Sierra Metals Inc.
Q1 2022 Earnings Call Transcript

Published: 12 May 2022

[Operator:]

Hello everyone and a warm welcome to the Sierra Metals First Quarter 2022 financial results call. My name is Bethany and I will be your Operator today. . I will now hand the floor over Christina Papadopoulos, Manager of Investor Relations at Sierra Metals. Christina, over to you.

[Christina Papadopoulos:]

Thank you, and good morning, everyone. Welcome to Sierra's First Quarter 2022 results conference call. On today's call we are joined by Luis Marchese, our CEO, and Ed Guimaraes, our CFO. Today's call will be followed by a question-and-answer period. The accompanying presentation for today's call is available for download through the webcast or from the company's website at sierrametals.com. Yesterday's press release, the financial statements, and the management's discussion and analysis are also posted on the Company's website. I'd like to note that this earnings call contains forward-looking information that is based on the company's current expectations, estimates, and beliefs. Our forward-looking information is subject to a number of risks, uncertainties, and other factors. Actual results could differ materially from our conclusions, forecasts, or projections as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusions, forecasts, or projections in the forward-looking information and the material factors or assumptions that are applied in drawing a conclusion and making a forecast projected. As reflected in the forward-looking information is contained in the company's annual information form, which is publicly available on SEDAR, EDGAR, Via Form 40F, or the Company's website. Please note that all dollar amounts mentioned on today's call are in U.S. dollars, unless otherwise noted. I'd now like to turn the call over to our CEO, Luis Marchese for an overview of the quarter's highlights, as well as a summary of what's ahead for the remainder of 2022, followed by Ed Guimaraes, our CFO for financial highlights.

[Luis Marchese:]

