Silvercorp Metals Inc (SVM) 2012 Q3 法說會逐字稿

Ladies and gentlemen, good morning. My name is Tom and I will be your conference operator today. At this time, I would like to welcome everyone to Silvercorp Metals Incorporated fiscal 2012 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 Incorporated. 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 third-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 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 results. Presentation slides are available as part of the webcast, or on our website. To advance the slides, please press 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 are pleased to report today that, during the quarter ended December 31, 2011, silver production increased by 2% to 1.55 million ounces, while gold production increased by over 256%. Sales increased by 19% to $61.9 million. Income from operations increased by 2% to $35 million. We generated $31.6 million in cash flow from operations and posted $20 million in net income.

On the operation side, we maintained our position as a leading low-cost producer. For the quarter, we produced silver at a cash cost of negative $4.56 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 increased dividends by 25% this quarter and now pay CAD0.025 Canadian per share. In addition, we completed the acquisition of the high-grade XHP mine, further consolidating the Ying Mining District region.

Slide 3. I will now review our unaudited financial highlights, which are expressed in US dollars, for the three months and nine months ended December 31, 2011. During the third quarter, we increased our sales by 19% to $61.9 million, and improved income from operations by 2% to $35 million. In addition, we recorded quarterly net income of $20 million, or $0.12 per share, a decrease of 31% compared to the prior-year period for a number of reasons.

First, as was the case for our last three quarters, net income this quarter relative to the prior-year quarter was impacted by a higher tax rate, as the Chinese tax holiday, which allowed the Company's most profitable subsidiary, Henan Found, to benefit from a 12.5% income tax rate expired at the end of 2010, returning the income tax rate to 25%. Also, $1.5 million in withholding taxes was incurred on the annual dividends declared by Silvercorp's subsidiary Hunan Found in the quarter.

Ore production from our Ying mine was also impacted in the quarter as our focus continued to be distracted from our normal business operations, citing the Short and Distort scheme. We also spent almost $1 million on this effort.

Finally, during the prior-year period, Silvercorp recorded various investment gains which did not occur this quarter. These reasons explain why we were able to grow our operating income this quarter but not our net income.

During the nine months ended December 31, 2011, Silvercorp sales increased by 55% to $193.7 million. Income from operations improved by 58% to $121.2 million. Net income increased by 15% to $64.1 million, or $0.37 per share. Sales and net income improved primarily due to higher realized selling prices as well as higher quantities sold.

Slide 4. In the third quarter of fiscal 2012, we generated $31.6 million in cash flows from operations, representing $0.18 per share. For the nine months, we increased cash flow from operations by 44% to $100.7 million, or $0.58 per share. Even after paying dividends, making acquisitions, and capital expenditures of $27 million, we ended the quarter with $168.8 million in cash and short-term investments and no debt.

Slide 5. Turning to our operational highlights, we achieved silver production of approximately 1.6 million ounces, a 2% increase compared to the same quarter last year. We also increased gold production by 256% to 2900 ounces, including 1800 ounces from our newly acquired BYP mine.

Silver equivalent production, which includes gold only at a 15-to-1 ratio, increased by 13% to 1.7 million ounces. In addition, we increased our base metals production by 4% to 24.5 million pounds of lead and zinc during the quarter.

Slide 6. Silvercorp continues to be an industry-leading low-cost producer. During the quarter, our consolidated cash cost per ounce of silver was negative $4.56. Precious metals now account for 69% of sales compared to 61% a year ago. In the quarter, silver accounted for 63% of sales, gold 6% of sales, lead 28% of sales, and zinc 4% of sales.

Slide 7. Silvercorp's increase in sales this quarter can be attributed to increased metal production and the strengthening precious metal prices offset by weakening base metal prices. Compared to the same period last year, average realized selling prices have increased by 23% for silver, 35% for gold, and have decreased 9% each for lead and zinc.

Slide 8. In our quarterly results released yesterday, we reconfirmed that we will meet or exceed our silver production guidance for fiscal 2012 of 5.6 million ounces of silver. This morning, we released our fiscal 2013 production guidance.

At the Ying Mining District, and we expect to process 695,000 tonnes of ore at grades of 295 grams per ton silver, 0.5 gram per ton gold, 5.1% lead, and 1.5% zinc, yielding 6.7 million ounces of silver, 3300 ounces of gold, and 87 million pounds of lead zinc.

Fiscal 2013 will also mark a significant achievement as we bring GC into production for the first time. We plan to mine and mill 153,000 tonnes of ore at a grade of 210 grams per tonne silver, 0.9% lead and 3.3% zinc to yield 630,000 ounces of silver, and 12.1 million pounds of lead and zinc.

