Silvercorp Metals Inc (SVM) 2008 Q3 法說會逐字稿

Good morning, I will be your conference operator today. At this time I would like to welcome everyone to Silvercorp Metals Inc.'s third quarter results analyst conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (Operator Instructions) Thank you.

It is now my pleasure to turn the floor over to your host, Mr. Lorne Waldman, Corporate Secretary of Silvercorp Metals Inc. Sir, you may begin your conference.

Thank you, operator. Good morning, ladies and gentlemen and welcome to Silvercorp's third quarter results analysts conference call. Joining me today on the call are Dr. Rui Feng, Silvercorp's Chairman and Chief Executive Officer; Maria Tang, Silvercorp's interim Chief Financial Officer; Derek Liu, Silvercorp's Controller; and Shirley Zhou, Manager of Corporation Communications.

During today's call, forward-looking statements will 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 can differ materially.

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

Before I dive into the results, I'd like to start by stating that the global financial crisis, which has swept across the world over the past six months, had a tremendous impact on the mining sector, hurting all producers and curbing expansionary plans. While silver prices have recovered somewhat from recent lows, with the price now about $13 per ounce, the markets remain extremely volatile.

Silvercorp has not been immune to the recent upheavals, but the Company today is in a stronger position than when we last spoke in November. We have been swiftly implementing measures to respond to harsh new realities. And measures implemented to date are yielding results. We are seeing improvements in our operational efficiency and have identified and reduced costs. Of particular note, we have improved the run of mine head grades at our Ying Mine this quarter by 27% through the enhancement of quality control procedures and applying a more systematic approach to monitoring and managing our contract miners. As a result we lowered our cash cost of production per tonne of ore by 19% which helped us achieve exceptional results given the very difficult pricing conditions that existed during the quarter.

During the quarter we also completed a new resource estimate that resulted in a 36% increase in the Company's measured and indicated silver resources. As a result of our achievements in this difficult quarter, we are confident that we will continue to generate positive cash flows, which will enable us to continue building a stronger foundation for future growth. I'll now deal with the financial highlights.

The financial statements for the third quarter ended December 31, 2008, were included in yesterday's news release and I will now review some of the highlights. For the three months ended December 31, 2008, the Company achieved sales of $15.2 million, down 50% compared to $30.1 million in the third quarter of 2007. Gross profit from mine operations for the third quarter ended December 31, 2008, was $5.2 million, down 78% from the prior year period. Gross profit margin declined from 80% in the prior year to 35% this quarter.

The Company reported a net loss for the quarter of $33.7 million, or $0.22 per share, compared to net income of $17.8 million or $0.12 per share for the same period last year. Included in this amount was a non-cash impairment charge of $47.4 million or $40.3 million after tax. And, an unrealized $2.5 million foreign exchange loss relating to the translation from Chinese RMB to Canadian dollars of a future income tax liability arising from the acquisition of the GC and SMT projects. The non-cash impairment charge was made to reflect our decision to suspend mining at the TLP and HPG mines, scale down mine production in the LM Mine and put our Nabao exploration program on hold. Excluding these two exceptional non-cash items, our adjusted earnings for the quarter was $2.6 million or $0.02 per share.

This quarter, the Company achieved higher production levels in terms of tonnes of ore mined, up 38% compared to the same period last year. However, sales, adjusted earnings and cash provided by operating activities all decreased. The biggest reason for the decrease, of course, was commodity prices. During the quarter the average metal prices we received from the smelters for silver, lead and zinc, decreased by 34%, 60% and 60% respectively, compared to the same quarter last year. For example, as shown on page three of our news release, the price we received in the quarter per ounce of silver was only $7.34, compared to $11.09 in the prior year period. For lead, we received only $0.41 per pound, compared to $1.02 last year.

The good news, of course, is that silver prices have been trending upwards since the end of the year and lead prices in China are now trading at a premium to world prices. Currently, more than a 35% premium. Most importantly, the Company this quarter reacted and adapted quickly, cut costs, improved efficiency, and as a result, we were able to generate healthy cash flows from operating activities of $8.5 million during the quarter. As such, we ended the quarter in a strong financial position with $43.3 million in cash and short-term investments, and no debt. This is even after making capital expenditures of $3.6 million and paying dividends of $3 million. Because of our strong financial position, and our confidence in our continued ability to generate positive operating cash flows, we declared this morning our third quarter dividend of CAD0.02 per share. We'll now touch on the operational highlights.

