Silvercorp Metals Inc (SVM) 2010 Q2 法說會逐字稿

Good morning. My name is Greg and I will be your conference Operator today. At this time, I would like to welcome everyone to Silvercorp Metals Incorporated's fiscal 2011 second quarter 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 Incorporated. 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 second 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 second quarter results. Presentation slides are available as part of the webcast or on Silvercorp's 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 second quarter of fiscal 2011 ended up being a very successful quarter for Silvercorp. And this was even before we began to witness the benefits from the recent improvement in silver prices. The quarter started out with a challenge in July when we experienced severe rainfall causing flood damage at the Ying Mining camp. Despite this, we were able to achieve record ore production of 154,000 tons, and increase silver production by 17%, sales by 45%, and net earnings by 40% compared to the second quarter last year. We achieved silver production of 1.34 million ounces, only 3% lower than our record production in Q1, thereby exceeding our post level guidance of a 10% reduction. And, as announced on Monday, Silvercorp entered into agreements to acquire a 70% interest in the BYP Gold-Lead-Zinc Mine in Hunan Province. This marks another significant step in our growth in China, which I will discuss in more detail later.

Slide three. Turning to our financial highlights. For the first three months ending September 30, 2010, we increased our sales by 45% to $36.3 million. Gross profit rose by 39% to $26.6 million. And net income improved by 40% to $12.5 million, representing $0.08 of earnings-per-share or $0.09 on an adjusted basis.

Turning to our operational highlights shown on slide four. Silvercorp mined a record 154,000 tons of ore and produced 1.34 million ounces of silver, 17 million pounds of lead, and 3.9 million pounds of zinc during the quarter, representing a year over year production increase of 17% for silver, 12% for lead and 3% for zinc.

Slide five. Silvercorp continues to be an industry leading low cost producer. During the quarter, we maintained tight control over our production costs resulting in consolidated cash cost per ounce of silver of negative $6.30. In fact, cash mining costs per ton decreased by 18% from $49.48 in the second quarter of 2000 -- fiscal 2010 to $40.36 per ton this quarter.

Slide six. Silvercorp's success in the second quarter of fiscal year 2012 can also be attributed to strengthening metal prices. Compared to the same period last year, average realized selling prices have increased by 33% for lead, -- 33% for silver, 21% for lead, and 26% for zinc. This increase was welcome. The current silver price has risen approximately a further 45%, compared to the average [alomy] silver price during the second quarter, which was $18.96.

Slide seven. Cash flow from operations, before non-cash working capital changes, for the second quarter was $18.8 million, or $0.11 per share, a 21% increase from $15.6 million in the second quarter of last year. As of September 30, 2010 we have $110.2 million in cash and short-term investments, up from $106 million at the end of June. This is even after payment of $3.2 million in dividends and $9.3 million in capital expenditures.

Slide eight. At the Ying Mining District ,where the Company's producing mines are located, Silvercorp's actual production results are on track to meet our full-year guidance for production, which remains at 5.3 million ounces of silver.

Slide nine. Capital expenditures in the Ying Mining District during the quarter were $5.5 million, mainly used to delineate and upgrade mineral resources by tunneling and diamond drilling, and to sink shafts and declines. Approximately 16,600 meters of tunneling, 33,000 meters of diamond drilling, and 800 meters of shafts and declines were completed during the quarter. At the Silvertip Project, as of September 30, 2010, $5.4 million has been incurred, of which $3.6 million was for exploration and permitting, and $1.8 million was for camp and infrastructure. In Q2, the surface drill program drilled more than 6000 meters. We also conducted a 4,100 line kilometer VTEM airborne geophysical survey over an area of 367 square kilometers. And completed certain studies and reports required for a BC small mine permit application. For the full fiscal year 2011, our CapEx forecast remains $13 million for the four mines at the Ying Mining District. And, we expect CapEx at Silvertip to be an additional $7 million to $8 million. We will provide further guidance on the capital expenditure forecast for the GC project pending finalization of permitting and construction plans.

Slide 10. In June, Silvercorp received the environmental permit for the GC project from the Department of Environmental Protection of Guangdong Province . Our mining permit application, along with all supporting documents, has been accepted by the Ministry of Land and Resources of China in August. We are now expecting to receive the GC mining permit within the current quarter, slightly behind our October target. Once the GC mining permit is granted, we plan to commence the construction phase of a 1,500 ton per day mine and mill operation, as the full mine and mill designs for the GC Project our close to completion.

Slide 11. At the Silvertip Project in northern BC Canada, we intend to complete the necessary studies required to submit a BC small mine permit application by late Spring 2011. Under a small mine permit, we are allowed to produce at 75,000 tons per year and will focus on higher grade zones that can be accessed from existing tunnels. The first step in achieving this goal is to obtain the necessary permits to dewater the existing 2.4 kilometers of underground tunnels, which we will apply for shortly. While our strategy at Silvertip is to get this property into production as quickly as possible, at the same time we are excited about further resource growth potential. We are continuing our aggressive drill program and look forward to providing news on exploration results in the near future.

