Fortuna Silver Mines Inc.
Q1 2015 Earnings Call Transcript

Published: 12 May 2015

[Operator:]

Greetings and welcome to the Fortuna Silver Mines' First Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Carlos Baca, Investor Relations Manager. You may begin.

[Carlos Baca:]

Thank you, Rob. Good morning, ladies and gentlemen. I would like to welcome you all to Fortuna Silver Mines and to our first quarter 2015 financial and operations results call. Jorge Alberto Ganoza, President and CEO; and Luis Dario Ganoza, CFO, will be hosting the call from Lima, Peru. Before I turn over the call to Jorge, I would like to indicate that this earnings call contains forward-looking information that is based on the company's current expectations, estimates and beliefs. This forward-looking information is subject to a number of risks, uncertainties and other factors. Actual results could differ materially from our conclusion, forecast or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing our conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were applied in drawing our conclusion or making a forecast or projection as reflected in the forward-looking information is contained in the company's annual information form, which is publicly available on SEDAR. I would now like to turn the call over to Jorge Ganoza, President, CEO and Co-Founder of Fortuna.

[Jorge A. Ganoza Durant:]

Thank you, Carlos. And good morning to all. Both our Caylloma and San Jose mines operated consistently within plan during the quarter. In Q1, the company produced 1.6 million ounces of silver and 9,700 ounces of gold, up 6% and 19% respectively, when compared to Q1, 2014. We're well within schedule to meet our guidance for the year of 6.5 million ounces of silver and 35,000 ounces of gold. The driver for the quarter-over-quarter production growth was the expansion of our San Jose Mine from 1,800 tonnes per day to 2,000 tonnes per day in April 2014. For the quarter, precious metals accounted for 84% of sales, silver representing 61% and gold 23%. The balance made of byproduct lead and zinc from the Caylloma Mine. At San Jose, we produced – we processed 178,000 tonnes at an average grade of 215 grams per tonne silver and 1.83 grams per tonne gold, resulting in 1.1 million ounces of silver and 9,300 ounces of gold. San Jose guidance is for 4.3 million ounces of silver for this year and 33,300 ounces of gold. At Caylloma, we processed 114,000 tonnes at an average grade of 171 grams per tonne silver, 3.3% zinc and 1.86% lead, resulting in 536,000 ounces of silver, 7.5 million pounds of zinc, 4 million pounds of lead. For 2015, we have guided 2.2 million ounces of silver at this mine, and we remain on target to meet guidance. We recorded lower operating costs at both our mines. At San Jose, we achieved $59.80, down from $66 in Q1 2014. At Caylloma, we achieved $84, down from $87.85 in the comparative quarter. Cost per tonne at both operations were below guidance for the year at $62 at San Jose and $92 at – $90 at Caylloma. At San Jose, the lower cost against guidance are explained by an 8% devaluation of the peso, partially offset by higher mining costs, basically break up, haulage and (0

[Luis Dario Ganoza Durant:]

Thank you, Jorge. For Q1 2015, we recorded sales of $39.8 million, down 13% from Q1, 2014 and net income of $3.9 million, a decrease of 20% compared to the same period last year. Main driver for lower income and the sales was a lower realized silver price, which fell 18% to $16.60 per ounce. This negative price effect was partially compensated by higher gold and base metals sold of 11% and 10% respectively, where silver sold was 1.62 million ounces, with no significant variation from Q1, 2014. Our mine operating earnings was $12.6 million, 27% below Q1, 2014 as a result of the lower sales. Gross margin, that is mine operating earnings over sales, came down from 38% to 32%, reflecting the impact of lower metal prices. This negative effect, however, was partially offset by lower unit costs year-over-year at both of our operating units. We recorded selling, general, and administrative expenses of $4.6 million, a decrease of $3.4 million compared to the prior year period. The decrease is explained by lower stock-based compensation charges, a reduction in corporate expenses of $0.8 million, and foreign exchange gain in the period. Operating income was $8 million, 14% below Q1 of 2014. And finally, net income was $3.8 million or $0.03 per share compared to $0.04 per share in Q1 of 2014. When comparing our financial results to the previous quarter, that is to Q4 of 2014, our sales were 5% higher, mine operating earnings was 25% higher and operating income was 180% higher, as a result of lower costs and expenses and higher metals sold. Moving down to the cash flow statement, cash flow from operations before changes in working capital and after taxes paid was $5.6 million, compared to $16.9 million in Q1 of 2014. The majority of that increase is related to timing issues in the payment of income taxes. And as a better comparison, EBITDA for Q1 2015 was $15.2 million, 16% below the $18 million generated in Q1 of 2014. Expenditures in mineral properties, plant and equipment was $6.1 million. As Jorge mentioned, we expect to see this figure rise over Q2 and Q3 as our two main projects for the year gain momentum. Moving on to the balance sheet, our total cash position, including short-term investments, as of the end of the quarter was $77 million, which remains at similar levels compared to year-end 2014. On our payables, we closed 2014 with $9.7 million of income tax payable related mostly to our Mexican operation. For this year moving forward, we anticipate we will see the opposite effect, as we start paying taxes. So we should expect that to see a tax credit building up in the balance sheet over the next couple of quarters. On April 1, we drew down $40 million in the term loan trench of our expanded bank credit facility. The $40 million is structured as a bullet loan with a four-year term. We have also proceeded to fix (0

[Carlos Baca:]

We would now like to turn the call over to any questions that you may have.

[Operator:]

Our first question comes from Chris Thompson with Raymond James. Please proceed with your question.

[Chris O. Thompson:]

Good morning, gentlemen. Thanks for taking my question. Couple of quick, quick questions here. The first one relates to the gold grade at San Jose, I noticed they're slightly higher than guidance. Do you see this as continuing and is this sustainable?

[Jorge A. Ganoza Durant:]

Hello, Chris. Grades, we expect to be – we – for the year, we expect to be within guidance. Yeah, we don't see a major variation, any changes, they're just (0

[Chris O. Thompson:]

Okay, great. And just obviously good cost for the quarter really on the back, I guess, of weakness in the peso and sol, I mean, if you do – if you move forward and assume that same sort of weakness or they stayed as quite as it is today, do you see your costs on an operating basis sort of indicative of what was delivered in Q1 for the remainder of the year?

[Luis Dario Ganoza Durant:]

Hi Chris. As you say, we assume the exchange rate we've seen in Q1, the answer will be yes. We would expect to be somewhat below our guidance. Otherwise we would expect to be very much close to what we've guided within 3% to 4% range.

[Chris O. Thompson:]

Okay, thanks. And as far as the CapEx allocation, I guess, for the build (0

[Luis Dario Ganoza Durant:]

We – yes, we expect over the next two quarters to see the bulk of the scheduled CapEx being expensed, let's call it $45 million to $40 million over the next two quarters.

[Chris O. Thompson:]

Correct. (0

[Jorge A. Ganoza Durant:]

Thank you.

[Operator:]

Our next question is from Craig Johnston with Scotiabank. Please proceed with your question.

[Craig Johnston:]

Hi guys, thanks for taking my call, good quarter. Just two questions, just relating to costs, both operations and I know, as (0

[Jorge A. Ganoza Durant:]

Yes. Well. We have been accelerating some on schedule (0

[Craig Johnston:]

Okay. Thanks. And then, just going to Caylloma, it looks like a great quarter from a cost per tonne perspective, kind of well exceeding or beating last year. Just thinking is that kind of primarily related to the depreciation in the currency, or is there more to it, and we can expect to see a cost per ton beat (0

[Jorge A. Ganoza Durant:]

I think, well, what we are seeing in Caylloma is a result in part of the optimization of the mine that's been taking place. We have taken away through that some flexibility in the mine, but, no, basically we're benefiting from some lower tariffs. We're shipping zinc concentrate out of the Matarani seaport. There is a positive change with respect to what we have been doing historically at this mine, where we've been trucking 1,000 kilometers all the way to (0

[Craig Johnston:]

Okay. Great. That's very helpful. And that's it from me. Thanks guys.

[Jorge A. Ganoza Durant:]

Thank you.

[Operator:]

Our next question is from Benjamin Asuncion with Haywood Securities. Please proceed with your question.

[Benjamin Asuncion:]

Good morning, guys. Just a quick question here for Luis. Just looking at the taxes, how should we look at taxes being paid going forward, so there was an accrual of just over $4 million for Q1, what's the timing on tax payments?

[Luis Dario Ganoza Durant:]

Yes. So, as I mentioned during the call, Ben, we – this year, we'll start paying tax installments. We've also paid around $8.7 million – sorry, actually more than that – $9.6 million in the first quarter, most of it related to fiscal 2014 in Mexico. So, where we should see – we should expect to see is payments above and beyond our incurred taxes in particular for the next two quarters. But all in all, towards year-end, we should accumulate a tax credit in the balance sheet of – in the range of $2 million to $3 million, right. Hope that gives you a good sense with respect to payments based on your – the assumptions you might have on incurred taxes, right.

[Benjamin Asuncion:]

Okay, okay. So they're not – just so I understand correctly, so on a quarterly basis we'll see some cash outflow on taxes being made relatively consistently as opposed to just sort of a big bullet payment, correct?

[Luis Dario Ganoza Durant:]

Yes, yes.

[Benjamin Asuncion:]

Okay. Perfect, that's it from me. Thanks, guys.

[Jorge A. Ganoza Durant:]

Thank You.

[Operator:]

Our next question is from Raghu Gordon, (0

[Operator:]

Hello. Thank you. I'm just calling to request you to comment on exploration activity near San Jose, Trinidad North specifically and all the surrounding areas. We were expecting kind of a press release in the last couple of months and there was nothing came and I was wondering when you would be commenting officially releasing a press release, statement something like that. Can you elaborate a little bit on that? Thank you.

[Jorge A. Ganoza Durant:]

Yes, thank you. We have a drilling budget of 12,000 meters basically allocated to San Jose this year. We have executed this first half of the year 4,800 meters – sorry – this first months of the year 4,800 meters, that's in eight drill holes. So we are waiting to conclude the program in the area of Trinidad North where we're currently working, before releasing. We're just a few holes short of concluding this first phase of the program. And with that, we will be publishing a release. This is drilling taking place on the northern most end of the Trinidad North discovery. We are also preparing to drill the north – the western vein system located some 2 kilometers away from the mine. Structurally, it looks like a mirror system to the Trinidad system, where we're currently mining. We have conducted all the necessary work to develop drill targets. We're working on getting land surface right to access (0

[Operator:]

Thank you. That's excellent. And one other quick question if you may. Recently, zinc and lead prices have strengthened, and it should bode well for Fortuna going forward being a byproduct. Can you comment your views on that? And it's really, I think, exciting times ahead for the company either way you look. Thank you.

[Jorge A. Ganoza Durant:]

Thank you for that. Yes, I mean lead and zinc combined quarterly (0

[Operator:]

There are no further questions at this time. At this point, I'd like to turn the call back over to management for any closing remarks.

[Carlos Baca:]

Thank you, Rob. If there are no further questions, I would like to thank everyone for listening to today's earnings call. We look forward to you joining us next week – next quarter, sorry.

[Operator:]

This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.