This quarter we mined 122,000 tonnes of ore, an increase of 38% compared to the prior year period, from which almost 3,288 tonnes of direct shipping ores were hand-sorted for direct shipment to smelters. Ores shipped to mills to recover silver, lead and zinc concentrates increased 39% to 115,000 tonnes. The total mining cost per tonne of ore increased to $64.30, which comprised of a cash unit mining cost of $42.57 per tonne and non-cash unit mining cost of $21.73 per tonne of ore. While total mining cost per tonne is up 19% year-over-year, the more important number, the cash cost per tonne, decreased by 8% on a year-over-year basis. And, our cash cost per tonne decreased by 19% compared to the September quarter. This is a clear demonstration that our renewed focus on operations efficiency and cost control are working.

Despite our achievements at lowering our costs, the cash cost per ounce of silver, adjusted for byproduct credits, was $0.25, up from negative $12.10 last year. The increase was mainly caused by the reduction in byproduct credits, as their average selling price of lead and zinc fell 60% compared to the same quarter last year.

Our combined head grade for the quarter was 324-grams per tonne silver, 6% lead and 2% zinc. The decline in combined head grade on a year-over-year basis is primarily due to the added production from the LM and TLP Mines which have lower grades relative to the high grades at Ying. Head grades of the Ying Mine for the quarter improved by 27% to 420 grams per tonne silver, from 331 grams per tonne silver in the last quarter ended September 30, 2008. Still, the grades were still approximately 10% below the prior year period's grades of 462 grams per tonne. By continuing to improve our quality control procedures and applying a more systematic approach to monitoring daily production of the mine contractors, we expect to continue to see further improvements to the grades at Ying. We're projecting head grades of 480 grams per tonne silver from the Ying Mine for our upcoming fiscal year.

Turning to the outlook. 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 low cost China. However, even low cost China is not immune to global commodity price pressures. As announced we have adjusted our operations plans to preserve cash and maintain a positive operating cash flow. Mining operations at the TLP and HPG Mines were suspended while mining capacity in the LM Mine has been scaled down from approximately 150 tonnes per day to 100 tonnes per day, with mining activities focusing on the higher grade zones.

Investors should keep these adjustments in perspective. Remember, our mining development and exploration plans at our flagship Ying Mine are proceeding as planned. Production at Ying is being maintained at 700 to 750 tonnes of ore per day and Ying accounted for almost 80% of sales and over 90% of cash flows year-to-date. For our upcoming fiscal year, we're projecting that we will produce 4.05 million-ounces of silver, with 3.65 million-ounces coming from our Ying Mine. The remaining balance will come from byproduction ores from the TLP, LM and HPG Mine development.

Using mid January commodity prices and the projections set out in our press release, we expect the Company's mines to be operating with a gross profit margin of between 55% and 65%, resulting in expected cash flows from mining operations of $30 million to $35 million. This will help us fund our current capital expenditure program for the Ying Mining camp for fiscal 2010 which is budgeted at $16 million including $11 million for the Ying Mine, and $5 million for TLP, LM and HPG Mines.

For our GC project in Guangdong province we recently announced the results of a 10,000 meter diamond drilling program which discovered 15 new veins with high grade silver mineralization. Our Phase II, 3,000 meter drill program will commence in March. And we expect to produce an updated resource estimate for GC in June. The Company also plans to complete an Environmental Assessment Study on the GC project by the end of March and then submit a mining permit application to the Ministry of Land and Resources of China in Beijing. We have budgeted approximately $4 million for the GC project in fiscal 2010, for exploration and permitting processes, bringing the Company's total capital expenditure budget for fiscal 2010 to $20 million. In conclusion, the Company this quarter demonstrated its ability to adjust its operations and strategies quickly, to be able to maintain strong positive cash flows, even under difficult conditions. At the same time we have continued to move forward with the key development and exploration projects, building a foundation for future growth and maintaining a strong financial position which allows us to seek out opportunistic acquisitions during the downturn. I would now ask the operator to open the line for questions.

