Sierra Metals Inc.
Q1 2017 Earnings Call Transcript

Published: 15 May 2017

[Operator:]

Good morning. My name is Kelly and I will be your conference operator today. At this time, I would like to welcome everyone to the Sierra Metals' First Quarter 2017 Results Conference Call. All participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session, instructions to ask question will be provided at that time. Thank you. I'll now turn the call over to Mike McAllister, Vice President of Corporate Development. Mr. McAllister, you may begin.

[Mike McAllister:]

Thank you, Operator and good morning everyone. Welcome to Sierra Metals Q1 2017 results conference call. On today's call, we are joined by Igor Gonzales, our President and CEO; Ed Guimaraes, our Chief Financial Officer; and Gordon Babcock, our Chief Operating Officer. Today's call will be followed by a question-and-answer period. Today's presentation is available for download both through this webcast and the company's Web site at www.sierrametals.com. Last Thursday's press release and the financial statements and the Management Discussion and Analysis are also posted at the company's Web site. Before we start, I would like to remind everyone about our disclaimer, that certain statements made today by the executive management team, may contain forward-looking information. Anything not historical is considered forward-looking. For more information, please refer to our detailed cautionary note and last Thursday's press release and to the disclaimer on Page 2 of today's presentation. Please note that all dollar amounts mentioned on this call are in U.S. dollars unless otherwise noted. Before proceeding with the call, I would like to take a moment to properly introduce Igor Gonzales. Igor joined the Sierra Metals team as our new President and CEO on May 1. He has over 35 years of experience with major mining companies with world-class mineral assets. He most recently was the Vice President of Operations at Buenaventura and prior to that Igor worked for Barrick Gold Corp., initially as the President and General Manager of the Pierina Mine in Peru and then as President of South America and most recently as their Chief Operating Officer with global responsibilities. Igor has worked for Southern Peru Copper and he is currently a Director at Hudbay Minerals and Buenaventura. Igor holds a Bachelor of Science degree in Chemical Engineering and a Master of Science in Extractive Metallurgy. I would like to extend a very warm welcome to Igor on behalf of my colleagues. We are very happy that you've joined the Sierra Metals management team. With that, I will now turn the call over to Igor to give us an overview of the first quarter results.

[Igor Gonzales:]

Thank you, Mike, and good morning everyone. I would like to begin with an overview of the 2017 first quarter results for Sierra Metals as well as the operational and exploration highlights for the quarter. With that, I must say that we are encouraged by the continuous progress and achievement in both financial, operational and exploration results at Sierra during the first quarter. We believe that 2017 will be a year of significant growth at all three mines and Sierra Metals as a whole. Following my summary highlights, Gordon Babcock will take us through the operational and exploration highlights, and then, Ed Guimaraes will take us through the first quarter financial highlights, then we will open the call for questions. Looking at Slide number 4, the first quarter of 2017 built upon the significant achievement from 2016 in both financial performance and operational improvements implemented at the Yauricocha Mine. This has increased our production and seen new geological discoveries from our brownfield exploration program with several new important discoveries. In Q1 2017, the company reported revenue of $64.5 million and adjusted EBITDA of $25.4 million on throughput of 529,695 tonne and metal production of 3.1 million silver equivalent ounces, or 26.1 million copper equivalent pounds. Sierra Metals had a third consecutive exceptional quarter in its operational and financial results aided by stable metal prices and continued production improvements at Yauricocha. During Q1 2017, the company continued to build upon the revenue and adjusted EBITDA realized during the previous quarter. The company achieved excellent results in the first quarter with revenues up to 130% and adjusted EBITDA up by $21 million over Q4 2016. The consolidated all-in sustaining cost per silver equivalent payable ounce decreased by 21% to $12.84 as compared to Q1 2016. During Q1 2017 consolidated metal production increased by 28% compared to Q1 2016 this was attributable to higher throughput, higher silver, copper and zinc head grades as well as higher recoveries for all metals except gold at Yauricocha. Additionally, the company saw higher throughput and recoveries of all metals at Bolivar, partially offset by lower throughput, head grades and recoveries at Cusi. Continuing on Slide 5, in the first quarter of 2017, Sierra Metals continue to make significant new discoveries in exploration. On February 27, 2017 the company announced the discovery of the Santa Rosa de Lima complex, which is the new high-grade zone at the Cusi Mine. With the completion of a15,000-meter drilling program, the company is now engaged on similar infill drilling program. Full results are expected to be released from the initial campaign in late June. Subsequent to the end of Q1, the exploration discoveries have continued. On May 1, 2017, the company announced a new high-grade oxides zone at Yauricocha referred to as the Esperanza North Zone. This in addition to the extension of the high-grade sulfide zone, referred to as the Cuye-Mascota zone which included 69 meters of continuous sulfide mineralization. All the drillings which have been completed at the Yauricocha mine will be included in an upcoming Mineral Resource and Reserve Estimate report that is expected to be published for the Yauricocha Mine early in the fourth quarter of 2017. Sierra continues with its brownfield exploration programs and definition drill programs at all three mines, which will continue to provide proofs of concept for several key areas in addition to further successes and expected resource growth at all three mines. With that, I'll now turn the call over to Gord Babcock, COO for the operations and exploration update.

