Silvercorp Metals Inc (SVM) 2011 Q1 法說會逐字稿

Good morning. My name is Brad, and I will be your conference operator today. At this time, I would like to welcome everyone to the Silvercorp Metals Inc. Fiscal 2012 first 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.

I would now like to turn the conference 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 2012 first quarter analyst conference call. Joining me today on the call are Dr. Rui Feng, Silvercorp's Chairman and Chief Executive Officer; Maria Tang, Silvercorp's 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 slide presentation 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 the forward arrow.

Slide 1. 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 2011 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 2. We are pleased to report to our shareholders today record sales, record operating profits, and record production. Sales increased 90%, profit by 82%, and we generated $33.9 million in cash flows from operations. We achieved record sales in the quarter in part due to increased silver prices, but also because we continue to expand our silver production, which increased 15% this quarter to a record 1.6 million ounces. In addition, we increased gold production by 30%.

On the operations side, we continue to maintain our position as a leading low-cost producer. This of course is a function of having a high-grade mine like Ying, located in a low-cost jurisdiction like China. For the quarter ended June 30, 2011, we produced silver at a cash cost of negative $6.12 per ounce, maintaining our status as the lowest cost primary silver producer among our industry peers.

Also, throughout the year, we've continued building the foundation for further growth by re-investing profits to expand production and resources at the Ying mining camp, by advancing our two development projects, GC and Silvertip, and this quarter, commencing production at the BYP gold mine in Hunan province. With these three new projects on board, we're aiming to double our annual production over the next three years to 10.6 million ounces.

Slide 3. I will now review our first quarter unaudited financial highlights, which are expressed in US dollars. For the first quarter ended June 30, 2011, we increased our sales by 90%, to $69.7 million, gross profits improved by 110% in Q1 2011 to $55.7 million, representing a gross profit margin of 80%. Silvercorp recorded quarterly net earnings of $25.6 million, or $0.15 per share, an increase of 82% over the net earnings of $14.1 million or $0.09 per share in the same quarter last year. Net earnings improved primarily due to higher realized selling prices as well as higher quantity sold.

Slide 4. Cash flows from operations improved 46% to $33.9 million, representing $0.19 per share, which is up from $0.14 per share last year. At quarter end, we had $230.5 million in cash and short-term investments. And we continue to have no debt.

Slide 5. Turning to our operational highlights, Silvercorp achieved record silver production of 1.6 million ounces, a 15% increase compared to the same quarter last year. We increased gold production by 30% to around 1,400 ounces in the quarter, which includes 600 ounces of gold from the BYP mine. We also produced 10% more lead and maintained stable zinc production relative to the same quarter last year. We achieved record production in the quarter by successfully increasing production from the TLP, HPG and LM mines in the Ying mining camp.

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 costs per ounce of silver of negative $6.12, a marginal increase compared to negative $6.31 in the same quarter last year. The marginal increase is due to the relatively lower head grades and higher production input costs, which were partially offset by increased byproduct metal prices. In the quarter, silver accounted for 68% of our sales, lead 26% of sales, zinc 4% of sales, and gold 2% of sales. Accordingly, precious metals now account for over 70% of our sales.

Slide 7. Silvercorp's increased sales this quarter are attributed to strengthening metal prices. Compared to the same period last year, average realized selling prices have increased by 115% for silver, 37% for gold, 18% for lead, and 3% for zinc.

Slide 8. We are happy to reconfirm today our production guidance at the Ying mining district. For fiscal 2012, we expect to process 600,000 tons of ore at grades 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, 4,000 ounces of gold, 90 million pounds of lead and zinc. Total production costs are expected to remain unchanged at approximately $75 per ton of ore.

Our fiscal 2012 production guidance for the BYP mine has been revised. We now expect to mine and mill 95,000 tons of ore at a grade of 6 grams per ton gold yielding 17,000 ounces of gold, which is adjusted from 26,000 ounces previously. The revision is attributable to the mill being temporarily shut down in the first quarter to allow for improvements to the tailing pond. At present, more than one-third of the tailing pond has been lined and mill production has resumed. Overall, in fiscal 2012, Silvercorp plans to achieve 22% year-over-year production growth.

