Great Panther Mining Limited
Q1 2013 Earnings Call Transcript

Published: 9 May 2013

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Great Panther Silver Limited First Quarter 2013 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 will now turn the call over to Rhonda Bennetto, Vice President of Corporate Communications. Please go ahead, Rhonda.

[Rhonda Bennetto:]

Thank you, Brenda. Good morning and thank you for taking the time to join our call. Here with me today are Bob Archer, our CEO and Jim Zadra our CFO. We are using a slide presentation today and encourage you to go to our website where you can follow along. You can access the site by going to www.greatpanther.com and just clicking on the main banner on the home page. Before we begin, I’d like to mention that some of the commentary on today’s call will contain forward-looking statements. Although we will make every effort, you should be cautioned that actual results and future events might differ from those noted in today’s presentation. At the end of the presentation, there will be a question and answer session, and a replay of this call will be available a little later today on our website. I’ll turn the call over to Bob.

[Bob Archer:]

Thank you, Rhonda. Good morning everyone and thanks for joining us. As Rhonda just noted, you can follow along with me and the slides I am referring to by logging on to our website at www.greatpanther.com where you will find them front and center on our homepage. I will assume that everyone has read the news release ,so I would like to start today by dealing head-on with the cost per ounce issues we are facing, particularly at Guanajuato. In order to do that effectively, I would like to spend a few moments just clarifying how our costs are broken out and highlighting which ones we can more easily control and which once present some challenges. I apologize it is seems a bit basic for some of you, but I feel it’s important to have a good grasp of this concept in order to fully understand what is happening with cost per ounce issue. After that, I’ll speak to a few more of the Q1 results and then open the call for questions. Firstly, it’s important to distinguish between site cost and cash costs. Site costs are specifically how much it costs to extract and process each ton of ore, whereas cash costs consider the total costs including site costs and off-site smelting and refining charges less the by-product credits for each ounce of silver sold. Then we need to determine the number of ounces of silver contained within those tons, and this is where ore grade plays a significant role. For example, if we extract 1000 tons of low grade ore containing minimal silver, the unit cost per ounce of extracting the small amount of silver will be very high. However, if we were to find a large amount of silver and gold in those 1000 tons of higher grade ore, then the cost per ounce of extracting that silver would be much lower. The profit margin at this point comes down to the price of silver and gold. Turning to site costs, as you can see, they have actually remained relatively steady with labor and materials typically accounting for about 75% of our total costs. These are areas that we can control, and you will note here on the next slide that we are trying to achieve better operational efficiency through the reduction of labor and materials cost and a few other initiatives. On the labor side of the equation, we have already taken some steps to reduce the labor force, and we continue to look at ways to gain better labor efficiency and productivity. We mine in many different areas of each operation, and we are looking at ways to best deploy labor and equipment in order to increase production in the most profitable areas. It should also be noted that the investments we made last year in plant upgrades, equipments, and overall efficiencies have already begun to have an impact on lowering costs, and our challenge now is the grade control. Based upon our geological model, we had expected grades to improve sooner than they have. We are working to constantly improve our mine planning to help prevent surprises, but in situations where the grades were low, our operations team was committed to achieving the targeted production and ended up processing more tonnage resulting in higher overall cash costs. As we have often pointed out in the past, there is significant grade variability at both of our operations. This is a natural phenomenon and it won’t change. Consequently, there can be surprises to the upside or the downside. While we are always looking for ways to smooth this out such as with more diamond drilling and/or better grade control, there is a practical limit as to how much you spend on collecting data on a zone before you just go ahead and mine it. As we go deeper at Guanajuato, we are encountering greater geological complexity and logistical challenges, and this is why we brought in a structural expert to help us interpret those complexities in order to improve our geological understanding. This slide is important in that it shows what happens when grades drop, the cash costs increase dramatically. There are other factors that play a role here too such as metal prices, but grade is by far the most influential factor. At Guanajuato, we are closely looking at ways to control the grade and have redeployed our best geologists to focus on this area. We have also shut down production in lower grade areas of the mine, and at Topia, we are in the process of shutting down some of the 14 individual mines that are now uneconomic. This sensitivity slide shows just how much of an impact grade can have on costs. In our example here, for Guanajuato, if we use grades of 200 grams per ton of silver, which is roughly our average for the last two years at silver prices of $28, our cash cost per ounce would be around $6. With Q1 grades that we had of 148 grams per ton and using silver prices of $28, cash cost per ounce is closer to $15, so you can see the huge difference here. While we are striving to increase our grades back to historical levels, this comparison also shows the impact of silver prices on our cash costs, obviously something we can’t control. I hope these visuals and the explanation helps to explain the dramatic quarter over quarter change that we have seen in the cash cost per ounce and why we feel that with better grades we can get this number back to a lower number the way it was previously. Here is a snapshot of the financial results from the first quarter. Revenues were down slightly from Q1 of 2012 and were impacted by an in-transit shipment of concentrate which represented about $4.5 million that will be booked in Q2. Having said that, it is important to recognize that the four-month lag period in payment for some of our concentrate shipments from Guanajuato means that there is always a re-valuation of unclosed lots at the end of each quarter. In other words, there will always be quarter-over-quarter fluctuations that are strictly a timing issue. Importantly, the company has a strong balance sheet with $25.6 million in cash and $42.2 million in working capital. On the operational side, our results were ahead of plan for Q1 as we processed record tonnage and delivered year-over-year production growth. As previously mentioned, this came about by mining more tons at a lower grade. Gold production at Guanajuato was up significantly as was lead and zinc production at Topia. While it’s possible that the current lower metal price regime could lead to revisions in our mine plans, until we've worked through this in more detail, and we are maintaining our production guidance for the year at 2.4 to 2.5 million ounces of silver equivalent. At San Ignacio, we've acquired additional surface rights for the development of a ramp and waste dumps and for auxiliary infrastructure, and we've applied for the permits required for underground development. During the first quarter, we received the explosives permit and began rehabilitation of the surface infrastructure to prepare for these development activities. We expect that the land use permit and the environmental impact assessment approvals will be received in the third quarter of 2013, and we still expect development and production from San Ignacio to ramp up through 2014. We began a surface drill program at our El Horcon project in mid-April that includes plans for about 30 drill holes for a total of around 3000 meters. This program is laid out along an 800 meter straight length of the Diamantillo vein and will test the vein as well as various splays in nearby parallel structures and veins. Should the drill program be successful in defining a resource, any ore from here will be trucked to plant at Cata. In closing, I would just like to say that we fully recognize that our costs were above estimates for the quarter and we have made this our top priority. While we don't provide quarterly guidance, it's clear that quarter-to-quarter grade fluctuations, primarily around grade at Guanajuato, can be hard for the market to digest. As such, we encourage a more annualized long-term view towards our business. We also believe that what we're seeing in metal pricing at the moment is a mid-cycle correction as opposed to the start of a bear market, as the fundamentals that have supported gold and silver over the last 12 years remain firmly in place. In the short term, this mid-cycle correction will evolve the industry away from growth for growths sake and more towards a focused on returns for shareholders. As a result of our cash costs being significantly impacted by lower grades from the first quarter, we will be reviewing our cash cost guidance for 2013 but have not changed it at this point. With that operator, I would like to open up the call for questions.

