Silvercorp Metals Inc (SVM) 2010 Q4 法說會逐字稿

Good morning, my name is Keylee, and I will be your conference operator today. At this time I would like to welcome everyone to the Silvercorp Metals Inc. fiscal 2011 fourth quarter and year-end 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's 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 would like to welcome everyone to our fiscal 2011 fourth quarter and uear-end analyst conference call. Joining me on the call today are Dr. Rui Feng, Silvercorp's Chairman and Chief Executive Officer, Maria Tang, Silvercorp's Chief Financial Officer, and Lauren 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 results. The 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 1, during today's call, for 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 will events can differ materially.

Slide 2. We are pleased to report to our shareholders today that we have achieved our best annual results in the Company's history. Sales increased 56%. Earnings 79%. Generating CAD104.2 million in cash flows from operations. We set records for annual sales, net income and cash flows from operations. In large part, due to increased silver prices. But also, because we continue to expand our silver production, which increased 15% this year, meeting our target of 5.3 million ounces. And, extending our track record of silver production growth to five consecutive years.

On the operations side, we continue to maintain our position as a leading low cost producer. This is a function of having a high-grade mine like Ying, located in a low cost jurisdiction like China. For fiscal year 2011, we produced silver at a cash cost of negative CAD6.80 per ounce. Reducing our cost from last year, and maintaining our status as the lowest cost silver producer in our industry.

Also, throughout the year, we continued building the foundation for continued growth by re-investing profits to expand production and resources at the Ying mining camp. By dancing our two development projects, GC and Silvertip, and this quarter, completing acquisition of the BYP gold project in Henan province, which we believe has the potential to grow into a major asset for Silvercorp. We're focusing on bringing these three new projects into production with an aim to double our production over the next three years to 10.6 million ounces of silver equivalent, including gold.

Slide 3. I will now review our fourth quarter unaudited financial highlights, which are expressed in US dollars. Please keep in mind, that Silvercorp's fourth quarter is seasonally our slowest quarter. Due to the impact of the Chinese new year holiday. For the fourth quarter ended March 31, 2011, we increased our sales by 50%, to $42.4 million, gross profit rose by 67% to $32.2 million, representing a gross profit margin of 76%. For the fourth quarter, Silvercorp recorded net earnings of $12.6 million, or $0.07 per share, an increase of 29% over net earnings of $9.8 million or $0.06 per share in the same quarter last year.

Slide 4. Cash flows from operations improved 44% to a record $34.3 million. Representing $0.20 per share, up from $0.14 per share last year. At quarter end, we had $206.3 million in cash and short-term investments. And no debt.

Slide 5. Turning to our operational highlights, Silvercorp produced 1.05 million ounces of silver, along with 14.4 million pounds of lead, and 3.3 million pounds of zinc, similar to the prior year quarter, silver production figure. Silver production, during this quarter, was lower than in the past three quarters, however, as the Company's operations were closed for 28 days for the Chinese New Year, up marginally from 25 days for the 2010 new years. Total ore mined increased to 125.7 thousand tons in the fourth quarter, up 55% compared to the prior year period. As we increased our production from the Ying satellite mines, which accounted for 50% of our mine production in the fourth quarter, up from 30% in the same quarter last year.

Slide 6. 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 $7.61. The improvement is the result of increased net realized selling prices for our lead and zinc byproduct credits. Offset by a slight reduction in consolidated head grades, from the same quarter last year, due to change in production mix between Ying and the three satellite mines. Importantly, head grades at our flagship Ying mine improved to 441 grams per ton silver and 11.3% lead zinc, compared to 429.3 grams per ton silver, and 10.4% lead zinc in the prior-year period. Head grades also improved at the three satellite mines, compared to the prior year period.

Slide 7. Silvercorp's increased sales in the fourth quarter are attributed to strengthening metal prices. Compared to the same period last year, average realized selling prices have increased 87% for silver, 17% for lead, and 12% for zinc. In the quarter, silver accounted for 61% of sales, lead for 31% of sales, zinc 6% of sales, and gold 2% of sales.