Slide 12. As announced Monday, Silvercorp has entered into agreements to acquire a 70% interest in Yunxiang Mining,, a local private mining company in Hunan Province, whose primary asset is the BYP gold-lead-zinc mine. This $33 million transaction is subject to various regulatory approvals and is expected to close before March 31, 2011. This acquisition fits our strategy of acquiring precious metal projects that can generate healthy cash flows long before the projects potential is fully explored and developed so, that further resources expansions and production growth can be financed with internal cash flows.

A geological report completed in 1992 by the Chinese government geological team defined a mineral resource grading 2.76 grams per ton gold, containing 482,000 ounces of in situ gold and 3.1 million tons of lead and zinc mineral resources, grading 2.45% lead, and 5.26% zinc. Please note that these resources are historical and are not in compliance with National Instrument 43-101 requirements and therefore should not be relied upon.

The BYP Mine has a mining permit and a 400 ton per day floatation mill. Currently the mill is not in operation, as the tailings pond is full. A new tailings facility is under construction and expected to be completed in five months. Over 4,100 meters of underground development is completed, including declines and exploration drifts. The mine and mill are easily accessed by paved roads and are serviced by the National Power Grid. Within 200 kilometers there are eight smelters with ample capacity ready to take our concentrates.

Slide 13. We intend to utilize the existing 400 ton per day floatation mill starting from April 2011, focusing on higher grade gold starter pockets. We then anticipate increasing production to 1,000 tons per day in fiscal 2013 and 2,000 tons per day in fiscal 2014. We will also carry out an extensive exploration program to upgrade and expand the current resources, and produce a 43-101 report on the project.

Slide 14. This cross-section of BYP shows exploration mine 17 and shows the thickness of the aura body, which you can see is approximately 40 meters wide thick.

Slide 15. In conclusion we are very pleased with the results of the second quarter. We overcame challenges resulting from the July flooding. Recorded robust financial and operational results from our Ying Mining District. Made important progress at Silvertip and now established a third location for growth in China. And, we are excited about the current quarter as we benefit from the increase in silver prices. As always, we will continue to use our position of financial strength to advance our key development and exploration projects and continue to 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 through increasing shareholder value and the payment of dividends. As a reminder, another $0.02 quarterly dividend was just announced this morning.

Slide 16. Thank you for listening to the highlights of Silvercorp's unaudited fiscal 2011 second quarter results conference call. I would now ask the Operator to open the lines for questions.

Thank you. (Operator Instructions) One moment please. Your first question comes from the line of Haytham Hodaly from RBC Capital Markets. Please go ahead.

Good morning, Lorne. Good morning, Rui. How are you?

Hi, Haytham.

Just a quick question on the BYP. Do you have any additional permits you need to actually put in place in order to complete this tailings pond? What's the cost to complete the tailings pond? And what is -- is there any pending reclamation liabilities associated with that, the tailings pond?

The tailing power is only 300,000 pounds power. The liability -- right now they are [doing the reclamation already]. The [call is loyal already]. So, it's a very minimum cost associated with that. For the new tailing pond, it will take -- we are thinking about a couple months to finish because it is almost half finished. So, our intention is maybe later on, we are going to do dry tailing. So, either way, we just started producing -- it won't delay us from production, but in future, we are looking at dry tailing. That is in China, too. People don't like --

When you say it is going to take, what is it, five months to complete the new tailings, that is basically dry tailings?

That is real -- that would be -- later on we will convert that into dry tailing.

I see. Okay. Okay. Is there any permits or anything left that have to be ascertained at this point?

I think one of the permits could be expanded right, a key thing. That's why we would do a -- first year we were producing using VTEM mill to produce, and hopefully we can expand that to 2,000 pound per day operation. That is a required permit. Also, we would have to have new design of the mine, and also get a new activity production permit. Right now for that (Inaudible) production permit already.

Okay, is there still employees et cetera around that they are still looking for work? Have they all been let go? Obviously a few months ago. Or when does thing actually shut down?

After -- through 2008, after the financial crisis. They shut down operations. They have been in development. You see that in the last slides, all the common ground cross cut tunnels. That is where they are digging right now. They are just getting ready to be mined. That is all they are doing. The mills (Inaudible). The mining contractors are working on the underground tunnels.

Okay, thank you.

(Operator Instructions) You have a question from the line of Chris Lichtenheldt from UBS. Please go ahead.

Good morning. Just on GC, quickly, can you just describe what the cause of the delay from October until now was?

Originally we submit everything and they've done all the review. After the Chinese October long weekend, they started work. We received a phone call from them that said we need one more piece of paper. That is back at October 15. Now we spent two weeks working on -- there is deficiency on the technical report. So, we went back to get our consulting company to rework on our report. Since then we have submitted the report, I think, around the 25th of October. They accepted that and it is okay now. Now it is final. What I heard was we got all the (Inaudible) Ministry for Land of Resource. We went to the head of the Department of Science (Inaudible).