Slide 9. For fiscal year 2012, total capital expenditures remain around $70 million, including $53 million for mine development, mill construction and other capital items, and $17 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 existing producing properties is the most economical way to grow resources and increase production.

I will now give an update on recent developments and plans at each of our four projects.

Slide 10. During the quarter at the Ying mining camp, the company incurred $5.5 million in exploration and development expenditures with over 20,000 meters of tunnels, 48,000 meters of surface and underground drilling, and 243 meters of shaft, declines and raises being built. The mine development works completed not only sustain the Ying mine's production level, but also allowed the TLP, HPG and LM mines to continue their current production growth trend.

Also during the quarter, we increased measured and indicated resources at the Ying mining district by 11%, to 76.5 million ounces of silver. Silvercorp has successfully maintained a 10-year mine life at the Ying camp and this is even after five years of mine operations.

For fiscal year 2012, we have an ambitious 171,000 meters underground drilling program at Ying, which will cost $8.5 million. We also plan to spend $18.5 million building vertical shafts, declines, and raises totaling 7,000 meters, 40,000 meters of horizontal tunnels, 1,500 meters of ramps and a new tailings facility. We are pleased with the current progress and this guidance remains unchanged.

Slide 11. Moving on to our GC project in the Guangdong province where we received the mining permit in December 2010. Since then, we have advanced the project focusing on acquisition of land usage rights, construction of the access road and power line, site preparation, negotiating and finalizing mine and mill construction contracts, and completion of a review of safety production measures by the Guangdong Provincial Safety Production Bureau.

We expect to achieve a 700 ton per day mining capacity and 1,500 ton per day milling capacity within the next fiscal year. With our mining permit in hand, we have resumed drilling at GC. There were three surface drill rigs performing step-out drilling during the quarter as part of our 20,000 meter program, which has a $2.5 million budget for the current fiscal year. So in total at GC, we expect to spend $22.5 million this fiscal year.

Slide 12. The BYP mine commenced production in May 2011 with approximately 8,000 tons of ore from existing development tunnels being processed, yielding 590 ounces of gold for the quarter. In addition, we refurbished and upgraded the existing 400 ton per day mill to 500 tons per day and we completed a 43-101 report on the BYP project.

In fiscal 2012, we plan to spend $12 million to complete work to achieve initial mining production tons per day and to expand the existing miles capacity to 1,000 tons per day. Concurrently, the company's engineers are working with a qualified Chinese engineering firm to complete a detailed and staged mining and development plan to fulfill the company's production goal of expanding the mining and milling capacity to 1,000 tons per day of gold mineralization for fiscal 2013 and further doubling to 2,000 tons per day, which would include 1,000 tons per day of lead-zinc mineralization by fiscal 2014.

Our 50,000 meter surface and underground drill program at BYP is budgeted at $3 million and 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 3 gold mineralization zone. Initial underground exploration drill results from BYP were announced on May 5. We are off to great start as all eight initial underground drill holes intercepted gold mineralization, reinforcing our belief in the resource potential of this property.

Slide 13. During the quarter, Silvercorp continued its effort in completing a small mine permit application. At the same time, the company initiated the 2011 exploration program to test the DM zone, a new zone of silver, lead, zinc mineralization approximately eight kilometers south of Silvertip Mountain.

For fiscal 2012, at Silvertip, we intend to spend $3 million to complete ongoing environmental assessment studies, a feasibility study, a 3,000-meter surface drilling program, and to prepare to apply for a BC Small Mine Permit under which we can produce up to 75,000 tons per year.

Slide 14. In conclusion, we are very pleased with this quarter's results. We achieved record silver production and sales, achieved strong growth in gross profits, net income and cash flow from operations. We commenced production at the BYP mine while also making important progress in moving GC and Silvertip towards production.