Slide 8. Net earnings improved 29% to $12.6 million, primarily due to higher realized selling prices. However, the improvement was partially offset by increased taxes, higher general and administrative expenses and foreign exchange losses. As previously disclosed, we have been benefiting from a Chinese tax holiday, which allowed the Company's most profitable, Chinese subsidiary, Henan Found, to enjoy a preferential 0% tax rate for the first two years of operations, and a 12.5% income tax rate for the next three years. This tax holiday expired on December 31, 2010. Henan Found is now subject to the normal income tax rate of 25%, resulting in a $3.1 million income tax increase for the quarter.

In addition, a VAT surtax which was previously exempt for foreign invested companies in China, and represented approximately 1.4% of sales, has been levied on us since December 1, 2010. This increased other taxes by $0.6 million for the quarter. Also included in other taxes was a one-time business tax of $0.4 million, relating to a capital transaction. G&A expenses increased by $1.7 million, compared to the same quarter last year, as the Company is now managing four separate operations, up from only one last year. Also in the quarter, the Company recorded a $1.6 million unrealized foreign exchange loss, as the US dollar continues to depreciate.

Slide 9. Last year, we gave guidance that we would produce 5.3 million ounces of silver, 72 million pounds of lead and 17 million pounds of zinc. The Company achieved its fiscal 2011 production guidance for silver, was 4% below guidance for lead and zinc, but produced 3200 ounces of gold for which no guidance was given. The actual sales of $167.3 million for the year, exceeded the fiscal 2011 sales guidance of $140 million by 20%.

Slide 10. We're happy to reconfirm today our production guidance for fiscal 2012. We expect to produce 5.6 million ounces of silver plus 30,000 ounces of gold, representing 7.1 million silver equivalent ounces, with gold converted at a 50 to 1 ratio. This represents year-over-year growth of 30%. Some production growth will come from the three satellite mines in the Ying mining camp with the largest growth coming from the added production from the BYP mine. From the four mines at the Ying mining camp, production is expected to increase to 600,000 tons of ore, at a head grade of 325 grams per ton silver, 0.4 grams per ton gold, 6% lead and 1.9% zinc, yielding 5.6 million ounces of silver, 4000 ounces of gold, 90 million pounds of lead zinc. Total production costs are expected to remain unchanged at approximately $75 per ton of ore. At BYP, we expect to mine and mill 130,000 tons of ore, at a grade of 7 grams per ton gold, yielding approximately 26,000 ounces of gold, at an estimated total production costs of $28 per ton of ore.

Slide 11. 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. 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 our existing producing properties is the most economical way to grow resources and increase production. I'll now give an update on recent developments and plans at each of our four projects.

Slide 12. During the quarter, at the Ying mining camp, the company incurred $2.9 million in exploration and development expenditures. For the year, a total of $19.6 million was spent for exploration and development, with 71,000 meters of tunnels, 125,000 meters of surface and underground drilling, and 1829 meters of shaft, declines and raises being built. The mine development works completed, not only sustained the Ying production level, but also allowed the TLP, HPG and LM mines to continue their current production growth trend.

The service and 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. In fiscal year 2012, we plan to spend $18.5 million, including vertical shaft, declines and raises, totaling 7000 meters, 40,000 meters of horizontal tunnels, and 1500 meters of ramps and a new tailing facility. We have also planned an aggressive, 171,000 meters underground drilling program, budgeted at a cost of $8.5 million. The goal at Ying is to extend the current ten year mine life, and to expand the milling capacity from the current 2000 tons per day, to match our existing milling capacity of 2500 tons per day.

