Sierra Metals Inc.
Q4 2020 Earnings Call Transcript

Published: 19 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Sierra Metals’ Fourth Quarter and Year End 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. I would now like to turn the call over to your speaker today, Mike McAllister, Vice President, Investor Relations. Thank you. Please go ahead.

[Mike McAllister:]

Thank you, Operator, and good morning, everyone. Welcome to Sierra’s year end 2020 results conference call. On today’s call, we are joined by Luis Marchese, our CEO; and Ed Guimaraes, our CFO.

[Ed Guimaraes:]

Thanks, Mike, and good morning, everyone. Turning now to slide four, the company achieved exceptional results in 2020, despite managing the implications of COVID. We reported a 6% increase to our consolidated throughput and record adjusted EBITDA of $97 million. We also reported strong cash flow and net income, and we finished the quarter and year end with approximately $71.5 million in cash. These solid results are the product of evolving optimized operations and expansions ramp up providing stronger financial and operational performances, which we expect to continue into 2021. Our revenue mix by metal continues to be led by copper followed by silver, which have taken an increasing percentage of the overall revenue mix with a ramp up of the Bolivar copper mine and the Cusi silver mine. Gold has also seen a continued increase as a percentage of the mix aided by improved production at Bolivar and supported by higher gold prices.

[Luis Marchese:]

Thanks, Ed, and good morning, everyone. Turning to slide six and looking ahead into 2021. We continue to see a strong growth of the company as the operations in Mexico are underway to running at an increased capacity of 5,000 tonnes per day at Bolivar and per day at Cusi. Furthermore, we recently received an ITS environmental permit and expect to receive the final ITS permit in Q2 2021, which would see Yauricocha increased permitted throughput by 20% to 3,600 tonnes per day. We’re optimistic that with improved operating efficiency and continued strength in metal prices, we will be in a position to meet the annual production and EBITDA guidance provided. COVID-19 is certainly still challenging us and case counts remain the highest in Mexico and Peru. However, policies and practices are in place to manage these issues, while prioritizing our employees and surrounding communities’ health and safety. At Yauricocha, we continued to complete drilling to grow our mineral reserves and resources, and complete the development work requiring operations to increase production in the future. We expect these capital expenditure projects to result in increased cash flows and lower cash costs. Additionally, we expect to fund these capital expenditure plans through the generation of operating cash flows. At Bolivar and Cusi, similar to Yauricocha we are ramping up mineral exploration programs and completing the construction and operational inputs. These improvements include an expanded tailing facility at both mines and driving an underground tunnel that will connect the mines with the concentrator plant at Bolivar to improve efficiency and reduce haulage costs.

[Mike McAllister:]

Thanks, Luis. That ends the presentation portion of the call. We would now like to open the call to questions from participants. However, in the interest of time and fairness, we ask participants to try and keep their questions to a limit of two to give all participants an opportunity to ask questions. With that said, Operator, please open the line.

[Operator:]

Our first question comes from the line of Heiko Ihle with HCW. Your line is open.

[Heiko Ihle:]

Hi, there. Thanks for taking my questions, and I hope everybody’s staying safe. In your press release and the – and it is also on the MD&A page seven exploration at Yauricocha was suspended with COVID restrictions and all that stuff, and you only drilled 10,100 meters of the 25,000 meters that you wanted to do. In January, during your 2020 production release, you mentioned that $10 million have been carried over from the 2020 CapEx budget for carryforward projects. What’s the latest spend for Peru specifically? Has this expectation changed since January, and should we anticipate these expenditures to be quite front-loaded for the year given that they were initially expected to be incurred last year? In other words, what are you starting to see for Q1, which is almost over?

[Ed Guimaraes:]

Hi, Heiko. Thanks. Thanks for your question. Yeah. They are -- they were largely -- the delays were largely due to COVID, and we have seen COVID continue into 2021. In terms of our guidance, we’re still holding to our CapEx guidance. But there is -- they’re not going to be front loaded, as you indicated. I think you’re still going to see some impacts into Q1, but we’re still holding firm with our guidance that we put out in January.