Looking forward, we will continue our aggressive drilling program on our properties in China, targeting to drill almost 0.25 million meters in fiscal 2012. In addition, we are excited about the upcoming quarters as we continue to benefit from 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 with a focus on high-margin precious metal properties that can be brought into production quickly and with relatively low capital requirements.

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 just announced this morning.

Slide 15. Thank you for listening to the highlights of Silvercorp's unaudited fiscal 2012 first quarter results.

I would now ask the operator to open the lines for your questions.

Of course. (Operator Instructions). Our first question today comes from the line of David Koenig with Morgan Stanley. Please go ahead.

Good morning. I would like to compliment you all there on a very fine quarter. However, as a shareholder, in addition to an analyst, I feel very low because the stock is trading right now at about 9.48. It's down 8.75%, which is more than the other similar silver mining stocks like AG, EXK, or SLW. And I was wondering if there is any explanation for why the stock is so low. And in addition and I know there was a share buyback program, perhaps we need an additional share buyback program. The question is, was that conceivable? And also, if there is any explanation of the low price considering we're firing on all cylinders and look like we are going to have a good fiscal 2012.

Hi David. It's Lorne Waldman. So thanks for your question. We all share your concern in terms of the share price. Unfortunately, from the company's perspective, the only thing that we believe we can do for the share price is to focus on our actual operations and delivering results. That being said, at times when the share is -- where we view it is being undervalued, we will repurchase shares. We do -- we have announced a share repurchase program, so that is also in place. At the time that we first put it in place, our shares were trading at $8, so we did see some recovery in our share price since the time that we first announced the share repurchase program.

The other -- there are some factors that are affecting our share price that's a bit different than some of the other silver companies that are our peers. And one of those is the China factor, there still seems to be some fear in the market in terms of investing in companies with assets in China. And I think right now we are probably getting a much larger discount than we should be getting considering the quality of our assets and the advantages of having a mine in China, which is a low cost jurisdiction and close to the end market. So I hope that helps to answer some of your questions and some of your concerns.

Well, are you still repurchasing? Have you repurchased a significant amount out of the -- I forget what it was $5 million or something?

No, we have not made repurchases yet.

Well, go to it.

Very soon after we announced the share repurchase program, the share price immediately shot up. It actually was up -- went up from what $8 to almost $11 very quickly. To the extent that the -- depending on where the share price moves that will impact our decisions of when to buy, how much to buy, if to buy, but we have the plan in place which is the important thing. And if you look in our past history when we have announced share repurchase plans in the past we have made repurchases.

Hopefully, you can do it soon because it looks like we need some help here at $9.45, the price.

Yes, right.

And the other thing about earnings usually will move the stock to, would it be fair for me to say you are earning $0.15 in the first quarter and if I kept the same level you are earning $0.60 less $0.05 for the one-month vacation would be -- well, a goal of let's say $0.55 per share for the 2012 fiscal? I know you don't want to make any projections but I wonder if that's a fair number $0.55, if things stay at $40, $42 for silver by the way.

I'll let you do the analysis there, but I think you're -- the assumptions that you put in are reasonable.

Well, then we are selling it less than 20 times earnings, so that's encouraging.

Yes.

Thank you very much.

Thank you.

And we do have a question from the line of Haytham Hodaly with RBC Capital Markets. Please go ahead.

Good morning, everybody.

Good morning, Haytham.

Just a quick question, just to follow-up a little bit on the last question. You got a strong cash position right now. You do have your share repurchase plan in place, as was stated, nothing has been purchased yet, which is -- makes sense for the run-up in the share price. You've got a dividend yield of just under 0.9%. Are you targeting a specific yield longer-term, do you see a special dividend or an increase in the dividend here in the near future?

Hi Haytham. No, right now, we've looked at our industry peers were they paying the highest dividend among the North American listed silver companies, it's already right now just around 1% yield. So I think we are going to be maintaining at that level, probably at least for another year and then we will look at it again. It's still is the highest yield in the industry.

Lorne, maybe one other question just with regards to the significant cash position and I mean, obviously you've got a healthy balance sheet. What's your CapEx look like over the next couple of years?

