Gatos Silver Inc (GATO) 2023 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Gatos Silver's fourth-quarter and full-year 2023 financial and operating results conference call. Presenting today will be Dale Andres, CEO of Gatos Silver; and Andre van Niekerk, Chief Financial Officer. We will conclude today's session with a question-and-answer period, where other members of the Gatos Silver management team will be available. (Operator Instructions)

Turning your attention to slide 2. Please note, today's call contains forward-looking statements. Various risks and uncertainties may cause actual results to vary. Gatos Silver does not assume the obligation to update any forward-looking statements.

I would now like to turn the call over to Dale Andres. Please go ahead.

Thank you, operator, and good morning, everyone. Turning to slide 3, I'd like to highlight three points for the quarter. Number one, we continued to further strengthen our balance sheet, increasing the cash balance while remaining debt-free, including at the 70% owned Los Gatos joint venture. Andre will speak to this in more detail, but I want to highlight Gatos Silver's free cash flow of $22 million in the fourth quarter and continuing distributions received in the first quarter of this year.

Number two point I want to highlight is that operations continue to perform very well, with the Cerro Los Gatos mine setting another record for throughput rate. We ended the year within our upwardly revised production guidance range, and we finished the year at the lower end of our cost guidance range for all-in sustaining costs. As a result, our free cash flow was approximately $22 million for Q4 and $85 million, and that's at the Los Gatos joint venture for the full-year 2023.

And the third point is yet again, we're aiming to extend the mine life by an additional three years when we update our life-of-mine plan in the third quarter of 2024, and we continue to drive operational performance with a medium-term goal of ramping up production to 3,500 tonnes per day on a sustainable basis.

Turning to slide 4, mill throughput in the quarter was over 3,000 tonnes per day, while silver grades improved compared to the prior quarter, which resulted in a 15% increase in silver production of approximately 2.6 million ounces. Importantly, we demonstrated in December that the current capacity of the mill is closer to 3,500 tonnes per day. And we are planning some minor upgrades to make sure it can sustain those kind of rates.

Silver equivalent production, which includes zinc, lead, and gold, was 3.9 million ounces for the quarter. For 2023, we produced 9.2 million ounces of silver and 14.3 million ounces of silver equivalent. Cost of sales for the fourth quarter increased by 10% compared to the comparable quarter last year, primarily due to the increased milling rates.

However, cost of sales for 2023 were only 4% higher and, on a cash cost basis, were only 1% higher in 2023 compared to 2022. And that's despite mining and processing 10% more tonnes year over year. So that's also despite the strong Mexican peso and the inflationary pressures, which we managed to largely offset.

All-in sustaining costs per payable ounce of silver for the full year after by-product credits we're $11.33 per ounce compared to $10.24 per ounce in 2022, which is a great result considering the lower planned production in 2023.

Turning to slide 5. This shows our production and cost guidance for 2024. We plan to increase throughput rates at the Cerro Los Gatos mine to average between 3,000 and 3,300 tonnes per day in 2024, with rates expected to increase through the year as we focused on ramping up mining rates to fill the extra mill capacity that we proved up in December.

Feed grades are expected to be lower in the first quarter versus the average grades expected for the full year. Sustaining capital expenditures are expected to be similar to last year's guidance at $45 million, with the majority of spend on underground development, with continued focus on opening up the southeast area.

Exploration and definition drilling spend is expected to increase as we complete the current phase of conversion drilling in the South-East Deeps and start to switch our focus to both near mine and district targets. We expect to produce between 8.4 million and 9.2 million ounces of silver during 2024 at an all-in sustaining cost after by-products of between $9.50 to $11.50 per ounce of payable silver, and 13.5 million to 15 million silver equivalent ounces at a $14 to $16 per ounce on a silver equivalent basis, and that's on a co-product basis.

I'll now turn the call over to Andre to present our financial results.

Thank you, Dale. Good morning, everyone. The 70% owned Los Gatos joint venture had another great quarter, generating cash flow from operations of approximately $38 million, 2% lower than cash flow generated in Q4 2022. However, the joint venture generated free cash flow of $22.3 million this quarter, 19% more than Q4 2022. This is due to lower capital expenditures offsetting the expected lower revenues.

