Silvercorp Metals Inc (SVM) 2009 Q2 法說會逐字稿

Good morning. My name is Mary and I'll be your conference operator today. At this time I would like to welcome everyone to Silvercorp Metals Inc.'s second 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. I'm Lorne Waldman, Corporate Secretary for Silvercorp. And I'd like to welcome everyone to our fiscal 2010 second quarter analyst conference call. Joining me today on the call are Dr. Rui Feng, Silvercorp's Chairman and Chief Executive Officer, Myles Gao, Silvercorp's President and Chief Operating Officer, Maria Tang, Silvercorp's interim Chief Financial Officer and Shirley Zhou, our Corporate Communications Manager.

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.

I'd like to start off by touching on the markets and how encouraging it has been to see prices for silver, lead, and zinc recover from the lows we saw around this time last year. The silver price is now sitting above $17 per ounce, double its low in October of last year. Lead and zinc prices have also posted impressive gains both trading back around $1 per pound from around $0.40 at the beginning of the year. While gold continues to make headlines as it pushes through one record high to another, silver in fact outpaced gold since the beginning of this year rising by an impressive 58% compared to 25% for gold.

For Silvercorp, the recovery in metal prices continues to boost our financial performance. For the second quarter, sales, gross profit, net income, and cash flows all improved from last quarter and the same period in the prior year. Regardless of the prices going forward, Silvercorp has become a much leaner, more efficient and cost conscience Company due to operational improvements made last year. The recovery in commodity prices has also enabled Silvercorp to reach another important milestone which was the Company's successful listing on the New York Stock Exchange last week. We are proud of the growth we've achieved over the past four years and it is an honor to have this recognized through a listing on one of the world's most prestigious stock exchanges.

I'll now touch on some of the highlights from our first financial results. For the quarter ended September 30, 2009, Silvercorp achieved sales revenues of $25.1 million, a 25% increase over sales of $20.1 million in the same quarter last year. While realized per unit prices for our main commodities of silver and lead this quarter were still lower than the same time last year, revenues were boosted through higher production volumes. Gross profit from mine operations for the quarter was $19 million, representing a gross profit margin of 76% compared with 51% in the same period a year ago. This improvement was due to a 33% reduction in the cost of sales this quarter as a result of improved operations and cost controls.

Net income for the quarter was $8.9 million or $0.06 per share compared to net income of $4.9 million or $0.03 per share in the same quarter last year. Cash provided by operating activities for the quarter was $15.9 million representing $0.10 per share. This increases our cash and short-term investments to $79 million as at September 30, 2009. This is a 26% increase to our cash position since the beginning of our fiscal year due to cash generating from operating activities of $26.3 million, offset by capital expenditures of $8.5 million and cash dividend payments of $5.5 million.

Turning now to our operational highlights. Silvercorp produced 1.2 million ounces of silver this quarter representing a 35% increase over the same period last year. Additionally, we've produced 15.2 million pounds of lead during this time, a 43% increase over the prior year period. This was all achieved despite an 18% decrease in ores mined from the same quarter last year as operations at the TLP, LM and HPG mines have only been partially resumed. The increase in silver and lead production is attributable to two factors -- first, we achieved a 13% increase in production from Silvercorp's flagship Ying mine where we mined 83,263 tons of ore representing 81% of the total 102,461 tons of ore mined during the quarter.

Second, our head grades increased 37% to 453 grams per ton for silver from 331 grams per ton in the same quarter last year. Lead head grades also increased to 8% compared with 6% in the prior year period. The increase in head grades is the result of reduced dilution at the Ying mine where quality control procedures implemented during the third quarter of last year continue to yield concrete results.

Consolidated cash costs per ounce of silver for the second quarter improved to negative $6.33 from negative $2.65 in the same period last year. Driven mainly by higher prices realized for our by-product credits, this also improves our cash costs of negative $5.09 achieved last quarter, keeping Silvercorp in the lead as the lowest cost producer among our global peers. For the Ying mine, the total production cost per ounce of silver adjusted for by-product credits was negative $5.51 and the total cash cost per ounce of silver was negative $6.24. Even if we took by-product credits out of the equation, Silvercorp would still be a leading low cost producer of silver at just $2.53 per ounce.

Consolidated total unit mining cost per ton for the quarter declined by 18% to $57.05, while the consolidated total unit mining cost declined by 5% to $49.48 per ton from the same period a year ago as we maintained tight vigilance over mine quality control procedures. Major components of cash mining costs during the quarter were 41% for mining contractor costs, 24% for raw material costs, 13% for labor costs, 10% for utility costs, and 12% for other miscellaneous costs. The savings we have seen also apply to our milling costs where cash unit milling cost was $9.09 per ton representing a decrease of 21% from the previous year period.