Moving to our BYP mine, we expect to mine and mill 175,000 tonnes of ore at a grade of 2.75 grams per tonne gold, yielding 13600 thousand ounces of gold. Additionally, we plan to process 186,000 tonnes of development ore at our newly acquired XBG and XHP mines to yield 163,000 ounces of silver, 1300 ounces of gold and 10.7 million pounds of lead and zinc. Overall, we plan to increase silver production by 20% in fiscal 2013, expecting Silvercorp's eighth consecutive year of silver production growth.

Slide 9. For fiscal year 2013, we plan to spend $98.9 million in capital expenditures, including $89.1 million for mine development, mill construction and other capital items, and $9.8 million for exploration and permitting. Our exploration budget includes a 206,000 meter surface and underground drilling program at our China projects with a projected cost of $9.8 million. We strongly believe that exploration in and around existing production properties is the most economical way to grow resources and increase production, and it's a great way to leverage China's low-cost advantage.

I will now give an update on recent developments and plans at each of our five projects. Slide 10. At the Ying Mining District, during the quarter, we continued ramping up production from the TLP, HPG and LM satellite mines, which have continued to expand operations over the last two years. Production from these satellite mines accounted for 25% of sales this quarter compared to 20% in the prior year.

We also introduced new measures to maintain a stable mining labor force. As a result, labor shortages were substantially resolved by December. The Company expects mining capacity at its flagship Ying mine will gradually improve over the next few quarters.

During the quarter, the Company incurred $10.5 million in exploration and development expenditures, including development work on a 5200 meter access ramp at the Ying mine, and a 4800 meter access ramp on the TLP mining permit which is adjacent to the LM mining permit. Both access ramps are expected to be completed in approximately 2.5 years, which will allow us to further increase our mining capacity.

Silvercorp currently produces 60,000 tonnes per year from the LM mine. However, once the 4800 meter access ramp is completed, expected capacity will increase to 200,000 tonnes per year.

Silvercorp completed almost 158,000 meters of surface and underground drilling at the Ying camp in 2011. For our fiscal year 2013, we have an ambitious 144,000 meter drilling program at the Ying camp planned at an expected cost of $5.6 million.

We also plan to spend $41 million building vertical shaft declines and raises totaling 4500 meters, over 100 kilometers of horizontal tunnels, 4900 meters of ramps, plus mill equipment, tailings and surface facilities.

Slide 11, moving to our GC project in the Guangdong province where we have been rapidly advancing development. During the quarter, we spend approximately $4.8 million in capital expenditures for a total of $12.5 million to December 31, 2011. Mine construction contractors moved on to the GC mine site in August 2011, and are on track with mine construction, completing almost 600 meters of the main access ramp as of December 31, 2011. Construction of the 1600 tonne per day floatation mill capable of producing silver, lead, zinc, pyrite floatation concentrates and an optional tin gravity concentrate is well underway.

Milling equipment was sourced and the final purchase contract was signed. Silvercorp is using the same contract for GC as was used in constructing the two mills at the Ying Mining District. The mill at GC is expected to be completed in July 2012 at an estimated cost of $17 million.

We completed over 14,000 meters of surface drilling in 2011, which lead to the discovery of four new high-grade silver lead zinc veins, increasing the total number of mineralized veins at the GC property to 33. Subsequent to quarter end, a 43-101 report prepared by AMC Consultants of Vancouver was released establishing mineral reserves at GC for the first time. This report did not, however, include the results of the 2011 surface drilling program.

In fiscal 2013, we expect initial production at GC to commence in the second quarter of fiscal 2013. During the year, we will spend another $30.3 million on mine and mill development and $1.9 million on the 26,000 meter drilling program.

Slide 12. During the quarter, we continued to ramp up production at the BYP mine with a 41,200 tonnes of ore being processed at the 500 tonne per day mill, yielding 1800 ounces of gold. Construction of an 800 tonne per day backfill facility to fill up gold mineralization soaks and the sinking of 180 meter deep shaft has commenced. For fiscal year 2013, we plan to spend $12.4 million on mine and mill development. Additionally, we will continue exploration at BYP with an 1800 meter of surface drilling.

Slide 13. Now moving on to our newest additions, the XBG and XHP projects located just a three-hour drive from the Ying Mining District. During the quarter, exploration, mine development, and small-scale tunneling mining continued at XBG.