Thank you. (Operator Instructions) And our first question comes from the line of [Thomas Tann]. Please go ahead.

Hi, everyone, and I have a couple questions. Should I just give both of them now? Or should I just shoot one by one.

Let's take it one by one.

Okay. You mentioned that TLP HPG has been suspended but what do you think the commodity price, especially silver price, will go back to, what level do you think, you will basically consider that decision?

Okay. I understand your question to be at what level would we start to reconsider bringing back those mines into production?

Yes, production.

We start considering it actually at the $13 to $14 per ounce level and, it really depends on also our outlook for it going forward. So that's the point where we start to reconsider it. So we are getting close to that point.

And you have written down, what, about $40 million $45 million for both of them. Why is that? What will you do, the accounting treatment, will that be no depletion for the future years, because you have pretty much written down the full amount this year?

Yes, that's correct. Once something is written down, then you no longer have depreciation charges from those assets in the future under current GAAP rules.

Yes, yes. Either depreciation or some people use depletion. On your latest Q4 statement, you have a non-cash unit cost, which above the $42. I think is about $22. Can you elaborate a little bit more what are the items in the non-cash unit cost per ounce?

That would relate to depreciation, depletion, amortization.

Okay. And I think the number is probably higher than comparing to the same quarter last year?

Yes, that would be correct and that would have to do with bringing on additional assets compared to the last -- the same quarter last year. Remember, we just acquired TLP in the last quarter and it hadn't begun production so you didn't have any depreciation charges for that asset, as an example.

I see. I think I also just saw an announcement this morning that your VP operation, Mike Hibbitts resigned. Are you going to refill that position or are you going to have some kind of an organizational restructuring?

No, we're not having an organizational restructuring. Our operations will be continuing on without any difficulties and at the same time, we're always looking to bring on new, good people, but at this time we also need to be controlling our costs.

I see. That's all the questions I have. Thank you very much.

Thank you.

Next question comes from the line of Haytham Hodaly. Please go ahead.

Good morning, Lorne, how are you?

Good, how you doing?

Good. A few simple questions. I'll start with just on the GC, the $4 million that's going to be spent on exploration, will it hit the income statement? In other words, is it going to be expensed or capitalized?

That will be capitalized. That will be capitalized.

How much will hit the income statement in (inaudible) terms? Will there be any expense to exploration? I know you've had small amounts here over the last little while.

In terms of GC, right?

No, not for GC, just in general. Will there be any exploration that hits the income statement?

It shouldn't be much.

Okay. So very minimal, Rui?

Yes.

Okay. Next question, I guess for the HPG and TLP and the new mill, obviously these are on care and maintenance at this point. What's your care and maintenance cost? I know the $20 million budget we had which was $11 million for Ying and, $5 million for TLP and HPG and GC of $4 million, but is there an actual care and maintenance cost to keep those things around?

For example, in terms of TLP there is no care and maintenance cost.

Okay.

And what we're going to do is instead of mining, we're going to do some infrastructure development, we're going to dig more tunnels, but we're not doing mining, right.

Okay. So that's part of the $5 million that was quoted; is that right, Rui?

People are still working there for development.

So that's what that $5 million is for.

Yes.

And then the new mill, is there any cost to keep that thing around?

There's no cost, right, and we still have something to be -- it's there but we still have a little bit here, there, just take time to finish up, right, it's minor.

How much more money do have you to spend on that new mill or is it pretty much done?

It's all done. We cost out everything already.

Okay. So it's--?

All the costs is included in our financial statement already.

Okay. Perfect. So two more questions, just simple ones. You're always quoting 100% of production when you're quoting the 4.1 million-ounces for the Company?

Right.

Then for G&A, you generate some great cash flows out of Ying, et cetera. Your G&A numbers seem high, they seem to bring your overall cash flow at the end -- after all is said and done down to much lower levels, you've got about $13 million if we were just to take this last quarter and annualize it in annual G&A. Is there any way you can bring that number down whether it's office administration, miscellaneous or professional fees, et cetera?