Slide 13. Since receiving a mining permit for our GC project in December 2010, we have continued moving the development forward. During the fourth quarter, we focused on acquiring land usage rights, construction of the access road and power lines, site preparation, negotiation and finalizing mine and mill construction contracts, and completion of a review of safety production measures by the Guangdong Provincial Safety Production Bureau. We now have a team of over 20 experienced technical staff to bring the GC project into production.

In addition, a surface drilling program with two drill rigs commenced step out drilling. We expect to complete 20,000 meters of drilling this year at GC, with a budget of $2.5 million. By this time next year, we expect that the GC project will achieve a 700 ton per day mining capacity, and a 1500 ton per day milling capacity. Additional capital, which will be partially financed through cash flows generated by GCs operations will be required in fiscal year 2013, to increase mining production capacity to 1500 tons per day.

Slide 14. In January 2011, we completed the acquisition of a 70% equity interest in the BYP gold lead zinc mine in Henan province. During the quarter, we assembled a team of over 25 technical staff and improved the operation of the 400 ton per day flotation mill. By adding a cone crusher, and extra flotation cells. Operations at the mill are expected to commence this month, with an initial focus on higher grade metals.

Concurrently, we plan on expanding the mining and milling capacity to 1000 tons per day gold mineralization for fiscal 2013, and to 2000 tons per day by fiscal 2014. Which includes 1000 tons per day of lead zinc mineralization. Our engineers are working with a qualified Chinese engineering firm to complete a detailed and staged mining and development plan to fulfill these production goals. In fiscal 2012, we plan to spend $12 million to complete work to achieve initial mining and milling production of 400 tons per day, and to expand the existing mill's capacity to 1000 tons per day.

Our 50,000 meter surface and underground drill program, budgeted at $3 million, has started with three surface drill rigs and three underground drill rigs. The surface drilling is mainly step out drilling, while the underground drilling is mainly for infill drilling of the number three gold mineralization zone. Initial underground exploration drill results from BYP were announced on May 5. We are off to a great start, as all eight initial underground drill holes intersected gold mineralization. Reinforcing our belief in the resource potential of this property.

Slide 15. During the quarter, Silvercorp completed an independent, preliminary assessment, technical report for the Silvertip project, and we continue working towards completing and submitting a small mine permit application. For fiscal 2012, we intend to spend $2 million to complete the ongoing environmental assessment studies, a feasibility study and to prepare to apply for a DC small mine permit.

Slide 16. In conclusion, we are very pleased with this year's results. We achieved records on all fronts, including silver production, sales, net incomes and cash flows from operations, all from our Ying operations. We grew our production for a fifth consecutive year, and grew resources for a sixth consecutive year. We also made important progress at GC and Silvertip and acquired BYP, providing a fourth platform for growth. Looking forward, we will continue with aggressive drilling programs at all 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 upcoming year as we continue to benefit from the strong, silver prices. And, as always, we will continue to use our position of financial strength, to advance our key development and exploration projects and to seek out strategic acquisitions. Both within and outside of China, with a focus on high margin, precious metal properties that can be brought into production quickly and profitably. 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 quarterly dividend was announced this morning.

Slide 17. Thank you for listening to the highlights of Silvercorp's unaudited, fiscal 2011 fourth quarter results. I would now ask the operator to open the lines for your questions.

(Operator Instructions)

One moment please for the first question. Chris Lichtenheldt at UBS Securities.

Thanks, good morning, everyone.

Hello, Chris.

First on the GC project how much more acquiring of land usage rights to do you have yet to accomplish?

I think we are almost achieving 95% already. And, right now we are tilting a road and getting inside ready and just bringing the hybrid power in to the site already.

Okay. And, the 5% of remaining land usage rights, what is that land ultimately going to be used for?

We are going to have to buy land for tailing ponds and waste wash down all those things.

Okay. Thanks. Second, on production at Ying, it looks like sales versus what I believe would have been the production during the quarter, look a bit lower than some of the other quarters this year. Was there a bit of an inventory build at Ying this quarter?

Chris, this is Maria. Yes, we have about 500 tons of concentrate inventory that has not been sold.

