Silvercorp Metals Inc (SVM) 2011 Q2 法說會逐字稿

Good morning. My name is Dave. I will be your conference operator today. At this time, I would like to welcome everyone to the Silvercorp Metals Inc. fiscal 2012 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) 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. I'd like to welcome everyone to our Fiscal 2012 second 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 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. Presentation slides are available as part of the webcast or on our website. To advance the slides, please present on 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're pleased to report today that during the quarter ended September 30, sales increased by 71%, profit increased by 49%, and we increased cash flow from operations by 140%, generating a record $35.2 million. Silver production increased by 4% this quarter to 1.4 million ounces, while gold production increased by over 700%. On the operations side, we maintained our position as a leading low-cost producer. For the quarter, we produced silver at a cash cost of negative $4.55 per ounce, maintaining our status as the lowest cost primary silver producer among our industry peers. This is a function of having a high-grade mine, like Ying, located in a low-cost jurisdiction like China.

We paid a cash dividend of $3.7 million in the quarter, or CAD0.02 per share, and as announced this morning, we are increasing the quarterly dividend by 25%. This quarter was not without its challenges, as we were forced to successfully defend ourselves against false and malicious anonymous allegations made in a Short and Distort scheme. Unfortunately, in order to fight the Short and Distort scheme, we incurred $1.5 million in costs in the quarter and our attention was almost entirely distracted from our normal business operations.

Slide 3. I'll now review our second quarter unaudited financial highlights, which are expressed in US dollars. For the second quarter ended September 30, 2011, we increased our sales by 71% to $62.1 million. Gross profits improved by 79% to $47.6 million, representing a gross profit margin of 77%. We recorded quarterly net earnings of $18.5 million or $0.11 per share, an increase of 49% over net earnings of $12.4 million, or $0.08 per share, in the same quarter last year.

Adjusted earnings were $23.6 million or $0.14 per share. Adjustments include $1.5 million for the Short and Distort fight and $3.6 million related to a China dividend withholding tax accrual. Net earnings improved, primarily due to higher realized selling prices, as well as higher quantities sold.

Slide 4. In the second quarter of fiscal 2012, Silvercorp increased cash flows from operations 140% to a record $35.2 million, representing $0.20 per share, up from $0.09 per share last year. Even after repurchasing 4.5 million of our own shares at a cost of $35.4 million, paying dividends, making acquisitions and capital expenditures, we ended the quarter with $176.7 million in cash and short-term investments and we have no debt.

Slide 5. Turning to our operational highlights, Silvercorp achieved silver production of 1.4 million ounces, a 4% increase compared to the same quarter last year. We increased gold production by 739%, to 2,516 ounces, which includes 1,600 ounces from our newly-acquired BYP mine. Silver equivalent production, which includes gold only, increased by 12% to 1.5 million ounces. In addition, 19.7 million pounds of lead and zinc were produced, slightly lower than the 20.9 million pounds in the same quarter last year.

Slide 6. Silvercorp continues to be an industry-leading, low-cost producer. During the quarter, our consolidated cash costs per ounce for silver was negative $4.55. The slight increase in cash costs is due to relatively lower byproduct grades and higher production costs, which were partially offset by an increased lead price. Precious metals now account for 74% of sales, up from 55% a year ago. In the quarter, silver accounted for 69% of sales, gold 5% of sales and base metals 26% of sales.

Slide 7. Silvercorp's 71% increase in sales this quarter can be attributed to increased precious metals production and also to strengthening metal prices. Compared to the same period last year, average realized selling prices have increased by 108% for silver, 56% for gold, 6% for lead, offset by a 4% decrease for zinc.

Slide 8, we are happy to reconfirm our fiscal 2012 production guidance. At the Ying Mining District, we continue to expect to produce 600,000 tonnes of ore at grades 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. Our fiscal 2012 production guidance at the BYP mine also remains unchanged. We expect to mine and mill 95,000 tonnes of ore at a grade of 6 grams per tonne gold, yielding 17,000 ounces of gold.

Slide 9. For fiscal year 2012, total capital expenditure guidance remains around $70 million, including $53 million from mine development, mill construction, and other capital items and $17 million for exploration and permitting. Our exploration budget includes a 241,000 metre surface and underground drilling program at our 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'll now give an update on recent developments and plans at each of our 5 projects.

