership in the LGJV from Dowa, and we simultaneously repaid -- made a capital contribution to end up repaying the Los Gatos Joint Venture debt facility. Dowa -- of course, Dowa also contributed $18 million to allow that full extinguishment of the facility. These transactions returned our ownership to 70% of joint venture.

For the first quarter, our equity income for the LGJV was $2.7 million and that represents up [51.5%] ownership through to March 10 and our 70% ownership from March 11 to March 31. I will talk about the LGJV results in a moment, but this is the third consecutive profitable quarter for the LGJV. We also paid Dowa from previous financings arrangement fees. In the first quarter of 2021, the arrangement fees were significantly lower as the working capital facility was extinguished in March.

Looking to the next slide, you will see the joint venture performance on this slide -- and this is slide 11 -- 10, sorry, slide 10. February 2021, freezing temperatures that we've already mentioned, restricted the natural gas availability in Texas and therefore in Northern Mexico. The lack of natural gas as a fuel source to generate the electricity caused the Mexican power plants to suspend their operations or to look for what little power they could provide -- provided at very high cost.

The milling operations were suspended for several days because of this, and the mining operations were effectively stopped for at least eight days with dewatering taking even longer to recover from. Unfortunately, these -- the mine development delays caused the plant high-grade mining from March to go to April.

With this backdrop, looking at Q1 2021, the metal prices were favorable. They contributed to robust sales despite the power outage suspension. As I previously mentioned, both the throughput and the [operators] were impacted by this power outage. Operating costs were essentially in line with the revenue shortfall and only slightly above the first quarter 2020. Our other expenses in Q1 2021 were $2.1 million of interest and $1.6 million of foreign exchange losses on peso-denominated net assets, primarily the value-added taxes and receivables that we have.

On a positive note, the high-grade material delayed from March processing began to be mined in April resulting in April cash collections to be the best month ever for the mine. With that, I will turn it over to Phil Pyle, our Vice President of Exploration and our Chief Geologist. Phil?

Thank you, Roger. I just want to give everyone a brief update on our definition drilling plans and exploration plans for the Los Gatos District and our Santa Valeria project. As you can see on this slide, we have a very large land position for mineral rights through the Mexican government, covering 103,000 hectares of contiguous land. Within that block, we have a total of 11 zones of interest, with mineralization that has already been identified by drilling, and three others zones which have NI43-101 mineral resources. The most important of which is where our mind is: in Cerro Los Gatos. We also have two other zones with mineral resources at Esther and Amapola.

At present, we have three drills operating at the Cerro Los Gatos deposit. And the principal focus of these drills is to convert inferred resources into measured and indicated resources, along both the northwestern and southeastern flanks of the deposits outside of the areas where the reserve is located. At present, we've completed 23 holes on the southeastern side. We've demonstrated continuous mineralization over a strike length of an additional 425 meters from the reserve block.

We've also identified a new vein, which has higher copper and very strong base metals and silver. It's deeper into the footwall of the volcanic package. We don't yet know the extent of this new vein, but we are targeting it in additional future drilling.

On the northwestern side of the deposit, we've completed a total of eight holes, principally focused on adding definition to the short-term mine plan over the next two years. Those holes are wrapping up and we'll be moving further to the northwest in the areas of inferred resources as we continue on our program.

And also today, we are beginning our very first drilling at the Esther deposit since we completed our drilling program in the early discovery phase in 2011. This program is dedicated towards converting measured -- converting inferred resources into measured and indicated resources and focusing on the development and finding of new resources along the Esther vein trend, which is very similar in strike length to the Cerro Los Gatos vein trends. We are excited about this program and our objective is to try to move enough resources into the measured and indicated category to perform a feasibility study as quickly as we can.

We also have another project outside of the Los Gatos Joint Venture, which is 100% owned by Gatos Silver. It is called Santa Valeria and it is only about 4 kilometers to the east of the Los Gatos Joint Venture [vein] block. Within that, we recognize a geologic setting that is very similar to Cerro Los Gatos -- the principal structural trends on the other side of the sedimentary basin where the sedimentary rocks are in contact with volcanic rocks.

Also, within this area, we have recognized on the surface a number of vein systems that show values of silver. We've completed our first three holes at Santa Valeria, and we anticipate approximately another 15 holes there over the next couple of months. We are very excited about our results so far. We produced one press release on April 15, and we plan on continuing to put out releases probably on a monthly basis to keep the market updated on the progress of all of our drilling activities.