Thank you, Christina, and good morning, everyone. Looking at the Slide 4, during the first quarter the company's operations continued to feel the impact from COVID-related issues. In particular, with Yauricocha, with further significant reduction in mining and service personnel, which prompted further delays in mine development and affected preparation of various deliveries. These restrictions, coupled with the expected reduced ore grades due to limitations of accessing high-grade ore areas, a 38% decrease in copper equivalent production during the quarter. We've continued efforts to safeguard the health of our employees to operate safely, we have seen a significant improvement in consistent . Vaccination efforts continue, with 100% of personnel at Yauricocha now fully vaccinated with . At Bolivar and Cusi most personnel are vaccinated with at least two doses, with plans to achieve full vaccination by the end of Q3 2022. During the second quarter of the year at Yauricocha, we expect to be able to make up for the lower production we've seen early in the year due to the personnel challenges, and we plan to operate throughput levels that will allow us to target our permitted capacity of 53,000 tonnes per day. The discovery of the new high grade will help boost our throughput levels, as well grades. The new zone is that gave us into the current mining operating located laterally between the Cachi Cachi and Esperanza zone, and can be decently incorporated into the mine plan. We have picked these orebody as early as Q3, 2022. At Bolivar, the full turn-around continues, unless we probably we have pick to see an improvement throughout the year. The first-quarter was particularly difficult as we reached the of the Bolivar West zone and these four zone within mineral . With a 50% reduction improvement, there are 54% decrease in corporate gross margin. is increasing and mine developing becomes really in the previous quarters and years. Both in grades have suffered. As we move into the full turnaround the preparation, we were expecting that performance may worsen before we saw improvement. However, by the end of this first-quarter, mining began at the Bolivar North West zone, and we suspected to provide 4 for the next several quarters, which will support our plans for incremental production we can prove great at Bolivar an up to 5,000 tonnes per day by year end. While production of the mine, further investment is done at the mine correct the drilling and development backlog, update the operating facilities and our auxilliary services, improve processes, and upgrade housing facilities, among several other initiatives. And finally, we have seen a substantial improvement at our Cusi operations so far this year. With investments into the mine's infrastructure last year with the addition of our raised board alleviating high temperatures of where most operations are taking place. A 15% increase in throughput during the first-quarter, coupled with the mining of slightly higher grade, resulted in a 57% increase in silver equivalent production for the same period last year. This is performance that no doubt helped support the consolidated production profile of the company during the quarter, especially as we continued to our operational recovery at Bolivar. We had anticipated a of at least two quarters before our Bolivar operations saw an improvement, and we plan our guidance accordingly. We can report that despite a 38% in creating consolidated copper equivalent production during the first quarter, we are on track to reach the company's first cost production guidance of 54 million to 59.5 million corporate earning pounds. Looking ahead in 2022. Turning to Slide 5. As our culture, despite of anything, restrictions to mining or levels of the mine were higher graded fifth. We are focused on reaping maximum levels of throughput at 56,000 tonnes per day. Highest throughput along we've mining 51 or from the new high-grade for CMS non. will positively impact our ability to reach yearly target. Our focus at Yauricocha remains the same; finding new and other ways to use and delivery at full capacity within our current mining constrains, especially with continued strength in metals price. We expect that we will make up for our least production during the yearly part on the first quarter of the report. And will start to meet our guidance of between $45 and $49 million corporate equivalent pounds. Whereas a new phone is suspected to provide making margin for the new year, our exploration building campaign continues with a focus on original high-value market. Moreover, a of the new 1,500 additional meters is proposed for Fortuna to further underline the ore value and potentially find correlations with the structural patterns and the physical information that may lead to finding additional high-value target. The structured price also continues in Yauricocha, including work on the Yauricocha ventilation infrastructure, and they require expansion, and we're doing it now. At Bolivar we continue to work our plans to increased through our quarterly date. We've attained a year target of 5,000 tonnes per day. Improve production, we anticipated in the second half of the year in the Bolivar North West zone supporting the bulk of production. Additionally, with the of the development at the mine and the installation of a new location, the is to get Bolivar to a point where you can take rate of 5,000 tonnes per day in 2023. our strategy is fleet and the actual timing may change as priorities in our operations has turnover shift. For the time being, our focus is to continue infill drilling problem, whatever is classification for ore. We continue with additional mine development so we floor and provides manufacturing needs, which could mean increase in the purchase value, including ventilation, communication, the integration plan of connecting the mine to the plant, development , and plant improvements. In terms of operations, the company is focused on two areas, Bolivar needs a year of high-grade theme silver and gold where we expected to initiate that a very campaign later this year and a high-grade system for silver and gold, which can provide mineral values to support the Bolivar mine. We've improved operating efficiencies around production and continued strength in metal prices, we're optimistic that we will see a stronger revenue contribution from Bolivar by the end of the year and into 2023. At Cusi continue mine development and processing optimization to target throughput of 1,200 tonnes per day. Infill drilling continues in order to support the development of the and Additional projects include equipment replacements and land development. We can report that the money is on track, with this production guidance within 1.75 million or 1.85 million silver equivalent ounces. And as we expect that it will continue to provide a positive contribution towards the company's EBITDA. And with that, I will now turn to Ed to review first quarter financial highlights.

[Ed Guimaraes:]