Slide 10. At the Ying Mining District, Silvercorp took important steps to improve safety at the Ying Mine by upgrading its hauling facilities and by replacing shaft gauges. This, plus labor shortages which impacted our mining contractors during the quarter, resulted in ore production at the Ying Mine down 15%. This was offset by increased production from the TLP, HPG and LM satellite mines, which have continued to expand operations over the last few years and contributed 32% of sales this quarter compared to 19% last year. We will introduce new measures to maintain a stable mining labor force, including the establishment of our own mining crews. We expect mining capacity at our flagship Ying Mine will gradually improve over the next 2 quarters.

During the quarter at the Ying Mining Camp, the Company incurred $6.8 million in exploration and development expenditures with over 23,000 metres of tunnels, 54,000 metres of diamond drilling, and 411 metres of the shafts, declines, and raises being built. Additionally, the second mill's capacity increased to 2,200 tonnes per day, bringing our total milling capacity to 3,200 tonnes per day. An improved mining technique for [resuing] mining stopes was also implemented in all 4 mines in October, which we expect will reduce mining dilution by 5% to 10%. Also during the quarter, the Company commenced the development of a 5,200 metre access ramp at the Ying Mine and a 4,800 metre access ramp at the LM Mine. Both access ramps are expected to be completed in approximately 2.5 years, which will allow us to further increase our mining capacity. For fiscal 2012, we have an ambitious 171,000 metre 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 metres; also 40,000 metres of horizontal tunnels, 1,500 metres of ramps, and a new tailings facility.

Slide 11. Moving to our GC project in Guangdong Province, where we received a mining permit in December 2010. During this quarter, we spent approximately $3 million to complete the acquisition of land usage rights for the GC mine and milling sites. Furthermore, mill and mine construction commenced. We completed 320 metres of a 4 by 4.5 metre main access ramp and started construction of the planned 620 metre vertical shaft.

We also successfully negotiated an agreement with the same contractor who built our 2 mills at the Ying Mining District to construct a 1,600 tonne per day capacity flotation mill at GC capable of producing silver, lead, zinc, and pyrite location concentrates and a tin gravity concentrate. The mill should be completed in July 2012 at an estimated cost of $17 million. We had 3 surface drill rigs performing step-out drilling during the quarter; part of our 20,000 metre, $2.5 million program. In total, we expect to spend $22.5 million at GC for this year. Finally, Silvercorp has retained AMC Consultants of Vancouver to convert our Chinese design report on the GC project into a 43-101 qualified report.

Slide 12. During the quarter, Silvercorp continued to ramp up production at the BYP mine with almost 20,000 tonnes of ore being processed at its 500 tonne per day mill yielding 1,613 ounces of gold. In the next quarters, we will be focusing production on higher grade mineralization areas at BYP. Upcoming capital projects costing $2.5 million will include an 800 tonne per day backfill facility, and a 180 metre deep shaft. The Company's production goal is to expand the mining and milling capacity to 1,500 tonnes per day for fiscal 2013 at a cost of about $10 million. In addition, we have a 50,000 metre drilling program underway at BYP.

Slide 13. Now, moving on to an acquisition completed this quarter -- the XBG Project, which is located just a 3 hour drive from our Ying Mining District. The XBG includes the high grade XBG silver-gold-lead-zinc mine with a mining permit, a 350 tonne per day flotation mill and an environmental permit to construct a 1,000 tonne per day mill. We intend to commence a comprehensive exploration program at XBG, which we expect to be self-funded by cash flows generated from continuing mining activities from the existing tunnels and flotation mill. Slide 14. At our Silvertip project in Northern BC, Canada, Silvercorp continued its effort in completing a small mine permit application, under which we can produce up to 75,000 tonnes per year. At the same time, the Company conducted the 2011 exploration program to test the DM zone, a new zone of silver-lead-zinc mineralization approximately 8 kilometres to the south of Silvertip Mountain. Assay results are pending.

Slide 15. In conclusion, recognizing the challenges we faced in this quarter, we are very pleased with our results. We achieved record cash flows from operations and achieved continued growth in silver and gold production, sales, gross profits, and net income. Also throughout the quarter, we continued building the foundation for further growth by reinvesting profits to expand production and resources at the Ying Mining Camp and at the BYP gold mine, making important progress in moving GC and Silvertip towards production and, this quarter, acquiring the XBG mine in who Henan province.