The XHP project, which was acquired in December 2011, includes the high-grade XHP silver, gold, lead, zinc mine, a 14 square kilometer mining permit, and a 500 tonne per day mill. The Company intends to resume mining activities at XHP mine to stockpile ore pending installation of a second location circuit to enable the mill to generate a gold, silver, lead concentrate and a zinc concentrate. The mill upgrade is expected to be completed and in operation next quarter. We plan to carry out 33,600 meters of surface and underground drilling on both projects in fiscal 2013 with a goal of defining a 43-101 compliant mineral resource.

Slide 14. At our Silvertip project in northern BC, Canada, Silvercorp continued its effort in completing a small mine permit application which we expect to be submitted within the next three months. Under a small mine permit, we can produce up to 75,000 tonnes per year. We also completed the 2011 exploration program to test a new zone of silver lead zinc mineralization approximately 8 kilometers to the south of Silvertip Mountain and are in the process of having an upgraded technical report for the property prepared.

Slide 15. In conclusion, despite some distractions, we are satisfied with this quarter's results. We continued to increase silver and gold production. We also generated robust sales, income from operations, net income and cash flow from operations. We continue to maintain our status as a leading low-cost silver producer. 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, acquired XHP, and advanced GC and Silvertip towards production.

Slides 16. Thank you for listening to the highlights of Silvercorp's unaudited fiscal 2012 third-quarter results. I would now ask the operator to open the lines for your questions.

(Operator Instructions). Brian Quast, CIBC.

Good morning guys. Just wondering if we can get a bit more color on a few of in pieces you've got going on here. Can you give us some sort of color on why the grades at BYP haven't sort of matched up to expectations over the first year or so of production there?

I think -- this is Rui. Our original plan was for year one we have a high grade and 6 grams and after that would be 3 grams because the resources run (inaudible) 3 grams. I think (inaudible) we got into that hybrid market, that's all the grades (inaudible) are drilled and actually in the mining process (inaudible) found out it's more like 3 grams materials. I think (inaudible) certainly related there are certain (inaudible) on the roof zones. I think that has been the main reason. Looking forward, I think the grade we expect will be around 3 grams, 2.75 to 3 grams gold.

Okay, so it's more of a mining dilution factor than anything else then.

Yes.

Then on the XH -- I'm losing track of all your acronyms, either the XHP or XHB mine there, how should we be looking at that? Should we be looking at that as an addition to the Ying Camp or as a stand-alone operation? What's sort of your views going forward in terms of whether you find some higher grade areas and so on and so forth?

That will be independent -- even though under the structure of (inaudible) company structure but it will be viewed as an independent operation. I think we were somehow changing the (inaudible) project (inaudible) NIM, so maybe I'm putting more like easier (inaudible).

Then there was one other quick thing. So in terms of GC SMT, when you ramp that up, are you going to capitalize the production there for a little while or are you going straight into what would be considered commercial production that's hitting your income statement?

GC, right?

Yes.

I think that's a tough question to answer that. Like the GC project, we expect to build a mill, finish the mill around July of this year, and now we are achieving 750 tonnes a day production. So maybe we should (inaudible) commercial production than ramp up.

So we'll see it when it sort of starts coming through there, maybe when we get a bit closer to the time.

Yes.

Thanks a lot guys. That's it for me.

Chris Lichtenheldt, UBS.

Good morning. Just a couple of questions if you don't mind back on the GC, when looking at the latest update that you guys provided. I think, from the original studies, the amount of silver you're going to recover came down and it looks like there's not going to be a sulfur concentrate with the initial plan. Can you comment on what the prospects for sulfur concentrate ultimately might be, or if you might be recovering from more silver to the zinc or pyrite cons or can you talk a little bit about ultimate recoveries there?

Okay. So, the original study, the silver (inaudible) concentrate (inaudible) called the lead concentrate. Another concentrate we report to you will be sulfur or pyrite concentrate. So as of right now, I think we are still trying to figure out how to deal with this pyrite or sulfur concentrate. That's why we decide to take that out of our (inaudible) study has no revenue -- has no revenue, right, because we are not sure what we can market it as. We can sell it and market it as pyrite or sulfur concentrate, no problem. But we may not get payment in silver if we sold it as a pyrite concentrate or a sulfur concentrate. So therefore, you can the Silver recovery has been dropped to 69% from 89%, 90%.

Yes, 80%-something I think. Okay.

So that is the other play, but we are still doing some more testing and [always making] the leach of the pyrite concentrate and then whatever (inaudible) out, we sold as a pyrite concentrate. But at the moment, we are not sure. That's why in the study we only take it (inaudible) of that silver and lead concentrate.

