Silvercorp Metals Inc (SVM) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is John and I will be your conference operator today. At this time, I would like to welcome everyone to the Silvercorp Metals Inc.'s fiscal 2010 first-quarter results analyst conference call. All lines have been placed on mute to prevent any background noise. After the presenters' remarks, there will be a question-and-answer period. (Operator Instructions). It is now my pleasure to turn the floor over to your host, Lorne Waldman, Corporate Secretary of Silvercorp Metals Inc. Sir, you may begin.

Thank you, operator. Good morning, ladies and gentlemen and welcome to Silvercorp's fiscal 2010 first-quarter results analyst 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; 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 2009 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 first quarter. Following that, I will discuss our outlook going forward.

Today's results mark a very encouraging start for Silvercorp's fiscal 2010 year. Compared with the prior quarter, we have achieved strong growth in sales, gross profit, net income and earnings per share, driven by a combination of higher total production, lower production costs and improved commodity prices.

While prices for silver, lead and zinc are still considerably lower than the prior year period, they have made significant gains since the beginning of this year and we hope this trend will continue. Still, our efforts are focused on what we can control and that is to continue growing our production while maintaining strict controls over costs.

The adjustments we announced in the third quarter of fiscal 2009 to improve our existing operations and maintain positive operating cash flows continue to yield concrete results. Through the implementation of enhanced quality control procedures and the application of a systematic approach to monitoring and managing our contract miners, we have been enjoying improved head grades at our mines and reduced mining costs.

These improvements, combined with higher prices for our byproduct metals, have lowered our total cash cost per ounce of silver in the first quarter to negative $5.09 per ounce, securing our status as the lowest-cost producer of silver among our global industry peers.

The benefit of being the lowest-cost producer is magnified during periods of soft commodity prices. This quarter, we still generated $10.4 million in cash flows from operations, fortifying Silvercorp's balance sheet to $75.7 million in cash and short-term investments.

With a record of 1.2 million ounces of silver produced this quarter, despite only limited production coming from our HPG, LM and TLP mines, we are on course to achieve our fourth consecutive year of production growth.

At the same time, we are focused on growing our resource base, announcing in June an increase of 250% to the measured and indicated resources at our GC silver, lead, zinc project in Guangdong Province.

In addition, we have commenced a regional exploration program at our Ying Mining camp to define additional drill targets outside of our current mining areas.

Given that our strategy has always been to commence mine operations before the full potential of the deposit is drilled off, there remains tremendous potential to further increase our resource and extend the life of our mines through additional exploration.

I will now highlight the financial statements for the first quarter ended June 30, 2009, which were included in yesterday's news release. For the first three months ended June 30, 2009, we produced 6% more silver and 11% more lead, achieving sales of $22.6 million. While this is a 27% decrease compared to the prior year period, it is a 30% improvement from sales in the previous quarter. The prices we receive for our concentrate after smelter charges and VAT, or the net smelter return, this quarter averaged $9.89 per ounce for silver, $0.56 per pound for lead and $0.46 per pound for zinc. This represents a decrease of 29%, 37% and 16% respectively compared to a year ago, but is an increase of 14%, 8% and 24% respectively compared to the March quarter.

Gross profit from mining operations for the first quarter ended June 30, 2009 was $16.7 million, down 22% from the prior year period, but up 51% through the prior quarter. Despite lower metal prices, gross profit margins for the first quarter improved to 74% this quarter from 69% in the prior year period as the Company was successful in reducing its cost of goods sold by 38% despite an increase in the quantities of silver, lead and zinc produced. The decrease in cost of sales reflected better cost controls and operational improvement.

We reported net income of $7.5 million, or $0.05 per share this quarter compared to a net income of $1.2 million, or $0.01 per share in the prior quarter and net income of $11.6 million or $0.08 per share for the same period last year.

Cash provided by operating activities for the quarter was $10.4 million, representing $0.06 per share. At the end of the quarter, we had cash and short-term investments of $75.7 million, even after making capital expenditures of $3 million and paying shareholders a total of $2.8 million in dividends. And we just announced another quarterly dividend of $0.02 per share this morning.

Turning now to our operational highlights, I would like to start off by stating that we have set a new quarterly record for silver production of 1.2 million ounces, which is 6.2% increase from the prior year period. This, despite the fact that we mined 24% less ore than the prior year period as operations at the HPG, TLP and LM mines were only partially resumed. We also increased our production of lead to a record of 16 million pounds, up 11% from the previous year period.

The increase in silver production in the face of lower tonnes of ore mined was the direct result of enhanced quality controls and better management of mining contractors at the Ying Mine, which have reduced mine dilution and improved run of mine head grade.

Silver head grades for this quarter increased to 488 grams per tonne to 23% higher than the head grade in the prior year. The head grade for our lead byproduct metal also increased to 9.1% compared with 6.7% in the prior year period. Total cash mining cost per tonne of ore was reduced by 24% to $43.61 per tonne from $57.34 per tonne as we continued to maintain tight vigilance over costs and mine quality control procedures. For the Ying Mine, total production costs and cash costs per ounce of silver adjusted for byproduct credits were negative $4.19 and negative $5 respectively.

