Silvercorp Metals Inc (SVM) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Silvercorp Metals Inc. 2009 first quarter conference call. All participants are in a listen-only mode. Later there will be an opportunity for analysts to ask questions. Instructions will be reviewed at that time. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Mr. Lorne Waldman, Corporate Secretary of Silvercorp Metals Inc. Please go ahead, Mr. Waldman.

Thank you, operator. Good morning, ladies and gentlemen. Welcome to Silvercorp's first quarter results analyst conference call. Joining me today on the call are Dr. Rui Feng, Silvercorp's Chairman and CEO; Myles Gao, Silvercorp's Chief Operating Officer and President; Grace Soo, Silvercorp's CFO; Michael Hibbitts, Silvercorp's VP Operations; and [Derrick Gill], Silvercorp's Controller. During today's conference call, forward-looking statements may be made relating to future production, resource growth, earnings, business expansion plans and others. Such forward-looking statements are subject to many risks and uncertainties, many of which are detailed in our 2008 annual information form filed on SEDAR. There can be no assurance such forward-looking statements will will prove to be accurate, as results and future events could differ materially. We seek safe harbor.

During today's call I will highlight our first quarter financial results and then review the operational highlights. Following that, I will discuss our outlook going forward.

Before I dive into the results, I will address shareholders' concerns regarding our share price, which has fallen significantly from our year high. Silvercorp today is a better, stronger, and more exciting company than it was only one year ago. Compared to the same time last year, we've achieved growth in both resources and our production. To be exact, measures indicated in inferred resources are up 60% compared to this time last year, and production of silver this quarter increased 27% compared to the prior year period to 1.1 million ounces resulting in record sales and cash flows. Over the year we quickly evolved from a single mining operation to now having three mining camps in different stages of development in three different provinces.

Yes, we recently faced temporary challenges from power rationing, which now appears solved, but we remain the lowest cost primary silver producer with a cash cost of negative CAD6.79 per ounce. We're in strong financial position and have exciting expansion plans. Yes, our share price along with many others has declined, but the sky has not fallen. Quite to the contrary. We're optimistic about our future and are demonstrating this confidence with a share buyback, continued investment in growing our business including a CAD50 million exploration and mine development program, and as just announced this morning, we're rewarding shareholders by increasing dividends. We will pay a CAD0.02 dividend on a quarterly basis, representing an annual increase of 60%.

Now I will talk specifically about the first quarter numbers. We had a number of great achievements this quarter. These include record sales, record cash flow from operations, record production of silver, record milling and mining production, and the commencement of production from the TLP and LM mines we purchased in December. The financial statements for the quarter ended June 30, 2008, were included in yesterday's news release. I will now review some of the highlights.

Sales for the quarter increased by CAD8.6 million or 39% to a record CAD30.9 million compared to CAD22.3 million in the prior year period. Gross profit from mine operations for the first quarter ended June 30, 2008 was CAD21.4 million, up 23% from the prior year period. Gross profit margin declined from 78% in the prior year period to 69%, but we continue to have the highest gross profit margins of all primary silver producers, a clear demonstration of the competitive advantage of mining in China. Earnings before other income and expenses increased 13% to CAD17.1 million. For a number of reasons which I will explain in more detail shortly, net income declined to CAD11.6 million compared to CAD14.5 million in 2007, representing basic earnings per share of CAD0.08 compared to CAD0.10 in the prior year quarter. After adjusting the prior year net income for an income tax benefit of CAD1.5 million, and mineral property option income of CAD1.9 million, this quarter's net income in fact increased by 4%, and basic earnings per share of CAD0.08 is comparable to the adjusted basic earnings per share for the prior year period.