Okay. 500 tons. And, how does that compare to last quarter? Are you able to tell me?

Last quarter, we don't have that much inventory.

Okay. So, it's pretty much all built in this quarter?

In terms of dollars, it's upwards about $2.5 million.

$2.5 million.

$2.5 million, okay. That's helpful. Thank you. And, actually maybe just another reporting question. The investment section of the cash flow statement, the total out flows were CAD83 million, I appreciate probably a good chunk of that was BYP. Can you talk a little bit about what the other moving parts were here?

So, your question is for the investment activity?

Yes, what were the other outflows? Acquisition is net --

We bought a 6% interest of a Canadian --

Yukon Zinc

Yes, Yukon Zinc. We bought 6% Yukon Zinc. Which is a mill and a mine already, about 1000 tons -- 1700 mill already, and so that project is producing more than 5 million ounces of silver a year, plus, 20,000, 30,000 ounces -- 50,000 ounces of gold, plus100 million pounds of lead, and zinc.

It's still--

Maybe 20 million pounds of copper. So, they built the mill already they are trying to get going. Apparently they had a big problem with their mining operations. So anyway we bought 6% of the operation.

Okay, great. How much was -- what the cost?

It was CAD22.3 million.

Okay, that's the CAD22.3. Okay. Right, I think that's it for me. Thanks a lot.

Thank you.

Brad Humphrey at Raymond James.

Hello, Brad.

Hello, guys. Just a couple things. On BYP, you're going to be mining 7 grams per ton this year, what is the grade dropping to as you expand the mill?

Right now, we're still in the percent calculated as grade as you allows the reading in our drills from the underground drilling, infill drilling is much better than the historical number. The historical number will be 3 grams, I think after that will probably drop to, to be conservative, 3 grams.

Okay. So, 7 grams this year, 3 grams next year to be conservative?

Yes.

All right. And Silvertip, any update on the timing of the permitting? Everything in submitting the application and how long that is going to take now that you've been there for a while?

Yes, I think we are, the environmental study takes a long time and everything is slow. So, we hope -- hopefully we will have the application put together by the end of August as to where we are from the environment study company. So, after that, hopefully we can get something -- springtime, like March of 2012. And then that's the time we are ready to do something.

And then, once you get that permit, I guess you've got to decide whether or not you're putting a mill there and everything else? When do you think, best case scenario, production would be?

I think that we will put a mill there, once we get a permit. And, I was thinking sometime in 2013.

As the preliminary economic assessment was put out, it call for a CAD50 million investment and there's going to be a 500 ton per day seasonal operation at the mill.

Perfect. That's it for me. Thanks, guys.

Thanks.

David Koenig, private investor.

Good morning. First, I would like to congratulate you on a job well done. You have certainly increased the resources, and the earnings have gone up. But my question would be for fiscal 2012 . Listening to all this data, you can get a nervous breakdown. I can't absorb all these things, I am a senior citizen at this point. But, if you put all the numbers and things that you expect to do in 2012, let's say with silver at a $30 average, which is very conservative, and gold at a $1400 average, what kind of an increase do you see yourself producing in 2012 fiscal over 2011, where whether that is a goal of yours or an actual number, you'd want to put out of an increase?

Number?

I heard 30% on something.

In terms of our production growth, you are looking to move from 5.6 million silver ounce equivalents to 7.1 million which would be an increase of 30%.

So, if you plug in the number, hopefully your earning will probably increase 30%, too.

That's just on the silver. The other factors are involved also, I'm sure. You would expect a 30%, so if we are earning about CAD0.40, whatever--

CAD0.41.

30% additional be another $0.12, so we would forward to a minimum of maybe CAD0.52, CAD0.53 a share? Of net earnings, not cash flow and the other numbers that come through? Am I correct?