In terms of Silvercorp's outlook going forward, our production forecast at the Ying mine for the remainder of the year has been revised upwards. So far this year, sales from the Ying mine reached 2.2 million ounces of silver, 29 million pounds of lead, and 7 million pounds of zinc. As these figures exceed our previous forecast for the period, we now expect the Ying mine to produce approximately 4.5 million ounces of silver, 58 million pounds of lead and 14 million pounds of zinc for the entire fiscal year 2010.

Total production of ore for the year is now forecast to be 410,000 tons, of which 80% will be coming from the Ying mine with the remainder from the HPG, TLP, and LM mines. For these smaller mines, the Company will continue to focus on mine development. By-product ores from this mine development is expected to contribute an additional 200,000 to 500,000 ounces of silver for the second half of fiscal 2010. Therefore, total production for fiscal 2010 will be between 4.7 million and 5 million ounces of silver. This will extend the Company's silver production growth record for a fourth consecutive year.

On the exploration front, the Company is carrying out a regional IP geophysical program aimed at defining drill targets outside the current mining areas within the 70 square kilometer Ying Mining Camp. This is in addition to underground exploration drill programs already underway at all four mines in the Ying Mining Camp. Capital expenditures for the second half of the year are budgeted at $11 million of which $5 million will be used for exploration drilling and mine development at the Ying mine and $3 million for exploration drilling and mine development at the TLP, LM, and HPG mines, and a further $3 million for the GC project, bringing the Company's overall capital expenditures for fiscal 2010 to just under $20 million.

At the GC project in Guangdong Province, China, the Company is currently awaiting final approval of its environmental assessment report from the Environmental Protection Bureau of Guangdong Province. Once the report is approved, a mining permit application will be submitted to the Ministry of Land and Resources of China in Beijing for a possible approval by early 2010. In the meantime the Company has engaged a Chinese engineering firm with Class A qualifications in mine and mill designs to provide a full mine and mill design for the GC project. This will be the equivalent to a feasibility study in Canada. The Company is targeting to commence mine development in early 2010 for commercial production in early 2012, enabling us to add another two million ounces of silver to our production profile.

Finally, we continue to pursue future growth opportunities through the evaluation of projects for potential acquisition, both within and outside of China. In conclusion we're very pleased to maintain our standing as the lowest cost primary silver producer among our peers. We will use our position of financial strength, now with $79 million in cash and short-term investments, to advance our key developments and exploration projects as well as making potential acquisitions, all the while rewarding shareholders through the payment of dividends. And as a reminder, another quarterly dividend of CAD0.02 was just announced this morning. I would now ask the operator to open the lines for any questions.

Thank you. (Operator Instructions) Our first question is from the line of Chris Licheten -- Lichtenheldt I'm sorry -- from UBS. Please go ahead.

Good morning everyone. Congratulations on a strong quarter. Just had a -- first question, at Ying you've obviously outperformed for the first half and you're raising your outlook for the second half. Is it conceivable that that production rate is 850 tons a day or greater could persist through next year?

Yes.

Okay, great and at the three smaller mines, during the quarter the lead grade was considerably above the resource grade. Is that something that could also last for a little while or are you high grading at this point or what explains the high grades there?

This is Myles, Chris. Yes, we could last for -- continue on like this, okay. So we're not high grading.

Okay, so that could be ongoing for some time?

Yes, ongoing.

Just the way you read those calculations is the more above average (inaudible) and also, the nature of the zone with the drill hole for some time, as you encounter access, that may be included in the grade.

Okay, I got it. So a function of resource calculation.

Yes.

And just also at those mines, the mining costs were considerably higher than in prior quarters. Is that just the result of development or what's going on there?

I think it's like 5% higher quarter by quarter (inaudible) treatment.

Sorry, Chris, are you referring to just the HPG, the smaller mines?

Well all three, so the HPG, TLP, and LM. I know the tonnage is obviously a lot lower but the cost -- the cash mining costs are [70 to 80] versus last quarter was [30 to 50] at least at HPG, and TLP.

Yes, this quarter because there is more (inaudible) mining so the ore (inaudible) and that's a little bit higher (inaudible).

Okay, and that will be carried through the rest of this year, is that the primary method at those mines?

Yes, that's correct.

Okay, thanks, and last quick question, the Ying grade was a little bit lower than last quarter as a result of I guess a broken zone you were mining. Is that now finished or are you contemplating higher grades for the second half?

It's pretty much the same because you got to remember when you (inaudible) look at the map, the vein is damaged which is more broken from certain levels were broken and sometimes really hard to get well controlled and it's a little bit higher dilution on when (inaudible).

Okay. Great. That's it for me. Thanks a lot.

Thank you. Our next question is from the line of Haytham Hodaly from Salman Partners. Please go ahead.