[Heiko Ihle:]

Got it. And then just one more, can you provide some color on what you’ve been seeing with the treatment and refining costs in Q1 so far. I mean in Peru last year, you spent $45.8 million on T&Cs and I understand that figure isn’t very comparable with the current environment. But I mean, is it maybe just a little bit more detail on what you can provide for 2021 for us today?

[Ed Guimaraes:]

Sure. I can’t really go into too much details there, but I can talk in general terms in terms of where benchmark was and where indicative benchmarks we think we foresee. Last year, benchmark was just under 300 . It was 299 per tonne. And what we’ve seen so far and into the end of fourth quarter and into this year, we saw about 50% lower in terms of indications where benchmark might fall. Spot prices have been all over the place with the container shortages that are happening in China, so you’ve got higher freight costs. So, all in all, it looks like they’re going to be better than what they were in 2020 for 2021, and copper looking like last year’s benchmark was about $60 per tonne, $0.06 on the refining side, and we’re seeing about indications are there about 25% lower in that regard.

[Heiko Ihle:]

Okay.

[Ed Guimaraes:]

That’s all I feel comfortable on costs.

[Heiko Ihle:]

Yeah. That’s actually pretty comprehensive. Appreciate the insights. Stay well, stay safe.

[Ed Guimaraes:]

Thanks, Heiko.

[Operator:]

Our next question comes from the line of Mark Reichman with NOBLE Capital Markets. Your line is now open.

[Mark Reichman:]

Thank you and good morning. This question is just on page six of the presentation where they talk about the new tailings dam both for Cusi and Bolivar. And I was just wondering if perhaps you could comment on that and kind of how those experiences set you up or whether you -- whether that’s going to provide enough capacity and kind of what’s -- what you’re envisioning there?

[Luis Marchese:]

Thank you, Mark. Yes. As we speak, we’re finishing the first stage in Cusi’s new tailings dam and we’re finishing as well the first stage in Bolivar. Both are thought out for the mid- to long-term operation of the mines. So these are going to give us the space for the next few years’ tailings from both mines. So this is a CapEx that we are observing now, but it’s going to let us operate comfortably for the next few years.

[Mark Reichman:]

Okay. And then my second question is just -- is there anything -- any updates related to the strategic review that you announced earlier in the year or anything related to that that is worth mentioning?

[Ed Guimaraes:]

Hi, Mark. I can take that one on. Yes. As stated in the company’s press release of January 8, 2021, the company does not intend to provide announcements or updates regarding the strategic process unless or until it determines that further disclosure is appropriate or necessary. That’s all we have to comment .

[Mark Reichman:]

Okay. That’s helpful. Thanks.

[Operator:]

Our next question comes from Alex Hunchak with CIBC World Markets. Your line is open.

[Alex Hunchak:]

Hi, guys. Thanks for taking my questions. Just want to ask on cost. So, obviously, they were up a bit in Q4, and I think most of that was due to COVID. But should we expect basically flat costs into Q1 as well given that COVID hasn’t really improved as much as we would have liked? And then, is there risk to guidance if vaccine rollouts are delayed later into the year or how have you sort of incorporated, I guess, COVID assumptions?

[Ed Guimaraes:]

Thanks, Alex. I will take the first part of the question and then I’ll pass the second one to Luis. Yes. In terms of costs, COVID has continued. It’s not like it ended in 2020. Obviously, we’re seeing some additional waves happening into 2021, January and so forth. So, I believe that you will see there could be some repercussions on costs, but we’re still sticking to our guidance that was put out in January. Now, I’ll pass it over to Luis for the second part question.

[Luis Marchese:]

So I said, we are maintaining our guidance for 2021. And in Peru, we are in the second -- in the height of the second wave now. It started mid-January and we’re still there and Mexico has had the hit of COVID, as in all of North America. We’ve also had the hit of the winter wave that went down to Texas and Northern Mexico. So, that also hit us a bit, so we are feeling the pain of those two issues that come on top of us.

