Great Panther Mining Limited
Q4 2017 Earnings Call Transcript

Published: 23 Feb 2018

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Great Panther Silver Limited’s 2017 Year End 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 call over to Alex Heath, Director of Investor Relations.

[Alex Heath:]

Thank you, Derik. Good morning everyone and thank you for taking the time to participate in our call today. With me here this morning are James Bannantine, 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 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 December 31, 2017. Also all amounts expressed in this presentation, and associated with the financial statements and MD&A are in U.S. dollars unless otherwise noted. I would like to remind everyone that this conference call is being recorded and will be available for replay after 11

[James Bannantine:]

Thank you, Alex and good morning everyone. On our call this morning, I’ll provide a snap shot of our 2017 highlights. Then provide an overview of our operational financial results. We’ll discuss our outlook for 2018 and we’ll conclude to the Q&A session. Before we begin, I want to pay tribute to Ken Major, Director of Great Panther Silver, who passed away on Wednesday. Ken had a long successful mining career, spend over 40 years. Earlier this year, he received the Lifetime Achievement Award from the Canadian Mineral Processors Technical Society for his enduring contributions to mineral processing. He was a dedicated member of our Board, having served since 2011 and with a strong performance of safety. It is honored; Great Panther has established the Kenneth W. Major Safety Award to recognize the employees annually to exemplify Ken’s value of safety in the workplace. Ken will be dearly missed. 2017 was a significant year for Great Panther as we took steps to enhance the future of the company and build long-term value for our shareholders. I would like to take this opportunity to review a few highlights from the year. First, we made important investments in our future. In June, we completed the acquisition of the Coricancha Mine in Peru. This previously producing mine as the potential of adding approximately 3 million of silver equivalent ounces per year to our production base, based on its historical production. At our Topia Mine and Guanajuato, Mexico, we completed upgrades to our processing plant in early 2017 and began preparations for what we call the Phase 2 tailing storage facility. Second, we significantly increased our mineral resource inventory. We acquired the Coricancha Mine with its resources and we completed an updated resource and increased, Measured and Indicated resource at the Guanajuato Mine Complex by approximately 90%. Third highlight, our operations saw improved metal production revenues and earnings over 2016. Silver Equivalent production was up 2% while revenues were up 3%. We delivered net income of $1.3 million for 2017, even after incurring significant investments in exploration development and respective Coricancha, and exploration development at the Guanajuato Mine Complex, which contributed to the significant increase in our mineral resource base. All of these items are fully expensed in our profit and loss statement. Finally, we maintained a strong balance sheet, ending the year with $56.9 million in cash and short-term deposits; $66 million in net working capital and no debt. With this capital position and the team we have assembled, we feel we are in a good position to pursue growth opportunities with the focus in the Americas. As mentioned, we made important investments in 2017. The acquisition of the Coricancha Mine provides us with engaged from which to expand within Peru and South America. After successfully closing, the acquisition in June, we began working on NI 43-101 compliant resource, which was announced and published in December. Our plans are to complete additional technical studies for the project in the second quarter of this year in advance of our production decision. Based on historical production at Coricancha, the mine has the potential to increase Great Panther Silver equivalent production by approximately 75% or 3 million new silver equivalent ounces. Lastly at Topia, we completed upgrades to our processing plant and tailings handling facility. Subsequently, in December we obtained all required environmental permits from SEMARNAT, the Mexican environmental authority, for the construction and operation of the new Phase 2 tailing storage facility. Construction of that facility is now underway. As I mentioned previously, the