Silvercorp Metals Inc (SVM) 2009 Q3 法說會逐字稿

Good morning. My name is Doug and I will be your conference operator today. At this time, I would like to welcome everyone to the Silvercorp Metals Inc's third quarter results analyst conference call. All lines have been placed on mute to prevent any background noise. After 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 now begin your conference.

Thank you, operator. Good morning. I'm Lorne Waldman, Corporate Secretary for Silvercorp. I'd like to welcome everyone to our fiscal 2010 third quarter 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, Silvercorp's Corporate Communications Manager. A PowerPoint of today's presentation is available on our website and is webcast. To advance the slides on the webcast, please press the forward arrow.

Moving now to slide one. 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.

Slide two. I'd like to start off by stating that notwithstanding recent commodity price volatility, Silvercorp continues to prove itself to be one of the most financially sound and consistent silver producers in our industry. The partial recovery in metal prices we saw late last year has been reflected in this quarter's financial performance as we have achieved robust sales, gross profit, net income and cash flows. The Company also achieved yet another record quarter of silver production, at 1.22 million ounces of silver. While we believe growing economies in the East will maintain demand for commodities, our shareholders should be reassured by the fact that Silvercorp remains one of the lowest cost producers of silver, with some of the highest gross profit margins in our space, a continuing benefit from having a high grade deposit like the Ying Mine in a low cost jurisdiction like China.

Slide three. Turning to our financial highlights. For the quarter ended December 31st, 2009, Silvercorp achieved sales of CAD31.3 million, 106% increase over sales of CAD15.2 million in the same quarter last year. Much of this was due to the partial recovery in the prices of silver, lead, and zinc, plus the increase in production of these metals. For the quarter, Silvercorp sold silver, lead, and zinc concentrates to five major local smelters for realized sales prices of CAD12.99 per pound for silver, CAD0.76 per pound for lead, and CAD0.64 per pound for zinc. This is an increase of 77% for silver, 85% for lead, and 129% for zinc over prices in the same quarter last year. These realized sales prices represent what is paid to Silvercorp for the metals contained in our concentrates after deduction of smelting charges and value added tax. While we increased our production this quarter, we were still able to reduce our cost of sales by 19% from the prior year period to CAD6 million, giving us gross profits from operations of CAD24.2 million. This represents a gross profit margin of 77% compared with 35% in the same period a year ago. Net income for the quarter was CAD12.4 million or CAD0.08 per share, compared to a net loss of CAD33.7 million in the prior year quarter as a result of CAD47.4 million of impairment charges.

Slide four. Cash provided by operating activities for the quarter was CAD15.9 million, representing CAD0.10 per share. This increases our cash and short-term investments to CAD87.8 million as at December 31st, 2009. This is a 34% increase to our cash position since the beginning of our fiscal year, even after CAD12.4 million in capital expenditures and CAD8.9 million in dividend payments.

Slide five. Turning now to our operational highlights. Silvercorp produced 1.22 million ounces of silver this quarter, a new record. Additionally, we produced 16.2 million pounds of lead and 4.5 million pounds of zinc, a 10% and 12% increase respectively over the prior year period. This was achieved despite a decrease in the tonnage of ores mined from the same quarter last year. The increase in silver and lead production is attributable to both an increase in production from Silvercorp's flagship Ying Mine, as a percentage of total production, and an increase in the head grades at the Ying Mine to 488.5 grams per ton from 420 grams per ton in the same quarter last year. The increase in head grades is the result of reduced dilution at the Ying Mine, where quality control procedures implemented this time last year continue to yield improvements.

Slide six. Consolidated cash costs per ounce of silver for the third quarter improved to negative CAD7.73 from CAD0.25 in the same period last year. Driven mainly by higher prices realized for our byproduct credits, this also improves on our cash costs per ounce of silver of negative CAD6.33 achieved last quarter and maintains Silvercorp's position as the lowest cost producer of silver among our global peers. For the Ying Mine, the total production cost per ounce of silver adjusted for byproduct credits was negative CAD8.36, and the total cash cost per ounce of silver was negative CAD7.47. Excluding byproduct credits, Silvercorp is still a significant low cost producer of silver at just CAD2.93 per ounce.

