Great Panther Mining Limited
Q3 2018 Earnings Call Transcript

Published: 1 Nov 2018

[Operator:]

Hello, ladies and gentlemen, and thank you for standing by. Welcome to the Great Panther Silver Limited's Third Quarter 2018 Financial Results Conference Call and Webcast. As a reminder, all participants are in a 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 Alex Heath, Director of Investor Relations.

[Alex Heath:]

Thank you Ryan. Hello everyone, and thank you for taking the time to participate on our call today. Joining me today are James Bannantine, President and CEO and Jim Zadra, Chief Financial Officer. Before we begin, I'd like to mention that some of the commentary on today's call contains forward-looking statements. You should be cautioned that actual results and future events may differ from those noted in today's presentation. The commentary also refers to various non-GAAP measures, definitions and reconciliations that are included in the Company's MD&A for the year ended September 30, 2018. All dollar amounts expressed in this presentation are in US dollars unless otherwise noted. The mineral resource estimates referred to in this presentation have been prepared in accordance with the requirements of the securities law in effect in Canada, with respect to Great Panther and in Australia with respect to Beadell which defer from the requirements of the United States Securities Laws and new terms that are not recognized by the United States Securities and Exchange Commission. United States investors are cautioned not to assume that any part or all of mineral deposits in these categories will be converted into reserved. Please take a moment to read the forward-looking and cautionary statements in this presentation. I would like to remind everyone that this conference call is being recorded and will be available for replay later today. Replay information and the presentation slides accompanying this conference call and webcast will be available on our website at greatpanther.com. I will now turn the call over to Great Panther's President and CEO, James Bannantine.

[James Bannantine:]