All this was achieved while being distracted and exhausted by having to fight a Short and Distort scheme. We remain committed to rewarding our shareholders through both growth and dividends and we're acknowledging our shareholders' loyalty today with a 25% increase to our dividend.

Thank you for listening to the highlights of Silvercorp's unaudited fiscal 2012 second quarter results. I would now ask the operator to open the lines for your questions.

(Operator Instructions) Alex Syrnyk, BMO Capital Markets.

I was wondering if you could provide us some more color around the labor shortages with your contract miners at Ying and particularly how that relationship is going to change going forward?

Okay, this is Rui. I think the labor shortage just happened so suddenly, we didn't realize that. And as a matter of fact, the labor force we have at the Ying Mine now is maybe 70%. of last year's labor force. Development changes take time.

We used to have a lot of migrant workers, I think the migrant worker now has more demand and they deserve that. Our mining contractor hasn't been able to develop, providing good enough benefit to the workers, maintain the labor relationship with the miners and serve in just a contractor role. So, that's the way we address things.

Okay. In terms of the impact that it had in the fiscal second quarter, would you say that the impact of the labor shortage was the greater issue, or was maybe more the reduction we saw in the production due to (multiple speakers)?

Due to both.

Yes, okay.

We may have to shutting down five (inaudible), right, for each of this case, right. So (inaudible) for 1 week, almost 5 days due to replace that., right, (inaudible), combined with the labor shortage. So, hopefully in this quarter, the current quarter, we'll have some improvement compared to last quarter.

Okay. Thank you. Just lastly, on GC, the 3 million land purchases, are you guys going to be doing any more, or do you have what you need now?

I think we've got almost 95% of the land that we wanted already.

Okay.

And maybe there are a few pieces of land maybe still (inaudible) as a result. But other than that, it's been done.

Okay, great. Thanks, guys.

Chris Lichtenheldt, UBS

Just a question. TLP looks like it's tracking pretty strongly and probably ahead of guidance. I think you've already milled almost 157,000 tonnes in the first 6 months. Is that going to keep up or how do you expect TLP to shape up over the next couple quarters?

I think it will be fairly improved. There will be a slight improvement.

Okay, at TLP?

Yes.

Okay. That's fair enough, so that'll probably make up for any loss production, at least in terms of time?

I think at the (inaudible) mine, we are also addressing that and know that traditionally we have a [slight] for that. The second quarter, I think actually, in comparison, is the weakest quarter, in terms of overall (inaudible). For some reason, because it's summertime, there's also maybe there's some partial (inaudible) from time to time. Like if they don't shut down the pump, it may not start for the whole day, it may start for a couple hours. It's summer time. Typically, it is a partial (inaudible).

At Ying in particular, or at all the mines?

All the mines and mills. Generally, if you look at every year, our second quarter tends to be the weak quarter for results.

Right, okay.

I think right now, for this season, I think the power shouldn't give us any problems. In the summertime, when (inaudible) releasing power, actually that's always contributed to our slow production.

Right. Okay.

Every summer there are some power problems.

Right, okay. I noticed that you said there is some cost inflation largely because of the US dollar/renminbi exchange rates changing. What sort of cost inflation are you seeing in local currency terms, in renminbi in China in terms of consumables and people? Can you talk a bit about the cuts?

Yes, so (inaudible) a payroll, we have other costs. Actually the total mining costs, the cash mining costs for this quarter is $42.3, I don't know if you've seen that.

Yes, for sure. That's in US dollars. I'm just curious in renminbi, what sort of inflation you're seeing? So, if I make an assumption on currency, what sort of inflation do you see actually on the ground?

I think the salary is the main inflating factor.

Okay.

But the way we manage it is to improve the productivity and to reduce dilution and that is why you see actually, this quarter our cash cost is $42.3 per tonne for mining cost, where the Q1 was $48, right?

Right.

So, you know, actually, it is a (fluctuation). In our table, there's 5 quarters (inaudible). This quarter, actually, it is not a highest quarter. Right.

Right.

So, basically, the inflation is mainly coming from wage, the worker's wage. That is the main pressure, whether by reducing the dilutions actually, you can still have room to improve, right?

Right, okay. But, to be fair, at Ying, grades have come down a little bit. Do you expect improvements in dilution to help support grade improvement over the next few quarters? Is that what you're hoping for?

I think at the Ying mine we have a 433 (inaudible), right?

Yes, something like that.

And I think (inaudible) as I said, for some reason the second quarter is always the lowest quarter.

Okay.

I don't have a last year ones, but I think the next quarter, the grade will be much higher than this quarter.

Okay.

For some reason, I don't know, (someone's name), she did the chart, and she called that every quarter is more grade in the Ying Mine. And as always the second quarter is lower than the other 3 quarters.

Right, okay. I guess that's fair. Thanks a lot.

(Operator Instructions) [Howard Klinker].

I have a few questions. You paid $7.90 for the 4.5 million shares you bought in the quarter and you spent $35 million. What is the average cost of the stock for the whole $35 million, can you remember?

It's about $7.90.

Yes, $7.90.

For the whole thing or just the recent quarter?

For the whole thing. (Multiple Speakers)

Wait, 4.5 times $7.90 is the same thing. My mistake. When you hire permanent laborers to replace contract laborers, how much more do you have to pay in wages?

Actually it's same.

Same?

Maybe it cost a few middle man.

So, approximately the same?

Yes, maybe it cost a few middle man.

I see, with contract laborers you need middlemen to get them, is that it? Is that what you're saying?

Typically, the manager, the contractor, you have to pay contractor and the contractor has to make 16% or 20% of profit.

Sure. Another question, in the LM mine, you say you're going to add production will be producing 200,000 tonnes a year. Translate that into ounces of silver?

That would be (inaudible) our last geology report, but it was about 10 ounces of silver grade.

So, would that be 2 million ounces?

Yes.

Approximately.

Yes. If you look at our -- I think May we have a resource calculation for the LM mine.

I forgot. Finally, I've asked this before and I keep forgetting the answer, in your category of other investments, which at the end of September were $39.4 million, is that CDs of some sort?

Yes, this is Maria. That investment is 103 million is DDX, actually you can think it is a Canadian mine in the Yukon. The rest of the investments include public companies where we have assets in Canadian public mining companies.

So, it's actual companies?

(multiple speakers) we own 8 million shares for a Company called, for symbol CBJ, Columbia Gold.

Yes.

We paid about $0.45, now it's what? $1.80?

$1.80, yes.

Shares in CBJ plus some other public companies?

Yes, we own a bunch of other public company shares, including some shares in New Pacific. How many shares in New Pacific?

New Pacific shares is not in other investments.

No?

No, yes, it's a investment in associate.

New Pacific is investment in associate. I see.

Yes.

Done. No more questions.

Thanks.

Brad Humphrey, Raymond James

Any thoughts on what the cost will be to fight those allegations in this quarter?

The total was 2.5, right, so we did 1.5 maybe another one.

Yes.

$1 million this quarter?

The main thing will be (inaudible).

At Silvertip, do you have any guidance on when you're expecting the small mines permit, now?

Based on our last conversation, I think we should get a direct box company permit maybe by January, February. For mining 60,000 tonnes of ore.

Okay. And then --

Based on our conversation with the government. And our (inaudible) firm is finalized. They are submitting the application right now.

When do you expect to have the feasibility study done?

Maybe next May or June.

All right. And at GC, are you --

The intention is, that is our coming intention to ship some high-grade oil from Silvertip directly to China. We're intending to ship 60,000 pounds. That's our obligation. We intend to mine the high grade pocket (inaudible) zinc and 700 grams of silver and direct ship to the mine site. And, the total revenue to NSR for this kind of grade is about $1,000, so hopefully it will be shipped like mining shipping cost and some other (inaudible) that kind of idea.

Right. At GC, are you guys providing any guidance for next year?

GC, right now, we have a schedule, but (inaudible) don't want to talk about that. AMC is just finishing the final feasibility studies, I think sometime this month. But our intention, as we said in the news release, that we want to build that mill by June, July time next year. And achieving the mining production capacity of 700 tonnes a day.

Perfect, thank you.

Currently there are no further questions in queue, speakers.

Great. To wrap up, I'd like to thank you again for joining us in today's conference call. As always, we will continue to use our position of financial strength to advance our key developments and exploration projects and to seek out strategic acquisitions with a focus on high margin, precious metal properties that can be brought into profitable production quickly and with relatively low capital requirements.

We remain very excited about Silvercorp's future growth prospects as we continue to benefit from strong silver prices. We look forward to reporting to you again when we release our third quarter results in February. Thank you and good day.

Thank you very much. Ladies and gentlemen, that concludes our conference today. We appreciate your participation and you're using AT&T executive teleconference. You may now disconnect.