Cash flow used in investing activities reduced from $20.4 million in Q4 2022 to $15.9 million this quarter, due to lower sustaining capital expenditures incurred. Resource development drilling totaled $3 million for the quarter, with most of the spending focused on the infill drilling of the South-East Deeps. For the full-year 2023, we incurred $41.6 million on sustaining capital expenditures and $30.5 million on resource development drilling.

Free cash flow for 2023 of approximately $85 million was 13% higher than the $75 million of free cash flow generated in 2022. As a result of the free cash flow generation, capital distributions made by the joint venture totaled $85 million in 2023. This is $30 million more than the $55 million of dividends distributed to the partners in 2022. In addition, the joint venture made a further quarterly capital distribution to the partners of $30 million subsequent to the end of the year on February 15.

Now turning to slide 7 to look at the financial results of Los Gatos joint venture for the quarter. Revenues decreased by $73.5 million in the fourth quarter of 2023. Revenues before the provisional revenue adjustment were 4% lower in the fourth quarter due to lower silver sales volumes as expected, which are partially offset by higher silver prices and higher lead revenues.

In Q4 2022, we recorded a larger positive provisional revenue adjustment, which contributed to lower Q4 2023 revenues compared to 2022. Cost of sales for the quarter were 10% higher than Q4 2022, primarily as a result of higher throughput, resulting in higher operating costs. The LGJV was impacted by the strengthening of the Mexican peso against the US dollar, which was partly offset by productivity improvement and cost reduction initiatives as part of our continuous improvement program.

Depreciation, depletion, and amortization expense decreased by approximately 8%, primarily due to the increase in mineral reserves and the extension of the mine life. And income tax recovery of $1.7 million was recorded in Q4 2023, compared to income tax expense of $14.8 million in Q4 2022. The income tax recovery is due to an increase in recognition of deferred tax assets and additional tax deductions available for certain mine development expenditures that we incurred. Finally, LGJV recorded net income of approximately $25 million for the quarter, 16% lower than Q4 2022.

Now moving to slide 8 to review the financial results for Gatos Silver. Net income and net income per basic and diluted share are up 160% and 157%, respectively, for the quarter. Gatos Silver recorded net income of $12.3 million or $0.18 per share for Q4 2023.

Equity income in affiliates decreased by 14%, primarily as a result of the lower net income recorded at the joint venture. Corporate G&A was approximately $2 million lower in Q4 2023, mainly due to lower audit consulting and severance costs incurred in the fourth quarter of 2023 compared to Q4 2022.

For the full year, we incurred general and administrative expenses of $25.6 million compared to $25.5 million in 2022. In 2023, general and administrative expenses included non-cash stock-based compensation of $6 million, non-recurring legal defense fees of $3.2 million, costs related to the restatement of the 2021 and 2022 financial statements of $2.3 million, and some severances of $200,000.

Moving to slide 9, Gatos Silver and the Los Gatos joint venture continued to remain debt-free. The LGJV ended with a cash balance of $34.3 million and had a cash balance of $43.1 million at January 31, 2024. As I've mentioned earlier, the joint venture paid a capital distribution of $30 million to its partners, Gatos Silver and Dowa, on February 15, 2024, of which we received $21 million.

Gatos Silver ended 2023 with a cash balance of $55.5 million and had a cash balance of $53.1 million at January 31, 2024, just a few weeks before the receipt of the additional $21 million capital distribution paid for the joint venture partner on February 15.

The company and the Los Gatos joint venture is well positioned to continue to execute on growth opportunities. I will now hand it back to Dale.

Thanks, Andre. And on slide 10, I'd like to highlight our updated life of mine and the mineral reserve that we announced on September 6 that extended our current mine life to the end of 2030. And we continue to believe we have substantial additional upside, and we are focused on realizing that upside with a target this year to add another three years, and we're on track to announce that in the third quarter of 2024.