Our increase in adjusted net profit and the net earnings per share for the quarter, however, did not increase in line with increased sales. This was mainly due to the following reasons. First, the company mined low grade areas at the Ying Mine. Mining higher quantities of lower head grades was one contributing factor to the CAD3.7 million increase in cash costs of goods sold. Second, we had a CAD1.2 million increase in amortization, depreciation, and depletion costs. Third, our general exploration expenses increased CAD0.2 million. Fourth, administrative and professional fees increased by CAD1.8 million. And lastly, as the Company started to pay income tax in China this year, a tax provision of CAD2 million was recorded in the quarter.

While costs increased, the Company remained a cash cow. This quarter we achieved record cash flow from operating activities of CAD25.1 million, up 33% over the prior year period. Even after funding capital expenditures of CAD35.3 million and spending CAD4.7 million to repurchase shares, we ended the quarter with CAD75.1 million in cash or approximately CAD0.50 per share and no long-term debt. None of the cash equivalents were in asset-backed commercial papers. Operationally, there are a number of achievements this quarter.

Key milestones were reached as we commenced test production at the LM and TLP mines, where we're meeting or exceeding our production targets as we ramp up production. This helped the company achieve record silver sales of CAD15.4 million, represented by 1.1 million ounces of silver, an increase of 27% compared to the prior year quarter. Sales of silver as part of our total sales mix increased to 49.9%, while the importance of lead declined to 41.6%. This quarter, we mined a record 136,000 tons of ore, an increase of 92% compared to the prior year quarter, from which almost 3,388 tons of direct smelting ores were hand sorted for direct shipment to smelters. Ores shipped to mills to recover silver, lead, and zinc concentrates increased 80% to a record 126,000 tons.

Due to reasons already mentioned and detailed in our press release, the average milling and mining costs for the quarter increased to CAD86.84 per ton from CAD63.37 per ton in the prior year period. Despite these increases, we continue to be the lowest cost primary silver producer, with a total cash cost per ounce of silver of negative CAD6.79. Our combined head grade for the quarter was 331.3 grams per ton silver, 5.7% lead, and 2% zinc. The decline in the combined head grade is partially due to the commencement of production from the LM and TLP mines, which have lower grades, and partially due to the mining process at the Ying Mine, which is going through certain lower grade pockets of ore zones. Head grades for Ying this quarter were at 396 grams per ton silver, 6.7% lead, and 3.3% zinc.

In terms of our outlook, we've quickly grown from a single producing mine at the Ying Mining camp in Henan Province to multiple mining projects diversified in three silver polymetallic mining camps in three provinces. At our flagship Ying mining camp, through the acquisition of the LM and TLP silver mines in December 2007 and the HPG mine one year earlier, we have now effectively consolidated the silver, lead, and zinc mines and exploration properties in the Ying silver mining camp, providing us with a solid base to significantly expand resources and increase production.

For the Ying Mine the mining process is going through certain lower grade pockets of ore. As described in our latest resource upgrade report dated August 2007, we have approximately 1 million tons of high grade measure and indicated ore in the SGX area at the Ying Mine and 800,000 tons of lower grade ores in the SGX area. It is expected that the current head grades of run of mine ores from the Ying Mine will continue for at least one more quarter until higher grade pockets of ore zones are developed. This may result in the company's bottom line not increasing during this period, as the Ying Mine represented 80% of the company's total revenue for the last quarter.

For the TLP mine, mining preparation and development are ramping up. We should reach a capacity of 900 tons of ore per day or 3,000 tons per year or 300,000 tons per year. We expect to reach this level in about two to three quarters. To accommodate this increased mining capacity, we are constructing a new 2,000 ton per day mill, which will triple our milling capacity. Construction is expected to be completed around the end of November at a cost of approximately CAD12 million. Also for this fiscal year we are planning to spend CAD10 million for developing mining capacity and infrastructure at the TLP and LM mines and CAD4 million for further updating and mechanizing the Ying and HPG mines.