[Gordon Babcock:]

Thanks, Igor, and welcome to Sierra. Good to have you. Turning now to the operational highlights, Slide 7, in Q1 2017, Sierra processed the total of 530,000 tonnes, which represents an 11% increase over Q1 2016. The company produced over 3 million silver equivalent ounces or 26.1 million copper equivalent pounds in the first quarter of this year, representing a 28% increase over the first quarter of 2016 production volume. Again, as Igor stated it's attributed to higher throughput, higher silver, copper and zinc head grades as well as higher recoveries for all metals except gold at Yauricocha. Additionally, the company saw higher throughput and recoveries of all metals at Bolivar, partially offset by lower throughput, head grades and recoveries at Cusi. The company continues to benefit some operational improvements at Q1 at the Yauricocha mine continuing with the similar program at Bolivar mine next quarter. Our objective is to start metal production improvement, increase the efforts that we are currently focused on reevaluating the mine development and definition drilling program focusing on a new resource estimate including new areas such as the Santa Rose de Lima area and others. This is anticipated as the two current resources -- for current resources [indiscernible] mine as well as improved silver, lead and zinc grades. Looking now at the Yauricocha, silver equivalent production in Q1 2017 was 220 million ounces representing a 54% increase over Q1 2016. Sierra saw increases in the production of all metals, except gold at Yauricocha in Q1 2017 versus Q1 2016 with increases in production of silver 76%, copper 49%, zinc 21% and lead at 73%. At Bolivar, the company had another quarter of consistent plan throughput of 243,974 tonnes processed, which represents an 11% increase in comparison to Q1 of 2016. The higher throughput recoveries of all metals help to offset lower head grades encountered and resulted in the 9% increase in copper equivalent production when compared to Q1 2016. Plans improvement such as the previous installation of a new vibrating screen in sites has not been completed. There are other events that are occurred as well. Copper production increased by 30% at Bolivar in third quarter of 2017, which is the first quarter of 2016 offset by 3% lower silver production and 2% lower gold production. The company's focus at Bolivar in 2017 would be to improve production volume, we're investing in new equipment which includes goods, jumbos, trucks expected to arrive in stages and deliveries to be completed by the end of the second quarter and I believe it's going to be some of the equipments that are coming in third quarter as well, with the inspection of moving raw material from variable production stuff within the mine. At Cusi, the company processed total ore of 34,541 tonnes, which represents a 31% decrease in Q1 2017 compared to Q1 2016. On a long basis, Cusi production accounts for a minimum contribution of 6.5% for the throughput for Sierra Metals. The decrease in process was due to lower head grades and recoveries of all metals combined with lower throughput, note the company is currently re-evaluating the development and definition drilling program with the main focus on north zone which exhibits encouraging wider width and currently being in mine and better grades with the inclusion of lead and zinc with the mineralized zone within the circle. The current drill program at Santa Rosa de Lima recently completed has highlighted wider mineralized zones and improved grades of the current known zone. This relates the company in increasing resources at the Cusi operation. With the definition drilling program is currently underway at this time, resource evaluation is moving very positive from a rapid phase. Please turn to Slide 8, exploration remains a key aspect at all three of the mines and during Q1 2017, the company drilled 80 holes, totaling 11,711 meters at Yauricocha. Exploration drilling accounted for 19 holes or 5,008 meters; at the Esperanza zones to test continuity; explore the continuity of the mineralization at debt and the Cachi Cachi to explore new mineralized zones. Definition drilling accounted for the remaining 61 holes or 6,703 meters at Rosaura, Catas, Marita, Mascota, Contacto Oriental and in the Cuerpos Pequenos that is in the mine zone. On May 1, 2017, the company announced the discovery of a new high-grade lead and silver oxides zone, referred to as the Esperanza North zone which is located between the Esperanza and the Cachi Cachi Mine. Drilling took place from the Yauricocha tunnel located on the 720 level. This area had never been drilled before and this discovery is important for the interpretation of the ore body extensions between Esperanza and Cachi Cachi which are located approximately one kilometer apart. Please turn to Slide 9. On May 1, 2017, the company also announced drilling results which demonstrate the extension of the high-grade sulfide zone, referred to as the Cuye Mascota zone which was discovered in November 2016. Results included 69 meters of continuous sulfide mineralization. This zone is located 200 meters north of the central mine area, along strike from current mining activities. The diamond drill intercepts at the Cuye Ore zone are some of the widest intercepts of sulfide mineralization discovered in the company's recent history and will be a priority for continuing exploration during the remainder of 2017. Results of the current program confirm the Cuye ore body continues below the 1270 level and company geologists have identified the transition zone of oxides to fresh lead zinc and silver sulfide mineralization in this drilling program which has important economic relevance to its high grades, particularly for zinc and copper. Cuye was one of the main cash flow generators for this company 10 years ago and this appears to be at depth with similar widths and grades. All drilling that has taken place will be included in an upcoming Mineral Resource and Reserve Estimate report which is expected to be published for the Yauricocha mine early in the fourth quarter of 2017. We see greater opportunity to expand our high value new mine tonnage in the near-term and the opportunities are numerous and by no means to exhaust it. One of the opportunities is the application of the site 24 physical program at the Yauricocha mine which will enable [indiscernible] still by target. This program has never been implemented at the Yauricocha mine site, the air is optimistic that the program will bring positive results. Please turn to Slide 10. At Bolivar, Q1 2017, 3,189 meters were drilled in the following areas