Slide seven. Consolidated total unit mining cost per ton for the quarter was CAD57.81, improved from CAD64.30 per ton for the prior year period as we continue to maintain tight vigilance over mine quality control procedures. The major components of cash mining costs in the third quarter were 40% for mining contractor costs, 23% for raw material costs, 13% for labor costs, 10% for utility costs, and 14% for other miscellaneous costs. The consolidated total unit milling cost in the third quarter was CAD12.28 per ton, representing a decrease of 3% from the same period last year.

Slide eight. In terms of Silvercorp's outlook going forward, in the near term we expect a significant amount of silver, lead, and zinc to be produced in the fourth quarter, as the Company begins production at its new mill to process 50,000 tons of stockpiled ore from all four mines within our Ying Mining Camp. Once fully ramped up, the newly built mill will run at 1,200 to 1,500 tons per day. The new mill, together with the existing 1,000 ton per day mill, provides sufficient capacity to accommodate anticipated increases in mine production in fiscal 2011, as production from the HPG, TLP, and LM Mine continue to increase from ongoing mine development.

Slide nine. For fiscal year 2011, the Company plans to produce approximately 500,000 tons of ore at grades of 360 grams per ton silver, 8% lead, and 1.2% zinc to yield 5.3 million ounces of silver, 83.7 million pounds of lead, and 10.3 million pounds of zinc. Using average metal prices in this third quarter and the above production projections, the Company's mining operations are projected to generate revenues of CAD140 million, resulting in expected cash flows from mine operations of between CAD95 million to CAD100 million. Capital expenditures for the fiscal 2011 are budgeted at CAD13 million at the Ying Mine camp, including CAD7 million for the Ying Mine, CAD4 million for the TLP Mine, and CAD2 million for the HPG and LM Mines.

Slide 10. Silvercorp is also carrying out an aggressive exploration program within its existing exploration and mining permit areas to expand and upgrade our resources to extend the life of our mines. Included in this is a regional IPGL physics program designed to cover unexplored areas at our exploration permit to identify new veins for future exploration.

Slide 11. At the GC project in Guangdong Province, the Company is engaged in the environmental permitting process. This is taking longer than we hoped, as the environmental authorities in China are drafting new regulations to address concerns in response to several environmental accidents in the country last year. The new regulations are expected to be completed and implemented in the first half of 2010. Having a proven track record operating a clean and environmentally responsible mine in the Henan Province, we are confident in our abilities to work with the authorities in the Guangdong Province to obtain the necessary environmental permits needed to secure our mining permit. In the meantime, a feasibility study for the GC project with mine and mill designs is underway.

Slide 12. Silvercorp continues to pursue future growth opportunities through the evaluation of projects for potential acquisition, both within and outside of China. With our cash and short-term investments now sitting at CAD87.8 million, and no debt, we are in an ever-stronger position to grow the Company.

Slide 13. In conclusion, we are pleased to maintain our standing as one of the most profitable and lowest cost primary silver producers amongst our peers, now with a cash cost of negative CAD7.73 per ounce. And we will use our position of financial strength to advance our key development and exploration projects and make strategic acquisitions, all the while rewarding shareholders through the payment of dividends. And as a reminder, another CAD0.02 quarterly dividend was just announced this morning.

Thank you for listening to the highlights of Silvercorp's third quarter. I would now ask the operator to open the lines for questions.

Thank you. (Operator Instructions). And our first question is from the line of Chris Lichtenheldt with UBS. Please go ahead.

Good morning, everyone. Thanks. I just had a couple questions. First, on the HPG, LM, TLP mines, it looks like based on the outlook that those are going to be ramping materially from where they are this year or this quarter. Can you just help us understand, give us a little clarity on what types of development -- is there still some ongoing mechanization at those mines that's going to help you get to the 500,000 tons next year?

This is Rui. Essentially, in our production rates, to produce 0.5 million ton material, 300,000 tons will come from Ying Mine, and 110,000 tons from TLP Mine and another 90,000 tons from HPG and LM Mines. That's a breakdown. HGP is slightly more than last year. And TLP Mine, the main development in there is still going on, and so that the greatest in comparison is now that very exciting compared to Ying Mine. So we're looking at a growth at our TLP Mine. We also look at more growth at Ying Mine. Back to TLP Mine. We will maintain around 110,000 tons for this year, and hopefully maybe more growth next year, and then probably maintain at around a little more than 200,000 tons a year in the future. And so for 2011 projection, the main growth actually -- growth from TLP and HPG Mine and LM Mine, also some growth from Ying Mine itself as mining activity going down. There are several horizontal projects like the project 102 and 103, now it's -- we are not using that right now, but if we go back to there again, we look at a lot of veins, which has material, which still has a lot of material which has almost same amount of grade as TLP Mine. Then we said okay, now we can mine things in TLP, why not we go back to Ying Mine, mining this low grade material? So looks like we may have some growth from there. So in comparison, we should be able to -- in the end, we should be able to make (inaudible) material from all these four mines.