updated resource base at the Guanajuato mining complex increased its M&I, sliver equivalent ounces by 91%. The aforementioned update estimated Coricancha contained 24 million of silver equivalent ounces in the Measured and Indicated category and another 28.4 million of silver equivalent ounces in the Inferred category. Overall, we increased our Measured and Indicated resources by a 164% and our Inferred resources by a 141% over the previous year. We believe that Coricancha hold significant exploration potential as well. For 2018, we planned on completing further exploration drilling of approximately 9,000 meters in San Ignacio and 14,000 meters in Guanajuato. On the operational front, our mines performed in line with our guidance for 2017. We expanded our silver equivalent production by 2% with increases in zinc, lead and gold production which was offset by a modest decline in silver production. We remain significantly leveraged to precious metals with 50% of our revenues from silver, 40% from gold and approximately 10% from lead and zinc. Financial highlights for 2017 included a 3% increase in revenue and net income of $1.3 million. It is significant to note that we reported net income while expensing all Coricancha projects costs in addition to all development and drilling at the Guanajuato Mine Complex. We ended the year with earnings per share of $0.01 compared to a loss per share of $0.03 for 2016. Consolidated cash cost for payable ounce was $5.76, up from $3.65 in 2016, but within our 2017 guidance of $5 to $6. All-in sustaining cost per payable silver ounce increased to $15.07 in 2017 from $10.99 in 2016. But, well also within our guidance of $14 to $16. We ended the year with a strong balance sheet with $56.9 million in cash, $66 million in net working capital and no debt. This liquidity provides us with sufficient capital to advance the opportunity at Coricancha and pursue other growth opportunities. To this end, we have put together a strong team to target and evaluate previous metals production and development projects focused on precious metals in the Americas. The Guanajuato Mine Complex or GMC accounted for approximately 73% of our total silver ounce production, silver equivalent ounce production in 2017. Metal production from the GMC was approximately 2.9 million silver equivalent ounces, which represented a 3% decrease over the previous year. This attributed to slightly lower silver and gold rates partly offset by improved recoveries. Cash cost for the Guanajuato Mining Complex was $4.32 per payable silver equivalent ounce up from $0.85 in 2016. The increase in cash cost at GMC in 2017 was mainly attributable to higher mining cost per ton due to mining of narrow bandwidth. These factors are partly offset by lower smelting and refining charges higher by-product credits resulting from the higher volume of gold and higher average realized gold price, as well as the strengthening of the U.S. dollar relative to the Mexican Peso. All-in sustaining cost increased to $9.17 per payable silver ounce from $5.20 the year before at Guanajuato. Reflecting the higher cash cost and increased E&E and expenditures at San Ignacio and respective increased drilling there. The Topia Mine accounted for approximately 27% of our total silver equivalent production in 2017. Metal production at Topia increased to 1.1 million silver equivalent ounces, a 21% improvement from 2016. Mainly as a result of increased order rates and improved gold and silver recoveries. We are very pleased with these results as we were able to achieve record metal production despite the suspension of mining operations during the first quarter of the year to complete the plant upgrades in the new tailings handling facility. Cash cost at Topia was $9.53 down from a $11.43 in 2016. The decrease in cash cost at Topia in 2017 was primarily the result, the higher by-product credit from increased by-product metal production and from higher metal prices. Lower smelting and refining charges and a stronger U.S. dollar relative to the Mexican Peso also contributed to the decrease in cash cost at Topia. All-in sustaining cost decreased to $14.98 per payable silver ounce from $15.31 the previous year, reflecting the lower cash cost. As noted, all-in sustaining cost also reflected the full investment in the plant upgrade and tailings facility. In this slide, we are happy with our team’s ability to reduce all-in sustaining cost year-over-year even when including the capital expenditure. I will now hand the call over to Jim Zadra, to review our financials in little more detail. Jim?