And with that, I'll turn it back over to Steve Orr to wrap up the project timelines.

Thank you, Phil. Turning to slide number 12, we've mentioned a couple of times in this presentation about the improved performance that we are seeing now in Q2, and this just gives you some stats from our April performance. In April, we mined the highest monthly tonnage since commissioning Cerro Los Gatos. In fact, the mine recovered 7,000 tonnes of its 17,000 tonnage shortfall from the February power loss. We also set a record for mined grade at 331 grams per tonne. And the mill recovered 3,000 tonnes of its 23,000 tonne shortfall from Q1.

Silver recovery also set a record at 87.3%, which contributed to the highest silver production since commissioning the project, and we produced 698,623 ounces. Cerro Los Gatos also set a record for zinc and lead production. This performance, combined with favorable silver and zinc prices, resulted in a record $21.2 million of revenue in April. We are confident that we can achieve our market guidance for 2021.

And that includes our presentation. I would like to ask the host now to open up lines for any questions.

(Operator Instructions). Alex Hunchak, CIBC World Markets.

Hi, everyone. Thanks for taking my questions and congrats on a pretty exciting sounding April as well. I wanted to ask on CapEx first. So I saw about $12 million in sustaining CapEx in the quarter. Can you guys confirm how much is left in total CapEx for the rest of the year and how that spend will play out over the next three quarters? Is it pretty even over the next three quarters or is it staggered a bit?

Roger, would you like to take that question?

I'm happy to field that question. No problem, Steve. On the $12 million -- so the guidance of sustaining capital too remains unchanged. That was the $65 million to $75 million range with previous communications we've made. The $12 million is in line with what we were expecting to spend during that first quarter as we ramp up through the rest of the year and getting those multiple key sustaining initiatives going throughout the rest of the year.

So it would not be a linear relationship. We do expect some of the sustaining capital with the increase, therefore, meeting that -- I guess, when you look at the remainder, $53 million to $73 million in that range of -- sorry, $53 million to $63 million range of additional sustaining capital to be completed in the remainder of the year.

Okay. And that will be sort of evenly over the next three?

Yes, from the recent medium-term forecast we've done, that would be on a fairly consistent basis quarter to quarter and then the following quarter, yes.

Okay.

I do need to apologize, Alex. I was speaking to you on mute and then -- so, Adam, thanks for covering for me.

No worries, no worries.

Okay, that's great. So then just given the current metals prices and the cost guidance, are you guys still comfortable that all of that CapEx remaining can be funded at the JV level with cash flow? Or do you see potentially that you're going to have to put a little extra money in from your end?

This is Roger. Absolutely, with prices particularly where they are currently, we are above $27 per ounce silver. Zinc is in the $1.30 per pound, and lead for the first time in a long time is above $1. We would be able to fund it at the prices we had previously planned, which Adam pretty much quoted when he mentioned what our AISC numbers were based upon. And so we are very confident that we will not be having to provide any further capital contributions to fund the spending.

Okay, now that's great to hear. Thank you for that. And then I just wanted to ask as well, you talked about the additional pumping stations. Can you just give me a little more color on how the water situation has been underground and has it impacted production at all yet or is it just something you want to get ahead of? Or how are you dealing with the water as it is right now?

So, Alex, the only time water impacts our production is when we lose power. And so we lose our ability to maintain the pumps. The pumping is essential though for us to be able to maintain the efficiencies in the mine. So one of the things we've learned from the grid power loss is that we still have backup power generation capabilities from diesel generators that we used to power the project during its construction phase. We are now adding additional diesel generation power capacity so that even in the event of a power loss, we will be able to maintain power to all the essential items, and that includes all our pumping as well.

Okay, okay. But to confirm that water hasn't been a bigger issue than expected that you're managing at this point?

Yes, were managing it very well now, but we need to keep the pumps active.

Okay, okay, that's good. And maybe just one more quickly then on the exploration updates. When do you think we might see the first results from Esther and even Santa Valeria in terms of timing this year?

Phil, do you want to take that? Maybe Phil is on mute.

Sorry about that. I was on mute. With one rig operating in Esther and one rig operating in Santa Valeria, we will complete each hole approximately in two-week interim intervals. And it normally takes about four weeks to get assays from ALS Chemex these days. And so each hole from the beginning to receipt of results is about six weeks. We won't want to release the results from Esther or Santa Valeria until we have enough data to make a meaningful interpretation of what we've been finding. So my guess is that because we've been drilling Santa Valeria a little bit longer, we will be able to release results on Santa Valeria within the next month or so. And then Esther will probably be more like six weeks to two months out before we give a first release.

