Silvercorp Metals Inc (SVM) 2010 Q3 法說會逐字稿

Good morning. My name is David and I will be your conference operator today. At this time, I would like to welcome everyone to Silvercorp Metals, Inc. fiscal 2011 third 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) 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 third 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 Chief Financial Officer; and Laurenn Russell, our Investor Relations Manager.

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 third 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.

Turning to slide one. During today's call, forward-looking statements will be made relating to future production and exploration, 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 third quarter of fiscal 2011 was a record quarter for Silvercorp on all fronts. We increased silver production by 25% compared to the prior year period, producing a record 1.52 million ounces of silver. We also achieved record sales, net earnings and cash flow from operations, while continuing to maintain our low-cost producer status for the cash cost of negative $7.13 per ounce.

We raised $110.5 million in an equity financing, further strengthening our balance sheet. An important milestone for Silvercorp this quarter was the receipt of a mining permit for the GC project in Guangdong Province. We also secured a third foothold for growth in China through the acquisition of a 70% equity interest in the BYP Mine in Hunan Province.

Slide three. Turning to our financial highlights; for the three months ended December 31, 2010 we increased our sales by 66% to a record $51.8 million. Gross profit rose by 65% to $40 million. And net income improved by 140% to a record $29.7 million. Net income per share increased by 125% to $0.18 or $0.13 adjusting for nonoperational items.

Slide four. Cash flows from operations before non-cash working capital changes improved 68% to a record $31.6 million, representing $0.19 per share, up from $0.11 last year. At quarter end we had $223.7 million in cash and short-term investments, after the payment of $3.2 million in dividends and $11.3 million of capital expenditures.

Slide five. Turning to our operational highlights; Silvercorp produced a record 1.52 million ounces of silver along with 18.8 million pounds of lead and 4.8 million pounds of zinc, representing a year over year production increase of 25% for silver, 16% for lead and 8% for zinc. Silver sales accounted for 60% of total sales in the quarter. Total ore mined increased 40% to a record 167,213 tonnes as we increased production from the Ying satellite mines, which now account for 19% of our production, up from 11% in the same quarter last year.

Slide six. 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 $7.13. Costs increased slightly from the same quarter last year as the change in production mix resulted in relatively lower head grades. Importantly, head grades at our flagship Ying mine improved to 499 grams per tonne silver and 11.2% lead zinc.

Slide seven. In addition to increased production, Silvercorp's success in the quarter can also be attributed to strengthening metal prices. Compared to the same period last year, average realized selling prices have increased by 57% for silver, 17% for lead and 9% for zinc.

Slide eight. For our fiscal 2011 year ending March 31st, we are on track to meet or exceed earlier guidance for production of 5.3 million ounces of silver. We are happy to release today new production guidance for fiscal 2012. We are planning to produce 5.6 million ounces of silver plus 30,000 ounces of gold, representing 7.1 million ounces of silver equivalent with gold converted at a 50 to 1 ratio.

Production growth will come from the three satellite mines in the Ying mining camp and the added production from the BYP Mine. From the four mines of the Ying mining camp production is expected to increase to 600,000 tonnes of ore at a head grade of 325 grams per tonne silver, 0.4 grams per tonne gold, 6% lead and 1.9% zinc, yielding 5.6 million ounces of silver, 4,000 ounces of gold and 90 million pounds of lead and zinc.

Total production costs are expected to remain unchanged at approximately $75 per tonne of ore. The BYP Mine is expected to commence production in the first quarter of fiscal year 2012 and we expect to mine and mill 130,000 tonnes of ore at a grade of 7 grams per tonne gold, yielding approximately 26,000 ounces of gold at an estimated production cost of $28 per tonne of ore.

Slide nine. For fiscal year 2012 total capital expenditures are estimated at $69 million which includes capital expenditures of $53 million for mine development, mill construction and other capital items and $16 million for exploration and permitting.

Slide 10. Our exploration budget includes a 241,000 meter surface and underground drilling program at our three China projects, with a projected cost of $14 million. We strongly believe that exploration in and around existing producing property is the most economical way to add low-cost ounces to grow our resources and increase production. In the past we added high-grade ounces at an average exploration cost of only $0.45 per ounce.

I'll now give an update on recent developments and plans at each of our properties.

Slide 11. At the Ying Mining District $6.2 million in capital expenditures were incurred during the quarter, mainly to delineate and upgrade mineral resources by tunneling and diamond drilling, and to sink shafts and declines. Our underground drilling program discovered 18 new veins at the TLP Mine and 12 new veins at the LM Mine, with numerous high-grade pockets identified. Furthermore, many existing veins at Ying were also substantially extended. We expect these results will expand our reserves to extend our mine life and/or increase current production.