[Jim Zadra:]

Thanks Jim. And welcome again to all of you who joined us on the call today. As noted, our revenues increased 3% to $53.7 million, the increase mainly attributable to the increase in by-product revenues and also to a reduction in smelting and refining charges. Realized silver prices were largely consistent year-over-year, while realized gold, zinc and lead prices increased. In addition, we saw increases in all of the by-product metal product which offset the slight reduction in silver production. Production cost from $48.1 million, an increase of 22% over 2016, the increase mainly due to higher mining cost of both operating Guanajuato and particular higher mining contract relates at GMC’s mining involved narrow vein structures. Our mine operating earnings came in at $17.7 million for the year and we’re down compared to the prior year mainly due to the increase in production cost. Before non-cash items and operating earnings were $22 million. G&A expenses was $7.8 million up from $5.8 million in 2016, approximately $1.1 million of the increase was attributable to non-recurring charges. Exploration, Evaluation and Development expenses or EE&D were $9.5 million for the year, compared to $6.1 million last year, $5.2 million of these expenditures relate to our operating mines in Mexico and were comprised mainly of drilling and mine development expenditures. Year-over-year, EE&D expenditures at the operating mines increased by about $1.4 million reflecting a higher exploration expenditures at the GMC, which in part led to the significant increase in the resource space there. The balance of the EE&D expenditures were about $4.3 million relate primarily Coricancha that also include exploration activity and our other projects and corporate development activities. As noted all Coricancha cost are being expensed in advance of the production decision. Corporate development expenditures increased by about $0.7 million as we were after in valuating other acquisition targets in the Americas. Net income for 2017 amounted to $1.3 million compared to a net loss $4.1 million in 2016. Improvements in finance and other income offset the lower mine operating earnings and the aforementioned increased, increases in non-capitalized investments in exploration, evaluation and development. Earnings per share for 2017 was $0.01 compared to a loss of $0.03 for 2016. Our cash balance at the end of 2017 including short-term deposits was $56.9 million and our net working capital was $66 million and most importantly we remain debt free. I will now turn the call back to our present CEO Jim Bannantine.

[James Bannantine:]

Thank you, Jim. In summary, we delivered on our production and cash cost guidance for 2017 which contributed to a positive net income for 2017. With our mines operating steadily, we expect to achieve similar production in 2018 between 4 million and 4.1 million of silver equivalent ounces. Cash cost are expected to be between $5 and $6.50 and we expect to lead lower all-in sustaining costs between $12.50 and $14.50. We planned to complete technical studies for Coricancha during the second quarter of 2018 in advance of a production decision. As noted, the Coricancha Mine has the potential to significantly increase Great Panther Silver equivalent ounce production based on its historical production. It also provides Great Panther with the base in which to expand within Peru and South America. We’re well positioned to grow with nearly $60 million in cash and no debt, and our focus on 2018 will be on leveraging our strong team to search for and evaluate near-term production and development projects in the Americas. I’d now like to open the call for questions.

[Operator:]

Thank you. [Operator Instructions]. And we’ll take our first question from Heiko Ihle with HCW. Please go ahead.

[Heiko Ihle:]

Hi guys, thanks for taking my question.

[James Bannantine:]

Welcome Heiko.

[Jim Zadra:]

Heiko, good morning.

[Heiko Ihle:]

Good morning. So, I went through your guidance, and I mean I’ll just point out the all-in sustaining is expected to go down well cash cost at the midpoint are flat, so well done on that. My question relates to your assumptions regarding that, what are the peso and gold price assumptions for this guidance?

[Jim Zadra:]

The peso assumption is 19 and the gold price assumption is 1,300.

[Heiko Ihle:]

Excellent, thank you. Okay and then you have $4.4 million of reimbursement rates related to the Coricancha and Nyrstar is responsible for up to $20 million for movement and reclamation. Is there any sort of time limit towards, what they have I mean, I saw that the fine, expansions they are liable for up to $4 million, but that’s only through last June, in other words depending on how things gold could, you would be look for anything and by when will we know?

[James Bannantine:]

We’ve got a three year window on Nyrstar’s obligations for their closure and reclamation responsibilities. So that starts at June of last year, three years from that would be 2020.