In conclusion, our operations continue to run smoothly and we are pleased to see the changes implemented to control costs and improve mine profitability are yielding such significant results at our Ying Mine.

In terms of our outlook going forward, we remain very excited about Silvercorp's 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 of November last year, but prices still remain significantly lower than a year ago and forecasting prices or market stability remains difficult.

Our production outlook for fiscal 2010 is essentially unchanged from what we reported last quarter. At the Ying Mine, mining, development and exploration are proceeding as planned with production forecast to be 260,000 tonnes for the year. Production is forecast at 100,000 tonnes for the TLP mine, 30,000 tonnes for the HPG mine and 20,000 tonnes for the LM mine for a total yearly production forecast of 410,000 tons, which will yield between 4.65 million and 5.05 million ounces of silver for fiscal 2010, which will extend our production growth record for a fourth consecutive year.

Capital expenditures are budgeted at $16 million for the Ying camp, of which $11 million are for exploration drilling at the Ying Mine and $5 million are for exploration drilling and mine development at the TLP, LM and HPG mines.

At the Ying camp, the Company is carrying out a regional IP geophysical program, aiming to define drill targets outside the current mining areas within the 70 square kilometer Ying camp.

At our silver, lead, zinc GC project in Guangdong Province, China, the Company has made the following progress in applying for a mining permit and advancing the project towards production. First, an environmental assessment report was completed in March 2009 and has passed a review by an expert panel appointed by the Environmental Protection Bureau of Guangdong Province and by the local community.

The panel has recommended that the Environmental Protection Bureau approve the GC project mining development. Pending receipt of the final approval from the Environmental Protection Bureau, a mining permit application can be submitted to the Ministry of Land and Resources of China in Beijing.

In June, the Company completed a National Instrument 43-101 technical report update for the GC project. Using 150 gram per tonne silver equivalent cutoff grade, the GC deposit contains 28.5 million ounces of silver, 96,000 tonnes of lead and 214,000 tonnes of zinc in the measured and indicated categories and 30.8 million ounces of silver, 115,000 tonnes of lead and 213 tonnes of zinc in the inferred category.

The Company has engaged a Chinese engineering firm with Class A qualifications in mine and mill design to provide a full mine and mill design for the GC project. This will be equivalent to a feasibility study in Canada.

The Company has budgeted approximately $4 million for the GC project in fiscal 2010 for exploration reports, mine and mill designs and for permitting. This brings the Company's overall capital expenditure budget for fiscal 2010 to $20 million.

In conclusion, we are pleased to be off to such a healthy start for our fiscal 2010. Cost, head grades and production are all meeting or exceeding expectations and our cash flows and balance sheet remain robust. We also continue to hold firm to our position as the lowest-cost producer of silver among our industry peers with an industry-leading cash cost of negative $5.09 per ounce.

All of this enabled us to continue paying our shareholders a quarterly dividend of C$0.02 equivalent today to a dividend yield of over 2%. And now with $75.7 million in cash and short-term investments, we will use our position of financial strength to advance our key development and exploration projects, building our foundation for future growth and we will continue to create long-term shareholder value by evaluating the acquisition of exploration, development or production projects in China and other jurisdictions. I would now ask the operator to please open the lines for your questions.

(Operator Instructions). Brad Humphrey, Raymond James.

Hi, guys. Just a couple of quick questions. Given what happened with Klondex, I was just wondering if you have had any changes in your M&A plans, if you are still focused on the Americas or if that has now changed to be more in China? Any feedback from your shareholders as to what you should be doing, if you should be focusing on the Americas or China as well would be helpful.

Okay, Brad, thank you for the question. After Klondex, we basically realized that any deal in the future, any deal would be a friendly deal and we still like Americas and China. And also we -- now we put even more effort into China. We realize that China still will be the best place in terms of for lower CAGR cost and also (inaudible) to operate in China. So we focus on China, but also keep our eyes open for other jurisdictions. In terms of feedback, I think a lot of our investors probably prefer we stay in China because that is where we are familiar.

Okay, that's great. On the co-product costs, just curious, are the costs broken out as a percentage of revenue for each metal or is the Company more complicated than that? So I am talking about the silver co-product cost of $2.59 an ounce.

Yes, that is being broke into different business line measures. Silver was 51% of revenue and lead is about 43%, 40% of the total revenue. So you could do that in the breakout. The silver cost in terms of (inaudible), right?

Yes, perfect. And Rui, I know you spent some time in China recently. I was just curious if you have any update on how things have changed since the world came to an end late last year?

I don't know much. But my observation is the market is hard, but it did take a crash right now. The whole (inaudible) market is still hard, right? And you see -- the industry -- I am (inaudible) would be like a smattering of our product. I recently visited silver smelters, which handle our concentrate and I understand all their -- all the smelters are operating at 100% of capacity right now. And also if you look at import of copper, (inaudible), they are heating regular month-by-month, right? So it looks like there is a lot of demand for those metals. But how long that will last, we don't know.

