Silvercorp Metals Inc (SVM) 2010 Q1 法說會逐字稿

Good morning. My name is Mary and I will be your conference Operator today. At this time, I would like to welcome everyone to Silvercorp Metals Inc. fiscal 2011 first 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 2011 first quarter analyst conference call. Joining me today on the call are Dr. Rui Feng, Silvercorp's Chairman and Chief Executive Officer, and Maria Tang, Silvercorp's Chief Financial Officer.

At this time, I'd like to invite you to follow along on the accompanying presentation slides as I go through the highlights of our first quarter results. Presentation slides are available as part of the webcast or on our website. To advance the slides, please press on the forward arrow.

Slide one. During today's call, forward-looking statements will be made relating to future production, capital expenditures, business expansion plans and others. Such forward-looking statements are subject to many risks and uncertainties many of which are detailed in our 2010 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. The first quarter of fiscal 2011 has marked a very successful start to the year for Silvercorp. During the three months ended June 30, 2010, we have achieved new records in both silver production and sales. Net earnings and cash flows from operations have also improved significantly compared to the same period last year. We've continued to see higher realized selling prices and increased demand for our silver and byproducts which were the main drivers of our success in the first quarter. In addition, the GC project has submitted its mining permit application to the Ministry of Land and Resources in Beijing, a key step towards commencing construction.

Slide three. Turning to our financial highlights. Silvercorp sales, gross profits, net income, and earnings per share have all improved markedly compared to the same period last year. For the three months ended June 30, 2010, we increased our sales by 63% to $36.7 million. Gross profits rose by 59% to $26.5 million and net income improved by 88% to $14.1 million representing $0.09 of earnings per share.

Slide four. Turning to our operational highlights. The Company's production has grown significantly compared to both last quarter and the same quarter last year. We have produced a record of 1.4 million ounces of silver plus 18.8 million pounds of lead and 4.4 million pounds of zinc during the quarter representing a year-over-year increase of 18% for silver, 17% for lead, and 19% for zinc.

Moving on to slide five. While production volumes increased, we maintained tight control over our production costs. Consolidated cash costs per ounce of silver for the first quarter improved to negative $6.31 from negative $5.09 in the same period last year making Silvercorp an industry leading low cost producer.

Slide six. The successful start of the year can also be attributed to strengthening metal prices. Compared to the same period last year, the average realized selling prices have increased 41% for silver, 32% for lead and 28% for zinc.

Slide seven. Cash flow from operations for the first quarter was $23.2 million or $0.14 per share, 123% increase from $10.4 million in the same quarter last year. As at June 30, 2010, we had $106 million in cash and short-term investments, up from $94.7 million as at March 31, 2010. And this is even after the payment of $3.2 million in dividends and $5.7 million for capital expenditures.

Slide eight. At the Ying Mining District where the Company's four producing mines are located, our actual production results are well ahead of our full year guidance after the first quarter. With improved operational efficiency, we mined approximately 20,000 more tonnes of ore than budget in the first quarter. Looking forward, as a result of the disruption to the Ying Mines operations caused by the abnormally heavy rainfall on July 24, 2010, we expect to see a 10% decrease in second quarter production. The good news, however, is that the recovery work is substantially completed. Mining operations at the Ying Mine resumed on August 2, and at TLP and LM a few days ago. HPG will resume in around one week. Importantly, our full year production guidance remains intact, unchanged.

Slide nine. Our capital expenditures were $5.1 million this quarter in the Ying Mining District as our mine development team has made advancements in several important development projects, including the completion of shafts at the Ying Mine that will allow for mining at lower levels in upcoming quarters. For the fiscal 2011 year, our CapEx forecast remains $13 million in total for the four mines in the Ying Mining District and an additional $4 million to $5 million for our Silvertip project. We will provide further guidance on the capital expenditure forecast for the GC project pending finalization of permitting and construction plans. We are confident that our current plans can be internally financed.

Moving on to slide ten. In this quarter, Silvercorp received the environmental permit for the GC project from the Department of Environmental Protection of Guangdong Province. In July, our mining permit application, along with all supporting documents, was accepted by the Ministry of Land and Resources of China. We now expect to receive the GC mining permit in October of this year. Once the GC Mining Permit is granted, we plan to commence the construction phase of a 1500-tonne per day mine and mill operation as the full mine and mill designs for the GC project are close to completion.