[Heiko Ihle:]

Very helpful. And final one and maybe a little bit of an hot question, you are cutting back at non-Coricancha CapEx from $4.4 million in 2017 to $2.5 million to $3.5 million for 2018. At the midpoint of $3 million and the 32% decrease, should we be reading anything into this, or is it just because of the sites right now are well enough to find and well enough to explore that the incremental expenditures don’t benefit us much as they did last year?

[Jim Zadra:]

I think it’s mainly a function of the, we had additional spending in 2017 at Topia for the plant upgrades, the dry tails handling. Heiko, now it’s about $2 million and, obviously we won’t see those were non-recurring expenditures so that’s why the number was little bit higher in 2017. And we really only capitalize our physical capital expenditures, the development is expanded in that EE&D line. And, those expenditures are increasing somewhat, so when you look at the picture of capital expenditures you really shouldn’t look at both the capital and the EE&D, because it does, the mix of pure capital and development does fluctuate from year-to-year.

[James Bannantine:]

So Heiko, was a engineer’s add-on the two plants are both in good shape, they don’t require expansions; they don’t require big rebuilds or anything. So, the plants are good, as Jim said we expense our development, so there is not CapEx in the mine per se we are conservative on that, which obviously leads to a good free cash flow number, because the mine developments already expensed.

[Heiko Ihle:]

Great, Jim, that has been suiting you pretty well so far, I hope 2018 is a success. Thank you guys.

[James Bannantine:]

Thank you, Heiko.

[Operator:]

Our next question comes from Jake Sekelsky with ROTH Capital Partners. Please go ahead.

[Jake Sekelsky:]

Hey good morning guys.

[James Bannantine:]

Good morning Jake.

[Jim Zadra:]

Good morning.

[Jake Sekelsky:]

I know San Ignacio would become a large part of the GMC as a whole, I’m just wondering is there an avenue to increase this further, I mean can the contribution go higher through additional development work or exploration or is there a thought process there?

[James Bannantine:]

In the mid-term that’s variable Jake, we could expand it, yes. In the short-term, it’s fairly fixed at that kind of 60% San Ignacio, 40% are Guanajuato, but over time with additional development we could open up additional access and face this in San Ignacio and expand the production out there.

[Jake Sekelsky:]

Got it, got it. And I know smelting and refining charges seem to be coming down across the board, just based on people that I have spoken with. Are you guys seeing this and if so, can you kind of quantify that for me?

[Jim Zadra:]

Yes they are, you are correct. Its, that the market is favorable for producers and treatments and refining charges that’s reflected in our guidance, because we contracted that those sales for 2018 and it’s a, the bottom-line impact for us, is something like a 5% impact in our bottom-line its quite significant.

[Jake Sekelsky:]

Got it, okay. And then just quick one, Coricancha assuming positive production decision is reached, just walking through the next steps following the economic study?

[Jim Zadra:]

The economic study will be the plan and then if, with the positive decision from the plan and we would proceed to reactivate our permits to for a restart and that well we expect that to take us a few months at the same time, we would have to do staging replenishment of stocks finding people, thought we’d be able to, it would be several months after half the decision before we could, what I would call start development, and the development would proceed production.

[Jake Sekelsky:]

Perfect, thank you guys.

[Jim Zadra:]

Thank you.

[Operator:]

Thank you. [Operator Instructions]. We’ll move next to our next question from Mark Reichman - Noble Capital Markets.

[Mark Reichman:]

Good morning. In the release you had mentioned, the increased contractor rates and I was just wanting to find out if you could discuss, kind of where you are seeing cost inflation or more or less kind of the puts and takes on with regard to production costs, exploration and evaluation as well as mind development cost?

[James Bannantine:]

Sure Mark, it’s at the bottom-line it is an increase in contractor rates, we pay our contractors based on tons delivered to the mill, which includes their all their in essence includes all their costs upstream. As you noticed, we also mentioned narrower bandwidths and narrow mining widths, that’s reflected in our contractor rates. And so it’s not, I wouldn’t call it inflation as much as a change in operating conditions. The inflation is, an inflation in Mexico is about 5% to 6% in pesos and we’re able to keep our contractor rate increases below that.

