Silvercorp Metals Inc (SVM) 2012 Q4 法說會逐字稿

Good morning. My name is Tony, and I will be your conference operator today. At this time, I would like to welcome everyone to the Silvercorp Metals Inc. fiscal 2012 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 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 fourth-quarter and yea- end analysts 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; and Maria Tang, Silvercorp's Chief Financial Officer.

At this time, I'd like to invite you to follow along on our accompanying presentation slides as I go through the highlights of our results. Presentation slides are available as part of the webcast or on Silvercorp's website. To advance the slides, please press on the forward arrow. 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 that we've achieved our best annual results in the Company's history. Sales increased 42%, earnings by 9%, and cash flows from operations increased 34%. We set records for annual sales, net income, and cash flow from operations, in large part due to increased silver prices, but also because we continue to expand our silver production, which reached a record 5.6 million ounces. This extends our track record of silver production growth to six 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 of China. For the fiscal year 2012, we produced silver at a cash cost of negative $5.13 per ounce, maintaining our status as one of the lowest-cost silver producers in our industry. Also, throughout the year, we continued building the foundation for continued growth by reinvesting profits to expand production and resources at the Ying Mining Camp and the BYP mine, by advancing our two development projects, GC and Silvertip, and completing the acquisition of the X Mine projects, further consolidating the Ying Mining District.

Slide 3. I'll now review our annual audited financial highlights, which are expressed in US dollars. Fiscal 2012 has been the most profitable year in our history. We reported record sales of $238 million and record net income of $73.8 million, representing a 42% and a 9% increase from last year. Sales and net income improved, primarily due to higher realized selling prices, as well as higher quantities sold.

Slide 4. I'll now review the fourth-quarter financial highlights. 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, 2012, we increased our sales by 4% to $44.3 million. The sales increase was due to higher silver and gold production and prices, offset by slightly lower base metal production and prices. Net earnings for the quarter was $9.7 million or $0.06 per share, a decrease of 19% compared to the prior-year period, in part, because we incurred almost $1.5 million in legal and forensic accounting fees related to last September's short-and-distort attack. Also, we have had higher production costs, which were partially offset by higher revenue.

Slide 5. In the fourth quarter of fiscal 2012, Silvercorp generated $20.9 million in cash flows from operations before non-cash working capital, representing a 3% increase from the same quarter last year, or $0.12 per share. In fiscal 2012, we generated record cash flows before non-cash working capital of $123.8 million. This represents a 34% increase, or $0.72 per share. Even after paying dividends of $14.9 million, spending $35.4 million on our share repurchase program, making acquisitions of $34.3 million, and various capital expenditures totaling $43.4 million, we still ended the year with $154.5 million in cash and short-term investments and no debt.

Slide 6. Turning to our fourth quarter operational highlights, we achieved silver production of 1.1 million ounces, a 4% increase compared to the same quarter last year. We increased gold production by 86%, to 2,000 ounces. Silver-equivalent production, which includes gold converted at a 50 to1 ratio, increased by 7%, to 1.2 million ounces.

Slide 7. Silvercorp continues to be an industry-leading low-cost producer. During the quarter, our consolidated cash cost per ounce of silver was negative $4.22. For the year, it was negative $5.13. For the quarter, precious metals accounted for 68% of sales, compared to 63% a year ago. In the quarter, silver accounted for 62% of sales; gold, 6% of sales; lead, 28% of sales; and zinc, 4% of sales. For fiscal 2012, precious metals accounted for 70% of sales.

Moving to slide 8, Silvercorp's increase in sales in Q4 was mainly due to the increase of metal production. For fiscal 2012, the sales increase was the result of both strengthening precious metal prices, combined with increased metals production. Compared to last year, average realized selling prices have increased by 54% for silver, 38% for gold, 2% for lead, and 1% for zinc.

Moving to slide 9, last year, we gave guidance that we would produce 5.6 million ounces of silver, 72.8 million pounds of lead, and 17.5 million pounds of zinc, and revised guidance of 10,000 ounces of gold. The Company achieved its fiscal 2012 production guidance for silver. It was 4% below guidance, however, for base metals and 12% below guidance for gold production. We are happy to reconfirm today our production guidance for fiscal 2013. We expect to produce 6.7 million ounces of silver, plus 18,200 ounces of gold, representing 7.6 million silver-equivalent ounces, with gold converted at a 50 to1 ratio. This represents year-over-year growth of 20%.