Since last April, we have had numerous drills working on our South-East Deep zone with the aim of having the higher-grade areas of inferred drilled to 50-meter spacing for conversion for that reserve and resource update that we have planned for the third quarter of this year. So right now, the South-East Deeps is our major focus, and we currently have seven surface drills focused on that infill drilling. We also have four rigs underground focused on definition and resource expansion across the mine.

We recently added another surface rig, which is on our Portigueño near-mine target, bringing the total number of drills on site up to 12. In December, we showed our mill is capable of processing 3,500 tonnes per day consistently on an operating basis, and we are now advancing future value-enhancement projects, including the potential expansion to 4,000 tonnes. And of course, that's linked with additional reserve growth.

On the recovery side, we are completing studies for our copper separation circuit and evaluating technology and various options for increasing the recovery of silver, gold, and zinc.

Turning to slide 11. This figure shows a few of the key targets that are within a few kilometers of the existing mine workings and potentially accessible from existing underground infrastructure. Our geologists have been hard at work for the last couple of years, getting the South-East Deeps defined and adding to our life of mine. And now in 2024, we are excited by the chance to ramp up the exploration work on the rest of our 103,000-hectare land package.

We will still be doing a lot of work within 3 to 4 kilometers of the mine operations as it will be easiest to bring anything we find in this area close to the mine into production in a timely manner; you can clearly see the large number of veins we already know of just within that close range. We will be getting the drill rigs out beyond this area as well, with some very prospective targets in the San Luis area, which is about 5 kilometers to the northwest of the mine. And we have a number of targets further to the northwest, about 22 kilometers from the mine, in the [Lenz] area.

So turning to slide 12. In summary, we continue to safely drive mill throughput increases together with productivity improvements and cost optimization, which is a core part of our business and operating strategy. We remain focused on extending the mine life, and that's by the third quarter of 2024, together with other value-enhancing initiatives.

And we continue to be very excited as we start to increase our near-mine and district drilling in the large and highly prospective Los Gatos district. And finally, and importantly, we continue to generate strong operating margins and cash flow, with regular distributions expected from the Los Gatos joint venture and a growing cash balance.

I'll now hand it back to the operator for questions.

(Operator Instructions) Lucas Pamatat, Cannacord.

Hey, Dale and team, thanks taking my questions. I just wanted to hit on the -- can you provide more color on the mine de-bottlenecking efforts that you're undertaking to get you to 3,500 tonnes a day?

Yeah, sure. Thanks, Lucas. Right now, we have development well ahead of production. So to sustain a mining rate above 3,000 tonnes per day, we need to continue to open up new areas and cycle through stopes faster. And our goal is -- we've stated our mid-term goal is to get up to that 3,500 tonne per day to fill the mill.

That's just cycling through the stopes quicker. So it's not really a matter of developing. It's more just on a day-to-day basis: equipment, productivities, utilizations, making maximum use of our paste plant to cycle through both cut-and-fill and long-hole stoping faster. And then importantly, it's opening up the southeast zone.

What we want to make sure of -- obviously, for short periods of time, we can do 3,500 tonnes per day. But our goal is to drive towards that at a long-term sustainable rate. And for that, we are going to need to open up the southeast area, and that's a lot of our focus on development as well.

Got you. Thank you. And as you undertake this drilling and understand more about the South-East Deep, do you think you'll be able to include that sort of 3,500 tonne a day scenario in your new mine plan later this year?

Like I said, we're making -- like we put in our guidance, we're guiding to average between 3,000 and 3,300. So we're making good progress towards that 3,500-tonne goal already, expected in our guidance range. But yes, that's what we're going to work towards, Lucas.

Okay. Thank you, guys. All the best.

(Operator Instructions) At this time there appear to be no further questions. Mr. Andres, I will turn the call back over to you.

Thanks to everyone who participated. We are very excited about 2024. We think we're very well positioned to deliver additional shareholder value, and we look forward to providing updates as the year progresses. Thanks, everyone.

This concludes today's conference call. You may now disconnect.