Slide eleven. At the Silvertip Project in northern BC Canada, the Company intends to complete the necessary studies within the next twelve month period for the submission of a BC small mine permit. Under a small mine permit, we are permitted to produce at 75,000 tonnes per year. The first step in achieving this goal is to obtain the necessary permits to dewater the existing 2.4-kilometers of underground tunnels. We expect this to take approximately six months.

While our strategy is to get Silvertip into production as quickly as possible, at the same time, we are excited about further resource growth potential. During this quarter, we set up a forty-man camp at mine site and are launching a 20,000-meter drilling program. This will include surface drill programs to define mineralized zones that were intercepted in past drilled programs but not Incorporated into the 2010 resource estimate, and drill testing of several geophysical and geochemical anomalies located within five kilometers of the existing resource area. We're also conducting a 4000 line kilometer high resolution airborne geophysical survey. The total capital expenditure budget for Silvertip will be between $4 million to $5 million for calendar 2010.

Moving on to slide twelve. In conclusion, we're very pleased with the first quarter as we not only recorded robust financial and operation results from our Ying Mining District but also made important progress with the GC and Silvertip projects, and, as always, we will continue to use our position of financial strength to advance our key development and exploration projects and to continue to make and seek out strategic acquisitions, both within and outside of China with a focus on asset quality and value. We will continue striving to reward shareholders by increasing shareholder value and through the payment of dividends. And as a reminder, another $0.02 quarterly dividend was just announced this morning.

I would also like to announce the recent appointment of Maria Tang as our Chief Financial Officer. Maria has been in this role in an interim basis for the last two years and we're pleased to have her assume the position as full-time Chief Financial Officer. It is a very timely appointment as well because our Manager of Corporate Communications, Shirley Zhou, is leaving Silvercorp for personal reasons, so in the future, please feel free to contact Maria Tang or myself should you have any questions.

Anyways, thank you for listening to the highlights of Silvercorp's unaudited fiscal 2011 first quarter conference call. I would now ask the Operator to open the lines for questions.

Thank you. (Operator Instructions) Our first question comes from the line of Haytham Hodaly from Salman Partners. Please go ahead.

Good morning, everybody.

Good morning.

Good morning, Haytham.

Morning Haytham.

Just a couple simple questions. We'll start with the, the GC project. You've outlined your expectation of when you expect the mining permit. What's your general development timeline you'd optimally like to see for this project?

We hope to get a permit, a mining permit by -- in less than two months time, and then after that, then we will be able to start to do development and construction. So basically we expect within 18 months from the time of getting the mining permit. We are trying to achieve a 600-tonne per day production and then after that, it will be another six, to eight, to 10 months to achieving 1000-tonne -- 1,500-tonne per day.

I'm sorry, 1500?

Yes.

1500 tonnes per day. So sorry just to go back your mining permit you're expecting October of this year, construction will take 12 to 18 months, how long did you say?

Yes, like for around eighteen months.

Okay.

We have the mill running already, with the mining capacity to, to achieving at about 600-tonne a day and then after that, it will be another I would say eight to 10 months to achieving full production.

Okay.

1,500-tonne per day.

1,500. Okay, and then have you thrown out any capital cost numbers yet, Rui?

Like our estimate of what the cost will be, we still talk about $30 million.

Okay.

And only one uncertainty will be the cost of land, and like the China -- China's situation has been changing fast and before the land value has (inaudible) and so, but the land value, I would say about $5 million to $6 million range.

And that's in the $30 million? Or is that over and above it?

Maybe, maybe $3 million.

Okay, so maybe $3 million. I see. So maybe a couple million dollars more.

Yes.

Okay, and then at Ying, I see the milling costs have actually gone up a little bit this last quarter. Are you experiencing cost pressures in terms of, you know, your non-fixed items? Or what are you seeing in terms of cost there?

The -- meaning cost?

Yes.

The -- this is Maria. The milling cost has about like $1.00 per tonne for this quarter, there's one reason is because we do some attendance work, eat our own meals and so in that way we expense it, therefore it is higher. In the future, I think the guideline is $11.00.

Okay, so that's just some maintenance work take place. Great. Thank you, Maria.

