Silvercorp Metals Inc (SVM) 2008 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Silvercorp Metals Incorporated second quarter results conference call. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS)

At this time and I'd like to turn the conference over to Mr. Lorne Waldman. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and welcome to Silvercorp's second quarter results analyst conference call. Joining me today on the call are Dr. Rui Feng, Silvercorp's Chairman, Maria Tang, Silvercorp's Interim Chief Financial Officer, [Derrick Ly], Silvercorp's Controller, and Shirley Zhou, Manager of Corporate Communications.

During today's 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 that such forward-looking statements will prove to be accurate, as actual results and future events could differ materially.

During today's call, I will highlight our second quarter financial results and then review operational highlights. Following that, I will discuss our outlook going forward. Before I dive into the results, I will address shareholders concerns regarding recent declines in commodity prices, which is impacting all resource companies. Silver today is trading at approximately $9.50 an ounce, down almost $0.45 from the average price of $17.17 in the first quarter. The prices for our by-product metals of lead and zinc are also down significantly. While we're executing well on our business plan, nearing completion of our new mill, bringing new mines into production, carrying out exploration to grow our resource base, we're not able to control global commodity prices. Accordingly, our profits are down and our short and mid-term outlook has been negatively impacted.

Despite the current declines in metal prices, Silvercorp remains in a very strong position. We ended the last quarter with $48 million in cash and short-term investments and we have no long-term debt. We also produced silver during the quarter at a cash cost of negative $2.56 per ounce, one of the lowest costs among primary silver producers. Accordingly, even with a challenging pricing environment, we are generating profits and positive cash flows. Still, because of the steep decline in commodity prices we are adjusting our expansion strategy to focus on maintaining mine profitability including implementing a series of cost cutting measures and controls.

Longer term we're very optimistic. China, while also experiencing a slowdown, will continue to grow and support long-term growth in demand for Silvercorp's commodities. In addition, the recent price declines are leading to supply contractions and there's already discussion about commodity shortages and price spikes when the global economic recovery begins. Given our strong balance sheet, we have the financial means to not only survive the downturn but to have the opportunity to acquire new properties at distressed prices, thereby better positioning ourselves to profit from the anticipated rebound.

The financial statements for the quarter ended September 30th, 2008, were included in Thursday's news release and I will now review some of the highlights. For the three months ended September 30th, 2008, the Company achieved sales of $20.1 million, down 31% compared to $29.2 million in the second quarter of 2007. Gross profit from mine operations for the second quarter was $10.2 million, down 56% from the prior year period. Gross profit margin declined from 80% in the prior year to 51% this quarter. Net income for the quarter declined to $4.9 million compared to $16.8 million in the 2007 quarter representing basic earnings per share of $0.03 compared to $0.11 in the prior year period.

While the Company achieved higher production levels in terms of tons of mined-- tons of ore mined and milled compared to the same period last year, both revenues and earnings decreased, mainly due to the following factors: Firstly, the Company mined lower grades areas during the first two months of the quarter resulting in less metals produced and higher unit production costs. The good news, however, is that grades began improving in the last month of the quarter and we expect a continuation in the third quarter. Second, our TLP and LM Mines are in the early stages of mining and therefore experiencing higher operating costs. Third, there is a significant drop in the selling price for lead from $1.05 to $0.81 per pound, and for zinc from $1.03 to $0.41 per pound. Fourth, we incurred a noncash charge of $1.2 million due to an equity pick up of an impairment loss of $7.3 million for New Pacific Metals Corp. Fifth, our professional fees increased $700,000 as we are moving to improve our internal controls and procedures as we move towards compliance with Sarbanes Oxley-- with the Sarbanes Oxley Act.

Also, we-- sixth, we experienced power shortages within the second quarter resulting in the loss of approximately 15 days worth of production. Also, we had no option income in this quarter while $1.1 million in option income was recorded during the same period last year. And the Company subsidiary, Henan Found, is now subject to a 12. 5% income tax rate whereas last year it was 0. Despite this, the Company continued to generate healthy cash flows from operating activities of $11.7 million and ended the quarter with $48.6 million in cash and short-term investments and no debt.