[Mark Reichman:]

Okay, thank you for that. And then on the third party or processing revenue, I know that’s just kind of a small amount, but is that in terms of, future quarters, are you kind of at a level that’s, kind of flattened out in terms of, processing the ore for third parties?

[James Bannantine:]

That’s I would call that fairly variable, it’s not nearly as predictable as our own production. It’s obviously, it’s got third party as a function of third parties decisions on where they take their ore, I would say about where it is, is a good estimate.

[Mark Reichman:]

Okay. And then just real quickly on Coricancha. In terms of the permits, you talked about reactivating the permit, on Page 24 the technical study, they talked about the following permits would be necessary, to advance the project to production. So it seems like a lot of, the decision center on the handling of the tailings. And so, in terms of reactivating versus, getting these permits what do you think as which ones that present the biggest hurdles and when do you think, from a timing perspective, you would have all those in place?

[James Bannantine:]

So they are generally in place, but they have to be updated with new details, the new mine plan will involve, identifying where waste is going to be taken, there is tailings and there is waste deductable that has to be permitted. We’ve got permitted, we’ve got permits for couple of existing waste dumps and we’ve got permits for the existing tailings facility. We’re also under the order to relocate the old tailings facilities that’s in, that we talked about already and the closure plan that Nyrstar is funding the cost out. So, there is not any really new permits, it’s basically updating the existing permits with the technical details that will come out, that will come out in the planning study.

[Mark Reichman:]

Okay, so looking at your presentation, I mean you think 19 is still, realistic in terms of when you might get to production?

[James Bannantine:]

Yes.

[Mark Reichman:]

And then, well I think that’s answers most of my questions. And I appreciate that.

[James Bannantine:]

Thanks a lot Mark.

[Operator:]

Our next question comes from Bhakti Pavani with Euro Pacific Capital. Please go ahead.

[Bhakti Pavani:]

Good morning guys.

[James Bannantine:]

Good morning, Bhakti.

[Bhakti Pavani:]

Just a quick question on the Topia TSF Phase 2 update, I know you guys received all the permits and construction is underway. Could you maybe provide a timeline on when do you anticipate or the construction to be completed and a successful transition to the Phase 2 tailings?

[James Bannantine:]

When would the construction be completed and say again.

[Bhakti Pavani:]

I mean, how soon can you transition, I mean, I’m trying to understand if should we be considering a downtime while you transition to Phase 2 or how is it going to happen?

[James Bannantine:]

No absolutely not, it’s a ten years process from Phase 1 to Phase 2. Phase 2 is under construction and deposition of tailings on from Phase 1 to Phase 2 will be continuous, there won’t be any visible change over from Phase 1 to Phase 2.

[Bhakti Pavani:]

Do we have, I mean is that going to be completed during this year or is there any kind of timeline?

[James Bannantine:]

Well yes, yes we’ll be depositing on Phase 2 this year.

[Bhakti Pavani:]

Okay perfect. Most of the questions have been asked. But just a quick question on production cost, there has been a significant increase on a year-over-year, I think majority of the increase has been due to the narrow vein mining at GMC. So, is that sort of the production cost should be, be modeling for 2018?

[James Bannantine:]

Yes, I think 2018, you can see in our guidance the range of cash cost and all-in sustaining cost, we’re pretty comfortable with those ranges and that’s good for your modeling purposes.

[Bhakti Pavani:]

Okay, perfect. That’s it from my side. Thank you, guys.

[James Bannantine:]

Thank you very much.

[Operator:]

And we have a follow-up question from Mark Reichman with Noble Capital Markets.