And also, the new mill, we are running the new mill, so there, there's some, like --

Additional admin cost.

Yes, additional, like, alteration here there, you know.

Okay. Okay. And I guess one last question, just with regards to your production, I know you indicated that production in the second quarter, your fiscal quarter is going to be down 10% due to flooding. What, what metal production levels are you, are you assuming? For Q2 that is?

We assume same as quarter one.

But -- so the exact same as quarter one but down 10%, or, or are you assuming you'll get -- you'll reach quarter one levels?

We'll reaching -- Q2, Q2 level maybe down 10% from Q1 maybe.

Okay, okay, fair enough. That's it, thank you.

But Q3, maybe we, we'll pick up some.

Okay. No, that's great. Appreciate it, Rui, thank you.

Thank you. (Operator Instructions) And we do go to the line of Chris Lichtenheldt from UBS. Please go ahead.

Good morning, everyone. Just wanted to ask, you'd mentioned that you continue to look for opportunities. Obviously the balance sheet is in pretty good shape even when you consider the expenditures that will be needed at GC and elsewhere, yet pretty strong cash balance. So what -- can you just talk a little bit about what sorts of things would be ideal for you? I mean, more Silvertips, sort of early stage small development? Or would you consider something larger? And if so, maybe how large? Just give us some guidance on that.

Like we look at high grade situation. So basically like if you look at Silvertip project, it is very high grade, like 18% lead zinc and (inaudible) silver. So that, that kind of project we're looking around trying to, to found out, to found. Right? But it's pretty tough, so basically, we're looking for bigs, but we can go down small, too.

Right.

If it is a high grade and it make money.

Yes. No, that's true. So you would be pretty much -- you're pretty much looking for something in like that, those type of grades, you wouldn't be really looking at -- ?

Yes, like maybe I look at a gold/silver situation, which is -- let's say (inaudible) should be over $400, right?

Okay, so no real change there to what you've been looking at in the past?

No. No. Maybe in China we also look around, but in China the cost structure is much better than Canada or other part of the world. So in China, if you could find something decent, but it's pretty tough.

Are you seeing better opportunities there this year than maybe last? I know at one point prices were getting a little bit frothy in China. Have they come down at all?

They are the same.

Same.

They are very safe prices but, you know like -- and it's tough to find any mature project.

Yes. Okay, that's helpful, thanks.

Thanks.

Thank you. We now go to the line of Andrew Kaip from BMO Capital Markets. Please go ahead.

Hi, hi, congratulations on the quarter.

Thanks.

Look, I've got two questions, one you indicated at the Ying Mine that the, the shaft sinking had been completed and you would begin accessing the lower levels. And one of the questions I have is just, what do you -- what are your expectations on grade profile as you descend? Are we going to begin looking at higher silver grades or lower? Can you give us some indication of what we'll see over the next two years as you begin exploiting from those lower levels?

I think it's because there are so many different things and I think, first of all, when we start to clear anything below, like, through 260-meter tunnel [lever], yes.

Okay.

And so we're still trying to develop those drill sites, and we're, we're -- because all production increases substantially, so there is a lot of, some -- it's a lot of competition between developers that (inaudible) tunnels, and the mining tunnels, right?

Okay.

So we try to balance that out, so, but meanwhile, we also looking at some other veins at the higher elevation, and there's a lot of smaller veins and which we haven't been focused on. We haven't been paying attention to, and we are being doing drilling on those veins. And based on the pre-- preliminary results, I would think we should be able to replace all of the depleted resources this year through those -- the, the vein at a shallower place. (Inaudible). Right? And so in terms, the second you have all of the grade, I think in the next two years we'll be able to maintain the current grade, like, essentially similar grade would be around 470 grams to 480 grams of silver, and the lead zinc will be around 11%, 12%.

Okay. And then the second question just follow up on what Chris was asking about corporate activities. We noticed that you had filed a prospectus for debtor equity offerings up to $120 million. You know, what should we be reading out of that, Rui? Should we be thinking that you guys are going to be looking at funding a portion of your development through additional offerings of some form? Or, or are you still looking at development through, through your existing cash?

I think if you look at every Company, they have something like (inaudible) prospectus available.

Mm-hmm.

So you never know. Just so -- so we are ready, like, you never know, there's a -- maybe there's a good opportunity to come along and then we can act fast, right?