Thanks for Luis and good morning everyone. Turning to Slide 6. With the continued impact of COVID-19 on our employees and operations during the early months of the year. We reported a 24% decrease to our consolidated throughput, and with a decline in all grades except for copper, this equated to a 38% decrease in consolidated copper equivalent production compared to the first quarter of 2021. Although strong metal prices continued, they were not able to fully offset the decline in production and revenue from metals payable which decreased 18% on compared to Q1 2021. Adjusted EBITDA was $16 million, a 43% decrease resulting from lower revenues and lower gross margins when compared to Q1 2021. We reported a net income attributable to shareholders of $0.4 million or $0.00 per share and adjusted net income of $5.9 million or $0.04 per share. We finished the quarter with approximately $19.5 million in cash. Our three months’ revenue mix by metal continues to be led by copper, followed by silver and zinc at 41%, 28% and 19% respectively. Lead and gold continue to contribute revenue in line with previous quarters, at 7% and 5% respectively. Looking at the efforts realized prices compared to Q1 2021, we continue to see an improvement in copper, driven by global infrastructure supply demand, and the green energy revolution. Silver realized prices lagged slightly with a 9% decrease, while gold increased a modest 5%. Zinc and lead saw a strong increase with 36% and Turning now to Slide 7, compared to Q1, 2021, a 48% increase in cash costs and a 41% increase in owns, saving cost was driven by a 37% decrease in copper equivalent payable pounds at Yauricocha. Given our inability to mine in higher-grade zones over the past few quarters, we have seen a downward trend in grades of the , which continued to result in costs and comparing Q1 2022 to last quarter. In addition to lower grades, throughput in the first quarter of 2022 was also impacted by core performance of a mining contract. Mines times were below targets, and the mine had to resort to stockpiles, which also negatively impacted grades. were also impacted to some extent by a nationwide transportation strike during the last week of March that resulted in an increase in unsold concentrate inventory at quarter end. Had this event not developed cash costs would've been closer to $2 per pound. At Bolivar, cash costs increased by 187% and all-in sustaining costs by 152%. Driven by a 56% decrease in copper equivalent payable pounds, which resulted in higher operating costs per tonne. When compared to Q4, 2021 Bolivar's cash costs have improved by 14%, and all-in sustaining costs by 15% while tonnage decreased by 18%. Higher grades this quarter, while still significantly lower compared to Q1 2021, compensated slightly and improved costs. Overall, this is a positive trend for our turnaround program as we are seeing improvements quarter-over-quarter. At Cusi, as mentioned earlier, investments into the mine last year have provided for increased operating efficiencies so far this year. A 49% increase in silver equivalent payable ounces resulted in a decline to both cash costs and all-in sustaining costs by 28% and 34% respectively, when compared to Q1 2021. Looking at a comparison to Q4, 2021, cash cost increased 14% while throughput increased by 4% quarter-over-quarter. The cost of inputs also increased. Global inflation and the impact of the ongoing Russia - Ukraine conflict, the cost of fuel, explosives, and drilling equipment have also increased. Silver equivalent payable ounces recorded during the quarter were in line with the previous quarters. However, the increase in cash costs resulted in higher cash costs per unit. On the other hand, all-in sustaining costs decreased by 5% when compared to Q4, 2021. Costs related to treatment and refining charges and general and administrative products, as well as sustaining capital expenditures, decreased, resulting in a lower all-in sustaining cost per ounce. In conclusion, on Slide 8, the company reported $19.5 million in cash as at March 31st, 2022. Our total debt at the end of the first quarter was $81.1 million, with a net debt of $61.6 million. Cash and cash equivalents decreased during the quarter due to $3.9 million used in operating cash activities, $10.7 million used in investing activities, and $0.9 million used in financing activities. The company has further access to available credit lines with local bank, as well as other short-term lines, and prepayment facilities with its commercial offtakers. For the remainder of 2022, the company's focus will be on improved operating cash flows through improve production and cost reduction supported by a strong base metals price environment. Management will continue to review metal prices and retains the option to adjust the capital expenditures should metal prices experience any dramatic changes within the year. With that, I will now turn the call back to Christina.

[Christina Papadopoulos:]

Thanks, Ed. That the presentation for this call. And now let's open the call to questions and answers. In the interest of time and fairness, we ask participants to keep their questions to a limit of two Operator, you may open the lines.

[Operator:]

Thank you. . From Noble Capital Markets. Mark, please go ahead.

[Mark Reichman:]

Thank you. And good morning. I just got a few questions. First is with the recovery in production over the balance of the -- by mine guidance.

[Luis Marchese:]

Hi, Mark. Thanks for the question. Yes, so we expect you to still meet those guidance numbers.