That will be ramping up throughout the year?

Yes.

Okay. Okay. Great. Just maybe another question on GC project. Can you explain maybe how you see -- if you have any idea how the changes in regulations may affect the scope of the project, if it's going to be materially more costly to build or what your outlook there is?

GC project, like last year, we have almost several occasions we were ready to get approval, but then somebody has an accident somewhere, which makes national news. Every time have you have this kind of accident, it makes the approving authority nervous. Every time some accident happens, get a notice from National Ministry of Environmental Protection, just say be careful, because every time there's an accident, we get public outrage and so makes people very cautious. I think September, October last year, the Chinese government studied a program called -- they called it Variable Contamination Source. And just reading recently, I just finished the survey for all kinds of contamination source, like heavy metals and other chemicals. And based on that, they are talking about agreeing to do some environmental protection tax, just reading the news yesterday. And also based on that result, survey results, they're going to introduce a new measure -- not a regulation, I would say more guidance, on how to permit these projects with the potential of heavy metal discharge such as a mining project.

And so from our point of view, in terms of cost and the timing, right, first the timing. This is delayed a couple of times already. Now the government guide doesn't want to move, doesn't want to make a move, even though we improved our environment study several times. Now, with this new regulation particularly introduced from our end, we are looking at one [dry tailing] process. Before we were talking about pumping everything, pumping the [tainting] of the water (inaudible). It's about a 4 kilometer [way] and that's all to make all those people nervous. Thinking about those (inaudible) storm, heavy waters. So now we look at dry tailing process, which turns out to be even better for us in terms of cost. We found a little valley just right beside the mill, potential mill site, and all we have to do is to increase attaining the water facility, which may cause extra $1 million to $2 million in terms of build that water dry tailing, dewatering facilities. You save almost $5 million to $6 million, maybe $10 million in building that attaining dam. In the end, it's more cost effective. Also you don't have to pump (inaudible). When we told this idea to those environmental people, they actually like this idea better (inaudible). Right now we're working on this dry tailing process and working on the design.

Do you have to prepare a new study on dry tailings?

That's what we're doing right now.

Okay.

As I say, Look. We're not doing nothing anyhow. We understand right now in Guangdong Province, there are five mining permit applications for environmental permits and I think we are the only foreign Company in the four guys. They are Chinese and government controlled companies. I think nobody got progress. Just call everything on hold. We're not doing nothing here. We have a much clearer indication from the central government regarding that new measure or guidance of heavy metal discharging.

If they clear up the regulation by middle of the year, you then submit your new proposal and there's still a new review process, so it could be later in the year (inaudible)?

I think they've done most of the review already. There's not much review to be done, other than to act.

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

Thanks.

And our next question comes from the line of Haytham Hodaly with Salman Partners. Please go ahead.

Good morning, everybody. Couple of questions, maybe I'll just follow up a little bit with the last question. At TLP, it looks like you stockpiled about 27,000 tons for the nine months ended December 31st. You processed a couple thousand, almost 3,000 tons. Does that mean you have about 25,000 tons remaining in stockpile that will go through the TLP this year?

Yes. Right now in total we have around 50,000 to 60,000 in total.

You're breaking up, Rui.

Sorry. I said that right now we have in total about 50,000 tons in stockpile.

That's 50,000 tons?

Yes, right now. 27,000 tons on TLP.

Where is the rest coming from?

From Ying Mine.

Sorry. You're breaking up again. Can anybody else hear?

From Ying Mine.

From the Ying Mine, okay. So 25,000 and 25,000 roughly?

Right.

And then Ying Mine, what type of grades are you expecting overall?

For the Ying Mine, we expect same kind of grade, 480 grams of silver and 12% of lead/zinc.

Sorry, you're breaking up. 480 grams of silver.

Yes, and about 12% lead/zinc.

12% lead/zinc.

Averages out, all the ore, you get 360 grams silver and 10% to 11% lead zinc.

I missed all that, I don't know if it's your connection or mine.

I think it's your connection. Other people are hearing it okay.

Okay. Let's try one more time.