I think it was quite a big part of that is some payment to local government.

Oh, I see. Okay. And does that fall under the office administration or under professional?

Yes, yes. (multiple speakers)

Is that consistent, that will keep going sort of thing?

Yes, it's like ongoing cost of almost $2 million.

Okay. So $2 million annually.

Yes.

Okay. Interesting. And the dividend, what do you see happening with the dividend going forward at these levels?

We just declared dividend of $0.07 as of the last quarter, right.

Do you expect that to continue if we see silver staying around the current levels?

I think so. I think just on the outlook we use a mean generate price numbers and since then like silver prices have improved almost 20%.

Yes.

So that will be enough to maintain our higher dividend paycheck, right.

Okay. One last question, Rui, just with regards to growth. Are you still pursuing other opportunities for production growth in the region?

I think as we said in the news release, TLP, LM, and HPG, we will be able to bring those into production, fairly quickly, because we are still working there on more development, right.

Yes.

So that's basically what the shorthand growth prospect, once the price is reasonably good and secondly, GC project, it's the one project will keep us like immediately like in two, three years term is about a 30 -- almost a 50% to 60% growth, right.

Yes.

So that's all accounted for. In addition to this shortened growth from TLP and HP mines, we have a three year like growth from TC project.

Right.

And also we also are looking for other opportunities, not just in China, maybe outside of China too.

Do you expect to put out a study on like a pre-fees or a fees on the GC project this year?

I think so. We hope to get another resource update with some kind of scoping study included.

So that will be included. Okay. Perfect, thank you.

We can use Chinese engineering firm to do some economic study, right.

That would be very helpful for us. That's wonderful. Thank you.

Thank you.

Next question comes from the line of [Afgel Mohammed]. Please go ahead.

Hi, I just have a question about the Ying Mine. At the Ying Mine, what are your exploration budgets or plans going forward in order to continue to replenish the resources?

Right now, for this year, we projected almost $11 million, which included some tunneling and (technical difficulty) also maybe $2 million, $3 million in the drilling, right, and also exploration tunnels. So based on our experience, that's pretty much the sustaining capital costs and we'll be able to -- when we first studied this operation in '06, we referred a scoping study report, we had a six year mine life. Now, based on '07 data, we will have a seven year -- a ten years mine life and you think that every year our exploration efforts should be more than enough to replenish the depleted resources, right, to maintain our, like ten year plus mine life.

And you expect that to continue going forward?

We expect that that continues. Right now, we are developing -- we've been almost drilling for anything about 200-meters plus, 200-meter elevation levels, so right now we are developing a 200-meter level tunneling, tunnels, so once that's been done, and we'll be able to start a drill at depths below that 200-meter elevation and which should bring more resource up.

Okay. Perfect. That's all I had. Thanks.

Thanks.

[Mike Kozak] your line is open for the next question.

First question, you guys wrote HPG and TLP all the way down to zero is that correct?

Yes.

I'm just curious why you would do that if you are talking about restarting both those mines at $13 or $14 silver and you're not stopping with development?

Because it's been suspended and--.

Okay. Just--?

So we're going to have to -- from an auditing point of view, we have to.

It has to go all the way down to zero, does it?

Yes. Or to $1.

Fair enough. Second question, op cost on a per tonne basis at Ying you had a great quarter. You guys have been saying that it was due to like improvements with the mining contracts or the ease? What exactly do you mean by that and how sustainable are those improved costs going forward?

We're in the process of trying to gather lease in the USA and we are introducing ours stocks (inaudible) in that for this (inaudible) practice, in our general operations. We bring that same concept to our mining operation. So essentially, it was that introduction and all the mining operation, especially with the mining contractor will be following a more routine practice which involve on-site mine engineer, contractor and also a quality control people for headquarter, right.

Okay.

So that's three group of people that follow a certain practice to make sure we have dilution under control.

Okay.

So I think that's going to be ongoing, we'll be able to maintain that cost (multiple speakers).

So of that cost improvement, let's say how much of it would you ascribe to like lower input costs like consumables and how much of it would you ascribe to the mining contractor and then the new (multiple speakers)?