In fiscal 2012 we plan to spend $18.5 million at the Ying Mining District, including vertical shaft, declines and raises totaling 7,000 meters, 40,000 meters of horizontal tunnels, 1,500 meters of ramps and a new tailing facility. We've also planned an aggressive 171,000 meter underground drilling program budgeted at a cost of $8.5 million. The goal at Ying is to extend the current 10-year mine life and to expand the mining capacity from the current 2,000 tonnes per day to match our existing milling capacity of 2,500 tonnes per day.

Slide 12. At the GC property Silvercorp received a 30-year mining permit from the Ministry of Land and Resources of China in December 2010. In fiscal 2012 we plan to spend $22.5 million to build a 1,500 tonne per day mill and tailing dam, 1,500 meters of ramp, 500 meters of shaft, as well as surface facilities. By the end of fiscal 2012 we expect that the GC project will achieve a 700 tonne per day mining capacity and a 1,500 tonne per day milling capacity.

Additional capital which will be partially financed through cash flows generated by GC's operations will be required in fiscal 2013 to increase GC's mining production capacity to 1,500 tonnes per day.

Now that we have a mining permit for GC, we will also be resuming exploration drilling. 20,000 meters of surface diamond drilling are planned this year with a budget of $2.5 million.

Slide 13. In Q3 2011 we announced the acquisition of a 70% equity interest in the BYP Gold-Lead-Zinc mine. The total cost of the share purchase and joint venture capital investment was approximately $33 million and the transaction just recently closed. In fiscal 2012 we plan to spend $12 million to complete work to achieve initial mining and milling production of 400 tonnes per day and to expand the existing mill's capacity to 1,000 tonnes per day. We also plan to spend $3 million to complete 50,000 meters of underground and surface drilling and are very excited about their resource growth potential at BYP.

Slide 14. At Silvertip in the third quarter of fiscal 2011 we completed 10,000 meters of surface drilling and a new 43-101 resource estimate is currently underway. Silvercorp also completed certain studies and reports required for a BC small mine permit application. For fiscal 2012 at Silvercorp we intend to spend $2 million to complete the ongoing environmental assessment studies, a feasibility study and to prepare to apply for a BC small mine permit.

Slide 15. So in conclusion, we're very pleased with this quarter's results. We achieved record silver production, sales, net income and cash flow from operations. We also made important progress at GC and BYP to establish additional platforms for growth in China. The same time we continued our ongoing aggressive exploration program at the Ying Mining camp with the aim of growing our resources and reserves to allow us to extend mine life and/or increase annual production.

Looking forward, we will continue with aggressive drilling programs at our properties in China, targeting to drill almost a quarter of a million meters in fiscal 2012, while we push our BYP, GC and Silvertip properties towards production. In addition, we are excited about the current quarter as we continue to benefit from the strengthening silver prices.

As always, we will continue to use our position of financial strength to seek out strategic acquisitions, both within and outside of China, with a focus on high margin assets that can be brought into production quickly. We remain committed to rewarding the loyalty of our shareholders through increasing shareholder value and the payment of dividends. And as a reminder, another CAD0.02 cent quarterly dividend was just announced this morning.

Slide 16. Thank you for listening to the highlights of Silvercorp's unaudited fiscal 2011 third quarter results and I would now ask the operator to open the lines for your questions.

(Operator instructions) Our first question is from Chris Lichtenheldt with UBS Securities.

Congratulations on the strong quarter. I just have a few questions. First, I've probably asked this in the past, at Ying the grade there is pretty good again this quarter. Should that keep up for a couple of quarters or how does that look over the next few?

I think that silver grade at Ying Mine is pretty good this quarter, but I would think long-term would [be to] maintain around 460-470 grams and you may see a fluctuation quarter by quarter of 5% maybe.

Okay, so just some high-grade veins were mined this quarter, nothing unusual going on?

Nothing unusual going on other than maybe we run into a pocket or high silver.

Okay. On BYP, a couple of questions there. Can you remind us again how is it the mine costs are so attractive there at $28 versus the rest of the operation?

There's some sections in some of the [edging] and they can see the weight of the ore body is almost 30 meters, where at Yima we are mining only a half meter wide zone, so that's the main reason we have a huge difference in cost.

Okay, so it's just mainly vein width, there's nothing else really?

Yes and also the [mining cost] we really recover one [part of] which is the gold concentrate, whereas at Yima we're trying to recover silver lead concentrate and zinc concentrate.

That makes sense. And then going into 2012 you thought maybe you'd get a 7 gram per tonne grade at BYP. I know you're not providing guidance for multiyear yet. Would you expect that to come down then after that as you move the tonnage up?

I think it will be around 3 to 4 grams and that would have another ore body with lead-zinc-gold which I think we'll be around 10 within lead and 1 gram gold. The ore body is also almost 10 to 20 meters thick. That would be the next priority. So initially by fiscal 2013 we probably can do 1,000 tonnes a day at 3 to 4 grams gold and after that we'll probably do another 1,000 tonnes of lead-zinc-gold ore for a total of [2,000] tonnes a day production.

Great. Just lastly, at GC can you remind us what you expect the CapEx to be after next year, once you get up to your initial 700 tonnes per day? So in 2013, what CapEx would be left?

