First Majestic Silver Corp.
Q2 2016 Earnings Call Transcript

Published: 23 Feb 2017

Operator:

Welcome to the First Majestic Silver’s Year-End 2016 Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Keith Neumeyer, President and CEO. Please go ahead.
Keith Neumeyer:

Welcome everyone to today’s conference call. Just to pre-warn you, I’m suffering from a little bit of sore throat and cough, so I might sound a little bit unusual that’s why and probably start coughing in the middle of this. I apologize ahead of time. I am in Europe currently, in Vancouver. Joining us we have Ray Polman, our CFO; we have Connie Lillico, our Corporate Secretary; we have Todd Anthony, our Vice President of Investor Relations; we also have Jill Arias, VP of Marketing, Andrew Poon, VP of Finance. I’m going to turn this over to Connie to start and then she will bring the call back to me.
Connie Lillico:

Thanks, Keith. Prior to us beginning today, I’ll read our disclaimer and forward-looking statement. Certain statements contained in this conference call regarding the company and its operations constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and Section 21E of the United States Securities Exchange Act of 1934 as amended. All statements that are not historical facts including without limitation, statements regarding the future estimates, plans, objectives, assumptions or expectations of future performance constitute forward-looking statements. We caution you that such forward-looking statements involve known and unknown risks and uncertainties that could cause actual results and future events to differ materially from those anticipated in such statements. Such risks and uncertainties include fluctuations in precious metal prices; unpredictable results of exploration activities; uncertainties inherent in the estimation of mineral reserves and resources; fluctuations in the cost of goods and services; problems associated with exploration and mining operations; changes in legal, social or political conditions in the jurisdictions where the company operates; lack of appropriate funding and other such risk factors as discussed in the company’s filings with the Canadian Securities regulatory agencies. Resources and production goals and forecasts may be based on data insufficient to support them. The company expressly disclaims any obligation to update any forward-looking statements. Back to you, Keith.
Keith Neumeyer:

Thanks Connie. I am assuming everyone that’s one the line has read this morning’s news release which outlined our financial results for the fourth quarter and the full year 2016. I’m not going to re-read it, but we will just cover a couple of highlights. Obviously, we had a record producing year, probably the fact that we had a couple of the mines actually produce less silver in 2016, but with the addition of our six mine in late 2015, it really added to our production for 2016 giving us a record year. I will go into that a little bit future in a couple of seconds, where all our sustaining cost came down quite nice at record revenues 278 million, good operating earnings of 49 million, and leaving the year with a record amount of cash in the bank of 129 million in the US dollars, but I think the most significant thing for me as the CEO of this company, the last five years have been pretty difficult and we have been trying to write the ship and lower our cost and 2016 really became a big turnaround year for us, where a lot of the things that we are doing over the last two years really started to pay out big time. It is really showing up in the results. Silver price is aren’t what they used to be, you know it is $17, $18 silver it is not that exciting, but we have really been able to bring our cost down substantially to really make substantial profits at current metal prices and what that’s allowing us to do is start to reinvest capital into our operations. And despite the fact that 2017 production will be very similar to 2016 production we are going to start to see some pretty interesting growth in our business again in 2018, 2019 and 2020. I think that’s really, why investors and shareholders should really be focused on because we are going into a new stage of growth. It is very similar to what we have experienced back before the crash occurred in metal prices. So it is getting exciting again and that’s really the highlights of the financials for 2016 and I open the call up to questions.
Operator:

We will now begin the question and answer session. [Operator Instructions] Our first question comes from Graeme Jennings of Cormark Securities. You may go ahead.
Graeme Jennings:

Hi guys congrats again on the solid year last year after difficult previous years, just got a couple of questions here on La Parrilla and La Encantada and then on the overall growth plan here, just looking like La Parrilla and La Guitarra both have seen costs are rising throughout the year, you know this is obviously coordinated with a slight decline in grades, La Parrilla also seems zinc down, I am just wondering what we should expect going forward from these mines?
Keith Neumeyer:

As I have said to you directly, Graeme in our various conversations and meetings and as I have been saying to other investors and shareholders is that 2016 we started to see an increase investment and the lack of production at that La Encantata and La Parrilla are directly related to the last investments over the last five years. So we’ve really had 2013, 2014, and 2015 as years where we were reducing our spend quite dramatically and than that started to affect our production, which we’ve highlighted in several of our public announcements over the last 12 to 18 months. We are expecting to see that reverse, but there is a delay. When we started to reinvest capital in Q3 and Q4 2016, depending on the mines because each mine is different, but there is about a 12 to 18 month delay from the time that you start to increase investments to the time that you get to actually see a benefit of that. So, we are projecting a relatively flat line growth in 2017. We may see some things happened, which might happen that positively, but we know we are projecting just flat line. We are with the increases coming in 2018.
Graeme Jennings:

What about zinc specifically for La Parrilla?
Keith Neumeyer:

The zinc was related to an area called [indiscernible] and that was a very high grade because zinc ore body, which we depleted over the last few years, but we have really not done anything and we have exploring looking for new zinc resources and that’s all now starting to happen. And as you know La Parrilla is a very, very large package, it is almost 70,000 hectors in size and it is very, very under explored. And we over the last few years, the exploration dollars have been very focused on just maintaining current resources and reserves and trying to maintain production as best as we can and now that we are starting to increase in investment and exploration, I think the number is about 29 million, I actually know it is 29 million for 2017 compared to about 18 million for 2016. That is a big increase. So that we feel is going to start to add out as to our resources over time and then we will see it, we can get the zinc production out, time will tell.
Graeme Jennings:

And La Parrilla, whatever happened to that railway systems or the underground hub and spoke, you were working on for a while and I know got shelled during the training time between of 2015, is that back on table or is still more a development CapEx right now?
Keith Neumeyer:

No, it is definitely back on the table. The whole hoist and winch apparatus was just shift aside, it was sitting in the United States for the last couple of years and you know spend the money to get that down to side that was paid for previously, but it was just never shipped. So that whole shaft will be built over the next while and the underground system we are about, I think we are about 2.5 km into about a 5 km development program. So over the last two years virtually nothing has really happened irrespective of that underground rail system, but now that’s all going to start to happen again and we are starting to invest in that currently.
Graeme Jennings:

And final question just on Del Toro, I noticed for Del Toro your CapEx for this year is one of the few mines that’s actually not seeing an increase and I know that it’s had some underground working as challenges and requires some more development, I am just wondering if you guys are taking a step back in just doing more exploration drilling there or what?
Keith Neumeyer:

Let me pass that on to Ray.
Ray Polman:

I think what we are experiencing with respect to Del Toro is not a slow down, just a delay in some of the exploration and development activities there. Our number of factors outside of control permitting or access issues have just prevented us from getting in there faster, we do plan on investing in expending in Del Toro and we have expanded the land package now significantly as well. So, I think that that will continue to be focused going forward.
Graeme Jennings:

Great, all right. Thanks, looking forward to it.
Keith Neumeyer:

Thanks Graeme.
Operator:

Our next…
Keith Neumeyer:

Just one other comment regarding what just Ray said about the expansion of land package, if you look in the financial statements we added about 5000 hectors of land to the Del Toro land package in the last couple of quarters.
Operator:

Our next question comes from Matthew O'Keefe of Echelon. You may go ahead.
Matthew O'Keefe:

Thanks operator. Good afternoon, congrats on a great quarter. It is nice to have some cash in the conference, I am sure, just a couple of quick questions really focused on the expansion, maybe you would it be possible to give a little more detail on kind of the timing in news flow of what we're going to see from the development plans at La Encantada and also on a potential growth project there in La Plomosas, so I'm kind of curious as to the timing of news flow on those two items particularly?
Keith Neumeyer:

In La Encantada the short term story is really the roaster, that roaster is going to add about 1.5 million ounces of production annually. We are optimistic we will have it completed by the end of the year, maybe it will be completed sooner, but we will just see the roster, it is a fairly large, it is a very large roster, one of the largest in México and is currently being manufactured, we have people monitoring the manufacturing process and it appears to be well on its way to be delivered on time and they their ground work at the mine site is now commencing, preparing the area for the delivery of all the components of this roster and so pretty excited about that, because it is going to significantly add to the profitability of the La Encantada. As well as the term it really comes down to very similar story as all in the mines. Although La Encantada has suffered from a lack of investment in development and as you know, La Encantada is made up of a system of several mantoes [ph] dollars and they are difficult to drill for, but they are normally discovered through underground development and that sort of even the SaaS of the La Encantada for the last few decades. We have had a huge amount of success, but without that developmental actually occurring it is rarely suffered from lack of great. So all that we are expecting will reverse over the next couple of years, we've got that occurring at the same time you have got a roster system coming online. So, we are optimistic among La Encantada works a lot better on the years to come.
Matthew O'Keefe:

Okay, great. And on the more distant, well not that distant future, but La Plomosas there is some work plan this year, is that correct and some significant work?
Keith Neumeyer:

Yes, more than just some work. You are right. Significant I think is the key word there and we have got above 40,000 meters of drilling and about kilometer of underground development that you're going to join some of the underground workings that we’ve completed four holes so far, that was done and it is pretty well in Q4, and that’s all, we recommencing as we speak and then we are optimistic that’s going to turn out to be quite interesting looking asset. We don't have any essays yet, but just based on what we are seeing we're liking, or what we're seeing from a very early and on the exploration development program, but we're going to try to come out with a brand new 43 101 for that part of the Plomosas project in early 2018 and then we are anticipating that it will become our next mine in Mexico. So we got other ways to go before we can actually say that, obviously we have to come out with the resources and come out with an economic study, but based on what we know of the asset, you know it is a big land package 10,000 hectors, yes and old producing mine, all the permits are in place from the old group of Mexico days, the campus sitting there and carry maintenance, we have got a family living there since we were acquired it. Two years ago the power lines is in good shape and the explosive permit still ground [indiscernible] previously the water usage permit is still in place, so there is a lot of really good things about this asset that is going to make it easily brought into production, but obviously we have to develop a substantial amount of resources we have to justify investments and that is what we are currently trying to do.
Matthew O'Keefe:

Great. And I appreciate that. That’s it from me. Thanks, looking forward to a good year.
Keith Neumeyer:

Thanks.
Operator:

Our next question comes from Chris Thompson with Raymond James. You may go ahead. Chris your line is open you may go ahead.
Chris Thompson:

Apologies, I was on mute there. Thanks for taking my questions, two real questions here, the first is the expansion plans at La Guitarra, can you give me a bit more detail on what you see there?
Keith Neumeyer:

Sure. The increase in investments in exploration developments is really the key to the future of La Guitarra, you know we were pretty optimistic of the potential of the additional ounces being discovered or being added to the 43-101 complied ounces, but we only do have to prove up sufficient ounces to justify the construction of a brand new mill there. And as we have been talking about for the last couple of years it was part of our budget going back as far as 2012, 2013 when we first added this asset to our portfolio, but due to the environment of what occurred during the fall in metal prices in 2012 and beyond that investment was cut off. So now we are getting back to that. We are in the early stages of engineering, a new mill and we are in the process of relocating the future tailings of - which will be part of the new process, so there is a number of steps we have to take over the next several months before we can actually put out guidance on exactly time lines, but it is a high priority project of ours. It is a low hanging fruit. Yes, it is our smallest mine. It is producing a silver gold concentrate which we want to convert over to doré bars, which we think is possible and so on. So, there is lots of good stuff happening there, but it is just a matter of time it is going to take time and energy to come out with a new 43-101 and the economic assessment which would justify how the expense of building a new mill.
Chris Thompson:

Okay. Thanks for that Keith. Just quickly, moving on the Santa Elena, I mean great to see good production, good operational performance there, for that mine last year, can you give us a sense of the sort of split we are looking at by way of the underground ore and the reprises sort of tailings, what sort of percentage split than how can we look at and what sort of mill rate are we looking at, what should we be modeling I guess for that asset this year?
Keith Neumeyer:

Well I will pass the details on to Ray, but we have been working on - and it’s not tailings by the way it is the old heap left behind by the previous open TED operation that we have been reprocessing blending that with higher grade mine ores. When we acquired the asset it was about 50/50 split and we have been slowly adjusting that, I think the last quarter is probably closer to 60/40. But I will pass this over to Ray for further details.
Ray Polman:

Sure, thanks Keith. The models that we are looking at right now and our projections going forward are for a total tonnage of 2,550 which we see 1,750 from underground and remainder of a 1,000 coming from the [indiscernible].
Chris Thompson:

Alright. That’s great. Okay, guys thank you very much.
Ray Polman:

You are most welcome.
Keith Neumeyer:

Thanks Chris.
Operator:

[Operator Instructions] Our next question comes from Andy Shilpeck [ph] a Private Investor. You may go ahead.
Unidentified Analyst:

Thank you. Hi Keith. I have a question for you and then one for a Ray if I can. I would like to just ask you a more general question about the impact, if any on the availability of trading on the Shanghai market for - whether or not you are seeing any impact on the overall silver market and how it is being priced?
Keith Neumeyer:

Andy, hi. I know there is a premium in Shanghai compared to CallMaX and that’s probably due to the fact that that it is a smaller market and most of the consumption of silver takes place in Asia for electronics and so on. There is a premium being paid in Asia, but we don’t have any Asian traders. All our traders are based in the United States. So, we do all our trading through Washington and Canada. We do all our trading through primarily US traders. So they have, and it is a physical market. They don't trade at least for the most part as far as I know, they don't trade on the CallMaX they are trading physical metal to actual real buyers, likes to be electronics manufacturing business, the window manufacturing business, circuit board manufacturers, and so on. So they are buying our silver directly from us and they have got buyers on the other side where they are actually delivering the metal too.
Unidentified Analyst:

So there is no real expectation that you would change in any manner the way you have been doing business, as a result of the availability of the Shanghai exchanges?
Keith Neumeyer:

I don't think so. The problem you have is transport ability. You know silver is a very bulky asset and this is likely why there is a premium because if we were to ship our silver to Asia and we had to absorb that cost. We would lose that premium right there because it is just as simple cost of shipping and we don't want to do that. Our buyers of our metal pay for the cost of the transportation of our metal right from the point that it is refined. So they are instructing the refiners where to send the metal and it is going to the end user. Our responsibility is to refine it to 999 silver and that’s it. We don't have to worry about transporting it to Intel or someone like that. So, we don't want to take on the responsibility of transporting our silver to a Asia because there will just be one more complication in our business while I just don't think it is necessary.
Unidentified Analyst:

Sure I understand, but just to be clear there is also a Shanghai futures exchange, as well as that physical market, but I don't think it really matters in terms of what you’ve, how you've replied. Ray, I would like to ask a question about the cash flow outlook given the current situation in the market and given the fact that you did achieve operating cash flows of over 107 million, whether you would anticipate any material change in the prospects for cash flow in the current year based on your current assumptions?
Ray Polman:

Yes that’s an interesting question. Obviously, we are extremely sensitive to the price of silver going forward and that’s the biggest determinant of our cash flow. We have marginal increases obviously in our production, which should help us with our cash flows on the cost side, I don't see the costs increasing at all in our assumptions. So, all in all I would say that there would be marginal increases in cash flow, but a lot of that cash flow again is dedicated towards projects, so we have to expand production in 2018 beyond what our expectations are for 2017. So, from operations yes there will be an increase, but it will be reinvested as well.
Unidentified Analyst:

Thank you. That's it from me.
Ray Polman:

You're welcome.
Keith Neumeyer:

Thanks Andy [ph].
Operator:

Our next question comes from Jim Young of West Family Investments. You may go ahead.
Jim Young:

Hi. Couple of questions, the all in sustaining cost that you brought down 20% was pretty impressive down to 10.79 and curious as to what accounts for such a dramatic decline and what is the outlook into 2017, are there further opportunities to bring those cost lower? Thank you.
Keith Neumeyer:

Yes I could jump in on that. The last four years, we have been automating the business quite a lot and it’s really started to affect the business quite nicely over the last two quarters. There has been several layoffs, as well as in the business. So if you go back to 2012, we had over 5000 employees in the business and today we have just over 3900. We are also producing more metal as well that less people on. So there is lot of severance payments going out over the last few years because every quarter there was substantial layoffs in 2012 to the end of 2015. 2016 was really the first year where the layoffs really slowed down to almost zero. And when combined that with no severance going out the door, increased automation and use of technology and also the Mexican peso, you know all of these combined assisted us in bringing metal and sustaining cost down to where it is today. Looking forward, I have mentioned periodically, while more than periodically, I have mentioned on a regular basis the fact that we’re starting to reinvest capital to some of that exploration and development investment we will show up in your sustaining costs. We will be doing other things to try to mitigate that by including other technologies and automation and so on. And that program still continues. So, we have put on our guidance for 2017. Todd, do you have those numbers in front of you?
Todd Anthony:

The guidance?
Keith Neumeyer:

The guidance, yes the guidance for 2017.
Todd Anthony:

According to the World Gold Council definition we are at $11.96 to $12.88 per ounce.
Keith Neumeyer:

Which is slightly higher than what it was last year and that is as a result of using flat silver prices, flat gold prices, as well as increased investment in exploration development.
Jim Young:

Okay thank you then. Secondly, regarding the new mill at La Guitarra can you talk and share with us approximately what size of a mill are you looking to design and build, approximately how much is this expected to cost and what is the overall timing, when do you think you would actually start construction, when do you think it will be completed?
Keith Neumeyer:

Well we have been talking about it for a couple of years now and I don't really want to get into too many specifics because we are still a year away from putting out a preliminary economic assessment, which is going to cover all those things, but back of the envelope stuff without committing to anything and I don't want to be a held to any of these numbers because it is, we need to do a proper work to get to that, but a 1000 tons Bay which would be about twice of the current throughput would likely cost in the $15 million range, but then there is a bunch of other costs that also could be a associated with that like additional land purchases and other costs, which could add to that number. So, as I said it’s premature to really throw out an exact number, but once we know the number of course we will put it out.
Jim Young:

And I couldn't hear that number, what does that again approximately.
Keith Neumeyer:

Well a thousand ton a day, it is not an Asian plant, I mean this is ex-land purchases. This is just the construction of a basic mill, you're looking at about $15 million investment, but …
Jim Young:

15?
Keith Neumeyer:

That's right. Then on top of that you have got other things that could add to that cost as well. So once we know all of those items of course we will put those that information out to the public.
Jim Young:

And any update on when the timing, when do you think you would actually start construction and how long will it take to construct the mill?
Keith Neumeyer:

Well to construct something like that it would normally take about 12 months, and I don’t want to be putting exact construction time lines. We have said a number of times that we are looking at getting the PA out in early 2018 and assuming the PA points to the proper economics which justifies the investment. Then we will break ground in all most immediately and then you will have it up and running likely a year later, but as I said we need to get the numbers, I think we need to justify the investment.
Jim Young:

Right. And then the last question is, with respect to possible consolidation in the industry to just kind of where we are in the cycle for the silver mining industry, are you seeing many opportunities for consolidation of companies or are you seeing many opportunities to buy standalone silver mines. That could be an either early stage production or last minute production, just kind of giving offenses to what the overall flavor looks like in this current environment.
Keith Neumeyer:

I think we have proven as a management team as we probably like for the most aggressive company in the space and we’ve built this business by buying other companies. We bought four of the publically companies and the rest of the assets have been bought from private Mexican families or companies. So, we are - though it is a pretty interesting portfolio well I think one of the best deals silver port folios there is in the world. So, I am proud of the asset base, we have got two development projects Plomosas and La Luz, which are currently in our portfolio, which we expect both will be managed in the future. So, without any acquisition we’ve got I think substantial growth ahead of us. But we have always got our eyes open, I can’t say anything more than that. We know the space well and if an opportunity comes to us, of course we will jump on as we have in the past.
Jim Young:

Right. I recon it is how the [indiscernible] I have kind of vow with the acquisitions and the like, but my question really is more to the given, to the current environment, are you seeing an increase in potential deal flow either with companies or with specific mines or are there a group of opportunities in the market at this time.
Keith Neumeyer:

It not really changes much Jim. We were looking at projects on a regular basis. We – while it was a year ago, two years ago, five years ago, ten years ago compared to today to – we are looking at a handful of projects. We have team of people that go around and visit assets and most of them don’t amount to very much, but we overall was keeping our eyes open. You know in the case of Del Toro , I just said previously about 10 or 15 minutes ago when Graeme Jennings threw a couple of questions at me, we had a 5000 hectors of land around De; Toro. Just also last quarter, we added about 4,000 hectors around the Santa Elena project over the Santa Elena mine. We are always looking at adding property. So just because we don’t [indiscernible] it because you can look into the financial statements and see the variety of acquisitions that we are doing, we are always looking to bolt-on land packages to our existing mines and we will continue to always do that.
Jim Young:

Okay, great. Thank you very much.
Keith Neumeyer:

Thanks.
Operator:

[Operator Instructions]
Keith Neumeyer:

It looks like it is about it. So appreciate everyone dialing in today and look forward to seeing you in the upcoming conferences. Thanks very much for your time.
Operator:

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

First Majestic Silver Corp. Q2 2016 Earnings Call Transcript

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