In terms of the operational highlights, this quarter we mined 124, 534 tons of ore, an increase of 67% compared to the prior year period from which almost 2,571 tons of direct smelting ores were hand sorted for direct shipment to smelters. Ore shipped to mills to recover silver, lead and zinc concentrates increased 71% to 121,963 tons. This increase in year-over-year production was achieved despite the interruptions to power supply in July and August. The total mining cost per ton of ore in the second quarter was $69.94 per ton, which comprised of cash unit mining costs of $52.33 and noncash unit mining costs of $17.61 per ton. While total mining cost per ton is up 33% year-over-year, the cash cost per ton increased only 15%. The increase in the cash cost is primarily caused by an increase in raw materials and utility costs of $6.71 per ton. The total milling cost increased 7% to $12.45 per ton of ore compared to the prior year quarter. Despite these increases we continue to be the lowest cost primary silver producer at a total cash cost per ounce of silver of negative $2.56 per ounce.

Our combined head grade for the quarter was 257.6 grams per ton silver, 4.6% lead, and 1.5% 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 as discussed in last quarters conference call, was going through certain lower grade pockets of ore zones in the first quarter and the first two months of this quarter. Head grades for Ying this quarter were 331 grams per ton silver, 6% lead and 3% zinc. In September, higher grade pockets of ore zones were developed at Ying with head grades of run of mine ores at 405 grams per ton for silver, 7.1% for lead and 2.8% for zinc. These higher grade runs of mine ores are expected to continue through the third quarter.

We remain very excited about the Company's long-term prospects and the advantage of having a high-grade asset like the Ying Mine in such a low cost jurisdiction like China. However the Company is adopting a strategy of cash conservation to maintain our strong balance sheet for future growth in the face of continued weakening metal prices and the current state of global financial markets. We are focusing on maintaining mine profitability including implementing a series of cost cutting measures and controls. The Company will be deferring some of its planned capital expenditures and development drilling programs planned for the second half of the fiscal year but will continue to move forward with key development and exploration projects to maximize our ability to build future value.

For the Ying Mine, improvement in the head grade of run of mine ores in the current third quarter compared to the second quarter will somewhat mitigate the impact from lower metal prices the Company is now experiencing.

At the TLP Mine, due to the lower grade nature of the ore , production will focus on those higher grade zones which will generate a positive cash flow while cutting back production in lower grade areas. The Company is still in the process of transferring the TLP mining permits from the previous owner to the Company subsidiary Henan Found which remains subject to receipt of all necessary approvals from governmental departments of the Henan Province. Further more the Company is in the process of completing a 43-101 Compliant Resource Estimate for the TLP Mine and the LM Mine.

The Company is nearing completion of a new mill and test production is expected to begin within the next two months with an initial capacity of 1,500 tons per day with the installation of one flotation system. It will be very easy for us to ramp up capacity with the installation of a second flotation system once metal prices recover. In Guangdong Province, the Company is applying for a mining permit for the Gaocheng or GC property. I'll now ask the operator to open the lines for your questions.

Great, thank you. (OPERATOR INSTRUCTIONS). And we are showing a question from the line of Haytham Hodaly with Salman Partners. Please go ahead.

Good morning, Lorne and Shirley, everybody else. How are you?

Hi, Haytham.

Good morning, Haytham.

A quick-- a couple of quick questions. Your CapEx breakdown, you're in cash preservation mode as you should be as everybody else should be as well in this type of environment, what would you say your CapEx for the second half of this fiscal year would look like and what's the general break down, how much would you be spending where?

Right now, we're actually significantly cutting back our capital expenditure program and it will also depend on the metal prices so I can't give you an exact figure right now.

In terms of the remaining expenditure exploration for the remaining year, we still-- for the new mill, we spent about a $5 million-- $6 million US already and we've spent-- expect to spend another $4 million US to complete the mill construction and the pay off over there. So that's about a $3 million-- $4 million. And for the exploration project, the Qinghai, we shut that down so there will be no exploration expenditure on that project. But the third project, GC project, we also-- it's in the process of shutting down a drilling project there, so we should expect another $1 million US expenditure for that. So and for the Ying Mine itself, we've spent all of the money already, and so essentially, the only capital remaining would be mine sustaining capital requirement let's say something around $2 million.

Is that for all of the mines combined Rui?

Yeah. So in summary, we may have about a $7 million US committment in terms of capital expenditures.

Okay, no that's a great answer. And maybe I'll go back to Lorne, just on the professional fees due to Sarbanes Oxley Act, are those fees you expect to carry forward quarter-to-quarter? I mean has your overall G&A which includes the IRR office and then professional fees, stock-based compensation, et cetera. Is that now a higher number because of those professional fees?

The professional fees were broken out separately in $700,000 and we expect that to decrease in the next quarter.

Okay, and is there any kind of seasonality associated with certain things that you need to get done annually or is that a one-time professional fee?

That's one-time item.

Okay.

So we're in the process of trying to get in compliance and once that's been done, that's over. So maybe another $1 million for the year.

Okay.

For professional fees.

Okay, no that's good to hear. Probably a little bit tougher question right now, but at Ying, obviously your primary focus, what's your full year production look like-- or your sales expectation at this point look like at Ying? In other words, for silver, lead and zinc at least. Silver I guess in the first two quarters we were producing roughly, we produced roughly 1.6 million ounces of silver, lead was 19.3 million pounds and zinc was 6.4.

I think hopefully the next two quarter we can-- in terms of silver production for Ying Mine it should be improved.

So the second half of the year should be greater than the first half of the year, right?

I think we'll improve the grade. We should be able to like 10% above in terms of silver ounces, right?

Okay.

And same thing for lead.

Okay, and are you getting the tonnage through? Is that-- are you having any problems on tonnage at all?

Tonnage, it's okay.

Okay. Okay, no that's great. Thank you.

Thanks. Our next question then comes from the line of [John Thees] with Sudbury Associates. Please go ahead.

Good morning, everybody. I'd like to compliment you on the quality and the comprehensive nature of your management discussion and analysis. It sure explains in detail the whole series of factors that contribute to the quarter-to-quarter changes. Good work. On-- with respect to the repurchase program, is there any way that we can determine with any precision when and whether you're in a blackout period?

We don't specifically announce our blackout periods but as we approach the quarterly results, the Company will not be buying its shares, so any time we have all of our inside information, we are not buying shares. The other thing you can know is that the Company does report any time it does buy shares within 10 days of the purchase.

Yeah, we can pick those numbers up.

Pick those numbers up that way.

Yeah. Fair enough. Yeah, it's perfectly logical that following the completion of a quarter, and probably not very long afterwards, your repurchase program would be in the blackout period.

Yes.

Until it's reported and thoroughly disseminated.

Correct.

Fair enough. With respect to foreign exchange, your main transaction currencies are the MB and Canadian Dollar and your reporting currency is the US dollar, and it looks as though for quarterly income statement purposes, you showed about a $3.1 million foreign exchange gain or a couple cents a share, but then on the other hand, in the cumulative effects for the operating subsidiaries, you show a positive figure. Anyway, that whole thing, I think I can visualize it but it's still kind of a puzzle to me. Is there anyway to clarify that?

Derrick?

Okay, for the foreign exchange, it's mainly because we will receive a dividend from our subsidiary, Henan Found, so once that-- because the (inaudible) it's stronger than the Q1, right. So once we receive the (inaudible) we're going to recall the foreign exchange gain.

Right.

And on (inaudible) Canadian Dollar financial (inaudible) to US, that would be a loss because of the US (inaudible).

Yeah.

But that loss, according to the buying share (inaudible) loss not for the P&L.

Okay. Fair enough. That's right. It was labeled comprehensive loss, right.

Yeah.

Okay. Thank you.

Thanks, John.

Thanks and our next question then comes from the line of [Robert Terangelo] with [Beltone]. Please go ahead.

Good morning, everyone. Just wanted to ask a question regarding the grade, the silver grades at the Ying Mine, since we're already in the middle of November and we're talking about higher grades for Q3, has this been proving out and have you been seeing that it's-- or do you have an idea of what percentage grade of silver you're getting?

I think that the silver grade, should go back to the first quarter of this year.

Okay. So around, I see it was reported at 396 grams per ton, is that about right?

Yeah, or it should be even higher than that.