I think mostly because by reducing of dilution.

Okay.

By reducing less, we (inaudible) can bring all that ore.

Okay.

That's the main improvement.

Okay. Great. Thanks, guys.

Next question comes from the line of John Bridges. Please go ahead.

Hi, good morning, everybody.

Hi, John.

Just wanted to dig a little bit into the cost structure and the -- I understand labor costs in China are significantly lower than those in the West, so the breakdown of that cost per tonne is going to be quite different. Could you offer some indication as to how it's broken down?

Maria, could you go ahead for that?

Yes. We have about--.

John, do you have another question while Maria is just getting that, the percentage?

Yes. I just wondered, you're using contractors to mine. What's the reason for that? What are the advantages, disadvantages of using a contractor and might you be able to save some more money by doing it yourselves?

That's a very good question. Using contractor or not using a contractor. From a management point of view, it's much simpler and easier because you don't have to deal with all the miners. All you deal with, the lead, like the manager of the mining contractor, right? And he will look at -- take care of all the mining detail, all the cost control, those things and I think that's the main reason. And the second reason will be, they offer a lot of more expertise in terms of mining and we can focus on more exploration and on mining planning, right. And thirdly, will be labor concerns. We don't have to manage all the labor contract and the labor, and all the workers, right, and so there, that Company, mining contractor Company, will take care of all those labor-related issues, right?

Okay.

John, in terms of the costs, around 34% of our cash costs are for the mining contractors.

Okay.

And maybe 30% are on the power, utilities and maybe 20 -- I think labor cost will be around 10% and maybe 20% from the--.

It's 13% for labor cost. You'll find all the information on page four of our MD&A where we give a breakdown, a full breakdown of the mining costs.

Okay. Fine. And then on December 30, you put out a note saying that -- describing how the smelter payments have fallen. Is there any hope of that percentage to recover in a stronger silver price environment or is the smelter situation in China still tight?

In that news release we made some kind of confusing to people. Actually, to answer your question, the terms have improved already because the smelter, the charge from smelter is always fixed and now with underlying silver price improved, the percentage that we got improved too, right. Because it doesn't matter how prices go up, whatever they charge don't change. Just give you an example -- for example, in China right now, I can generate one gram silver, they pay you 2.4 RMB and the smelter take 0.4 RMB, per gram so basically we got 2 RMB per gram. Right now, today, silver price is almost 2.9 -- 2.8-gram per tonne -- 2.8 RMB per gram. The smelter is still charging 0.4 gram. We were getting 2.4-grams right, so that's almost 20% improvement already. So I hope that answers your question.

Okay. And so the reduction--?

The smelter charge a fixed turn. The underlying commodity price improves and then we get more.

So those things that you mentioned reflected changes in price, not percentage, changes in payability percentages?

Yes, it's actually more a reflection of what percentage we got.

I thought that they had pulled your payability down.

If you looked at last year, the high tonnes, silver price is 4.4 RMB per gram and the smelter still charges 0.4 RMB per gram so we got 4 RMB per gram, right. (inaudible) they didn't charge more but because of the underlying commodity price is reduced, had decreased, therefore, the percentage we got is also reduced.

Okay. Fine. And those percentages of the cost per tonne, is the MD&A from -- which document is that in?

There's a separate filing which includes our MD&A that you'll be able to find on SEDAR.

Okay. Thank you.

Next question comes from the line of [George Hsueh]. Please go ahead.

You mentioned some M&A possibly outside of China. Can you tell us where you're looking? South America or Canada or what area?

We open to -- we prefer America right, North America, South America.

You say North America?

North America or South America, right. And same kind of time zone and closer to home, right.

I see. So that would mean--?

And we prefer high grade too, right, so.

Yes. So that would include perhaps Peru and Mexico and--?

Right.

Canada.

Right.

Okay. And secondly, would you -- you thought about listing your stock in the United States if the stock gets up a little higher and if the stock remains at this level or a little higher, would you think about that?

Yes, we're making very good progress there, hopefully we'll have something to announce shortly. So keep looking.

Okay. Thank you. That ends my questions. Thank you very much.

Next question comes from the line of [Forbes Gamil]. Please go ahead.