Okay, great. Thanks a lot, guys.

Haytham Hodaly, Salman Partners.

Good morning, everyone. How are you? Just a few quick questions. It looks like, in the quarter, you realized significantly higher prices on all your commodities. I guess it appears to be related to higher renegotiated margins. And I know you revisit those monthly. For example, you realized roughly 100% of the average lead price in the quarter, which was incredibly high and not expected. What is happening with your margins, the negotiated margins, with the smelter these days? What numbers are you at in terms of actual payables?

Right now, the actual payable would be based on Shanghai. Like the Shanghai price during the last quarter was about 30 [billion] higher than the (inaudible) price. But that gap is almost -- it almost disappeared. The (inaudible) like right now, I'll just give you an example, June -- at the end of this month, the Shanghai metal price for lead is $0.90 per pound. The blended metal price, (inaudible) price, was around $0.79, $0.80. So you still see that is more reflective of the VAT. Obvious (inaudible) in VAT. I think the gap is narrowing. So I think last quarter, we got almost 100% of payables at the blended price. I think this quarter, will be -- the price will remains almost the same because even though the [London] price has more (inaudible) where Chinese price has kind of stayed flat or only up 5%.

And your pricing, Rui, is based on the Shanghai price?

Yes, all prices are based on Shanghai price and right now, to give you an example to be exactly, Shanghai blend price was trading at RMB314,000 a tonne and the smelter charge right now is around [5500], RMB2500 a ton, which is a little bit of an improvement from last quarter, almost RMB3000 a tonne for smelter charge.

Okay. But what was it for zinc?

The zinc price, again in Shanghai right now, is RMB14,200 a tonne and the charge would be RMB5500 a ton, which is slightly increased like last quarter. A couple months ago, the zinc charge for smelter are around RMB4500 to RMB5000 -- RMB4500 to 5000 RMB a ton. Right now, they are charging RMB5500 a ton. And just a reflection of a lot of the zinc (inaudible) pour into smelter where lead concentrate is in big shortage right now.

Okay. So within the country, you are saying the Shanghai pricing is so much higher than the LME pricing that you are realizing affectively LME pricing?

Exactly.

Okay. And how often does that variate? I mean how often do we get such a significant difference in pricing?

Generally, lead price is about 10% higher than LME price in China because you have to take into consideration all the transportation costs and there is some duty other than VAT right. There are some other handling costs and where we said (inaudible) smelter, they just sail directly to the manufacturer. So we carve all those costs out. So generally it is about 10% higher in Shanghai.

And that is purely a function of in-country supply/demand?

Right.

Okay. And your cost per tonne -- I know you guys have done a great job in actually controlling your mining costs. Is this latest number, are they sustainable or are you still having problems keeping the contractors in line?

No, I think this is pretty much like -- I mentioned that even the Q3, like in the December quarter of 2008, you can see our mining costs, cash mining costs of about $45 per tonne and the March 31 quarter is always $45 per ton. So we just substantially reduced (inaudible) from like $55 per tonne last year. So I think this cost is kind of sustainable by better control of dilution and less (inaudible) holding out, right?

Okay. Even your milling costs improved a little bit. Is that sustainable as well?

I think the milling cost is kind of like only 10%. I think more like a fluctuation than anything else.

Okay. So just somewhere in that range works still?

Yes.

Okay. And last question (technical difficulty). I guess is your non-cash mining cost per tonne of ore mined went down significantly. In this last quarter, I guess, is this a reasonable indicator of future quarters or are you using more straight-line depreciation method and since you have put more tons, that number went down?

I think like the last quarter, we took a write-down, which has helped us on that aspect. So I think, looking forward, it will be sustainable.

Okay. So that is why there is a big difference from quarter-to-quarter because of the write-down you took? Okay. Perfect. Thank you and keep up the great results.

Thanks.

(Operator Instructions). Brian Quast, CIBC.

Hi, guys. I just wanted to get a bit more guidance on what your exploration budget is going to be like for the rest of the year and into fiscal 2011.

Hi, Brian. Our exploration budget is in line. Right now, because as I indicated to you earlier that we are developing a deep tunnel at the 250 meter level. And before that, while drilling was limited, other than we carry out the regional exploration IP survey at Ying mine, so right now, that tunnel is almost completed already and we have started to do extensive underground drilling. So right now, we budget around $4 million for exploration. So looking to next year, this should be increased to anywhere around $6 million.

Okay, great. Thanks, guys.

And to the presenters, no further questions in queue.

I would like to thank everyone for participating in today's call. To wrap up, I would like to reiterate that Silvercorp is striving to become a stronger and more resilient company today than it has ever been. With their strong cash position, industry-leading low production costs, high-grade Ying Mine and tremendous exploration potential at our existing projects, we are positioned to prosper in the short term with the ramp-up of production at our HPG, TLP and LM mines. In the midterm, as our GC development project advances towards production and in the long term through both exploration and the acquisition of projects in China and possibly other regions in the world. 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 your conference. Thank you for your participation. You may now disconnect.