Oh, right.

I think that's the main purpose, main purpose, based on our current cash position, our future cash flow and analysis of future capital expenditure requirement, I think like a GC project would require $30 million, maybe 10% increase to $33 million, and we should be able, we should be able to handle with our cash flow from operation. And for the Silvertip project, somehow we spent almost $2, $2 -- of the, of the acquisition, we spent almost $2.5 million already to build the (inaudible) and the interior [pinnacle]. So we -- I think we should be able to maintain the cash requirement. So the (inaudible) shaft prospectus is just, just to get something ready just in case. Right? We like some projects, we like some companies, and we can use that as a means to finance, right?

Okay. All right, that's it. Thanks very much.

Thank you. Our next question is from the line of Howard Flinker from Flinker & Company. Please go ahead.

Hello, all.

Hi, Howard.

Is the difference between the prices received for gold and silver and the market prices in the June quarter, the result of high smelting costs in China?

Maria?

The smelting cost in China is basically -- along with what happened in the rest of the world, and for the silver, we have -- for the silver, in the Shanghai price is about 17% over higher than the [London] price. That's because back in China, we -- the Chinese government that had 17% of AET, otherwise, it's the same. And for the smelting one is about 18% of the Shanghai price. It's pretty much in line with the rest of the world.

So --

And then that is a --

Go ahead.

-- a little bit higher smelting charge, like 18-- is 20% is also, is also common.

So are you saying that those two, about 35%, are the reason between what you get and what the worldwide price is?

Yes, like every Company is the same thing.

Yes.

The way we report is we report a net of smelter return.

Oh, I see.

Where every other company reporting the gross.

Yes, I thought you had mentioned that in the past, but I -- I wasn't --

So that's the difference. So that's why, you know, our (inaudible) is higher I think it's because we deduct that smelter charge already.

Yes, sure.

But in terms, in terms of actual smelter charge, actually for silver lead zinc, for silver it actually reduced during the last two quarters, because apparently people -- there's a lot of tight supply for lead concentrate.

Because of what?

Very tight supply of lead concentrate.

Oh I see. Oh I see. Okay. Did you say that the silver grade at Silvertip is 40 grams? I didn't hear you clearly.

400 grams.

Oh, 400 grams.

Yes.

Plus around 17% lead/zinc.

Okay. Pen just ran out of ink. And the final question, I noticed relates to your Income Statement which has loss on trading securities. What trading securities are those?

That one is pretty much the mark-to-market writedown for a warrant which were kind of a private placement in before.

We did a private placement with a (inaudible) company.

Oh, I forgot.

And then they give us a warrant and then --

Oh, I see. The warrant. Oh, I see. Okay. But you're not, you're not buying and selling gold and silver securities?

No. That's a --

Yes, okay. I thought maybe you were and I was going to ask about that. That's it. Xie xie (inaudible)

Okay, thank you.

Thank you.

You're welcome.

Thank you, and we have a follow-up from the line of Chris Lichtenheldt from UBS. Please go ahead.

Thanks. I had one -- maybe a couple quick follow-ups. The -- during the quarter you guys were able to increase your ownership in HBG and LM from 70% to 80%. Do, do you see more opportunity in the future for that, at those mines, or in the other mines for increased ownership?

Probably not.

Okay.

That's a -- no.

Not so much. Not at Ying, either?

No. They actually are trying to prioritize that, their part of their interest to their employee, right?

Okay.

It's a government owned, you know, the government entity owned 18.5%.

Right.

(Inaudible) they see the big cash flow coming in, so they, they use a different method to do evaluation of that 22.5%, so maybe they are trying to privatize that, right (inaudible).

Oh.

To their employee.

Okay. So yes, they will be keeping that. Okay, thanks.

And then maybe just a quick follow-up for Maria. I know, you mentioned I think you said the silver TCRC now is 17% of metal price, Shanghai metal price?

Yes.

17%, and then can you just remind us--

I think it's 18%.

Yes, it's 18.

18% okay. And can you remind us what lead and zinc are?

Lead and zinc is about -- I have the number. For the lead, it is about --

16.

16% to 18%. For the zinc it is about 30 -- 35% around.

35%. Okay, that's great. That's it for me, thanks.