[Ed Guimaraes:]

Thanks Gordon. As mentioned the company had a very strong first quarter and benefited from stabilized metal price as well as record throughput at Yauricocha and Bolivar mine. Along with the strong operational results realized during the quarter, cash flow generation continues to improve and provide the company with a healthier balance sheet and increase liquidity. The company realized revenues of $54.5 million in the first quarter of 2017, which represented a 130% increase compared to the first quarter of 2016. Realized metal prices in the first quarter were also higher for our metals including 65% higher for zinc, 30% higher for lead, 24% higher for copper, 16% higher for silver and 2% higher for gold. In addition, to the higher metal prices realized, the increase in annual revenues are primarily attributable to the 11% increase in throughput and the increase in silver, copper, and lead head grade and higher recoveries for our metals except gold at Yauricocha. The 11% increase in throughput and higher recoveries for our metals at Bolivar partially offset by a 31% increase in throughput and lower head grades in recoveries for our metals at Cusi. Adjusted EBITDA of $25.4 million for Q1 2017, increased by $21 million compared to $4.4 million in Q1 2016. The increase in adjusted EBITDA was primarily due to the $26 million increase in revenue at Yauricocha. Yauricocha's Q1 2017 cash cost per silver equivalent payable ounce was $7.39 versus $8.69 in Q1 2016 and the all-in sustaining cash cost per silver equivalent payable ounce was $10.60 versus $15.16 in Q1 2016. The decrease in the all-in sustaining cash cost per silver equivalent payable ounce during Q1 2017 was due to an increase in silver equivalent payable ounces as a result of higher throughput and ore feed head grades from the increase in available production from higher grade zones in the mine. Also lower treatment in refining costs were incurred during Q1 2017 resulting from improved terms within renegotiated sales contracts with their off-takers. Bolivar's Q1 2017 cash cost per copper equivalent payable pound was $1.14 versus $1.41 in Q1 2016 and the all-in sustaining cash cost per copper equivalent payable pound was $1.89 versus $2.35 in Q1 2016. The decrease in all-in sustaining cash cost per copper equivalent payable pound was due to an increase in copper equivalent payable pounds as a result of 11% higher throughput and higher recoveries realized for all metals during Q1 2017. Cusi's Q1 2017 cash cost for silver equivalent payable ounce was $10.82 versus $3.88 in Q1 2016 and the all-in sustaining cash cost for silver equivalent payable ounce was $22.72 versus $12.88 in Q1 2016. The all-in sustaining cash cost per silver equivalent payable ounce increased due to an increase of 0.4 million in sustaining capital expenditures related to stope and drift development within the mine during Q1 2017 as the company is currently re-evaluating its development plan following the successful reinterpretation of the mines geology. The decline in silver head grades and recoveries resulted in fewer silver equivalent payable ounces which also contributed to the higher all-in sustaining cost per silver equivalent payable ounce in Q1 2017 compared to Q1 2016. Cash flow generated from operations before movements in working capital was $22.8 million for Q1 2017 compared to $5 million in Q1 2016. The increase in operating cash flow was mainly the result of higher revenues generated and higher gross margins realized. I would now like to review our cash flows which provides the clearest perspective on our financial performance. I have summarized the changes in cash during Q1 2017 on Slide 14. During the first quarter, our operating cash flows were $11 million, we spent $9.8 million on capital expenditures in Mexico and Peru and paid $5.2 million of interest in principle repayments on our credit facilities in Peru and Mexico. We also paid $0.5 million in dividends in non-controlling interest shareholders. These items decreased our cash balance from $42.1 million as of December 31, 2016 to $38 million as of March 31, 2017. Turning to the balance sheet and liquidity on Slide 15, we have ended the first quarter of 2017 in a strong financial position with $38 million in cash and total debt of $75million. The company's net debt was $37 million at the end of the quarter. The company expects that the 2017 EBITDA will be greater than the current debt outstanding at the end of the year. The company has principle payment obligations on its loans and credit facilities of approximately $16 million to be paid in 2017, $14 million to be paid in 2018, $8 million to be paid in 2019 and $29 million to be paid in 2020. We are confident that our financial position together with the potential future cash flow generation from our three producing mines including the recently discovered Esperanza and Cuye-Mascota zones at Yauricocha, the La Sidra in Bolivar West and Northwest zones at Bolivar and the Santa Rosa de Lima zone at Cusi will be sufficient to support the company's financial commitments in 2017 and beyond. I will now turn the call back to Mike.