Well, this year, we are looking at $70 million. And certainly on a going forward basis, I wouldn't expect it to be more than that and we'll continue to be generating more cash flows from operations. So, for example, with the GC mine, the CapEx will probably be $30 million, but this year we will spend $22.5 million. And then the future CapEx, we will be able to refund it from initial production. So I think the long and the short of it is, yes, we probably have more cash than we require to fund our existing portfolio of projects. But that being said, we are very aggressive in looking to acquire new projects. Our preference for new projects would be projects in China where we've had a demonstrated track record of successfully developing projects, but we are also looking outside of China. With the recent acquisition of BYP, it demonstrates that there are properties -- good properties that are available in China, and so we will keep looking out for acquisitions in the future.

Okay. Thank you.

(Operator Instructions). And we do have a question from the line Chris Lichtenheldt with UBS. Please go ahead.

Good morning, everyone. First --

Good morning

Good morning, Chris.

Good morning. Just wanted to ask on the refining charges right now for silver, could you just tell me where they are in dollars per ounce in silver right now?

Well, right now the sales contract is about -- the payout is 91% of the silver price.

Okay.

So, it's -- so silver price is a little bit tighter than the London price. So in terms of the dollar value, probably $3.

Okay, yes. All right. Yes, that's great. Thanks. And is it still fair to say that that's roughly $3 is not included in your cash cost per ounce in silver numbers? Is that right to think about like that?

Yes, that's correct.

Yes.

That's right, okay. Great, thanks. And secondly I just wanted to ask about -- since we are here, if I can ask about the recent technical report at Ying. I know there was a slight decrease in assumed head grade based on I think higher assumed dilution. Can you maybe just touch on why higher dilution? Does it seem -- does that little bit more dilution happening than you expected at Ying?

Chris, I am going to have to get back to you on that. I don't have the full details on that item.

Okay, no problem. We will circle back. Thanks a lot.

Okay. Thanks.

Now, we do have a question from the line of Andrew Kaip with BMO Capital Markets.

Hi, Andrew.

Hi, Andrew.

Hi. Look -- just a quick question. Can you give us a sense on how you are going to breakout exploration expenditures between expensing them and capitalizing them?

So Andrew, the question is how is the breakdown the expense curve?

Yes. You are outlining what $17 million in the exploration. How should we -- how much of that is going to be expensed?

For each project, right?

Yes, ideally.

Okay. So, if you look at our Slide 9, then the capital expenditure budget basically at Ying mine where we have a total expenditure of $14.6 million, TLP will be $5.3 million, HPG and LM will be $7.1 million and GC project is $25 million because we are building the mill and mine. And BYP mine will be $15 million where we are building -- also building a mill -- in halfway building a mill and also the mine development. And the Silvertip will be $3 million. So added together is the $70 million.

Okay. I understand that, but I am talking about exploration?

Yes, so the -- how much of this number is capitalized versus expenses?

Okay. So, the mine development will be capitalized.

We're just looking -- just for this...

For the --

Just on the exploration side?

For the exploration side, I think as 80% will be capitalized. There is a certain exploration drilling under the tunnel will be due during the production phase -- production, so there probably will be expense, very less.

Okay. So, approximately 80% will be capitalized.

Yes.

Okay. Thank you very much.

Thank you.

(Operator Instructions). We do have question from the line of David Koenig with Morgan Stanley. Please go ahead.

Hi. It's me again. I just heard that oil is something significant in mining and the oil price has gone down from $100 to $90. I was wondering if that's a factor in your mining operations.

It's not a significant factor. The biggest factor for us is the price of silver, which remains very strong. So in terms of what's driving our profits we are happy with the environment we are in today.

On the message board they keep writing there, oil is down, should help Silvercorp. I guess they don't know what they are saying. Thank you again.

Yes. Thanks.

And at this time, it appears there are no further questions from the phone lines. Please continue.

Okay. Well, 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 unaudited second quarter results in November. Thank you.

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.