[Ed Guimaraes:]

It's a little hard to help because sometimes you experienced some inflation in some of the particular line items I was just thinking, Well, I think QC was fine for the first quarter, but Bolivar and Yauricocha were quite a bit higher than the guidance. And I thought, well, maybe there might be some stickiness for some of those costs, but it sounds like it's really just a function of production. And then just a second question is, if you could provide just a little more clarity. In your corporate presentation, you've got Slides 11 on-field, opportunities. And if you could just maybe provide a little more clarity on Fortuna kind of what that means in terms of a great uplift. And then kind of longer-term plans to bridge to the mining at depth after 2023, once you get the permit.

[Luis Marchese:]

For Puma, we've been in routine. All the area of 1120 level mark which is our current mining restrictions. So by doing that and some reinterpretation, we were successful in finding the consular area, which is in the Good answer, these are large operating area there in the level of fall we see I guess really good development because we found these high-grade zone and we are in the presentation in looking into hopefully finding more areas like that. Now, what does this mean in terms of the mine production? As you are aware, over the years, the repurchase has benefited from the rate of these smaller rising high-grade will usually means knowing great larger or values and that will give you the needs that make the repurchase small, or how to make under cultural profitabilities. What happens is that most of their now are below the okay actually almost all of it. So by extent by finding tuner. Above the , we are replacing the high-grade as we would usually mine from the core particularly below the grade. This is really good news. The other very good news is that each of the , which is where we have our main destruction panel. . We've got all the facilities there. We've got ventilation, we've got power. So we're now developing a , particularly the production in a few months. This is very good news as we highlighted in our presentation.

[Mark Reichman:]

Thank you very much. That's really helpful.

[Operator:]

Our next question comes from Heiko Ihle from Wainwright & Co. Heiko, please go ahead.

[Heiko Ihle:]

Hi, its Heiko from H.C. Wainwright. I saw some news with the protests of a rise in food, energy costs improve just given your commodity price spikes. And obviously, inflation is an issue. We have just but any comes in every single earnings call. It's been on so far. What are you seeing and what are you doing to if at all, mitigate it as much as you can? And also, how much of your fuel costs have actually gone up?

[Luis Marchese:]

Yeah, we essentially concerns, Heiko, as well as with changed rate. Now the exchange rate when we the budgeting process was about per dollar and now it's closer to $3.80. Around 65% of our costs and will come in a bit of a . And we are also having on fuel, but we're not so fuel intensive as much as power intensive and power has remained fairly similar, and so that hasn't affected us so much. We're looking at explosives and other items that we are partakers in a large and we can manage but if the market is moving up, there is not much we can do about it, but certainly we are trying to improve the effectiveness of the use of those .

[Heiko Ihle:]

Earlier on this call, you talk about the year exploration at Bolivar high-grade zinc is very good in this market. How much are you actually spending on exploring this area? And I guess that's an impossible question to answer, but how much material do you think might be located in this area please?

[Luis Marchese:]

We're talking -- we what we can expect with Heiko but certainly we're just starting to do that, that we -- one is called La Sierra that has been in the works for some time but we working comparable to when we could get from additional volume and great from corporate right now we will become quite relevant but we're targeting that and the other is the it was before COVID and then financially being tied to deposit. Much we're going to spend so far close to a million dollar depending on how good we get, we might be patient in production quite to we will have to imagine really processing plans to corporate for.

[Mark Reichman:]

Thanks so much, all the best to you.

[Operator:]

The next question comes from Leon Cooperman at Imax Family Office. Please go ahead.

[Leon Cooperman:]

Thank you very much. And hope everybody is safe and healthy. So maybe, Ed -- this is directed to Ed Guimaraes. Maybe you can help us tie this together, give us a range that you're comfortable with EBITDA for this year. And your range of CapEX, and therefore where we could look towards free cash flow. That would be my first question. Second, and I think we're a much better company than $0.78 stock price. And I think that the price of stock gives it a cheapened image. Have we thought about the virtues of a reverse split as a way of elevating the stock price and maybe getting us at a category of cigar butt? And finally, based upon your budgets, last year you went to a dividend with the hope of the dividend being sustainable. I know this is determined by the Board rather than management but do you think you'll be in a position to pay a dividend at the end of this year based upon you budgets if things go along with your expected lines? Thank you, and wish you good luck.