In in addition to increasing production, we also have an extensive drilling and exploration tunneling program planned and ongoing at the Ying camp, including 60,000 meters of tunneling, 5,000 meters of underground drilling, and 22,500 meters of surface drilling. This CAD15.5 million exploration program equates to over 100 miles of tunneling and drilling and aims to upgrade our resources from inferred categories to indicated and higher ones and to drill and tunnel new targets. In the Guangdong Province, the company is applying for a mining permit for the newly acquired GC and SMT properties. We're also conducting a CAD4.5 million 30,000 meter drilling program to grow the resources there this year. We are also exploring the Na-Bao Polymetallic Project in the Qinghai Province of China. Finally, Silvercorp has a team of four geologists dedicated to searching for and evaluating new mining projects in China. We believe China continues to be an ideal place to explore and develop mining projects.

One concern facing Silvercorp and many other Chinese businesses is power supply. Last Friday, we released news detailing the amount of downtime we experienced in July in the first eight days of August. Since then, we have noted an improvement to the outlook. There has been no power rationing for the last six days. Furthermore, we have now received assurances from the local County Utility Bureau there will be minimal power rationing, as power supply to the local county has improved, with a new hydro power generating project in the county brought into operation just last week. Our management is working closely with the local Utility Bureau to minimize any future power interruptions, including investing almost CAD1 million since last May to build a new power line to the Ying Mine. The new power line is expected to be completed by the end of this August. The Company is also expanding diesel power generating capacity at the Ying Mine to cope with any potential power rationing. We believe that we will not experience any further material power problems beyond those noted, and further guidance on the power situation will be provided if the situation changes.

We remain very excited about the Company's prospects and the opportunity for mining in China, but believe that the prevailing market conditions have resulted in our shares being undervalued relative to the immediate and long-term value of our projects. Accordingly, we are continuing to acquire our own shares under the normal course issuer bid. To date we have acquired approximately 1.1 million of the 3 million share target at an average price of approximately CAD5.80.

Before opening up the call for questions, quickly summarize this quarter's highlights. Record total sales, record silver sales, record cash flows from operations, record mining and milling production, commencement of production at our TLP and LM mines. We continue to be the lowest cost producer of negative CAD6.79 per ounce. We have CAD75.1 million cash on hand, and no long-term debt, representing approximately CAD0.50 per share, and we just increased our dividend 60% which will be paid quarterly at CAD0.02 per share. Thank you for listening. I will now ask the operator to open the lines for your questions.

(OPERATOR INSTRUCTIONS) Our first question is from the line of David Stein. Please go ahead.

Thanks. Good morning.

Good morning, David.

My first -- I wanted to see if we can get some guidance on the grades at Ying going forward. You had very good lead grades in Q2, and I am wondering if that will continue and as well some guidance on the silver grade going forward. Thank you.

Okay. It is Rui, and I wanted to answer this question. I think our grade will remain almost the same as the first quarter, as we're going through certain lower grade area like we're intentionally going to mine that, because that's what's [outlining] last [reason of] date. And in other places and time the silver [investing] price will be able to make money as we demonstrate in the first quarter. So we're going through some of those -- [park] area of the ore bodies. And and hopefully in the third quarter we will start to develop some higher grade [park] area of the ore bodies, so this will go back to the same kind of grade as last year. Around 440 gram silver.

Okay, so 10% higher than currently?

Yes.

Okay.

And also I think should be 20% higher.

Okay. And then you mined 14,500 tons at the LM mine. Is that fully ramped, or what is that mine going to look like going forward?

Basically we acquired that project -- this is Rui again answering this question because I just visited the mine last week, and we acquired the mine last December. And so over the last six months, seven months, the main focus will be on the resource online, because we don't have much information and now based on those half year how it work, we will be able to define substantial amount of resources which we hope we'll be able to release -- meaning while two months we're working on that. And based on this basic [geology] work, we think the production right now is just beginning. And our intention is to producing around 120,000 to 150,000 tons of ore from TLP and hopefully next year we'll ramp that up to about 300,000 or 400,000 a year. So that will be 1,000 [ton] plats a day. And based on the data we have and based on the amount of access tunnel we have, I think it is quite realistic and quite achievable. And therefore that [40,000] tons -- it doesn't just [refracing], we're starting work on that. Mostly as a [casting] product, by the byproduct.