Good morning, everybody.

Hi.

Just a couple quick questions. Maybe I'll just follow up, do a little follow-up on the last question, based on your tonnage that you guided to I guess for the second half of the year of around 160,000 tons, what are you doing differently that's allowing you to go from -- to go up to that 80,000-ton a quarter level?

It's just -- there are -- you mean there are -- so there are --you talking about the lower tonnage?

Yes. No, I'm talking about higher tonnage. So throughput previously guided to even in your presentations in the 10 year mine plans say about 260,000 tons but I think you're guiding to 160,000 tons alone in the second half of the year of throughput. What's changed in terms of your mining that's allowing you to get up to those higher levels these days?

I think the key thing is that we've been like last several years we've been working on the three vertical shafts and also we are allowing that vertical shaft to all be finished and all the (inaudible) has been connected and the developers and therefore allow us to have much more access to most (inaudible) which I think that's the main reason with the increase production, right?

So with that increased tonnage we obviously saw a little bit variety in grades. Should we expect the silver grades for example, to come off a little bit?

I would think that (inaudible) 80 grams of silver would be very consistent, it should be very consistent.

The 480 you said, Rui?

Yes.

And then you gave some good guidance also for the lead and the zinc, but for the zinc guidance that you provided the 14 million pounds I think it was. Based on that guidance, that implies that you're expecting zinc grades to drop in the second half of the year. Is that a fact?

Not really. Just maybe like 3% I would think we would maintain around 3% zinc.

Okay, so maybe a little bit of a drop, and then previously when we were there last time we talked about the new mill and building inventories for the new mill. Could you just give us an update on what's happening there?

Yes. We're going to start the new mill after the Chinese New Year, we start it in March 1st, 2010. (inaudible)

Okay, so that's changed a little bit from what we were thinking before.

Yes, I think we have something around 30,000 stockpile of ore mostly come from --.

Okay, so 30,000-ton stockpiled right now, so you're going to get a little more in there and then start the mill after that?

That's correct.

So hopefully after March 1, 2010?

Yes.

And one final question. Your CapEx guidance of $11 million in the second half of the year, does that include sustaining capital at the operations?

Yes.

Okay, it does, perfect. Thank you, gentlemen. Good quarter.

Thank you.

Thank you. We now go to the line of Brad Humphrey from Raymond James. Please go ahead.

Hi, guys. Just a really quick question. Can you remind us what the smelter terms are at this time?

The smelter terms, yes. Still the same, 85% for (inaudible).

It's the same. It's actually -- (inaudible) 2500

23.

2300 improved. For lead, (inaudible) it's for the Shanghai (inaudible) quoted price and for silver is for the 400 (inaudible) per gram.

It's about 86% of the (inaudible) price --.

It's about 86. Lead is about 85.

And zinc is about 64%.

That was 64?

Yes, 64%.

Great. And on the M&A plans, are you guys going to focus on silver or precious metals?

I think (inaudible) silver probably with some [light] zinc, because silver doesn't go alone, right? So we still focus on silver.

Okay, great. Thanks a lot.

Thank you. We have a follow-up from the line of Haytham Hodaly from Salman Partners.

Sorry guys I just wanted to clarify a number. So for zinc it's roughly 54% or 64%? Five four or six four?

64%.

I'm sorry, you're cutting out a little bit, Rui.

Six four.

Six four perfect, and then are those reasonable numbers to use for the remainder of this year?

Yes.

And that's based on Shanghai price, correct?

Yes.

Okay, perfect, thank you.

Remember Shanghai price you have to deduct 17% of VAT, right?

That's right. Thank you, Rui.

Thank you, we now go to the line of [George Shay from Sinita Investments]. Please go ahead.

Hi.

Hi, George.

Are you considering anymore stock buybacks?

Not at this time. Our focus is on growing the Company, getting our project in GC developed, looking at acquisitions and at the same time paying dividends to our shareholders.

Okay, and how much is the value-added tax?

17%.

17% of what?

17% of like pure metal, like for example, in Shanghai metal exchange, the lead price would be 17% more expensive than you would buy in London metal exchange. If you bring pure lead into China for example, you have to pay 17%, if you bring pure copper into China you have to pay 17%. So it's wash-wash.

Yes. Thank you. Thanks very much.

Thank you.

Thank you. (Operator Instructions) There are no further questions.

Okay, thank you. To wrap up I'd like to reiterate that with our strong cash position, industry leading low production costs, and a recent listing on the New York Stock Exchange, Silvercorp is positioned to prosper. Now, more than ever. We thank you again for joining us in today's conference call and we look forward to reporting to you again in February.

Thank you. That does conclude our conference for today. Thank you for using the AT&T executive teleconference. You may now disconnect.