[Ed Guimaraes:]

Thankfully, thanks for those questions. So in terms of EBITDA, we're maintaining our guidance between 90-105 million in terms of Q1 EBITDA, there was a little bit better than expected and so we're definitely tracking well. But things CapEx stands for $71 million depending on maybe the turn around. AppFolio burn, we will have the option to produce that, I believe we'll probably come under CapEx, the $71 million. Probably somewhere between $50 to $60 million. Again, wanting to ensure that we have sufficient liquidity to meet any production shortfalls, we may have -- we're still mad over the which yet with respect to the turnaround, but we hope to be over the next couple of months. In terms of any NAD, there's no question are share price has gotten hammered and more slowly the whole mining space. I think it's fair to say that mining companies globally have seen depressed share prices. But Sierra has definitely suffered more -- most than the rest. So I don't really want to speculate on in terms of what an NAD is, I would you, again I believe our analysts have done a really good job and you can encourage everyone on the call to really review the analyst coverage research reports where they do provide target and provide an idea and then target share price. In terms of

[Leon Cooperman:]

reverse split the dividend intentions.

[Ed Guimaraes:]

Oh, yeah. No, now we just wanted to mention that as well. In terms of the reverse split, yes, that is something. I think it is a little bit of -- it's fairly from an arithmetic perspective. There's really a lot going on there, but it is something we can look at. It's more cosmetic than anything else, but it is something I'm happy to speak to you more about that in terms of the best way to go about that, and really the advantages of doing that. But it is something that I know we have discussed in the past and it's on my -- on my list. In terms of the dividend, the dividend really will depend on the turnaround, on the strength of the metal prices. It's not a big dividend, but given where we are now, I think it's too early to make that call. We'll be in a much better position, when we get through close to let's say, August, September to make that call. But for now --

[Leon Cooperman:]

Remind me the terms of your debt. You have a quarterly amortization of debt?

[Ed Guimaraes:]

That's correct, Lee, it's $6.25 million per quarter so $25 million a year. We're in the process of refinancing the $25 million for 2022. We have very good relations with with our approving banks and those discussions are going very well and we hope to make an announcement soon, but they have been extremely supportive. Thank you very much for your response. I appreciate it.

[Leon Cooperman:]

Thank you.

[Operator:]

The next question comes from Jim Young at Midwest investments. Jim, please go ahead.

[Unidentified Analyst:]

Hi. Everyone to just give us an update as to what status is the Cusi please? Because my impression that the management team was focused on divesting its asset.

[Ed Guimaraes:]

Thanks, Jim. Yeah. Cusi we are in a process for Cusi. But as you know, Cusi really represents 10% of our revenue. It's not our focus, our primary focus right now could see the investments that we made last year. Infrastructure, really paid off, and you can see that in Q1 results. From our perspective, there would have to be acquired with good financial wherewithal, or willing to pay cash, willing to continue to invest in Cusi because I think it does need investments yearly, given the epi thermal well, being characteristics. And we'd also be looking for some sort of a royalty. So all these things need to play out. Whether we're going to find, even though we are in a process. And, again, it's, it's really not our priority or we're certainly happy to retain Cusi, especially with the financial results that we're seeing this year. And we should be able to provide an update ensuring our next conference call. The process should be done by then for sure.

[Unidentified Analyst:]

Okay. Thank you. And secondly, regarding EBITDA, and you said that first-quarter you'd have $60 million a little bit ahead of your expectation; is that correct?

[Luis Marchese:]

Yes. And that certainly, not low prices. So this won't stop other prices.