That's a good calculation for you to use, but the company itself, we tend not to give out bottom line guidance, just because there are so many factors at play. But, where we are helping you out is by showing you how the production is going to be growing by 30%, and we are also giving some cost estimates. So for example, for the production at BYP, in you could be using a CAD28 per ton and from the Ying mining camp, we are talking about $75 per ton. But, we really prefer if our investors build their own financial model, and come out with their own valuations.

Well, the numbers that I see our something like from CAD0.50 to CAD1. It is very hard to figure with so many balls in the air. And, I can see even that you insiders can't even do that well a job of anticipating all of the situations that you are involved in.

There are a lot of variables.

Tremendous. Any event, I thank you for somewhat for your guidance, and I hope it can do something for the price of the stock because it has really been going pretty poorly the last couple of months. So, have a good day, all of you.

Thank you.

Thank you, David.

Right, bye.

Thank you.

(Operator Instructions)

Michael Colbert at Buckman, Buckman & Reid.

Congratulations, you guys had a fantastic quarter. I had a question regarding your increase in operations from 2010, you brought it up 4 to 1. Have you targeted any new operations in Asia for the 2012, or do you think 2013 might be an earlier number?

Well, we have a very active team of people looking for alternative, many in China and other parts of the world. And I would think you may have some new acquisitions in China sometime this year.

Sometime this year?

Yes. But, we are looking around for other opportunities. There is no guarantee anything will happen.

Okay. Within the same provinces? Or are you looking towards new provinces?

In China, everywhere, in the same province and others in China.

Okay. Is that one of your goals on a yearly basis, to increase operations every year?

Yes. That's the goal. That is the way to grow the company. Now, we have a good base. So we will grow into other locations.

Do you have a specific number of operations that your goal is to reach with whether it's in the next 2 years, 3 years, 4 years?

As many as you can handle, right? Like right now this year were very busy already. We are building our BYP mine, we are also building GC mine, so, you may stretch too much. So you have to --

What you believe the life of those 2 mines, once they start production will be?

I think the GC mine may have a bit of resources maybe 15, to 20 to 30 years. In the commodities. And BYP I would think it's 10 years.

Okay. One other question, I don't know if you would be able to answer this, but I understand China is starting to put together the government specific funds, upward of $3 trillion for investment. Being that you say you are the largest silver producer in China, would your company be opened up for their investment? Would they -- I don't know if that's with them getting the permits, would there be anything stopping Chinese funds from investing in you or taking positions with your company?

There is always a possibility, but we didn't pursue that typical investment.

Okay. Okay, fantastic quarter. I wish you all the best in the coming year.

Thanks.

Thank you.

Walt Sosnowski of SRC Capital Management.

Thank you. Last quarter you mentioned that you saw some differences in silver and lead pricing between China and the LME. This quarter did you see any difference in pricing, or no?

I think this month, our LME for example lead, we are dealing with spot cash price. So LME prices more like future price of there's always a gap between cash price and spot price and the future price. I think last quarter was within 10% range.

I'm sorry, you said within 10%? Or 3% to 10%?

Yes, within 10%. Like sometimes, some quarter, China made the spot price maybe 10% higher than LME price.

Okay.

And some other quarter, maybe like last quarter, China spot price is lower than LME price, future price.

This is Maria. But overall, China's price is higher than LME price.

In lead.

In lead.

In lead by about 10%?

Yes.

And, that was the same this quarter as last quarter?

This quarter, is a little bit special because of volatility, so for this quarter, it's around 7% higher.

Okay.

Yes.

And for silver, what was it for this quarter?

For silver, in the middle of the quarter, it started the middle of the quarter as LME and China price is quite close. The first half of the quarter LME is lower than the China price, about 5% I would think.

Okay.

And the China price is spot price.

Yes. Yes. Okay, great. Thank you very much.

Thank you. And, there are no further questions in queue at this time.

Okay. Thank you. To wrap up, I would like to thank everyone 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 unaudited, first-quarter results in August. Thank you and goodbye.

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