Thank you, Alex and good morning and welcome everyone. It was a very eventful third quarter for Great Panther with the announcement of friendly agreement to acquire Beadell and continued advancement at Coricancha in Peru. In our call today I'll start with highlights of the third quarter then follow with an overview of our operational and financial results. Discuss our outlook for the remainder of 2018 and conclude with questions-and-answers. The highlights from the third quarter as noted first. We announced a friendly agreement to acquire Beadell Resources Limited which 100% owner of Tucano Open Pit Mine in the state of Amapa Brazil. This will represent a transformational acquisition for Great Panther and in terms of creating a new intermediate gold producer with an attractive near term growth profile to achieve 250,000 ounces of annual gold equivalent production. Beadell is currently guiding to 130,000 ounces of gold production for this year. At Coricancha in Peru we continue to make very good progress on our bulk sample program and expect to be in a position to make a restart decision in early 2019. Our Mexican operation suffered from the continued pressure on metal prices and the impact of mining narrow than expected veins and variability in the mineral resource at our Guanajuato Mine complex specifically at the Guanajuato Mine. Many of you recall that the Guanajuato mining complex comprises the Guanajuato Mine and the San Ignacio Mine, the latter of which accounts for the bulk of our production at the Guanajuato mining complex. In light of the lower metal prices and variability of the resource at the Guanajuato mine, we've implemented a restructuring plan to reduce cost there. With these measures in place, we expect and approve Q4 both in terms of production and cost. As a result of the changes to the Guanajuato mining complex mine plan and adjustments to 2018 metal prices. We're adjusting our 2018 annual guidance increasing both expected silver equivalent announced production and cash cost and all-in sustaining cost. We continue to maintain a strong balance ending the quarter with $58 million in cash and short-term deposits and $65 million in net working capital and we remain debt free. First, I'd like to talk about the Beadell acquisition. The acquisition of Beadell marks a very important milestone for Great Panther. For the better part of the last year, we've looked for an acquisition that would meaningfully impact our production and growth. Our mandate was to find an acquisition in production our late stage of development that would be accretive on key per share metrics for Great Panther. We believe the transaction with Beadell meets all these criteria. The key highlights of the acquisition include the creation of new emerging and growth oriented precious metals producer focused on the America in the intermediate producers' space. The addition of Beadell's Tucano mine in Brazil with an extensive resource base. Great Panther's strong balance sheet and cash position to leverage the optimization and long-term expiration of Beadell's 100% owned Tucano mine in surrounding land package. A diverse asset portfolio in [indiscernible] Latin America mining jurisdictions which includes three producing mines and advanced stage project and significant exploration potential. We have a robust growth profile and we believe we gain an attractive re-rating potential. The transaction is subject to shareholder approvals from both Beadell and [technical difficulty] shareholders and regulatory approvals as expected to be completed in January 2019. For those of you who are not yet familiar with Beadell, the company's flagship asset is the Tucano Mine located in the Amapa state in North Brazil. If you're viewing the webcast the slide presented shows the location of the mine and highlights there is good access for people [technical difficulty] equivalent and consumables. Tucano Open Pit Mine with a 3.5 million ton per annum capacity conventional style plant. The reserves and resources summary table highlights the significant open pit as well as underground resources. Tucano has over 2.2 million ounces of gold and the measured indicated category and 1 million ounces of reserves in the open fit. [Technical difficulty] 300,000 ounces of gold reserves underground. Moving to the next slide, Beadell is in the final stages of completing a Tucano plant upgrade and a transition to a new mining contractor U&M as a leading mining contractor in Brazil. These initiatives shown in the slide entitle fully optimized mine starting in 2019 will be completed in November and the Tucano operation is already seeing improvements in material movement, operating cost and gold production. The Tucano plant was previously constrained to processing a maximum of 30% sulphide which are hosted in Hard Rock and the plant upgrade provides a sulphide blend flexibility up to 80% of the high grade sulphides. The plant upgrade is also expected to yield higher gold recoveries raising the recovery level from 88% to 93%. The higher flexibility for processing ore type will allow for the focus of mining to be on maximizing grade rather than constrained by ore type for the first time in Tucano's operating history after this plant upgrade. Additionally the plant is now operating primarily on grid power and will transition to full grid power from generator power over the coming months which will further decrease cost. Moving onto our Coricancha project in Peru. We continue to make very good process on the bulk sample program or BSP as we call it. At the end of the third quarter, in advance to decline 160 meters with additional 210 meters of gallery and [indiscernible] development represent 60% [ph] of the total plan for the BSP advance. 1,600 of the 6,000 [ph] plant tonnes extracting the stock pile at the end of the third quarter. At the plant the concentrator, we successfully completed the test on [indiscernible] grinding and floatation circuits. We upgraded the rehabilitation of surface roads in underground mining infrastructure is also ongoing. Finally, key personnel are in place to execute Bulk Sample Program and also support a transition to full scale mining should we make a positive production decision early in 2019. Now onto our operations in Mexico. As mentioned earlier on our call, we've begun implementing a restructuring plan at the Guanajuato Mining Complex, GMC. With the decline in metal prices we've decided to adjust our mine plan for GMC to reduce mining from less economic areas of the mine. The result will be a decrease in production from the Guanajuato mine and an increase in production from the San Ignacio Mine. We plan to continue exploring high priority targets to expand our resources at the Guanajuato Mining Complex. In addition we're [technical difficulty] an increase in output from the Topia Mine which we believe is possible. We feel like this is a prudent response to our current operating conditions primarily low metal price environment. The plan was initiated during the third quarter, however benefits will begin to be realized in the Q4 and beyond. Furthermore, we'll continue to look for ways to reduce cost and approve efficiency of our operations. Metal production from the Guanajuato Mining Complex or GMC was approximately 614,000 ounces silver equivalent which represents 15% decrease over the previous year. This is attributed to the impact of mining narrow than expected veins. And variability in the mineral resource again particularly at the Guanajuato Mine. Metal production at Topia next slide was approximately 409,000 silver equivalent ounces which represented a 15% increase over the previous year. The increase was attributed to a combination of mining wider veins as well as higher mill availability due to improved operational efficiencies. I'd now like to hand the conversation over to Jim Zadra, our Chief Financial Officer to discuss our financial summary for the third quarter.