[Unidentified Analyst:]

Okay. So then could you give us the quarterly progression for the remainder of 2022 or the June quarters, September and December? there would get to the lower end with a $99 million guidance range?

[Luis Marchese:]

I think you should see Q2 being somewhat in line with Q1 and then you really going to see the significant uptake in the second half, Jim. So really it's still sticking. If you look at the guidance broken by first half and second-half, I believe we'll be in those ranges this year.

[Unidentified Analyst:]

Okay. Well, if you're looking for a similar level of EBITDA for the single-core , I suggest that the third and the fourth quarters should show significant ramp-ups. I'm not quite clear as to what's going to drive the ramp up in the third quarter and the fourth quarter. So can you help us understand what's going to drive that improvement, please?

[Luis Marchese:]

It's really scale. It's really scale. Bolivar being at the 5,000 working up to the 6,000 tonnes per day. That's going to be significant.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

The next question comes from Chen Lynn with at Lynn Asset Management. Chen, please go ahead.

[Unidentified Analyst:]

Hi. Thank you for taking my questions. Most of my question has been answered. I'm just curious, one of the issue for Peru is the water level. How challenging do you see, for instance, to get the permit to mine below the water map -- water level, and then how long that would take? Thank you.

[Luis Marchese:]

Thank you too. We -- the issue that minute different meeting for 34 Channel 1 of progress on their own workloads in mindset or, in order to reach into those level, you've got to draw full environmental impact as treatment. And that processes are a fairly robust and complicated and related fee process which can take up to three years as history has told us. So we started that process last year and we expect that process to finish and then through to the next year and then we would apply for the running conduct good and I was to go into these new areas. We don't foresee in the major issues on who's on those areas because has been mining with the areas for quite a number of years. So we just have to follow the process and keep the communities and with the

[Unidentified Analyst:]

Okay great. Thank you. And then congratulations, for your recent high-grade discovery underground. So how -- do you have the size -- relatively side of that discovery or it's -- right it's now it too early to tell?

[Luis Marchese:]

Thank you for your congratulation. Yeah, it is still early, but I think that we believe that it's more about the grade than the tonnage, and that it's going to help us replace these high grade that we've been mining over the years, which will be low . So it's going to give us some relevant but more particularly the higher grade. And I don't want to understate that we are still looking in that area, so we're still hopeful that we may be able to find some other similar ore bodies, but nature will tell.

[Unidentified Analyst:]

Great. Thank you. maybe the others I will take it offline. Thank you.

[Luis Marchese:]

Thank you.

[Operator:]

We have a follow-up question from Leon Cooperman at Omega Family Office. Please go ahead.

[Leon Cooperman:]

Thank you. I was just curious any insight into latest moves in the government Peru, the company-friendly, industry friendly, industry negative? What's going on in terms of leadership of the country?

[Luis Marchese:]

Actually, that's a difficult question really because the government has shown different phases of how we deal with industry. the speed that there is supporting on your . That's just not necessarily the case. So it's . I'm considering a small now with the experience of the people that is now in the ministry of particularly and . These are very technical entities. And our concerns are that, if the new offering fees don't have that required experience. But only a few months on the job. So we will see how it works. But it's a difficult question to answer.

[Unidentified Analyst:]

Do you have an easy question you want me to ask you? Good luck and thank you for your response. Appreciate it. Okay, good luck.

[Luis Marchese:]

Thank you. Thank you.

[Operator:]

We have no further questions, so I'll hand it back for any final remarks.

[Christina Papadopoulos:]

Thank you, Operator. That concludes today's call. On behalf of the management team, I would like to thank all participants for joining us today. A replay of the webcast and all materials can be found on our website at sierrametals.com. If there are any further questions or concerns, you may reach out to us after today's call. Our contact information can be found in today's presentation, as well as on the company's Flex Pay. Thank you, operator, please conclude the call.

[Operator:]

This concludes the Sierra Metals first quarter 2022 Financial Results crew. Thank you for joining us. You may now disconnect your lines.