Okay, that's great. All right. Thanks for all the info, guys, and good luck in Q2.

(Operator Instructions) Ryan Thompson, BMO.

Hey, Steve and team, thanks for the updates. I was actually going to ask the same question on CapEx, so thanks for clarifying that. Maybe just on grades, you've talked about grades ticking up in Q2 there, 331 grams per tonne, I think you said. Can you just give us a little bit of color on Q1, where grades were? Were they in line with budget and how we should be thinking about I guess the trend through the next couple of quarters here and even into 2022? If you could give any granularity on that, that would be great.

Yes. Well, you'll see when you go through the quarterly, the grades were lower in Q1. And the reason that they were lower in Q1 is because we ended up mining in areas that were not originally budgeted for mining, and it was strictly because of our development, the constraints that we had. Once we had the power loss, it put our development behind. And so we were not able to access the higher grade areas when we thought we would be able to access them.

So we continued mining in other areas of the deposit that were lower grade. So now we are in those areas. And this is the good news, Ryan, how this has [ticked]. Now that we are into those higher grade areas, the grades are pretty much exactly what the resource model said they would be. So I mentioned we were -- for the month of April, we were 331 grams per tonne, and that's exactly where we expected that we would be. And I have to say the beginning of May is as good if not better than April was.

Perfect. Thanks for that. Good to hear that things are reconciling. And can you say the same about the lower grade areas that you are mining in Q1 or are they reconciling well to the model? And if you can, any forward-looking guidance maybe even into Q3 and Q4? Should we expect an upward trend or is the number that you mentioned in April a good number to be thinking about?

The number in April is a good number to think about. And then to your earlier question, we actually did a reconciliation to the resource model for all of the mining we did in 2020. And interestingly enough, we actually ended up mining more silver than the resource -- modestly more silver than the resource model indicated. The difference was where we ended up mining because we didn't have access and we hadn't yet achieved development access into areas that we anticipated we would have. So we ended up going into areas that were lower grade and the resource model showed that as lower grade as well. But the takeaway for us was that the resource is turning out -- our calculation is turning out to be very reliable, which is terrific news. And then secondly, we have to stick to plan.

Got it, got it. Now that's very helpful and that's good to hear that it's reconciling well. Maybe just a follow-up question. Can you just give us some color? I know on the last update call, you mentioned that COVID was still pretty problematic in Northern Mexico and you had to deal with it. Can you just give us an update on how things are on that front and mitigation efforts and so on, and cost as well, I guess?

Yes. So the COVID infection rate, at least relative to our employees, seem to have peaked in December. And in the late November, early December timeframe, we were getting 40 to 50 employees testing positive every shift rotation, as people that had been off for their 10 days leave came back. In January, it dropped precipitously and now it seems to be stabilized. It bounces around between maybe 8 to 12 each rotation, which is very manageable for us.

When it was 40 to 50, that was difficult because those people, we are replacing other employees. And so with 9 to 12 people, we can go back to the employee that was due to go off on their break and asked them if they would like to stay for another rotation. And normally, they do. When we had so many in November and December, we couldn't cover all of it. So we are really quite encouraged at what we are seeing, but we haven't reduced any of our protocols, and we are still fortunate that we have not had an outbreak at Cerro Los Gatos.

Can I add one note? Sorry, Ryan, I just had one note. You asked about costs on COVID, too, and I had earlier given that breakout of the cost per silver ounce on the by-product AISC basis. And to Steve's point -- we did see the cost spike a bit, too, along with the infection rates. And so in January and February and then into March, we saw it precipitously declined to the amount of costs we are incurring for the COVID-related elements and protocols and isolation. The cost of the whole quarter were approximately $1.1 million with all of our COVID efforts that were identified in that number that I earlier showed on an AISC basis.

Got it, okay, perfect. I think that was all I had. Thanks for the update and looking forward to Q2 results.

(Operator Instructions) And there are no further questions at this time. I will turn it back over to the management.

Well, if there are no further questions, thank you very much for attending our Q1 2021 earnings call. And well, this now concludes the call.

This concludes today's conference call. Thank you for participating. You may now disconnect.