Silvercorp Metals Inc (SVM) 2008 Q4 法說會逐字稿

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

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

Thank you, Operator. Good morning, ladies and gentlemen. And welcome to Silvercorp's fourth 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 Chief Financial Officer; Derek Liu, Silvercorp's Controller; and Shirley Zhou, Manager of Corporate Communications.

During today's call, forward-looking statements will be made relating to future production, 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 fourth quarter. Following that I will discuss our outlook going forward.

The fourth quarter for Silvercorp marked a positive conclusion to what has been a very challenging year for the global economy and commodity markets. While the direction of the global economy and the timing of the recovery remain unclear, what is clear is that commodity prices have recovered from the lows they reached late last year and the adjustments we announced in the third quarter to focus on preserving cash, improving our existing operations, and maintaining positive operating cash flows have yielded concrete results. In what is seasonally our slowest quarter because of the Chinese new year holidays, we were still able to achieve strong growth and sales, gross profit, net income, and cash flows.

The improvements come from both higher silver prices and a 16% improvement in the run of mine head grades at our Ying mine to 487 grams per ton this quarter. This was achieved through enhanced quality control procedures and by applying a systemic approach to monitoring and managing our contract miners. The improved head grades, coupled with improved prices for our by-product metals, lowered our cash cost per ounce of silver in the fourth quarter to negative CAD3.62 per ounce, extending our three-year long track record as the lowest cost producer of silver among our industry peers.

The benefit of being the lowest cost producer is magnified during market downturns. Even with significantly lower metal prices compared to last year, we still generated healthy cash flows from operations of CAD10.6 million in the fourth quarter. Our strength generating strong operating cash flows allows us to internally finance our growth plans and pay a quarterly dividend of CAD0.02 to our shareholders.

Other significant achievements in the quarter included obtaining a US listing on the NYSE AMEX exchange and raising CAD31 million in an equity financing. Silvercorp now has CAD67 million in cash and short term investments and is debt free. We are in a solid position to grow our business through internal expansion within the Ying mining camp and at our GC property in Guangdong province as well as through acquisitions and joint ventures.

Finally, in this quarter we produced 1.04 million ounces of silver, bringing the yearly total to a new record of 4.2 million ounces of silver. And extending our track record to three consecutive years of production growth.

The financial statements for the fourth quarter ended March 31st, 2009 were included in yesterday's news release, and I will now review the highlights. For the three months ended March 31st, 2009, the Company achieved sales of CAD17.4 million. While sales are down 35% compared to the prior year period, they're up 14.5% from the previous quarter. The prices we received from the smelters for our concentrates, or the net smelter return, this quarter averaged CAD8.68 per ounce for silver, CAD0.52 per pound for lead and CAD0.37 per pound for zinc. This represents a decrease of 33%, 51%, and 33%, respectively, compared to a year ago. But increased by 18%, 27%, and 32%, respectively, compared to the previous quarter.

Gross profit from mine operations for the fourth quarter ended March 31st, 2009 was CAD11 million, down 45% from the prior year period, but up 111% from the prior quarter. Gross profit margin declined from 75% in the prior year period to a still healthy 63% this quarter, up from 35% in the third quarter. We reported net income of CAD1.2 million, or $0.01 per share, this quarter, compared to a net loss in the prior quarter of CAD33.7 million, or a loss of CAD0.22 per share, and compared to net income of CAD10.9 million, or CAD0.07 per share for the same period last year. Included in this quarter's net income was a CAD1.2 million noncash impairment charge mainly relating to writing down an equity investment, also CAD1.6 million in accrued withholding taxes, and finally CAD1.2 million in unrealized foreign exchange losses. Excluding these exceptional items our adjusted earnings for the quarter were CAD6.9 million or CAD0.05 per share.

For the quarter, cash provided by operating activities was CAD10.6 million, a decrease of 39% from CAD17.2 million in the same period last year, but a 24% increase from CAD8.5 million for the last quarter. Total cash flows from operating activities for the year was CAD47 million, a solid performance given the challenges we faced in the past year. At the end of the quarter we had cash and short term investments of CAD65 million, and no debt, even after making capital expenditures of CAD2.2 million and paying shareholders a total of CAD3.3 million in dividends.