[Jim Zadra:]

Thank you, Jim and welcome again to all of you who joined us on the call today for the third quarter 2018. We reported net loss of $0.02 per share which is attributed to a number of factors. The primary factors were lower metal prices gold production at our Guanajuato Mining Complex and large concentrate shipment which we were not able to ship until just after the end of the closing the quarter. Together these accounted for approximately 36% decrease and our revenues compared to Q3 of 2017. The variability in the resource and narrow mining with the GMC which Jim previously mentioned also increased our cost and [indiscernible] packed on our mine operating earnings. For the third quarter consolidated cash cost was $12.79 per payable silver ounce and all-in sustaining cost was $19.74 per payable silver ounce. Lower metal prices were a significant factor and the increase over cash cost through the impact of the by-product credit and accounted for approximately $2 per payable ounce increase. The lower metal production in sales accounted for further significant in the Q3 cash cost and all-in sustaining cost. I also note that our all-in sustaining cost reflects our full G&A cost and share based cost including out of the head office. And as a function of our lower sales and production for the quarter these accounted for an almost $4 per payable ounce at measure in all-in sustaining cost number for Q3. As a result of the restructuring steps taken towards the end of the third quarter including headcount reductions and the revision of our GMC mine plan, we expect our Mexico [ph] operations to deliver improved results for the fourth quarter as always our financial results are very sensitive to metal prices and the Mexican Peso to US Dollar exchange rate. Our loss per share was also function over our Coricancha project cost, which were expensing as it relates to the project until we make a formal decision to restart our production. These cost amounted to about $1.8 million in the third quarter or about penny per share and are reflected in the Exploration, Evaluation and Development EE&D line of our financial statements. During the third quarter EE&D expenditures also reflected a significant amount of corporate development expenses and connection with the agreement to acquire [indiscernible] resources. And we'll continue to incur cost related to the acquisition as we work through the closing of the transaction which is expected in January, 2019. Our balance sheet remains strong with $58 million of cash and short-term deposits and net working capital $65 million and no debt. A significant note, we have sufficient cash and net working capital to fund the closing and integration of Beadell and the potential restart of Coricancha. I will now turn the call back to our President and CEO, Jim Bannantine.

[James Bannantine:]

Thank you, Jim. So everyone in terms of guidance for the rest of 2018 for our Mexican operations we're adjusting our production guidance higher to account for changes in the gold and silver ratio and the revised mine plan at the Guanajuato Mining Complex. Total silver equivalent ounce production is expected to range between 4.1 million to 4.2 million ounces. Cash cost for 2018 has been adjusted to between $7.20 and $8.20 per payable silver ounce and all-in sustaining cost is expected to be between $14.50 and $15.50 per payable silver ounce. Again the focus in the coming quarter will be on building for our future closing on the acquisition of Beadell and continuing to advance the Bulk Sample Program in Coricancha and increasing the profitability at Guanajuato. I'd now like to open the floor for questions.

[Operator:]

[Operator Instructions] our first question will come from Jake Sekelsky, ROTH Capital Partners.

[Jake Sekelsky:]

In order to focus on mining more economic areas of GMC and increasing throughout from San Ignacio. What percentage of total throughput does San Ignacio account for right now, is there a target percentage there?

[James Bannantine:]

Jake, San Ignacio obviously changes from month-to-month, but over the years it's been about two-thirds to 70% of our production and we're actually going to take it up a bit from there.

[Jake Sekelsky:]

Okay, just kind of building on that. What does that entail just a bit more development work?

[James Bannantine:]

No, San Ignacio can do it. We've got contractor capacity, we've got equipment capacity and obviously development as you mentioned we have to basically coordinated all those to maximize the capacity out of San Ignacio but and you know if you break down our mines into the actual mines, our producers will then be San Ignacio first, Topia second and Guanajuato third. If we're able to bring on Coricancha will actually become the biggest of those producers.

[Jake Sekelsky:]

Got it. And just [indiscernible] I know smelting charges have come down pretty significantly across the board this year and you guys have seen some benefits of that. Do you expect to see further compression in charges over the next year. I mean this might be something more for Jim Zadra, but you know do you expect that to continue and do you see that going down anymore?

[James Bannantine:]

Maybe I can fill [ph] that, I was just last month at the London Metals Exchange Annual LME Week and we kicked off our discussion for off take for next year. It's preliminary and it's too early to say what the terms are going to be next year. You have to remember that we produce silver gold concentrated Guanajuato which is kind of niche concentrate. The terms are not as easily quotable on that. So we have to go out for our annual tender to see how those come in, too early to say right now.

[Jake Sekelsky:]

Okay, very good. That's all from me. Congrats in the quarter.