[Operator:]

(Operator Instructions) Our first question comes from the line of Heiko Ihle with Euro Pacific Capital. Please proceed with your question.

[Heiko Ihle:]

You have a slide in the presentation where you have stated that Guanajuato has seen $2 to $3 cash costs that can be done again. Can you just maybe provide some color on the assumptions that you use to get to those prices? I mean obviously it implies a much higher silver and gold grade, and therefore pretty big by-product credits and reasonable labor rates, but can you just quantify a little bit more?

[Bob Archer:]

That range was actually just Q1 of 2012, so it was just a year ago, and the silver grades at that point were just over 200 grams per ton. And, as I recall, the cash cost per ounce was about $2.87, so it's not that long ago. The silver grade was around about the historical average, and it's one of the things that helps to emphasize the impact that grade has on the cash costs. There were some other issues in there, some site costs were a little lower at that time; obviously metal prices were higher as well. So, that will have an impact, but I am not saying it's going to happen overnight, it certainly won't, but that's certainly the direction we are going to be pushing things.

[Heiko Ihle:]

Slightly more general question, obviously smelting and refining charges have gone quite a bit over the past few years, and Bob, (inaudible) for a long, long time, and I just want to sort of get your opinion on when do you think there is going to be some additional competition from the smelters amongst themselves, you know, part due to some of the high-cost operations shutting down and giving some excess capacity. At what point do you think we'll see some easing of those costs? I am not just talking about starting of the increase in the price, I am actually talking about a decline.

[Bob Archer:]

Well, there is an increase in capacity happening even now Heiko, some new smelters coming on stream, but you can appreciate smelters is not something that you just build overnight, environmental permitting for one is huge for something like that. the ones that are coming on stream are more older ones that perhaps have been mothballed at one point and are being refurbished and reopened, there are a couple in Europe, I can think of where that’s happening. Some are just increasing capacity, and over the last few years, some have been building in different circuits or different capacity to be able to treat high silver concentrates. We went in to initially there a couple of years ago where the smelters just weren’t set up for that, and it certainly impacted us and that’s one of the things that drove prices up because they were just saying look we are not set up to take these concentrates, so if you want us to take it, it's going to cost you more, and smelters are always trying to get a piece of the action, so there is not a sufficient level of competition there yet that, and I don’t think to start pushing prices down, so until it gets to the points of perhaps metal prices dropping, I don’t see it happening in the next year or two anyways in terms of smelter prices coming down.

[Heiko Ihle:]

Maybe just one more, we spoke yesterday, and you mentioned you guys were looking at some assets that will increase your resource base. What kind of amount should we be looking into what you guys would be willing to spend? Obviously, your balance sheet right now is insanely healthy.

[Bob Archer:]

Yes. I mean this is something I mentioned that as a possibility. We’re just in a process of revising our M&A strategy with these lower prices, and the main focus right now is on the operations. So, we’re always looking at things, and the one possibility is to look at something with the resource, but in all honesty, I couldn’t quantify that for you at the moment, Heiko.

[Heiko Ihle:]

I’ll ask the question a little bit differently. Would you be willing to dilute shareholders at these prices for the right acquisition?

[Bob Archer:]

Well, it’s all relative. Obviously, we’re not going to be looking to dilute or to -- we’re not going to be looking at a deal that’s dilutive, put it that way. If we look towards doing any kind of a deal, it would have to be accretive. So, from that standpoint, I guess it depends on how you look at it, it’s not going to be dilutive.

[Operator:]

(Operator Instructions). Mr. Archer, it concludes the questions from the callers; I would like to turn the call back to you for closing remarks.

[Bob Archer:]

Thanks very much, operator. If there are no more questions, then I’d just like to thank everyone for joining us this morning and look forward to better times going ahead.

[Operator:]

Thank you. This concludes Great Panther Silver Limited conference all. You may disconnect your lines at this time, and thank you for your participation.