Great Panther Mining Limited
Q2 2015 Earnings Call Transcript

Published: 8 Aug 2015

[Spiros Cacos:]

Thanks for joining 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 will contain forward-looking statements. You should be cautioned that actual results and future events could defer from those noted in today’s presentation. I would like to remind you that this conference call is being recorded and will be available for replay after 10

[Robert Archer:]

Thank you, Spiros. Good morning everyone. Thanks for joining us today. We’ll start this morning with a brief overview followed by the second quarter highlights from our operations. We’ll then discuss our second quarter financial results in more detail, provide our outlook for the balance of 2015 and conclude the call with a Q&A session where we encourage you to ask any questions you may have. The second quarter was an eventful launch for Great Panther. Our operations set quarterly records for gold, silver and total metal production, ore grades were higher and costs were significantly lower. This translated to excellent financial results in the quarter in terms of growth in revenue, gross profit, adjusted EBITDA and operating cash flow despite the continued declines in metal prices. We incurred auction agreements on two advanced stage projections in the quarter that have significantly enhanced Great Panther’s gold potential. If we’re successful in bringing the core potential projects approved back into production it would lay the foundation for Great Panther’s expansion into the second largest silver producing nation in Latin America and replicate our entrée into Mexico 10 years ago. Our financial results also benefited from the strong U.S. dollar but then this also resulted in a large unrealized or non-cash foreign exchange loss which contributed to a net loss for the quarter. The unrealized foreign exchange losses associated with Great Panther’s investment in its Mexican operations, which is structured by way of a significant U.S. dollar loan through our Mexican subsidiary. The strong operating cash flow generated in the quarter enabled us to pay for our new projects and still maintain our strong balance sheet with $34 million of net working capital and $19 million of cash. Both of which increased over the comparable balances at the start of the calendar year. In addition, we continue to have no long term debt and used our credit capacity to add a $10 million credit facility which remains undrawn today. Turning now to the operational highlights from our second quarter. Overall, metal production in the second quarter exceeded 1 million silver equivalent ounces for the first time in Great Panther’s history, a robust 51% increase compared to the same period in 2014 and a 10% increase compared to the previous quarter. The large increase was primarily attributed to the ramp up in production San Ignacio, which commenced commercial production in June of last year, as well as the higher ore grades from all of our operations. During the second quarter, ore processed increased by 8% when compared to the second quarter of 2014, but decreased 12% when compared to the prior quarter. The increase over last year once again reflects the continued ramp in production at San Ignacio, while significantly higher ore grades at Guanajuato allowed us to grow production over Q1 with less tons and therefore lower cash cost. Total silver production set another all time record in the second quarter; compared to the same period in 2014, silver production increased by 54% to approximately 650,000 ounces, mainly as a result of higher silver grades and the overall increased throughput at both operations. Total gold production increased by 41% to more than 5,300 ounces compared to the second quarter of 2014. Looking at the individual operations. Guanajuato mine contracts or the GMC which includes the San Ignacio satellite mine accounted for approximately 74% of our total production in the second quarter, processing over 71,000 tons. The primary driver of the increase in production was the ramp up at San Ignacio as well as the increase in higher ore grades throughout the GMC and slight improvements in metal recoveries. San Ignacio is currently producing at a rate of 370 tons per day and will be expanding to approximately 450 tons per day by year end. Metal production of more than 818,000 silver equivalent ounces was a quarterly record for the GMC, presenting an increase of 74% when compared to the same period in 2014 and a 15% increase over the previous quarter. In Q2, we saw significant improvements in ore grades at Guanajuato compared to Q2 of last year. The higher ore grades were due to a number of factors including higher cut off grades, new grade control measures being implemented and some high grade total recoveries. Underground drilling continues to focus on the definition of high grade resources, mainly in the areas currently being mined. A total of more than 4,800 meters was drilled in the second quarter at Guanajuato for a year-to-date total of 8,250 meters. Almost half of that was vendor taken in the Valenciana area in order to update the resource estimate for that zone, which is expected to be completed in the third quarter. Once complete, the Valenciana resource will be evaluated for near term production. Development at San Ignacio concentrated on the new self extension zones which contributed higher ore grades, particularly gold, grades in the second quarter were 145 grams per ton silver and 3.22 grams per ton gold. The Company is planning 2,400 meter surface drill program at San Ignacio scheduled to begin late in the third quarter to further define these zones. Cash cost per silver payable ounce at the GMC for the second quarter decreased to $4.88 from $14.49 in Q2 of 2014. All in sustaining cost per for AISC at the GMC also saw significant decline to $8.93 from $20.96 in the same period of last year. The decreases were the result of a combination of higher grades and the U.S. dollar strengthening against the Mexican peso. At our Topia Silver-Lead-Zinc mine in Durango metal production was relatively consistent when compared to the previous quarter but increased 9% over the second quarter of last year due to higher ore grades and operational improvements that yielded better grades and recoveries. Topia’s throughput during the second quarter of 2015 was 17,905 tons, including total ounce. This was slightly lower than the same period in 2014 as well as when compared to the first quarter of 2015. The lower throughput is attributed to weaker gram conditions at the Argentina mine with slow productions and narrow veins encountered at several of the other mines. Nonetheless, cash cost for Topia decreased to $12.14 in the second quarter of 2015 from $13.31 in the second quarter of 2014. While AISC declined to $13.77 from $18.38 over the same period. Again, this is primarily due to the strengthening of the U.S. dollar compared to the Mexican peso but also to the increase in ore grades and recoveries. In July, we announced the significant increase in Topia’s mineral resource estimate, reflecting continued refinements in our resource model. The improved model and the success in-vein development