[Alex Hunchak:]

Okay. Okay. Fair enough. Just wanted to kind of take a temperature check on that but that sounds good. Thank you. And then maybe just to what -- so obviously we don’t have any reserves right now, because of the PEAs last year, but then I assume that when the Prefeasibility Studies come out, we’ll get reserve updates with those. So will there be anything that changes in terms of price assumption and the other calculations or can we just kind of assume that we take the last reserve statements subtract depletion and we should be sort of matching up when the new reserves are out?

[Luis Marchese:]

Yes. That should be the way to do it, Alex. Yeah. We are planning to release a reserves when once we have finalized, I agreed on the PFS during this year.

[Alex Hunchak:]

Okay. Great. So no changes to our metal price assumptions or anything?

[Luis Marchese:]

No. No. Not other than this, no.

[Alex Hunchak:]

Okay. Thanks.

[Luis Marchese:]

Okay.

[Operator:]

Our next question comes from James Young with Midwest Investments. Your line is open.

[James Young:]

Hi. A couple of questions here for you, number one is regarding your guidance for EBITDA in 2021 of $170 million to $185 million. Can you give us a sense as to where that -- what is your range of EBITDA, given the fact that you’ve had copper prices up about 16% since that guidance was issued and silver has also been a little bit higher.

[Ed Guimaraes:]

Hi, Jim. Thanks for your question there. Yeah. Copper is up -- since our guidance we put out in January, our copper is up about 10% actually and silver has remained relatively the same. So we’re still sticking with our consensus and I think I would have you or direct you to analyst’s updated EBITDA price. I believe, Alex from CIBC just put out a revised target. That’s all I have to say on that.

[James Young:]

Okay. And I guess the question regarding, of course, is strategic alternative that you’re pursuing. I hear you what you said about no announcements. But can you give us a sense as to, when you made this announcement on January 8th, there’s some price and expectation about the ability to follow through and get this executed and done. Can you give us a sense as to, are you feeling less confident today or more confident today that you will reach some mutually agreeable agreement?

[Ed Guimaraes:]

Jim, I can’t comment beyond what I commented in answering Mark’s question.

[James Young:]

Okay. Can you give us a sense at all is to about, I mean, here we are, it’s March date 19th and it’s -- I would expect it something’s going to occur that we should be hearing something, say, by the end of April?

[Ed Guimaraes:]

I appreciate your understanding, Jim, in this matter. But we don’t intend to provide announcements or updates regarding the process unless or until it’s determined that further disclosure is appropriate are necessary.

[James Young:]

Okay. Thank you very much. That’s it for me.

[Operator:]

Our next question comes from Lee with Omega Family Office. Your line is open.

[Lee Cooperman:]

Thank you. It’s Lee Cooperman. Anyway, there’s something wrong with your financial communications and let me explain why I say that. Freeport copper and gold is up 32% year-to-date, your stock is down 13.9%, okay? They have not announced an attempt to seek strategic alternatives, which will be a plus for your stock. So despite making that announcement, January 8th, your stock is down 13.8% and I couldn’t think, I mean, Ed, has done an excellent job in managing the business, the earnings look terrific, and so, you’ve kept people in the dark. So I think I have three questions. Question number one is, what do you think a reasonable free cash flow generation for this year is? The CapEx, you mentioned, is $78 million. I assume net interest expense will be very nominal, because you’re generating cash and you have net debt coming into the year of $27.9 million. You’ll probably end the year I assume with net cash. But what kind of free cash flow are you anticipating for the year range?

[Ed Guimaraes:]

Hi. Thanks for your question. I’m not going to comment further than what’s in our guidance that was published in January. I think that there is no way…

[Lee Cooperman:]

What was your free cash flow guidance in January, February?

[Ed Guimaraes:]

I’d have you looked at that Lee. I’m not prepared to get into that on this call.

[Lee Cooperman:]

What are you prepared to get into it? This is so ridiculous that it’s like drilling too basically. You gave various assumptions on EBITDA, you give CapEx, the interest expense is can be a nominal number. What kind of kept taxes? I assume that you’re going to generate a cash flow of almost $100 million this year. Maybe, I don’t know $80 million to $100 million or something like that. I’m on a conference call. Please stop everybody now. I’m sorry, excuse me, I was interrupted.