Some production growth will come from the three satellite mines in the Ying Mining Camp, with the largest growth coming from the GC project, which we will bring into production for the first time. From the four mines at the Ying Mining Camp, production is expected to increase to 695,000 tonnes of ore at a head grade of 295 grams per tonne silver, 0.5 gram per tonne gold, 5.1% lead, and 1.5% zinc, yielding 5.9 million ounces of silver, 3,300 ounces of gold, and 86.9 million pounds of lead and zinc. Total production costs will be approximately $85 per tonne of ore. The GC project in Guangdong Province is expected to commence initial production in the third quarter of calendar 2012. It is expected to mine 160,000 tonnes and to mill 153,000 tonnes of ore, yielding approximately 630,000 ounces of silver and 12.1 million pounds of lead and zinc. Total production costs at GC are expected to be approximately $65 per tonne of ore. Overall, we plan to increase silver production by 20% in fiscal 2013, establishing Silvercorp's seventh consecutive year of silver production growth.

Now moving to slide 10, for fiscal year 2013, we plan to spend $89.7 million in capital expenditures, including $79.9 million for mine development, mill construction, and other capital items, and $9.8 million for exploration and permitting, including a 206,000-meter surface and underground drilling program at our three China projects. We have deferred $9.2 million in planned capital expenditures at BYP to build a new mill as we are upgrading the existing mill from 500 tonnes per day to 800 tonnes per day. I'll now give an update on recent developments and plans at each of our five projects.

Slide 11. During the quarter, Silvercorp continued to ramp 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 29% of sales this quarter, compared to 27% in the prior year. The Company incurred $5.8 million in exploration and development expenditures for the quarter and $28.7 million for fiscal 2012. We continued to do development work on a 5,200-meter access ramp at the Ying Mine and a 4,800-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 two years, which will allow us to further increase our mining capacity. For example, Silvercorp currently produces approximately 60,000 tonnes per year from the LM mine. However, once the 4,800-meter access ramp is completed, expected capacity will increase to 200,000 tonnes per year.

Slide 12. Moving on to our GC project in Guangdong Province, during the quarter, Silvercorp spent approximately $3.5 million in capital expenditures for a total of $5.9 million for fiscal 2012. The construction of the 1,600-tonne-per-day flotation mill that is capable of producing silver, lead, zinc, and pyrite flotation concentrates plus an optional tin gravity concentrate, is well underway. We are seeing good progress on our main access ramp and are nearing completion of office buildings and lab facilities. We expect initial production at GC to commence in the second quarter of our fiscal 2013. During the year, we will spend another $30.3 million on mine and mill development and $1.9 million on a 26,400-meter drilling program.

Slide 13. During the quarter at the BYP mine, construction of an 800-tonne-per-day backfill facility to fill up gold mineralization stokes was well underway. It will cost approximately $1.5 million and will be completed in July of this year. In fiscal 2012, the Company also started to sink 180-meter-deep shaft, which is estimated to cost $1 million and expected to be completed in October this year. For fiscal 2013, we plan to spend $3.4 million in mine and mill development at BYP. We will also continue exploration at BYP, with 1,800 meters of surface drilling.

Slide 14. Now moving on to our newest additions, the X Mine Projects, located just a three-hour drive from the Ying Mining District. The Company will carry out an exploration program immediately, including tunneling and surface and underground diamond drilling, with a goal of defining a 43-101 compliant mineral resource. Silvercorp plans to carry out 33,600 meters of surface and underground drilling on both X Mine Projects in fiscal 2013.

Slide 15. At our Silvertip project in Northern British Columbia, Canada, the Company is working on completing and submitting its small mine permit application, which will allow production of up to 75,000 tonnes per year. We are also looking forward to completion of a new 43-101 report on the property within the current quarter.

Slide 16. In conclusion, we are pleased with our fiscal 2012 fourth quarter and our annual results. We continue to increase silver and gold production. We also generated robust sales, income from operations, net income, and cash flows 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, and made progress in advancing the GC project towards production.

Slide 17. Thank you for listening to the highlights of Silvercorp's fiscal 2012 fourth-quarter and audited annual results conference call. I will now ask the operator to open the lines for your questions.

Thank you very much. (Operator Instructions). Our first question will come from Chris Lichtenheldt with UBS. Please go ahead.

Good morning, guys.

Good morning, Chris.

Wanted to ask first, do you expect costs, ongoing costs related to the audit and legal fees that you experienced in the quarter? Should we see those every quarter going forward for the next few?

Yes. Hi, Chris. It's Lorne talking. In terms of litigation, it's very difficult to give full expectation of costs. You never know what's going to happen, and we are reluctant to discuss ongoing litigation matters. That said, you could probably estimate that the cost would be no more than $0.5 million within the next quarter. And I don't want to go any further beyond that.

Okay. That's helpful. Thanks. Secondly, costs at the HPGLM seemed to jump up a bit this quarter in terms of cash mining costs and cash milling costs. Is there anything in particular going on there that drove those up this quarter, or is that just throughput, mostly?

Hi, Chris. This is Maria.

Hi.

For the HPG and TLP, our cost, yes, it increased a bit. Part of the reason is we paid some one-time, once a year insurance to -- the contractor pays for their workers, and we need to compensate them. That's one of the reasons.