[James Bannantine:]

Thank you. To just iterate how important Beadell is for us, it's huge for us.

[Operator:]

Thank you. [Operator Instructions] we'll take our next question from Mark Reichman from Noble Capital Markets.

[Mark Reichman:]

Good morning, just wanted to ask about the concentrate shipment that cannot be shipped until after the end of quarter cut off. So that will show up in the fourth quarter results but I was just wondering if you could talk a little bit more about that and the specific revenue impact. What we might expect to show up in the fourth quarter from that?

[Jim Zadra:]

Mark. It's Jim Zadra. It's about $1.5 million worth of revenue.

[Mark Reichman:]

Okay, thank you. In fact, go ahead did you have more color on that?

[James Bannantine:]

No, I was just going to say that's purely a batching question. There was nothing extraordinary about it.

[Mark Reichman:]

Okay and then second on the Beadell Resources acquisition. Tucano mine just kind of overwhelms I guess on a silver equivalent basis what will be expected from Coricancha but both are attractive and I was just wondering one of the things that you bring to the transaction for with, Beadell is a very strong balance sheet. So I was just curious kind of how you're thinking about capital allocation going forward and at the same time protecting your liquidity.

[James Bannantine:]

That's a good insightful question, Mark. So we calculated pretty carefully. We believe that given the state of Tucano and the state of Coricancha that we're fully funded with our balance sheet and our cash to do both projects. That's why, one reason why Beadell is so great for us because it's perfectly sized. We're looking for something that was very large for us, it's obviously very large the 300% increase in our production. But it's also something that we felt like we could do reasonably comfortable with our balance sheet and our cash. So Tucano and the team at Beadell got the ball all the way to the 10-yard line but not quite in the end zone, so most of it is done. There's not that much left to do, there is debt on the balance sheet that has to be serviced so we're bringing our balance sheet of $60 million in cash and no debt to their balance sheet of $80 million in debt and not much cash. If you put the two of those together and two asset bases together you have a very large healthy company. So we're not only healthy but fully funded, that's going to be making 250,000 ounces of gold a year by 2020. Without any significant CapEx, right? You know the CapEx for Coricancha is limited and we feel like we're fully funded to finish up the turnaround at Beadell.

[Mark Reichman:]

Well that's great. Thank you very much.

[Operator:]

Thank you. Our next question will come from Heiko Ihle with H.C. Wainwright.

[Heiko Ihle:]

So the higher cost at Guanajuato you mentioned earlier or in the release at state something with personnel reduction coupled with lower grade scenario with at the site. Obviously the personnel reductions and their severance impacts are more of a one-time thing while the labor cost savings are going to remain in place. That said the narrow width at the site remain at cost head when as long as they're in counter. Can you just sort of break down those two factors and the impact of the cost increases at play? Can we make a trend out of whatever assumptions we had this year?

[James Bannantine:]

I'll take the first shot and Jim, you can add in if you want. The economics of what happened in the third quarter were a little bit of double whammy. The silver price went down so the cut-off grade went up, so you could take less silver ounces out economically. Second is the less ounces with the fixed cost base increase in the unit cost and third to a lesser extent, you got the narrow veins and the lack of uniformity of the Guanajuato Mining Complex that also involve not only the narrow veins but development projects to get to the ore. So we're cutting out some of those development cost, we're cutting out some overhead, some people and we're cutting out operating cost for stopes that don't pay at $14.50 or $15 silver. We don't have that totally engineered yet, but we're well on our way and we think it will get back to our what I call steady state business model which is healthy profitability out of our Mexican production that covers our corporate G&A and exploration experience.

[Jim Zadra:]

Heiko, I would just add the restructuring cost are probably in the order of $0.50 to $0.75 per payable ounce.

[Heiko Ihle:]

Say that number again, there's humming in the background there.

[Jim Zadra:]

Sorry I would just add the restructuring cost are about $0.50 to $0.75 in the third quarter. There was a really big impact on the metal prices as it relates to the by-product credit in particular gold and remember that we have about pretty high share of production in gold from Guanajuato. So the lower gold prices had a big impact and adding to that is the adjustment the revaluation adjustment on gold sales from the prior quarter that were valued at a higher amount because we still have a much higher gold price at the start of Q3 versus the end of Q3.