Better.

That's better?

Yes.

That's unusual. Okay. So it's 300,000 tons at Ying at a grade of 480 grams ton silver. What were the lead and zinc grades?

12%.

12% lead/zinc combined.

Yes.

What was the TLP number you were recording?

I don't have that offhand right now.

Okay. And then for the Ying, you're seeing higher silver and lead grades. Are you seeing it in the direct smelting ores or in the milled ores?

Say that question again.

At Ying are you seeing the higher silver and lead grades in the direct smelting ores or in the milled ores?

Actually the same.

The same?

Yes.

Okay. What's the tonnage you're forecasting for Ying in terms of direct smelting, or is it going to change much or is it going to be around the same?

Probably the same. It will be around 10,000 tons. 10,000 to 11,000 tons a year (inaudible).

And for -- you said you didn't have the grades for silver at TLP, is that correct?

I don't have it right now, but we'll get it to you.

That's great. Just at Ying, your milling cost per ton of ore milled seems to have increased from last quarter by about 14%. Is there anything that's driving that, or is there some unusual costs (inaudible) there?

Mining cost for the Ying Mine?

Yes, they went up by 14% from last quarter.

I think our milling cost is consistent, as around CAD10 an [ounce].

This quarter it was CAD10.40.

Yes, it's consistent.

And the last quarter --

It was nine something or low nines.

And also there's some foreign exchange impact; there is about 1% foreign exchange impact.

Oh, foreign exchange, okay.

So actually --

So it should still stay around the CAD10 mark, is that correct?

That's right.

In terms of exploration, what do you expect to expense in terms of exploration in fiscal 2011?

We are spending around CAD13 million on the Ying mining.

That's development, correct?

Actually, including development and Ying Mining Camp we are spending CAD7 million which is mostly -- maybe half of it development and half will be like on-the-ground drilling and underground exploration tunnels.

Will some of that hit the income statement then?

We will capitalize some of these items.

So you capitalize some expense -- so I assume if I use similar numbers to what you're seeing this year, it's not going to be far off then?

No, no.

And the GC feasibility study, when do you expect to have that done?

I think maybe in -- we're almost halfway through (inaudible). I'll tell you, maybe sometime in April.

April of next year? Sorry, this year?

Yes, April of this year.

April of 2010. And I think that covers my questions. Thank you and great quarter.

Thanks.

Thank you.

Our next question then is from [Amtel Mohammed] with Raymond James. Please go ahead.

Hi, maybe just a couple questions here. First of all at LM, you mined a bunch of ores. You sold very little ounces. Are you guys just stockpiling there?

Yes.

Okay. And second question, in terms of M&A, are you -- how keen are you guys still on that front and where are you guys still looking? Are you guys more in China or out of China?

We've been looking at a lot of different situations, but our key idea is we want -- if we want to buy something, that something will have the same kind of grade compared to near a Ying Mine. Like Ying Mine, we have about 480 grams silver. For the whole Ying Mining Camp, we're talking about like [obviously one] producing 0.5 million ton, 360 grams silver and 10% lead/zinc. Anything we want to buy will be something close to that. And so we look at -- we look at some situations in North America and we look at some situations in other part of the world like Australia, South America. The key thing is the high grade. That's our main focus. We haven't done nothing to be announced yet.

I see. Okay. Thank you. That's all.

(Operator Instructions).

Okay. If there's no further questions, I'd like to wrap up by thanking everybody for -- we have one more question.

Indeed, sir, we do. Our question will come from the line of Fred [Esselin], a private investor in the Company. Please go ahead.

Yes, I subscribe to a US reporting on companies, and what they do is they give a brief description without naming the name and then try to sell you a report. I pretty well narrowed down this description as you guys with CAD77 million in the bank which was prior this announcement and paying a dividend. But they're talking about the exploration potential somewhere along the Great Wall of China and touting like billions of dollars of silver in this thing. Where are we in the exploration phase on new or step-up properties that have some potential?

Any time there's a material development, something significant, the Company would put out a press release. So I would just caution you to be very careful when you read any outrageous claims where there is not a press release that's already been issued by the Company.

Well said, prudently. Thank you.

Speakers, at this time then there are no further questions in our queue.

On that note, I'd like to wrap up by thanking everybody for joining us in today's conference call. We remain very excited about Silvercorp's future growth prospects and we look forward to reporting to you again in June. Thanks a lot. Bye now.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.