So it's fair to say it's a marketing issue, it's not really a metallurgical issue?

I think it's both.

Okay.

It like depends. If you (inaudible) leach that, and now we will be able to return that [to her] and then whatever is left gets sold as a pyrite concentrate.

Okay. When do you think we --

That something we're working on.

Do you know when you expect to have some conclusions there?

I think we need a couple of months.

Okay, that's great. Thanks. I wanted to ask just on costs in China, your guidance for next year says that total cash production costs to be about 3% higher than this past nine-month period. So I'm wondering. That looks pretty good in the context of the currency is moving and inflation on the ground I would think perhaps might be a little higher than 3%. Can you discuss a little bit about what inflation is like, excluding any operating efficiencies you might be including in the 3% estimate, in terms of labor and consumables, are they higher? Are they increasing more than 3% or can you give us some context there?

This is Maria. So in general, in China, we say in the labor cost is probably like a 5 (inaudible) percent of increase in terms of the energy around 2% to 5% because (inaudible) it is and raw material is around 2% to 5%, also depends on what raw material it is.

But in terms of impact on us, because we also increase our [permit] in silver production, so average we can see the labor cost probably impact cost actually 1% to 2% in terms of per-tonne cost. Then energy was around 1%. I didn't see a lot of increase for energy, either I didn't see a lot of for the consumables either. Because of the cost control program [everything] so I think it was pretty much, we were pretty much in line with the 3% around.

Okay. That's really helpful, thanks.

(multiple speakers)

Can you tell me what sort of RMB rate you are assuming in your cost guidance for next year?

It's 6.3%.

6.3%, okay, perfect. That's it for me. Thanks a lot.

Andrew Kaip, BMO.

Good morning. Look, just a couple of questions. First of all, I want to get a sense of what the new projects that you are bringing into production are contributing towards your higher G&A costs. First of all -- go ahead.

Yes, this is Maria. For this quarter, it is around $300,000. (multiple speakers)

And that would be --

For the two new projects?

Yes for that.

That's repeated in [SBD].

Yes, it's (multiple speakers) for this quarter. That is why (inaudible) is lower fairly constant because this quarter there are some more people there and we haven't streamlined the process (inaudible) so we got everything streamlined and we factored like $200,000 for [quicker].

Okay.

There's no production activity right now there.

All right. Then GC, can you give us a sense of how that is contributing to your overall corporate costs?

GC is -- just a second -- GC is for the whole year, basic whole year 2013, will be around $4.5 million.

Okay, thanks. Then can you give us overall guidance for 2013 in your corporate G&A?

It is around $32 million, $33 million.

$30 million to $33 million.

$32 million to $33 million, all right.

Then the other question I had was just regarding the LM mine. What are your expectations as you gradually continue on your development path? What are your expectations of grade once you've hit 200,000 pounds per annum in a couple of years?

It's about 10 ounce.

It's around 10 ounce?

Yes, of silver.

Okay. All right.

I think that's maybe another Ying mine.

Okay. All right. Then with respect to your tax, can you give us a sense on the withholding tax? Is this something that we should expect to be a recurring event, or how is this -- how should we model this moving forward?

I think the conservative way assuming we take (inaudible) is doing a major agreement with the Chinese partner.

Yes.

We need to (inaudible) 75% of the profit out of that Chinese subsidiary. I assume that's the case. Like, so every year, we take money out of China. We need to pay 10% net profit dividend to the Chinese government.

I see, okay. So that's the way we should look at it.

Yes, so it depends. Like maybe next year, because we are using (inaudible) to acquire part of a new project, and then therefore we can, like, not pay that dividend out of China. So the way we have been doing it is that's why you saw we just our 2010 dividend because at the time we had spent the money, so there is more -- (inaudible) the cash is not enough to pay that dividend. So that's why the dividend has been delayed until now.

Okay. So it's really involved with taking any dividend to come out of Henan Found and moving to Canada and incurring that 10% tax.

Yes.

All right.

So for example, GC project we would -- because of the Hong Kong company holding our assets, if it is on the mainline in Hong Kong, the tax (inaudible) the withholding tax will be only 5%.

Okay. Great, that's it. Thanks.

There are no other participants queuing up at this time.

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 production profitably, quickly, and with relatively low capital requirements. We remain very excited about Silvercorp's future growth prospects and the benefits of operating in low-cost, mining-friendly China. We look forward to reporting to you again when we release our year-end results around late May. Thank you and have a good day.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect.