Great Panther Mining Limited
Q1 2017 Earnings Call Transcript

Published: 4 May 2017

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Great Panther Silver Limited First Quarter 2017 Financial Results 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 Spiros Cacos, Director of Investor Relations.

[Spiros Cacos:]

Thank you, Vicky. Good morning everyone, and thank you for taking the time to join our call today. With me here this morning are Robert Archer, President and CEO; and Jim Zadra, Chief Financial Officer. Before we begin, I would like to mention that some of the commentary on today's call may contain forward statements. You should be cautioned that actual results and future events could differ from those noted in today's presentation. The commentary also makes reference to various non-IFRS measures, definitions, and reconciliations, which are included in the company's MD&A for the year-end ended March 31st, 2017. I would like to remind everyone that this conference call is being recorded and will be available for replay after 10

[Bob Archer:]

Thank you, Spiros. Good morning everyone. As always, I would like start this morning's conference call with our first quarter highlights, and then provide an overview of our operational and financial results, discuss our outlook for 2017, and conclude with a Q&A session. Before we start, I'd like to remind everyone that all dollar amounts expressed in this presentation and the associated financial statements in MD&A are in U.S. dollars unless otherwise noted. We reported a significant increase in net income and lowered our cash cost in the first quarter. As most of you will recall, we suspended milling operations at our Topia Mine in early December 2016 in order to complete plant upgrades and prepare for the transition to a new dry-stack tailings storage facility. This shutdown continued throughout the entire first quarter. Although mining at Topia continued through the shutdown with ore being stockpiled, the lack of processing had the expected impact on our overall metal production resulting in a 28% decrease compared to the first quarter of 2016. During the same period, the mines were undergoing optimization program to improve grade control through more selected mining with the result being that the grade of the stockpiled ore is higher than that mined previously. The stockpiles will be processed once the plant returns to full production. In the first quarter, our cash cost dropped 16% to $3.54 per payable silver ounce. Understandably, our overall -- our all-in sustaining cost or AISC was significantly impacted by the increase in capital expenditures at Topia and increased to $19.55 per payable sliver ounce as a result. The Topia project accounted for approximately $4 per payable silver ounce. And the impact of fewer production payable ounces compounded the effect. However, AISC should start to decrease again in the second quarter such that we expect to meet our guidance of $14-$16 for 2017. Revenue, adjusted EBITDA and operating cash flow also decreases over the prior year, primarily due to the reduction in metal production as a result of the suspension of processing at Topia, but these decreases were mitigated somewhat by the positive impact of higher metal prices. Despite the decrease in metal production, we recorded net income of $3 million for the quarter and as of March 31, we held $53.2 million in cash and short-term deposits, $69.3 million in net working capital and no long-term debt. Turning now to our operations; metal production from the Guanajuato Mine Complex or the GMC, was approximately 727,000 silver equivalent ounces, representing a 4% decrease over the previous year, due to slightly lower grades and recoveries. Cash cost for the GMC increased to $2.48 per payable silver ounce in the first quarter, mainly due to a strengthening in the Mexican Peso and lower grades. AISC increased to $7.59 per payable silver ounce, reflecting the increase in cash cost, and an increase in our investment in exploration and development expenditures at the GMC. At our Topia mine in Durango, the suspension of milling operations continued through the first quarter with the plant upgrades and the installation of the tailings handling equipment have now been completed with the project staying under budget. Commissioning of the plant is presently underway with temporary use of the old Phase 1 tailings storage facility. We were expecting to receive a permit for the use of the Phase 2 tailings storage facility by the end of April, but there is still one requirement outstanding. If this issue is not resolved by the time the commissioning period ends in a few weeks, it is possible that the operations may have to be shutdown until the final permit is received. Should the operations be able to continue uninterrupted, it's our plan to process all the stockpiled ores through the balance of 2017. On December 19, we signed an agreement with Near Star to acquire 100% interest in the Coricancha Mine Complex, approximately 90 kilometers east of Lima, Peru. Coricancha comprises a polymetallic mine and operational 600 ton per day processing plant, and supporting mining infrastructure. It's fully permitted, but has been on care and maintenance since 2013. This is a high grade, narrow vein underground mine that fits very well with our existing operations in Mexico, and we believe that we have the expertise and the discipline to successfully bring it back into production. We now expect the acquisition to be finalized by late June due to some administrative delays in the closing process. Nonetheless, we have initiated a program to update the resource estimate for the mine, and this should be completed by the third quarter. Other financial due diligence is continuing as our plans for advancing the project. Upon closing the transaction and taking possession, we will disclose those plans and commence detailed work in preparation for a pre-feasibility study, including underground drilling. At present, our preliminary estimates suggest that it could cost approximately $25 million over 18 months to bring the mine back into production, and we are fully financed to achieve this. Based upon historical records, we believe the mine has a potential for approximately 3 million silver equivalent ounces of production annually, which would boost our consolidated metal production by about 75%. Turning now to our first quarter consolidated financial results, revenues for the first quarter decreased 13% to 12.4 million, due primarily to the 20% decrease in metal sales, the result of the reduction in metal production attributed to the voluntary suspension of milling at the Topia mine. This was only partially offset by the $0.8 million positive impact of improved metal prices. Despite the suspension of processing at Topia, and resulting decrease in revenue, we generated healthy mine operating earnings before non-cash items of $5.5 million, albeit down 8% from the first quarter of 2016. Adjusted EBITDA came in at $0.7 million, but also was down compared to Q1 of last year as a result of the lower production and revenues. We're particularly pleased that we're able to deliver net income of $3 million, or $0.02 per share for the first quarter. This is a function of maintaining good mine operating earnings, which was also helped in a large increase in finance and other income, which was mainly the result of gains on foreign exchange forward contracts. Cash and short-term deposits decreased by $3.5 million in the quarter to 53.2 million. This was mainly due to the increase in inventory as we stockpiled ore at Topia and the higher levels of capital investment associated with the Topia project. Our balance sheet remains strong with networking capital of $69.3 million, and no debt. This keeps us at an enviable position to pursue additional acquisition opportunities as part of our growth strategy. For that reason, we recently appointed Samuel Mah to the new position of Vice President of Corporate Development, Sam has more than 20 years experience in the mining industry and was most recently employed at Silver Wheaton Corp as Senior Director of Project Evaluations, Sam is a great addition to the team and I'm confident that he'll make a significant contribution to successfully grow Great Panther into a leading mid-tier silver producer. To that end, as many of you know last month I announced that I will be stepping down as President and CEO and will help the company transition to new leadership that will be focused on executing our growth strategy and take the company to a new level. With our current operations at full capacity, any significant growth will require bringing Coricancha into production and completing additional acquisitions. Therefore, I believe that this is the right time for the company to bring in someone who will have an ownership in the development and execution of our growth strategy, I will be staying on the board once the new CEO has been appointed to support an effective transition and help guide Great Panther's exciting future. As one of Great Panther's largest individual non-institutional investors, I have a strong vested interest in the continued success of the company. In summary, Great Panther delivered a significant increase in net income and a decrease in cash costs for the quarter despite the plan suspension of operations at our Topia plant. Assuming we can resolve the permitting issue at Topia, we still expect to achieve our guidance of 4 to 4.1 million silver equivalent ounces for the year. If this changes however, we will disclose any revisions as soon as possible. Cash cost is expected to increase slightly due to the resumption of milling operations at Topia which is historically operated at a higher cash cost for the GMC. Consequently cash cost is anticipated to be in the range of $5 to $6 per payable silver ounce for the full year. Our AISC is projected to be $14 to $16 per payable silver ounce reflecting the capital expenditures on the new tailings facility in Topia. We look forward to advancing the Coricancha Mine project as the first step in establishing a foundation in Peru and to rolling out a new acquisitive phase of Great Panther's growth strategy. I will now open the call for questions.

[Operator:]

[Operator Instructions] We'll go first Heiko Ihle with Rodman.

[Heiko Ihle:]

Hey. Hello, good morning, guys.

[Bob Archer:]

Hi, Heiko.

[Heiko Ihle:]

I will tackle the elephant in the room first off, tell me, Bob [indiscernible] any wrong, but can you just give us some additional details as to the timing of this?

[Bob Archer:]

Yes. It's largely strategic Heiko. I mean. you are correct that's big part you want to see the Coricancha go through the production and successful and still intend to be very involved in helping to make that happen and when we talked about it with the board. We talked about that possibility everything on for, few more years recognizing that step down at some point but we just talk rather than bring someone, someone new in midstream with this new phase in our growth strategy it's kind of made more sense to bringing in someone now more at the ground level and help them, let them develop help to develop the strategy from the ground up such that's they would have the more of a sense of ownership in that and then drive it forward. So, I still planned to be very active, very involved particularly in trying to get things going in Peru so, it was really just strategic decision on planning.

[Heiko Ihle:]

Great, thanks. Can you get a timing commissioning of obvious only two weeks away can you just give some indicators of things that still need to get done and how much of ramp up rather than looking to such, you think this will be and lastly can you give you some more details on the similar not issue can you just give an estimate of this actually based on private place? Thank you.

[Bob Archer:]

Yes, your first and third question are pretty much related the second one is the easiest answer and as much as the commissioning to full production is almost slipping the switch right now we're running at about 60% to 70% dries anyways and commissioning is going well. So it would just be sort of final transition to full dry stack at full operations so they are running at little over 200 tons per day right now so, that's it's a fairly easy transition. With regards to the timing of that, and the SEMARNAT issue; the outstanding issue is really a document that is required from the Hito from whom we rent the land that the tailings dam sits on. And we had an agreement with him since even before we started production that the existing agreement expected to 2003 before we really even in there and it just gets updated every five years. However, SEMARNAT has asked that we get an update on that agreement from them. From the Hito that is essentially just being a little bit more explicit in the recognition of the change in use of soils, which is actually newer legislation coming in 2005. So it should just be a formality, the challenges that the Hito is now trying to use that requirement as leverage against us to negotiate on a few points, and so, that's really what it is. So, I mean, we are continuing discussions and meetings and such and trying to resolve that issue, so we can get that final piece of paper, which is really just an update of an agreement that already exist. So it's -- ironically it's not even an environmental issue, it's more just -- more like an administrative one, but anyway it sits with El Hito and not actually with SEMARNAT itself.

[Heiko Ihle:]

Assuming you come to an agreement, they don't make any money off the land whatsoever, right, the contract doesn't keep going even in the non-producing state right?

[Bob Archer:]

Exactly. If we have to shutdown even temporarily, that would impact any funds that go back to them.

[Heiko Ihle:]

Excellent, thank you guys so much.

[Bob Archer:]

Thanks, Heiko.

[Operator:]

[Operator Instructions] And we will go next to Rob Chang with Cantor Fitzgerald.

[Rob Chang:]

Good morning, guys. Thanks for taking my questions. First one just -- hello; leveraging off of Heiko's question as well, what's the progress with respect to finding the successor.

[Bob Archer:]

Well, there is -- a committee has been set-up on our Board, and they have commissioned a -- head answer recruiting firm to look for successor. And so, they have started that process, they're reaching out to some individuals and accepting applications from others. So they are basically just in the early stages of all of that. It will take some time to identify the number of people, and then they will go through their process, create a shortlist, and then bring back to us, I guess. So it's really just in the early stages, but I mean I haven't personally gone through this process before, but from what I'm told from this guys, the CEO search typically takes anywhere from three to six months, or maybe longer. So I'm not rushing out the door, its business as usual here until some progress is made.

[Rob Chang:]

All right. Okay. Thanks with that. Now I will keep an eye on that, and with respect to Topia, if the decision is made to at least temporarily not going forward because the negotiations don't work out well. What kind of costs will we be expecting for you to incur, if that decision had to make?

[Bob Archer:]

Yes, it's a good question. It's a little bit up in the air right now actually to because depending on a sort of timeframe. We think, we might be dealing with that will dictate whether it's just a temporary thing we might continue to pay people for just for a week or a couple of weeks. If we think that they could dry out for a period of time. We may have to look at some severance packages and then potentially hiring people back. So there are a lot of different factors that play here and so it's really difficult to put up, to put a number on that right now we are up.

[Rob Chang:]

Okay, great. Well, thank you then.

[Bob Archer:]

Okay.

[Operator:]

We will go next to Bhakti Pavani with Euro Pacific Capital.

[Bhakti Pavani:]

Good morning guys.

[Bob Archer:]

Good morning, Bhakti.

[Bhakti Pavani:]

I had a follow-up question Topia as well. The MD&A just adjust or they talk about an audit program by Profepa or could you maybe provide some additional color on what that audit is regarding and how long that would take and while the audit is on, is that in anyway going to impact production or milling operations at Topia at all?

[Bob Archer:]

Yes, definitely. Yes, one of these things that as people see they would audit and they automatically assume it's negative. But in this particular case, it's actually -- this is actually a positive thing. We have a very good relationship with Profepa and we have this program in place already at Guanajuato. And what it does is because it's a voluntary program that they sign off on and rather than submitting annual documents and updates and so on and waiting for them to review and maybe give you a surprise visit and take a look at things. The voluntary program means that we go through a process whereby the company identifies things that we feel and need to be done and then we submit that to Profepa and they would conduct a discussion with us, walk through everything ultimately they sign off or suggest things that we should do and so it's a very cooperative program and so in order to start this so you know, you need a baseline and that's what the initial audit is about. So that will be kicking that off fairly soon and just walking through that project and trying to determine what things might need to be done. And then, we will start about to get those things accomplished. So this is a positive thing and but its ongoing once you start that process, it's just continues. So it's not something whether it's -- any necessarily deadlines or anything like that.

[Bhakti Pavani:]

Well, thank you. That's great color. One more question on - so how many tons of ore has been stock while we have at Topia today and could you maybe provide some color on what kind of grades are we looking at?

[Bob Archer:]

Just checking on the number of tons we have in total. In terms of grades, a little bit variable we are stock piling from the individual mines and you recall it there are nine different mines at Topia and part of the commissioning process is that we are looking at the pros and cons of attaching the mine separately versus blending different types of war and so degrade some individual mines very significantly from say, 400 grams to over a kilo in some places. So the blended grade through the commissioning process has been more than 400 grams per ton and compared to about 350 or so what we were producing before. So the grade so far is higher recovers with expect recovers to be better and the tonnage estimate right now we think is in that 8000 to 9000 tons range.

[Bhakti Pavani:]

So just a follow-up to Rob's question; in case, things don't move forward as you plan and the operations would be - would shutdown in Topia. Would you continue mining at Topia at all and if you do how much capacity do you have to stockpile the ore?

[Bob Archer:]

Yes, whether we continue mining or not, a lot of it depends on the sort of timeframe that we think might be up against, and again, if it's a short-term thing maybe couple of weeks or something of that nature, then we probably would just keep mind, but if for any reason we think that it might be longer, then there maybe a shutdown mining. And that would be more as a cost saving measure than anything else. There's sufficient capacity to continue to stockpile, so that in itself isn't the limiting factor.

[Bhakti Pavani:]

Okay, perfect. With regards to GMC, there also has been an inspection going on by CONAGUA. Could you maybe provide some additional color as to when do you anticipate that inspection to be done?

[Bob Archer:]

Unfortunately I can't. These guys are very difficult to predict. And there's a lot of back and forth, our dealings with CONAGUA have been going on for years, and they often -- they got a history of changing their minds, and so on. So, we're just continuing to work with them. In the meantime, it's just business as usual, and there are no issues that I am aware of, it's just a process.

[Bhakti Pavani:]

Oh, okay. Is there any kind of costs associated with that? Or do or do you anticipate any kind of costs like base ore [ph] cost going forward?

[Bob Archer:]

No, it's -- right now, if any cost that will be negligible it's just the time, and we're not anticipating any major cost going forward.

[Bhakti Pavani:]

Okay, perfect. With regards to capital expenditure, the 2017 guidance range include $6.3 million to $7.3 million. Assuming that most of -- majority of the expense at Topia tailings facility has been completed. Just was curious to know how the remaining capital expenditure is going to look like towards the quarters, and could you maybe talk about the major item lines that would consume most of the cost?

[Bob Archer:]

I will let Jim answer that one, Bhakti.

[Jim Zadra:]

Sure. Well, Bhakti, if you look at our guidance table, we provide the Q1 capital expenditures and development expenditures right beside the guidance. So, you can essentially take the difference and see what's remaining for the rest of the year. And you can see that a good part of the capital expenditures have been expended in the first quarter. Where we'll see maybe a bigger ramp up is in the exploration and development.

[Bhakti Pavani:]

Okay. And how does the spend look like through the quarters, is it going to be like evenly distributed through the quarters or…

[Jim Zadra:]

Again, it's really hard; capital expenditures by their nature are lumpy. So, you can get a large expenditure that falls on one side of the quarter or another side of the quarter. At this point, we don't have any expectation of a significant amount falling in one quarter versus another. So I guess, it's reasonable that you can assume that all falls fairly evenly. I would expect our capital expenditures to be in the lower-end of the range of our guidance, or even -- well let's say, at the lower-end of the range of our guidance, because the Topia tailings dam project has come in fairly well under budget. And then, to your question, I think, yes, it's a reasonable assumption to see the expenditures fall evenly in the quarters, but again, we could have an item that falls on one side of the quarter versus another or delays in capital expenditures that will end up making the picture a little different.

[Bhakti Pavani:]

Okay, thanks for the color. That's it from my side.

[Bob Archer:]

Next question?

[Operator:]

[Operator Instruction] Mr. Archer, there appears that we do not have any more questions at this time.

[Bob Archer:]

Great. Thank you, Operator. In closing then I'd like to once again thank our employees, contractors, stakeholders, shareholders, and analysts for the continued support and confidence. We'll continue to focus on execution of our goals and strategies, and hope for an improved commodity market that will reward our industry and our shareholders. Thank you for your participation today, and I look forward to sharing our progress with you again in the next quarter.

[Operator:]

Thank you, Mr. Archer. That concludes Great Panther's first quarter 2017 financial results conference call and webcast. Goodbye.