Okay. So really, it should be lower again next --

I will say will be even, because we increase a little bit, contractor, mining contractor costs too.

Okay. Grades at Ying, that's just my last question here. Those -- I know it can vary quarter to quarter, but it's one of the lower quarters over the past couple years, I think, actually. So is there anything -- was that mining dilution, or are you just in lower veins right now, or what's happening there?

Myles, do you want to take that one?

I think this is the probably lower portion of the zones.

Okay. I mean, it could be that simple. So into next year, into fiscal 2013, we should see around 440 or 450 again, or --

I think in the end, we will have 43-101 resource very soon. And I think in that, a lot of the detail of the mining schedule, and I think we should come back to normal after, I think, maybe one-half more quarter, for relatively lower rate in comparison.

Okay. That sounds good. I see your guidance actually 460, so I guess we're expecting it to pop back up. Okay. That's helpful. Thank you. That's it from me.

Thank you. (Operator Instructions). And next in queue is the line of Howard Flinker with Flinker & Company. Please go ahead.

Hi, Howard.

Hi, everybody. I have a few questions. I probably keep asking this and probably keep forgetting. The other investments on the balance sheet, those are CDs, right? They're not stock investments, right?

The other investment on the balance sheet?

Yes, $46 million.

The $46 million, actually, if you can see the note, those basically the public Company, we invest in the public Company shares. Also, there's $32 million for the Yukon Zinc. It's a private company. It's going to be listed in the Hong Kong stock exchange.

Okay.

Does that answer your question?

Yes.

Sorry, Howard. You're referring to under where we talk about the short-term investments?

No, talking about other investments. Other investments in note nine. There's three parts. First part is a public traded Company. We have about $12 million US dollars investment, and another one is Yukon Zinc, (inaudible) $22 million. (Inaudible) going to listed on the Hong Kong stock exchange, and another $9 million is a private smelter in China. We own them, 15%.

Wait a sec. That comes out to $53 million, $12 million plus $32 million plus $9 million.

It's $12 million plus $9 million plus $22 million.

Oh, $22 million. $22 million, okay. Got it. That explains. Okay. Similarly, in the income statements, you have share of gain or loss in associates. No, no, gain or loss on investments, excuse me. Is that the same thing?

Gain or loss of investment represents the relative gain or loss, which is a warrant, we acquired a public Company's warrant. That will be through the market, and the difference will go to the P&L.

Oh, okay. Finally, this is for (inaudible). You paid, I think, $12 million and $22 million or $23 million for the various -- for the two X mines. What kind of history do they have? What do you think they have in the way of resources?

I think as we mentioned in our news release, there's no resource and there's (inaudible) day. That's XHG. (inaudible) 26 square kilometer mining permit, and there's a lot of (inaudible) zones, the veins. But there's no resource there.

Okay. Have they been mining there before?

Yes, they've been mining there before, and then there's another XHP mine, (inaudible) tonne per day, CIP (inaudible) mill, and there's some resource. But it's not a 43-101 resource, and so we're now working on a 43-101 resource.

You say it has a mill too?

Yes. There's a new service, and a mill, and also 14-square kilometer mining permit. We've been drilling and we will do some mining there. And for the XHP and QS for this year, we expect to produce about 480,000 tonnes of material, rounding right around 40 grams silver, about 2 grams gold, and maybe 4, 5 for lead and zinc.

What did you say on lead and zinc?

Maybe 5% lead, zinc.

Oh, okay.

Unfortunately, there's no 43-101 resource number right now.

I know.

And so we're working on a 43-101 report.

And in the XVG, what kind of production have they had in the past before you took it over?

You know, they've been producing for one or two years. It's not big. (Inaudible) mill, right? And they've been producing oxy (inaudible) material with us. CIP, CIP, you know, right? It recovered (inaudible). They recovered all this oxidized gold.

Do they both have mills?

Yes, and now they are in sulfide zones. So, we are producing like roughly we bought last November. We're spending last couple months, trying to install air flotation circuit so we can recover silver, lead, gold concentrate and zinc concentrate.

Both of them has a mill? Each of them has a mill?

Yes, yes.

How big is each mill? I'm just curious.

The XHP is 500 tonnes a day. (Inaudible).

How much?

500 tonnes.

Okay.

And the other mill, it's 350 tonnes.

And that's all part of the purchase price?

Yes.

So, those two mills alone cover two-thirds of your purchase price.

Yes, hope so, hopefully.

Yes. Okay. Sounds like you're just doing the regular thing of plowing forward. Sounds good to me.

Thank you.

Thank you very much. (Operator Instructions). And allowing a few moments, I'm showing to additional questions in queue. Please continue.

Okay. 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 and the benefit of operating in low-cost, mining-friendly China. We look forward to reporting to you again when we release our fiscal first quarter results in August. Thank you and good-bye.

Thank you very much. And ladies and gentlemen, that does conclude your conference call for today. We do thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.