I will now move on to our operational highlights. This quarter we mined 60,466 tons of ore, 17% less than the prior year period as we mined almost exclusively at the Ying mine. Nevertheless, we managed to produce over 1 million ounces of silver, a 3.5% increase from the prior year period. At the Ying mine, enhanced quality control and better management of mining contractors have reduced mine dilution and improved run of mine head grades. The Ying mine this quarter achieved silver head grades of 487 grams per ton which is 16% higher than the previous quarter's head grade of 420 grams per ton. Head grades also improved compared to last quarter for byproduct metals lead at 9.1% compared to 7.7%, and for zinc at 3.1% compared to 2.6%.

The total cash mining costs per ton of ore at the Ying mine was basically unchanged at CAD45.44 per ton as we continue maintaining tight vigilance over cost. For the Ying mine, production costs and cash cost per ounce of silver, adjusted for byproduct credits, were negative CAD3.24 and negative CAD3.62, respectively. This is dramatically lower than the previous quarter's cost of positive CAD0.18 and negative CAD1.39. The decrease in production and cash costs per ounce was mainly due to higher byproduct credits realized as average quarterly lead and zinc prices increased to CAD0.52 per pound and CAD0.37 per pound from CAD0.41 per pound and CAD0.28 per pound in the prior quarter.

In conclusion, our operations are running smoothly and we are pleased to see the changes implemented to control costs and improve mine profitability have yielded improved operating results at our Ying mine.

In terms of Silvercorp's outlook going forward, we remain very excited about our long-term prospects and the advantage of having a high grade asset like the Ying mine in a low cost jurisdiction like China. We are encouraged that commodity prices have improved in recent months from the lows back in November last year. But they still remain significantly lower than a year ago and forecasting prices or market stability remains difficult. If light of the somewhat improved global commodity prices, the Company has adjusted its China operating plans. In addition to continuing full scale production at the Ying mine, we will be partially resuming production at the TLP, LM and HPG mines which were suspended in late December 2008.

At the Ying mine, mining, development and exploration are proceeding as planned with production being maintained at 700 to 750 tons of ore per day. Ore production is forecast to be 260,000 tons, yielding 3.65 million ounces of silver, 49 million pounds of lead, and 12 million pounds of zinc for fiscal 2010. Projected head grades for the year are forecast at 480 grams per ton silver, 9% lead, and 3% zinc. At the TLP, HPG and LM mines, the Company will focus on exploration and mine development. Mine production is scheduled to be partially resumed in the current quarter, and is forecast at 120,000 tons for TLP and LM mines, and 30,000 tons for the HPG mine in fiscal 2010. This will yield between 1 million and 1.4 million ounces of silver, bringing the total silver production from the Ying mining camp to around 4.65 to 5.05 million ounces for fiscal 2010. This will extend our production growth record for a fourth consecutive year.

Using January metal prices, and the above production forecast, the Company's mining operations are projected to achieve a gross profit margin of between 55% and 60% resulting in expected cash flows from operations of CAD35 million to CAD40 million. Capital expenditures for fiscal 2010 are budgeted at CAD16 million for the Ying mining camp, including CAD11 million for the Ying mine and CAD5 million for the TLP, LM and HPG mines.

At the GC project, we are making concrete progress in applying for a mining permit and advancing the project towards production. This includes the completion of an environmental assessment report in March 2009. The report has passed a review by an expert panel appointed by the provincial Environmental Protection Bureau and by the local community. Pending receipt of the final approval from the Environmental Protection Bureau, we can submit a mining permit application to the Ministry of Land and Resources of China in Beijing.

Also, 2008 exploration results and recent drilling results are being incorporated into a new 43-101 technical update with a new resource estimate for the GC project. This report is expect to be ready this June.

Finally, we have engaged a Chinese engineering firm with class A qualifications in mine and mill designs to provide full mine and mill design for the GC project. This is equivalent to a feasibility study in Canada. In fiscal 2010, the Company;s GC capital expenditure budget includes approximately CAD4 million for exploration, reports, mine and mill designs and for permitting. This bring the Company's overall capital expenditures budget for fiscal 2010 to CAD20 million.

On the acquisition front, Silvercorp is actively evaluating mining assets with defined resources in North America for potential acquisitions or joint ventures.

In conclusion, the Company this quarter has demonstrated its ability to adjust its operations and strategies quickly, to achieve strong positive cash flows even under difficult pricing conditions. At the same time, we have continued to move forward with 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.

I would now ask the operator to open the lines for questions.

(Operator Instructions). Our first question comes from Michael Gray. Please go ahead.

Yes. Good morning. Just wanted to ask if you can expand on how you managed to get the head grades up from 420 grams to 487, a little bit more detail on how you managed the contractors and monitored the grades.

Okay. This is Rui to answer the question. Since last July, as you can see from our second quarter of last year, the grade was low. The major reason was narrow but high grade. And the central procedure, we were doing pretty good last year but then (inaudible) and also the control procedure was another property in place. Since last July we implementing a SOX for the act, our other aspect of management.

We also have (inaudible) incomes into the mining operations. And so basically our mining contractors, they are trying to figure out more ways because they got to pay by ton, where we are leaving that. So we bring the higher (inaudible). And the secondly we have formed a new quality control department and so everyday we have a way of measure and require signature from our supervision engineer, our quality control department, and also contractor, like three parties will have to each to make sign measurement we have. So by doing this, usually every other dilution has reduced substantially. July-quarter to September-quarter, September-quarter to December-quarter and to this March-quarter the grade has improved substantially.

Okay. Thanks. Second question is in terms of trying to make an acquisition in North America as expressed, and presumably to diversify political exposure, would you still be looking to maintain lowest cost producer status or do you see grade potentially decreasing and costs going up as a trade off?

I think the key is the high grade. Even though, if you look look at our costs, because the narrow vein on the ground, (inaudible) ore costs, we are running around $70 per pound, which is actually quite close to North American costs which is in many cases $100 per pound, (inaudible). So we look at anything in North America, it is really high grade story, high grade underground mine, we will focus on this kind of situation. We were not interested in any open silver mine unless it's very high grade. But we will focus on high grade underground mine. So by a high grade you can always maintain low costs. So that's the strategy.

And the reason for that is to reduce our country risk profile. And secondly, in China, because there's a lot of opportunity around but a lot of those opportunities are private information. A lot of information are private. We have no access like we have in Canada. We have so many junior exploration public companies we they announce all the great results so we can evaluate a lot of these opportunities. Where in China, even though there's a lot of opportunities around, but it takes a lot of networking. On that point of view it is easier by the today's -- a lot of those junior companies, stock price has been dropped substantially and that's still the opportunity exists.

Okay. Well thank you very much. That answers my questions.

Thank you.

Our next question comes from line of Haytham Hodaly. Please go ahead.

Good morning, Rui, everybody. Just a couple of questions. For the TLP, HPG and LM, the 1 million to 1.4 million ounces, based on current byproduct prices, what cash costs do you foresee these three started ops to operate at?

In terms of cash cost; right for silver?

Yes.

The cash cost will be below like CAD5 million for that, three new mines to be open, TLP, LM and HPG.

That was CAD5 million you said to reopen?

You mean, sorry, the capital cost required?

I want both, I wasn't sure what I heard. You are saying?

Number one, the capital costs required, we budgeted $5 million this year mainly on TLM mine. Because we built a brand new mill already last year. So the mill was there already and so all we needed to do was some development.

So that $5 million includes restart costs and everything else?

Everything, everything, yes.

And then when you are operating you think you can get -- I mean, your cash costs, if I recall -

The Ying mine, like this quarter we did a negative CAD3.8. So hopefully for those three, TLP, LM and HPG mines we can do around CAD5 for that three mines.

What lead price are you assuming in there, Rui?

We use in like January lead price. We just, about, like around CAD0.50.

Okay. Maybe I will ask another question just with regards to on the corporate side, G&A. G&A seems to be increasing each year even though we had TLP, HPG, LM shut down last year. What do you forecast your G&A will be and what type of cost control measures are you doing there?

If you look at quarterly G&A, you can see this last quarter G&A has been dropped substantially. And so in that part of the G&A, like last year, one of the main expense items would be, we hired a (inaudible) to teach us how to do SOX, the Act 401. So that will cost almost $2 million.

Okay. So this year if you had to throw a number out there for G&A, what would you think it will come out?

I think this year we should be able to see around CAD6 million to CAD7 million.

Okay. So substantially improved. Perfect. With regard to exploration, you talked a little bit about it. Can you talk about how much are you planning on drilling and what is the time line, when will you start this, et cetera?

For the Ying mine, we are trying to do drilling down to 260 meter levels. We have been working on those tunnels for the last several quarters. I just went to the site today, come back to the site today and we are ready to start a drill in the underground. So I think in total we budget over, for Ying, we budget almost 30,000 (inaudible). For TLP, we are thinking about 30,000 meters, and for HPG and LM we maybe do another 10,000. So it would be a 60,000 meter underground drilling and each meter costs about $30 US. So it is about a $2 million US.

Okay. That's perfect. Thank you.

Your next question comes from Brad Humphrey. Please go ahead.

Hi, guys. Just a couple of quick questions. The NSR on silver, have the terms changed this quarter? It seems lower than I expected.

It has not been changed.

So it is still CAD1.67 a ton?

For the silver, it is around 24 R&B per gram on the price.

All right. And just on the M&A you are no longer looking at China. You are looking at North America for high grade. Any specific minimum amount of ounces defined or any other requirements?

We didn't limit out of China but just focus on high grade, and North America tend to have more alternatives. So I think we need at least (inaudible).

Okay. Great. The permits at GC, when do you think you will have those in hand and be able to start moving forward?

Like we give everything to the Department of Environmental Protection Bureau, Guangdong Province, already.

So best case scenario?

It would be like I am hoping maybe, I was hoping May they can give us a approval. But maybe June, I don't know.

So any time.

Yes. And but at least those are panel, expert panel has reviewed and recommend to that. And also a local community review has been finished too. They also had no problem.

What about the feasibility study. When do you expect that to be out?

We just signed a contract with the Chinese company like last, late last month, April. So I think it may be three to four months we should be able to do something.

That's it for me. Thanks.

The next question comes from Thomas tan. Please go ahead.

Hi. I also have a couple of quick questions. Good morning, everyone. My first question is on the recommissioning of those few mines you mentioned in the Ying district, you raised your production to 4.65 which is the lower end of the range and up to 5 million, silver I guess, silver ounces. But your cash flow, you operating cash flow I think is still stay about the same as before at CAD35 million and CAD40 million. So I am just wondering, that number just sounds extremely low. If you raise your production target, you probably should also raise the operating cash flow figure, too?

Yes, like if you look at last quarter we are talking about a CAD30 million to CAD35 million.

Right, but now you raised from CAD4 million to CAD4.65 million.

Yes because the profit margin at the other three mines is much lower than the one at the Ying mine. So that's why we talk about CAD40 million cash flow right now instead of another CAD10 million.

Okay. I think you are probably also tend to be a little bit conservative.

Yes. I hope we are conservative. But we still increase our cash flow projection for this, in our, this quarter by CAD5 million from last quarter; because last quarter would talk about CAD30 million to CAD35 million and this quarter we talk about CAD40 million. So that's an increase of almost CAD5 million to CAD10 million already.

Yes. But you know, I did a calculation here. I think the number is quite higher with that.

You cannot use that same profit margin.

Okay. I go back review that. Another thing is what is the silver equivalent ounces? I think you, I can't find that on your report for the first quarter.

Yes. I think we have skipped that out now. We don't want to do silver equivalent. It is really misleading, right. If you really want to have that number I think it will be 10 million ounces silver equivalent.

I kind of do a back calculation. So for 2009 fiscal year, you'll report 4.189 for just pure silver, but you didn't report the silver equivalent. But from your actually cash cost with byproduct credits, I can actually back calculate that number and just try to verify that with you. I think it is about 8.2 million. That sounds about right you think?

Yes, yes, I think so. Because in terms of revenue it is 50/50 so it sounds about right.

Okay. Thank you.

Okay. Thanks.

Our next question comes from Andrea Cheung. Please go ahead.

Good morning. Just a quick question on accounting. I notice depreciation has come down quite a bit. Could you expand upon that?

The depreciation goes down as the part of the reason we load up of our TLP, LM and the HPG mines.

But still it seems most of the production is from Ying anyway. So I can see depreciation coming down but it seems to have gone down by like 90%.

Like Ying mine, because our total (inaudible) investment in Ying mine was low and therefore there's not much to write off.

Okay. And then just based on your throughput guidance, it would seem that you would need that second mill to be operating. Have you started the commissioning process for the mill and how is that going?

Okay. The mill is ready to go like maybe another, like very minor work here and there. And but we just want to have all of the other mines, three other mines to be operating. So because of the big capacity, we essentially we stockpile ore from here, because each month it goes through 60,000 ton.

Sorry, can you say that again?

Each month we do 2,000 ton a day so we do like 60,000 ton a month. So essentially the mill has bigger actual capacity. So we have to wait for mine, so we have a lot of leeway, lead time.

Yes. Okay. I was just wondering how that process was going. And then just to follow up on I think Brad's question on GC and time line, what could we see for construction time line and potential production? I'm not sure if you can answer.

So basically if we are lucky, we get a mining permit by the end of '09 and then we will be able to start the construction around the early 2010. So give us two years construction. So we are looking at maybe April 1st, 2012. So like two year, past quarter. And hopefully we can have some ore even one year after our construction.

Right. Right. Okay. I think those are all my questions. The you very much.

Okay. Thanks.

Our next question then comes from the line of [Hazem Holdsley]. Please go ahead.

Hi, Rui. Just a follow up question with regards to the TLP, HPG and LM again. What was the lead price at the time when you decided it was uneconomic to operate those assets? I'm just curious what your break even price would be at, let's say --

Like in China, China price and national price, sometimes doesn't match much. So last December we have to shut down. The lead price is almost 8,000 R&B a ton of lead. So if you divided, if you calculate that back it is around 40-something a pound. So by this first quarter our net realized lead price, as you can see, is almost CAD0.53, where international price for first quarter was only CAD0.50. So even though our net NSR for lead is higher than pure metal price. So today the price is about, our NSR for this quarter will be around CAD0.50. So compared to last December, we have almost almost 35% to 30% improvement in lead price.

Okay. And then the silver price was also much lower at the time, as well, right?

Yes.

Okay. Is there any operational improvements planned that can help bring some of the costs down at the TL, HPG, and LM?

Yes, and also we focus on some higher grade zones.

Okay. What type of silver grades are you expecting from each one of those?

We expect around 7, anywhere between 7 to 9 tons of silver.

Okay. Is it pretty consistent over all three?

I think so. It is average out around, let's say 7 ounce. And then maybe 4% lead.

Okay. That's great.

(inaudible) Zinc.

How much zinc, sorry?

Maybe 1% zinc.

Perfect. Thank you very much, Rui.

Okay. Thanks.

(Operator Instructions). And our next question comes from the line of [Forbes Gamel]. Please go ahead.

Good morning, just one quick question. Just want to reconcile the realized prices for silver and lead. So after backing out the smelter charge, it appears lead price on the Shanghai Exchange is a lot higher than on the LMA. The silver was a lot lower than the LMA. Could you perhaps explain some of the dynamics there in terms of why they are different and some expectations going forward?

Okay. In terms of lead price, apparently China maybe require way more lead. So China has bring lead companies into the country. And so over last quarter it is about a 30% higher than our ME price. Where silver, apparently China, because they have a lot of smelters, so they produce a lot of silver from smelter copper, smelter zinc, smelter lead. So they produce a lot of silver out of the (inaudible) into those silver mines. And also they producing silver from recycle programs. They recycle a lot of computer, a lot of those things.

As a result of these three sources of silver, China has oversupply of silver. And I understand that silver council has some kind of arrangement with Chinese Government (inaudible) to alleviate how much silver they can export per year. I understand it is about a 5,000-pound silver which is about (inaudible) ounces of silver they can export a year. So I think that's why in China silver price may be 10% lower than ME price.

All right. That's great. Thanks.

Our next question is from [Robert Tong]. Please go ahead.

Rui, just a couple of questions. Regarding the reduction in dilution. You have taken some steps to monitor the contract miners more carefully which was accounted for the reduction over the last few quarters. Now you are still paying the contract miners by the ton, is that correct?

Right..

Do you expect that the reduced dilution to sustain itself as you ramp up, or do you expect that to fall back a bit?

I think at Ying mine, we are not planning on ramping up, and it will stay as it is because we understand that is a key thing. It doesn't matter where you cut costs, it doesn't matter how many people you fire, you get dilution increase, you just drop the whole thing. So, I think it will be sustainable in terms of our keep that management control in place, and the key thing is that we form a quality control department. If you look at the factory, every factory has a quality control department, where you look at our mine, we have no such department. And once we formed this department we found that we have substantial improvement of the results. Therefore, this is quality control department will be there forever. So I hope you are sustained. We will be sustainable.

Okay. Great. And just on a different note, I wanted to get your thoughts on the stimulus package in China in regards to whether the recent rebound in zinc and lead prices are sustainable and where you see that going.

In China, I think a lot of money went into the stock market and a lot of money went to (inaudible), so a lot of people, lot of inventory has been disappeared already. And also in terms of cost sales, the last quarter in China had surplus US number one car in the market. So all of this require a lot of lead and with so much money running around I'd say, I think maybe Chinese people start to consume because of the market and the people are made some money on the market are recovering some of their loss from previous years, and also people who have investment are holding some investments, they can get rid of now. So I think you will see some increased consumption which will be good news for the metallurgy.

Great. Thank you.

(Operator Instructions). Our last question right now comes from [Howie Slinker]. Please go ahead.

What is your tax rate going to be in the next few years? You had to pay some foreign dividend tax and that inflated the tax rate for the recent quarter so I would like to know what the ongoing rate is.

We will have tax rate in our (inaudible) in 2008, '09 and '10 at 12.5%. Plus if there's withholding tax, 10% withholding tax, we have effective tax rate around 20%. However, though, those withholding tax, 10% for the dividend, is only required to pay when the money go out of China. That means if we keep the tax in China for our growth, let's say we invest the money in the GC project, we actually don't have to pay these tax even though we really accrue it for our accounting basis.

So you accrue it but don't pay it until you receive the dividend.

Yes. That's correct.

And the other question I had is in the verbiage, the quarterly report, you used the words previous and last, previous for previous quarter and last for last quarter confusingly. What's previous quarter and what's last quarter?

It is all about the quarter three.

But sometimes in the same sentence you would say previous and last. Do you mean the same quarter or do you mean two different quarters, one last year and one this year, or one previous to this one?

Both are same quarter.

Both, you're referring to --

Quarter 3, 2009.

Quarter that ended December 31st.

Okay. Thanks.

At this time, there are no other questions.

Okay. I would like to thank everybody for participating in today's call. To wrap up, I would like to state that with our continued strong cash position, industry-leading low costs, and the high grade Ying mine, we are positioned to prosper in these uncertain market conditions. If commodity prices continue recovering, we will be able to achieve short term growth if we ramp up production at our TLP, LM and HPG mines. If the recovery is delayed we are looking to take advantage of the opportunity by seeking out acquisitions during the downturn which will yield high returns when the markets rebound. At the same time, we are continuing to move forward with the key development and exploration projects that are in the basis for our future growth.

We thank you again for joining us in today's conference call and we look forward to reporting to you again in a few months time. 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.