Now we just are waiting every month. There is a routine meeting for the Deputy Minister. In that meeting we hope it will be approved. It should be sometime this month we should get approved. That meeting in this month.

Okay. Great thanks. Just speaking of approvals, the BYP acquisition needs approval, is that a big process or do you expect any particular challenges in trying to get that deal approved?

Before we signed this deal, we have done all the (Inaudible). This approval only required to be obtained at the Province in 2009. Speaking of Hunan Province, we don't have (Inaudible). It is an acquisition of the shares of the Company. It is easier. We chat with the Department of Commerce, which the agency approves the transaction. Also the Department of Land of Resources of Hunan Province. They have no problem, but there is only one time we needed to get a clearance that was the military clearance in China before any mining deals can be approved at the Minister of Facility near by. If that is not the case, we should have no problem.

Okay. And presumably since it was already operating, that shouldn't be --

Foreign companies. Chinese company is okay. The Chinese company doesn't require these military clearance.

I see.

(Inaudible) requires based on Chinese money laws. You need a clearance for military facility, there is no military facility nearby.

And you are obviously a foreign company under that definition?

Right. Right. (Inaudible) we learn there is no -- obviously, military facility. We don't know it.

Yes. Okay. And then lastly can you maybe talk a little bit about how you see grad profile at Ying over the next few quarters? Still in the high fours or how is that looking?

I think it is in line with being able to maintain about 450,000 grams the last couple quarters. I think we should be able to maintain that for the next couple of quarters. And mostly through the terrible supervision of the contractors. Also improvement of internal operations. That is the main effort we have been putting out. We have been hiring, hiring more people. As to supervise the contractor. If you hire or fire more people, (Inaudible) situation. We see the results actually. This quarter is going to be -- October or November will be even better than the last quarter.

Right, okay. Great. Actually, maybe just one more. With having done the Silvertip not too long ago and now the BYP, assuming that closes, do you see your growth plate relatively full for the next couple -- for the next while or are you still looking at some of the smaller projects to add?

The BYP project, right now looks small, but it is good size of the market. 6.6 kilometers square mining permit. There are a lot -- when the Chinese (Inaudible) tunnels, they found several new gold-lead-zinc ore bodies which hadn't been drilled. Hadn't bee drilled (Inaudible). I think it is a good start for us. For BYP project, based on the geology and the size of our organization, I think we should be able to grow the resource for (Inaudible) once we start to produce. Kind of repeating our Ying story and we will be able to grow that substantially.

So, assuming everything goes smoothly, we should be able to provide gold equivalent, silver equivalent, maybe 2 million ounces of silver production starting next year. So -- which may represent almost 30% or 40% of our current production. Also with the GC, we should add another 2 million ounces. Also looking at GC down the road, we should be able to double or more than double the current production. On the China operation. In Silvertip we are hoping to add another 2 million to 3 million ounces in production. We keep on looking at a high -- similar situation like currently all acquisitions is so high. We don't want to spend like $1 billion to acquire some of these. That is what we are maintaining our pot of gold. (Inaudible)

Right. Okay that's great, thanks a lot.

(Operator Instructions) Next we will go back to the line of Haytham Hodaly from RBC Capital Markets. Please go ahead.

Sorry, a couple more questions. Just, Rui, when you were looking at this acquisition, what was your, what was your silver price assumption and what did you calculate as a payback in terms of timing?

For the BYP project?

Yes.

(Inaudible) $33 million. The deal would be that we would pay $25 million. We pay them $24 million in cash. Then, put $9 million into the Company. Our partner, he put 30%. It is about $3 million, $4 million. Essentially, the Company would have $12 million between the [major] companies. And our intention in the year is there are some width targets, (Inaudible). Which we are not affecting material mining pictures. (Inaudible). So, the year one, we include potential mines. Seven to eight gram added rate, and 120,000 ton per year. We should be able to generate a cash back within first one or two years of this project on that (Inaudible).

Okay, then, so, roughly to your payback you are saying, your production timeline, I think you mentioned it earlier, could you restate that? Was it 2013?

Hopefully we will be able to start April. If everything goes, in terms of approval, goes smoothly, we should be able to start producing April 2011. Hopefully producing 150,000 tons utilizing VTEM mill. And to focus on that hybrid pocket, which is about seven or eight gram goal added rate. If this goes through, we would produce about a 27,000 pounds of silver -- gold based on 1,000 units of gold pipe.

Sorry, how much was the -- how much was the overall high-grade pocket cuttage?

2011, (Inaudible) 2012 we are thinking about 120,000 pounds, 120,000 pounds.

The total high grade zone that you are talking about --

Quarter million tons.

Quarter million tons. Okay.

Year two we are going to (Inaudible). Based on the current, [our new lumber, our historic lumber segment] 2.8 grams. [Based on new lumber, that is more like 3.3 grams. Because there is new tunnel data that has been incorporated into this resource -- our resource calculation.

Okay, perfect, thank you.

(Operator Instructions) At this time there are no further questions.

Okay, thank you.

I would like to thank everyone again for joining us on 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 third-quarter results in February 2011. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.