Sorry, just to clarify, so the first phase you see 120,000 to 150,000 tons per year?

Yes, like for this year that's our target, right.

Okay.

And then next year -- because of the key thing for this year will be exploration and (inaudible) because when we took over this project we don't have much data. But then we'll be doing lot of tunneling, a lot of remapping of the existing tunnels, and also drillings.

You were pretty close to that throughput in the first quarter, then?

Yes. I think we're done with that already. And now based on this, the key thing is the geology information -- now we have everything on hand already about the geology and the resource. And now we're planning very, very aggressive mining plan. And our intention to produce about 1,000 to 1,500 ton a day of ore from TLP. So right now we're thinking about like 200 tons a day, something like that. 300 tons a day. Hopefully that will go to 1,000 to 1,500 a day over the next couple of quarters.

Great. Finally, could you give us some guidance on your G&A costs going forward?

Yes. General and administrative, right? And our companies are looking to -- number one we see big increase on that aspect, because we acquired TLP and the LM mine. And where the production is now ramping up and we got a lot of people working on this project -- the key thing is exploration, geology, and you can see a lot of cost increase on that aspect. And in addition to that, our company is trying to get listed on the New York Stock Exchange. We have hired a bunch of professional people to give us advice about how to comply with American listing requirement such as (inaudible) as a requirement -- so there's a lot of professional takehomes on that, that aspect.

Okay. Are those one-time fees?

Those are one-time fees, right. So we have to learn from those people how to do things right, and to have a much higher requirement in terms of disclosure and management of the company. So hopefully maybe next quarter -- next two, three quarters we are seeing a little bit more expenditures from that I expect -- it's very expensive, which is good for our company long-term which indeed improves our operation and the management. So I think we're maintaining some lever, and --

Okay. That's all I have. Thank you very much.

Thank you, David.

Thank you. (OPERATOR INSTRUCTIONS) We'll go next to the line of [John Tees]. Please go ahead.

Good morning, all. The government removed the export rebate on the silver. Does that have any impact at all on you?

The government in terms of silver export -- actually I think Silver Council has reached agreement with the Chinese government to limit export of silver. And so every year the Chinese government actually has a quarter as how much silver it can export. And where in terms of lead and zinc Chinese government has been like has a rebate to people who export lead and zinc. But now I think sometime this year a change in regulations -- if you want to export lead, you have to pay 10% of duty to the government, and if you export zinc you have to pay also 10% duty to the government. So based on this situation, because China has excessive silver and silver is often traded in Shanghai, it is not a matter of exchange. It is a swap market. So basically historically our silver price is about 10% lower than international price, but they charge you 70% GST if you bring silver to China, so I think (inaudible) 10% or lower. But in terms of lead and zinc, I think our lead price average is about 10% to 13% higher than international price because in China you pay [VAT] or value-added tax. And the zinc [in process in China] at international price. So to answer your question, right, so in terms of silver 10% lower, in terms of lead zinc, lead 10% higher [than zinc], same price, as international price in China.

Fair enough. That's a very complete answer. I am still a little confused, but I will digest it within the next few days.

Okay. Sorry. Okay.

A little bit complex, but you spelled it out pretty thoroughly. Thank you very much.

Yes. Thank you.

Okay. Thank you. At this time there are no further questions. I will turn the call back to Mr. Lorne Waldman, Corporate Secretary of Silvercorp Metals Inc. Please go ahead, Mr. Waldman.

I would like to thank everybody for joining us today for our first quarter results conference call, and we look forward to having you join us again next quarter. Thanks and goodbye.

Thank you. Bye.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.