Hi, guys, just a couple of quick questions. Getting back to the potential reopening of the TLP and HPG mines, can you be a bit more specific in terms of how long it would take to ramp up to full production at those mines?

We're able to ramp up production very quickly, probably within a two-week period of time, once the decision is made.

Okay. And just on the impact of the Chinese New Year, can you sort of provide a bit of color there, perhaps in terms of days of down time or something in that regard?

We had about a two weeks holiday.

Two weeks holiday, okay.

Yes, so basically a two weeks down time and so at that time we did a maintenance for the mill, right, and so the holiday started around January 15, and we started work around February 2.

And Forbes, just to clarify, this is something that's common for every business in China, so this isn't unique to Silvercorp.

Absolutely. All right. That was it for me. Thanks for that.

Next question comes from the line of Howard Flinker. Please go ahead.

I got two questions. In the breakdown of grades at the Ying Mine, do you have a comparison for the same period last year at the Ying Mine?

Off of this quarter or last?

Yes, you had 324 grams and 6% lead, and 2% zinc, what was it last year?

The 324 was combined. That wasn't just for Ying.

That was Company-wide?

The 324 you're mentioning is Company-wide. For Ying this quarter we were 420 grams.

That's right. You mentioned that. That's right.

That compares to 460 in the prior-year period but the thing is, it was a big improvement from the September quarter when we were only approximately 330.

And corporately, using the 324 and 6% and 2% now, what was it last year? Do you have it?

Last year it was 410 grams silver, 7.2% lead and 3.1% zinc. The thing you have to keep in mind, though, is we brought three other mines into the production so that changes the mix so you really can't -- you aren't comparing apples-to-apples if you're trying to look at the grades.

Oh, good point. And you said in the quarter you increased grade, I think you said 27%, grade of silver?

At the Ying Mine; correct.

Was that purely accidental or was it deliberate by selecting higher grade sections of the mine?

I think Rui mentioned one of the major contributors to being able to get the grades higher is by improving our management and having less dilution, so that's been a major reason why the grade has improved and why we're confident that it will continue to improve. So while we're at 420 this quarter at Ying we expect for all of 2010 it will be around 480 grams per tonne.

I thought the dilution was a nonfactor. Clearly it was more significant than I thought. Okay. Thanks.

Next question comes from the line of [Scott Nystrom]. Please go ahead.

Thank you. I have one question. You talked about improving quality control in your processing of ore during an earlier question and the release mentioned that recovery rates are 91% for silver, 95% for lead, and 72% for zinc. Given this emphasis on quality control and the processing, what is your goal for recovery rates for each metal in 2009?

We hope to -- in terms for silver and lead, the recovery is pretty high already and we don't know how much we can do to improve that. So our first goal is to maintain that recovery.

On page five of the press release, we set out our forecast for the full fiscal year of 2010, so we're looking for recoveries of silver of 91%, lead, 95%, and zinc, 72%.

Just a follow-up, so you think you're pretty much as high as you can go?

Yes.

And why is that?

Yes.

That's in milling recoveries we're talking about there.

Right. Is that the contractor's responsibility and that's--?

No, we are the operation of that that mill. That's, to fix it, the only way you can do.

When we talk about the improvements and efficiencies, it's not in the milling process where we're making the big gains, it's in the mining process.

Okay. So we can expect these recovery rates going forward in the mill?

Yes.

Okay. Thank you.

We have no further questions. Please continue.

Thanks for participating in today's call. To wrap up, I'd like to state that with our continued strong cash position, industry-leading low costs, and the high grade Ying Mine, we are more than prepared to face the challenges arising from today's economic crisis and we are looking forward to take advantage of the inevitable opportunities ahead. As a result of the downturn, we have implemented a number of measures that will provide meaningful benefits that will last even after the downturn ends. So in the short-term, we will focus on controlling costs and improving controls to remain profitable. At the same time, we are continuing to move forward with the key development and exploration projects that are the basis for future growth. And are seeking out acquisitions during the downturn that will yield high returns when the markets rebound. We thank you again for joining us on today's conference call and we look forward to reporting to you again in a few months. Thank you.

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