[Mark Reichman:]

Yes, just a couple of follow-ups. In terms of a production decision at Coricancha, is any of that hinge on, moving some of the resources from Inferred to Measured and Indicated, are you pretty satisfied with, the resource estimate, currently?

[James Bannantine:]

That’s a good question Mark. We will be taking the decision mainly based on M&I, Measured and Indicated, but the Inferred will, I would say add power to our decision or give us additional confidence or conviction. The Inferreds Coricancha are not in different areas or different zones, they are just a halo around the Measured and Indicated, just a function of distance from samples and drill holes. So, the Inferreds have a, they don’t change your mine plan, taken the Inferreds or not taken the Inferreds don’t change your mine plan. The mine plan is going to be going down the middle of the Measured and Indicated and the Inferreds around the edges of where your mine infrastructure is going to be anyway. So, it’s pretty much doesn’t change the decision, just increases your, increases your upside or increases your confidence in whatever decision you are going to make.

[Mark Reichman:]

I was just thinking, I mean a 600 tons per day, given, the plant capacity, if you just apply that against Measured and Indicated versus, all-in, it implies pretty significant differential, in the life of the property, but understanding that a lot of that, inferred can move into the M&I over time, but I just wanted to kind of find out, how comfortable you are with that, currently. Also in terms of looking at for acquisitions, if you reach a production decision, on Coricancha, does that change your mindset in terms of how aggressively you pursue acquisitions or you just kind of look and checking out in acquisition landscape now, with the mine that, you’re still, in process of evaluating Coricancha?

[Jim Zadra:]

No it’s in series, it’s not in parallel. We were intending to look for acquisitions on top of Coricancha and not instead of.

[Mark Reichman:]

Okay and then just, its time relatively new to the story, on the in the technical report on Coricancha, I think it was, there was a page which kind of showed the differences between the 2012 and 2017 resource estimates and I talked about, different source parameters. Could you just kind of discuss that briefly in terms of the differences/

[James Bannantine:]

Well obviously the big difference between 2012 and 2017 was significant reduction in the Inferreds. We applied a tougher standards on the statistically requirements on the Inferreds than the previous owned it, the M&I hasn’t changed much, the Inferreds changed quite a bit. The Inferreds, our Inferreds are still so significant versus the mine like or the plant capacity the annual production and if you look at 24 million of measured and indicated and 28 million ounces of silver ounce equivalents of Inferreds, it’s many, many years at 3 million per year. So, it doesn’t have a big effect on new decision. Again the nature of the mine and geometry of the mine involves the Inferreds being right where the M&I is, just like a halo or a rim around the M&I. So, you are, if you are making money on the M&I with your and you are amortizing your mine infrastructure cost, the Inferreds come almost free.

[Mark Reichman:]

I see, well I look like you also got a pick up in the grades as well, in many cases?

[James Bannantine:]

We did, we did.

[Mark Reichman:]

So I very much appreciate it.

[James Bannantine:]

Its, we’re very excited about the project at the bottom-line.

[Mark Reichman:]

Thank you for the information, I appreciate that.

[James Bannantine:]

Thanks Mark.

[Operator:]

And Mr. Bannantine, it appears there we do not have any more questions at this time.

[James Bannantine:]

Thank you, Derik. Just in closing, and reflecting back on the last six months, I would like to say that, I’m very excited, optimistic about what I see after six months. I think the company is got a lot of potential, it’s on the solid ground with its production and positive net income, positive free cash flow with weight development potential in Coricancha, I mean they were working on well and we see and that plant come together. I also believe we have a very good team that allows us to grow the company both through Coricancha and to work through other inorganic growth opportunities. So I look forward to talking to you, a quarter from now. And thank you for your participation today, on behalf of everyone here at the company, I would like to thank you and look forward to sharing our progress as we go forward.

[Operator:]

Thank you, Mr. Bannantine. That concludes, Great Panther’s 2017 year-end financial results conference call and website. Good bye.