[Ed Guimaraes:]

No problem, Lee. It -- just to get to your, like it’s all in the guidance, right?

[Lee Cooperman:]

If it’s in the guidance, just give me a number. I don’t have it in front of me. What do you think you generate in the way of cash, you expect to end the year with net cash?

[Ed Guimaraes:]

Well, take the adjusted EBITDA and that range and just deduct the anticipated CapEx and that’s…

[Lee Cooperman:]

And what about you want to give me a number that you expect for taxes or interest?

[Ed Guimaraes:]

No. I don’t want to do that now, Lee.

[Lee Cooperman:]

Yeah. Okay. Okay. Now what -- everyone has asked you a question about the strategic process, okay? And I hear your answers, but it’s not an unreasonable question to ask, when do you think the process will be concluded? Not ask you what the outcome is going to be? When do you think the shareholders should expect to hear from you as to the process? It was announced January 8th. This process takes usually three months or four months. I would guess before you announced in January 8th, you had some insight into the process already. Basically, you think we’re likely to hear from you before the end of April. And I’m not asking what you’re going to say, I am going to say, when will the process be concluded? Well, that you have an acceptable offer or you don’t?

[Ed Guimaraes:]

There’s nothing more I can say on that, Lee.

[Lee Cooperman:]

Well, you’re getting bad advice from your advisors. Okay. Last question before I give up on you people. What level of debt would management be comfortable in carrying? Let me explain what’s behind the question. I think your stock is ridiculously mispriced, okay? I think you probably have a potential of earning $200 million of EBITDA basically. If I put 2 times leverage in the company, you have the capacity to borrow $400 million. I don’t know if manager will be comfortable in doing that, $400 million is not an inconsequential percentage of the market cap of the company. So would the company consider if you don’t get an acceptable offer? I think the stock is very mispriced. If you don’t get an acceptable offer would the company consider recapping itself and is one of the lighter shows in the company, I would not be against that? I mean, the market cap is $472 million. So $200 million basically would represent pretty significant percentage of the company. But I don’t know what the management’s attitude is towards taking on debt. Can you elaborate on that a little bit?

[Ed Guimaraes:]

Right now, Lee, there’s no need to take on debt. Well, we have -- as you mentioned, our EBITDA targets, there’s really no need. Should there be a need down the road, for sure, we’ll consider it. But right now, we’re cash flowing enough to fund all of our growth projects and there’s no need for debt at this time.

[Operator:]

Our next question comes from James Young with Midwest Investments. Your line is open.

[James Young:]

Yeah. Hi. Given where you were on the net cash -- on the net debt level ending the fourth quarter, can you give us a sense, are you already net cash positive because of, when I think about the significant price increase that we’ve seen so far year-to-date in the metals markets and your cash generating ability? Can you give us a sense, are you currently net cash positive?

[Ed Guimaraes:]

Hi, Jim. No. We can’t comment on that. Yeah. That’s not publicly disclosed. We’re -- this is a Q4 and year end conference call. I’m not prepared to comment on our net debt position into 2021. That we will provide in the May conference call for Q1.

[James Young:]

Do you have date -- do you have in terms of date for your first quarter call?

[Luis Marchese:]

I think it’s usually the third week, Jim. But we -- I am not sure. Mike, if that’s -- it’s around May 18th through there about, but that hasn’t been finalized yet. Mike, is there any comment you could add on that? You are unmute?

[Mike McAllister:]

Okay. Yeah. It’s around that time -- around the third week. We haven’t finalized the date quite yet. But we will put out an announcement well in advance of that, Jim.

[Operator:]

Okay. And that’s all the time that we have for questions today. I’ll now turn the call over to Mike McAllister for closing comments.

[Mike McAllister:]

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 the materials can be found on our website at sierrametals.com. If there are any further questions or concerns you can reach out to us after today’s call. Our contact information is in the presentation, as well as on the company website. Thank you, Operator. Please conclude the call.

[Operator:]

This concludes today’s conference call. You may now disconnect.