Thank you. Our next question is from the line of Lon Harnish from CIBC Wood Gundy. Please go ahead.

Good morning folks.

Hi.

Thanks for taking my call. I have a number of clients that own the stock and I just wanted to see your comments on a few questions such as where you see lead and zinc prices going? Any comments on that, please and thank you?

I think the lead price is pretty strong in China simply because of the costs (inaudible) for the last two quarters, every month the Chinese car sales has been growing like 20%, 25, 26% last month.

Right.

And so that's given a lot of support for the lead.

So you guys are positive going forward on--

On the lead price.

On the lead price.

For example, during the July month, we had a heavy flood.

Right.

So we haven't been able to do sales.

Right.

But during that ten-day you know, like, actually the lead price increased about 10%.

Yes, excellent. Okay, next quick question, thank you very much. Flooding of the mine that took place, it's up and running again. Have you taken any precautions to ensure there may not be any additional flooding? China's getting a lot of rain, although I don't know exactly all the parts of China, but I just wondered about safety precautions on additional --

I think the main, main flood was down at HPG mine.

Right.

And where the Ying Mine which represents almost 80% of our production --

Right.

-- and it's only one place was flooded, and only a small access tunnel was flooded.

Right. So not a big issue?

No, big issue. But then the HPG Mine has been flooded, the mine was not flooded but the mainly the access road was flooded because of the mountains very steep.

Right. So you're --

And so we're doing a lot of like we're doing a lot of dam now to stop those -- it's not just the water, when we have heavy rain, there's a lot of broken rock comes down from the slope. And those mud and rock mixed with the water (inaudible) make a very powerful like mud flow, right?

Absolutely.

So that's why we're trying to build a dam so we can prevent the rock from coming down.

Got you, thank you. Another quick question. Any comments on possible share dilution for the shelf perspectives that you have? Obviously you haven't implemented yet, but do you have any comments on what the possible share dilution might be?

I think if you do that financing, it will have some impact in terms of dilution, but unless we are buying some really accretive asset, we wouldn't do that. So if you buy a very good asset --

Right.

-- then with the new issue of shares but the asset base has increased, so actually, it's accretive, right?

Right, yes. If the acquisition is accretive.

So I think really (inaudible) do that, and we don't need that many.

So you're not overly concerned about possible dilution -- share dilution?

No. (Inaudible) get it ready just in case like what if some opportunity come along.

Another very quick question and that is negative cash cost for silver. I'm not totally aware as to how it could be negative. Is that because you sell the other products like lead and zinc that keeps your negative?

Yes, the numbers I play around with every day.

Okay, so you sell the by-products and that keeps your silver cost down?

Right.

Okay and the very final question is, is governmental relations with China, are you guys, you guys I know have been in the country for a number of years, but is your governmental relations on a strong, strong ties kind of thing?

I think government relationship is a case-by-case, like, for example, we have two operations in China and the Ying Mining District because every year -- like this year we are going to pay the $20 million -- $200 million (inaudible) in tax revenue.

Right.

So that's economic, economic foundation for a relationship, right?

So you're -- yes -- so you're dealing with local governments in the provinces, or whatever?

Yes. So they look at that number, oh see, that's a big number. So we -- this Company, they don't do funny things and everything is public, and --

Yes.

-- so they are happy. So basically, everything is a fundamental is economic foundation.

So they're happy and you're happy. How much employment are you providing approximately? Like, you must be pretty --

We have almost 2000 people work for us in the Ying Mining District.

Right, okay.

So we're in the GC project, because we are starting on the project. How many -- the government, the local government hasn't realized a benefit, so they don't quite understand what's the impact that could have. So they, they -- like the support is less though as compared to where the Ying Mine is located. Right?

I see. Yes.

But everything is based on money.

Yes. Fair enough. Gentlemen and ladies, thank you ever so much for your comments. I greatly appreciate it.

Thank you.

Thank you. There are no further questions. We'll turn it back for closing comments.

Okay. To wrap up I'd like to thank you again for joining us in today's conference call. We remain very excited about Silvercorp's future growth prospects. We look forward to reporting to you again when we release our second quarter results in November 2010. Thank you, and goodbye.

Thank you.

Thank you. That does conclude our conference for today. Thank you for using AT&T Executive Teleconference. You may now disconnect.