[Heiko Ihle:]

And then just a quick clarification on your financials, you have no outstanding forward contract as of September 30. Has anything - I went through the M&DA earlier too. I mean has anything that undertaken since September 30 and if no, should we expect to see something except for regular remainder of the year assuming exchange rates go on your favor and on that same note, do you think you'll ever be willing hedge the Brazilian Real as well?

[James Bannantine:]

We have no hedges on our metals, our philosophy, current time and it has been for a while is not to hedge silver and gold. We have just recently entered in some forward contracts in the Mexican Peso. We saw a pretty significant weakness in the Peso in the last few days and the BRL that will have to I think we would consider that but it need to be considered closer to the closing of the Beadell transaction.

[Heiko Ihle:]

I was talking about the Peso [ph].

[James Bannantine:]

The Brazilian Real has recovered with the Presidential Election too, so the attractiveness in hedging the current time it's not as attractive as it was a couple months ago.

[Heiko Ihle:]

Arguably on that same token, given the outcome of the election. The asset has improved in value as well.

[James Bannantine:]

Yes and the business climate.

[Heiko Ihle:]

Perfect and then last but not least, the higher corporate development expenditures of $0.7 million related to Beadell we can just trend line just figure and keep it constant until closing in transaction all right.

[Jim Zadra:]

I would expect that to be a little bit lower than Q3, but in order of magnitude relatively close.

[James Bannantine:]

I got also for you to Beadell - Heiko, I'd refer you to Beadell's third quarter production press release from October 30 as well.

[Heiko Ihle:]

Got it. Thank you guys.

[Operator:]

Thank you. [Operator Instructions] we'll take our next question from Bhakti Pavani with Alliance Global Partners.

[Bhakti Pavani:]

Under the question for the production going forward. Earlier you mentioned that as a part of the restructuring plan, you guys plan to increase production from San Ignacio. Just kind of wondering, in the second quarter San Ignacio accounted for about 70% of total production and one of the remarks in the press release was, the ore from San Ignacio is comparatively harder just kind of wondering, do you anticipate the same thing going forward, now that you're planning to increase production from San Ignacio which could impact the overall production.

[James Bannantine:]

Yes we have that calculated into our guidance Bhakti, that's correct. More San Ignacio ore means it means harder ore and slightly less throughput through the plan, but that's in our calculations.

[Bhakti Pavani:]

Okay, perfect. The other question was with regards to Coricancha, you mentioned that you were expensing all the cost when it comes to the Bulk Sampling Program and other activities what kind of estimates as to we should be modeling going forward until you plan to make a production decision?

[James Bannantine:]

You probably the same - same type of run rate with the non-recurring revenue item of sale of all the production that we're generating for the Bulk Sample Program.

[Bhakti Pavani:]

Good and lastly, could you maybe comment on the political environment of Brazil and if it's friendly to mining companies or any kind of details?

[James Bannantine:]

Sure I'll take a minute to review our acquisition strategy. As you may have heard us talk about in our previous discussions we were looking for precious metals project, late stage that would more than double the size of Great Panther and be in a good jurisdiction. The top jurisdictions we listed were Mexico, Peru and Brazil. So we like Brazil very much as a mining jurisdiction. It's a combination of factors. It's a mining country. It's got a history of mining. It's got mining regulations, mining laws, mining royalties that we know about, mining workforce, mining supply chain. So Brazil, Mexico and Peru are all very attractive for us. So from that whole spectrum, you include political risk in the spectrum Brazil is very attractive.

[Bhakti Pavani:]

Okay fair enough, that's it from my side.

[James Bannantine:]

And you also remembered that I lived and operated in Brazil for 12 years.

[Bhakti Pavani:]

Yes, thank you very much.

[Operator:]

It looks like there are no more questions at this time.

[James Bannantine:]

Thank you. Thank you very much operator and Brian, thank you. Thank you everyone for attending and look forward to updating you on the closing of the Beadell transaction and progress on Coricancha and in our next quarters call.

[Operator:]

Thank you. Ladies and gentlemen. Thank you for joining today's conference call. The call has now concluded. Please disconnect your phones and have a great day.