Higher than that, great. And just kind of a separate question following up on the cash, conservation of cash. Do you have a projection of what your cash balance should be at the end of this calendar year, 12-31?

We expect to generate about a $10 million plus cash per quarter and where our expenditure, our capital expenditure for the next two quarters will be another $1 up, so I would think that we should have a slight increase of about $10 million cash.

Great. Thank you very much.

Great, thanks. (OPERATOR INSTRUCTIONS). And we are going to go to the line of [Thomas Tann] with [Astopia]. Please go ahead.

Hi, everyone. And this is Thomas Tann.

Hi, Thomas.

Hi, I've got two questions actually. One is you mentioned earlier which also is reflected in the report that there's some kind of impairment loss for New Pacific Metals which I'm not really have a knowledge about. Could you comment a little bit more on that and why it's $1.2 million for this quarter, how long this continue going to go, things like that? And my second question is I think when you answered the question regarding the reserve, I mean constraint cash or reserved cash, you mentioned you stop spending any money in Qinghai project. Is that just a temporary approach or you actually don't see a future good perspective in this project, you're going to just discontinue that project or just a temporary thing to reserve your cash? That's it. Thank you.

Thanks, Thomas, I'll answer in terms of New Pacific first. Silvercorp owns 24% of a company called New Pacific Metals and in the last quarter, New Pacific Metals wrote down the value of one of its assets and as a result, had a $7.3 million loss. Our share of that loss or our 24% of that worked out to be the $1.3 million and so yes, that's basically considered a one-time item.

I see.

Okay? In terms of Qinghai?

In terms of the Qinghai project, the project is high, very high and the commodity price is very low and so. And also, the wintertime is coming, so we will stall that project for-- until next springtime, and if the metal price recovers we may revalue that project but otherwise, we were just maybe shutting down the project for this cycle.

I see. Thank you.

Thanks and our next question then comes from the line of Howard Flinker with Flinker & Company. Please go ahead.

Hello, everybody (inaudible).

(Inaudible).

In your balance sheet, what are these long-term investments?

One would be the investment in (inaudible) other one would be (inaudible) in the smelter.

Oh, I see. They're not liquid investments?

Nope.

Thus the $16.2 million?

Yes.

And they're separate from the property, plant and equipment obviously?

Yes.

Okay, I just wanted to clarify that. Thanks, (inaudible).

All right, thanks. Did you have any further questions Mr. Flinker?

No, I did not.

Okay, great. Thank you. We're going to go then to the line of [Phil Roads] with [MRI]. Please go ahead.

Yes, I wanted to ask because of the dividend distribution cut, I wanted to find out if the capital conservation plan forecasts further reduction in distributions?

We're going to be continuing paying the dividend this quarter for sure, so that will be a $0.02 per share dividend.

We just know the CapEx was increased.

Yeah, and that dividend, Phil, previously was $0.05 annually and now it's $0.02 per quarter which would equal $0.08 annually so it hadn't been cut back. But in terms of future dividends that's always at the discretion of the Board, really depends on cash flows and ultimately on commodity prices.

Well tell me this, with the Sarbanes Oxley filing and so fourth that you're working on now, is the intent to at least in the near future to list on one of the major exchanges?

Yeah, Phil. You might have noticed that Silvercorp is now a US registered filer, so we have a 40-F filed with the SEC. I would have liked us to have been actually listed by now but unfortunately, the exchange that we were looking to list on, the New York Stock Exchange, has a $4 minimum share price requirement. Hopefully that will, our share price will recover, if not then we'll have to evaluate other options for potentially listing in the US. In the meantime, we're also looking to see how we can get our shares trading on the OTC bulletin board.

Thank you, Lorne.

Thank you. At this time we have no further questions in queue.

Okay. To conclude, I just want to remind people that the word " crisis" in Chinese is made up of two characters, danger and opportunity. Without our strong cash position and low cost, high grade Ying Mine, we're prepared to face the dangers from today's economic crisis and we are looking to take advantage of the inevitable opportunities ahead. So, in the short-term, we will focus on controlling costs and improving controls to remain profitable while seeking out opportunistic acquisitions during the downturn which will yield high returns when the markets recover. Thanks again for joining us for today's conference call.

Great, thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.