I think in 2013 the main thing will finish the installation of the equipment of the shaft and also finishing the ramp of another 4,000 meters (inaudible) development tunnels. We actually put it around $12 to $15 million mainly on the development costs. We drilled the mill already.

Thank you. One more question quickly, the realized lead prices you quoted were probably a little bit better than I had expected. Was there a timing of sales that worked in your favor this quarter?

In the lead price, I think for the last quarter, China [spot market] lead price is generally about 5% to 10% higher than the international market price and I think now the gap is gone. For some reason I think last quarter there was a lot of demand in China probably for lead and so right now I think the gap is gone. It's almost same price as the London Metal Exchange rate. But (inaudible) from last April 1st, 2010 to December 31st, 2010 the whole year is about 10% positive or higher in Shanghai, the price.

So that was the main driver there.

We (inaudible) almost 87% of our lead price in Shanghai Metal Exchange.

Your next question is from George [Shay] with [Sagitta] Investments.

On page four of your press release you mentioned outlook for the fourth quarter of fiscal year 2011 and if I just subtract the total year production of 5.3 million ounces and subtract from that the production for the first nine months, I get just over 1 million ounces and you've been producing close to 1.4 million ounces or even higher during the year per quarter. Is that lower amount just being conservative because you didn't want to raise your forecast for the year as yet or is there some reason why the quarter ending March might be a little lower than some of the previous quarters?

I think the fourth quarter is always a weak quarter for us because of the Chinese New Year and basically they take two weeks holiday, all the workers and that's the main reason. One week before the holiday and one week after the holiday nobody really think about work.

I see. And secondly, your total cash and equivalent was $223 or $224 million and your estimating $67 million of CapEx for 2012; number one, does the total cash and equivalent include the closing cost of $33 million for BYP, should we deduct that out and what is the remaining money going to be used for, is there a specific plan or is it just to maintain a good cash position for an opportunity?

I think basically we want to [deduct] almost $24 million for the cash payment for accreditation of the BYP project and then we have to deduct $13 or $14 million dividend to pay [check], so basically after that we will have $190 million and we will spend $69 million and now we will generate another $100 million so hopefully by the year we will probably maintain same kind of cash position as we are now, like next year. But next year we could have $200 million plus cash so it's [a little bit of] cash which will give us flexibility to look around some more (inaudible) projects in terms of positioning [and geography]. [Joint venture.]

I see. Thank you very much and congratulations.

(Operator instructions) Your next question is from David Koenig, a private investor.

Good morning and again congratulations on a fine quarter. I wonder if you could estimate the earnings power going forward in that you have all the estimates on the [why of] various mines and if we say the price of the various metals stay constant, what kind of increase would you expect in your earnings power?

I think we probably increase like 25% compared to last year, based on our projections. We did not publish those numbers because we're not sure on what kind of commodity price to use but based on our increase of production and same kind of costs and maintain same kind of commodity price, I would think [our earnings should increase by] 25%.

Thank you. That's a nice number. One other question. There have been a lot of reports on the backwardization price of silver, in other words silver in the future is down lower than the spot price and I was wondering if you as one of the mining companies are affected by these future prices they're putting down or by the spot price?

Our silver prices we quote are Shanghai [Metal Exchange]. Shanghai silver swap market which for now is kind of spot silver price.

About $30.50 now.

In comparison to London Metal Exchange price and we're being pretty much same price as London Metal Exchange price. Only recently the price in Shanghai maybe a gap about 5% higher and so basically we're not affected by this. We are more related to China spot price.

That's good, because I noticed a lot of the mining stocks have not gone up with the appreciation in the price of silver recently going from $28 again back to $30.50 and you haven't had the same price in the stock exchange which previously had been when the silver was $30 or so and that's why I thought maybe it's these futures that are lower that's causing the problem. But you say the Shanghai price is pretty level then. Thank you very much and again, congratulations.

Your next question is from Howard Flinker with Flinker & Company.

On page five at the top you have exploratory expenditures for the year of $14 million in the verbiage and I know you said $16 million as part of your total budget and if you add the separate exploratory budget project by project it comes out to $16 million. So is it $14 million or $16 million?

The $16 million included the Silvertip project and the $14 million for China project. So basically [we have the exploration and the permitting.] So we are spending $2 million on permitting for Silvertip project.

I see, because here is says $2 million to complete the environmental assessment study for Silvertip.

That's part of permitting process.

I see. And you didn't include that in the $14 million as you wrote it?

No.

Okay. Again, Happy New Year. Hope you have lots of rabbits.

(Operator instructions) At this point we have no additional questions in queue.

To wrap up I'd like to thank you again for joining us on today's conference call. We remain very excited about Silvercorp's future growth prospects and we look forward to reporting to you again when we release our unaudited fourth quarter results in May 2011. Thank you again.

That does conclude our conference for today. We do appreciate your participation and you may now disconnect.