and better reconciliation between the geological model and actual mine output resulted in an increase in estimated tonnage and contained ounces in spite of a notable drop in the price of silver. Turning now to our first quarter consolidated financial results. Despite continued declines in silver and gold prices, revenues for the second quarter increased 33% to $19.2 million compared to the same period in 2014. The $4.7 million increase in revenue was primarily the result of the increase in metal production and was also helped by the appreciation of the U.S. dollar against the Canadian dollar. Gross profit before non-cash items increased by $4.3 million in the second quarter of 2015 compared to the second quarter of 2014, as a result of a $4.7 million increase in revenue and the significant reduction in cash cost. As noted despite the increases in revenue, gross profit and operating cash flow in the second quarter, the Company generated a net loss. The main factor for this was a $3.8 million foreign exchange loss, primarily associated with a mark to market adjustment on the U.S. dollar denominated investment in our own Mexican operations structured by array of significant U.S. dollar loan. As an intercompany debt, the loan is not a liability to Group. However, the mark-to-market adjustments are still reflecting the Company’s consolidated statement of comprehensive income. Adjusted EBITDA which removes the unrealized foreign exchange loss and other non-cash items, increased $4.2 million compared to $0.2 million for the same period in 2014. The increase primarily reflects $4.3 million increase in gross profit before non-cash items. Consolidated cash cost per silver payable ounce of $6.63 for the second quarter of 2015, decreased 56% from $15.03 in the second quarter of 2014, primarily due to the combination of improved grades and the U.S. dollar strengthening against Mexican peso which reduced cost in the U.S. dollar terms. AISC for the second quarter of 2015 decreased to $12.54 from $24.40 in the second quarter of 2014. This 49% reduction is primarily due to the reduction in cash cost and the increase in production which reduced capital and G&A expenditures for payable ounce of silver. As we mentioned at the beginning of the call, Great Panther continues to have a strong balance sheet. At June 30, 2015, the Company had a cash position of $33.9 and net working capital with no long term debt. In both cases, these represent increases from our balances at the start of the year. As also noted, we signed a $10 million credit facility during the quarter. The facility has a term of one year and bears interest at a rate of LIBOR plus 5%. The Company has not drawn down any amounts on this credit facility. I should clarify that the current facility was put in place to give us additional financial flexibility and despite its timing, not to specifically fund any projects. Regarding those new projects, the Company announced on May 19th that it had entered into a two year option agreement with Nyrstar whereby we can acquire a 100% interest in the Coricancha Mine Complex Peru. This mark the beginning of an exciting new chapter in Great Panther’s development as the Company broadens its geographic diversity. The Coricancha Mine Complex is being on counter maintenance since August of 2013 and has a fully permitted and operational 600 ton per day location and bio leach plants along with supporting mining infrastructure. It is a high-grade gold silver copper lead zinc main deposit with a significant historical resource in a prolific and well established mining district 90 kilometers east of Lima. Coricancha represents the near term production opportunity and the 10 year option will allow us to gain comfort with the project without having to make an immediate and significant financial commitment in the current environment of low metal prices and depressed market conditions. The Company is planning the commencement of underground drilling in the third quarter and surface drilling before year end. In addition, the Company completed the acquisition of Cangold Limited, and as a result, Great Panther now holds an option to acquire a 100% interest in the Guadalupe de los Reyes or GDLR gold silver project Sinaloa, Mexico. GDLR has a historical PBA and the compliance resource of $31 million silver equivalent ounces in the indicated category and the further $13.7 million in the inferred category; mineralization is contained in the vein systems, similar to San Ignacio, and have significant upside potential. Great panther will commence drilling this quarter and will concentrate on higher grade areas in order to support the evaluation of an underground mine plan. While the terms of both agreements are described in further detail on our Web site and on CEDAR, it is significant to point out that we have fully funded these acquisitions under year-to-date cash flow generated from our operations and it is our objective to continue to fund project cost and future options payments in the similar fashion. In summary, Great Panther delivered another quarter of record production with substantially lower cash cost and AISC from a year ago. Given better than expected production results for the first half of 2015, we increased our production guidance for the year by 8% to 3.8 million to 3.9 million silver equivalent ounces. The revise guidance represents an approximate 21% increase over 2014 production, including a small impact from the change in ratios in determining silver equivalent ounces to account for the movement in metal prices over the past year. Similarly strong cash cost and AISC performance for the first half of the year led us to review our previously issued cash cost and AISC guidance for 2015. While improved grade control and higher cut off grades at all our mines should maintain higher production levels, it is still early in the production history of the South Extension zones at San Ignacio. Therefore, grade fluctuations are possible and the Company may consider alternate mining methods and the mining of lower grade material in order to increase cash flow, but with could also lower head grades and increase unit costs. Accordingly, we are reducing our cash cost guidance to $9 to $10 from $11.50 to $12.50, and AISC to $15 to $17 down from $15.50 to $19.85 previously. Naturally we will strive to achieve cost lower than guidance. Last month the Company provided an update on our standard drilling programs for the second half of 2015. As a result of the completion of the Cangold acquisition and the signing of the Coricancha option, total planned drilling meters for the GMC and the GDLR and Coricancha projects in 2015 has been increased to 29,700 meters from 19,000 meters. This translates into a $3 million to $4 million of additional exploration and evaluation expenditures for 2015, and it is our objective to pay for this out of our operating cash flows, existing cash and net working capital. The Company is maintaining its guidance for $10 million to $12 million in capital expenditures for 2015 comprising capitalized mine development and diamond drilling, and for the second quarter of new mining and plant equipment. I’ll now open the call up for questions.

[Operator:]

Thank you [Operator Instructions]. Your first question comes from the line of Bhakti Pavani from Euro Pacific Capital.

[Bhakti Pavani:]

Just on the production front, the grades have significantly improved in the second quarter. I was just curious to know are those the ongoing grades that we should be expecting for the remaining up to two quarter, or was that one time hitting of the high grade pillars. How should we look about it?

[Robert Archer:]

Well, the high grade pillars specifically were probably 5% or less contribution to that. But those were more or less one-time events. There’re maybe others over-time. But we’re forecasting slightly lower grades for the second half. But at San Ignacio as I mentioned it’s still early days in terms of the South Extension zones and the grades there are little bit higher what we’ve been mining previously. So I’d say overall slightly lower grades in the second half, but hopefully not significantly.

[Bhakti Pavani:]

The other question was regarding the production cost. The cost has come down significantly. Could you maybe provide more color on what kind of mining methods you changed and how should we forecast it going forward?

[Robert Archer:]

I wouldn’t change anything in the forecast, at this point. At San Ignacio, we’re looking at the possibility of using long haul mining in certain areas, particularly the South Extension zones because they’re wider and steeper dipping. So, they could be more meaningful to long haul mining as opposed to cut and fail. But that’s something that we’re still just looking at ourselves and no final decision has been made on that. At Guanajuato and Topia, nothing has changed. So, we haven’t actually built anything into our forecast ourselves as far as changing mining methods. But it’s something that’s possible. Jim, do you have a comment on that.

[Jim Zadra:]

Bhakti I’d add that most of the decrease in those two factors in the decrease in cash cost and first part it’s the grades, the high grades significantly reduced the cash cost. And the second part is just the strengthening U.S. dollar. Most of our costs are in Mexican peso. So, you can see that that will continue to benefit from those factors in the current quarter, and hopefully throughout the rest of the year.

[Bhakti Pavani:]

The other thing was we’re looking at the cash cost and all in sustaining cost for the individual mine, especially with the all in sustaining cost. For this quarter, you guys haven’t allocated any G&A expense to the individual mines and it’s more sort of a corporate G&A expense. Just was wondering, what made you change that and allocate the all in sustaining cost towards individual mine?

[Jim Zadra:]

We did that on the basis of looking at number of peers. What we found is that there’re many companies out there that are not including the head office G&A allocation in the all-in sustaining cost for the individual mines but are putting there on a consolidated basis. So, we decided to align ourselves with the number of companies that are doing it on that basis.

[Bhakti Pavani:]

So this is going to be an ongoing practice going forward?

[Jim Zadra:]

Okay.

[Operator:]

[Operator Instructions] There are no further questions at this time.

[Robert Archer:]

Thank you, Operator. In closing, I would like to thank our employees, our contractors and our stakeholders for delivering another strong quarter for 2015. In this low metal price environment, Great Panther has demonstrated operations resilience and the strong balance sheet has an ability to capitalize on organic and external growth opportunities. We’re excited about the opportunities supported by the Coricancha mine and the GDLR project, and look forward to developing these assets further. Thanks for your participation today and I look forward to sharing our progress with you again next quarter.

[Operator:]

Thank you, Mr. Archer. This does conclude Great Panther Silver Limited’s second quarter 2015 results conference call and webcast. Goodbye.