[Mike McAllister:]

Thanks Ed. That ends the presentation portion of this call. We'd now like to open the call up to questions from participants. Operator, if you could please open the lines.

[Operator:]

[Operator Instructions] Your first question comes from the line of Lee Cooperman of Omega Advisors. Your line is open.

[Lee Cooperman:]

Thank you. Very nice quarter. Congratulations. I guess if you were to build out your most perspective new discoveries, what level of CapEx would be necessary to achieve that and your CapEx has been -- I guess last year was $25 million, maybe you could tell us what you're budgeting this year for CapEx and what would be if you were to develop some of these elephant feet as you refer to them as?

[Ed Guimaraes:]

Hi, Lee. I'll take the first part of the question. Thanks for the question. In terms of our CapEx and what we budgeted, we're expecting to expand about $25 million on CapEx at our mines this year. In addition, we're looking to spend about $25 million on our exploration programs as well at all three mines. In terms of future spending in the potential on where we see future spending that's still uncertain at this time. We still haven't developed our budget for next year that will be definitely consideration in terms of the spend not only for 2018, but over the next five years.

[Lee Cooperman:]

Okay. Would you expect to be debt free theoretically at the end of the year where it is between your EBITDA, you're running at a run rate at over $100 million minus your CapEx, would you expect to be debt free if you chose no other alternative to use your funds?

[Ed Guimaraes:]

If we chose no other alternative use of funds, we still likely wouldn't have been debt free because we do have taxes to pay from our Yauricocha operation. We would be close, I'm not going to venture too far away from saying we would be close to that, but we do have major expenditure programs in place.

[Lee Cooperman:]

Got you. Thank you.

[Operator:]

[Operator Instructions] Your next question comes from the line of Jacques Wortman from Eight Capital Partners. Your line is open.

[Jacques Wortman:]

Hi, good morning, gentlemen. I guess this is a question for Gord Babcock, I could hear most of your commentary, but missed some of your comments regarding Yauricocha, so apologies if you've covered this. Can you speak to the 2017 mine plan and the ability to maintain these higher throughput in grades and recoveries at Yauricocha over the balance of the year? And I guess the second part of the question is a bit tougher, conceptually how will you target in sequence and bring the new zones that you are getting in your exploration into the 2018 mine plan and beyond. I'm just trying to get a sense of how to look at the mine on a go forward basis?

[Gordon Babcock:]

Well, basically where we're sitting right now, we're going to focus on following the same line of production. We have in recent field program we just completed and this is going to be coming out in the very near future and the resource of reserve estimate. We got our operational improvements that are ongoing. We got some good intercepts in our Cuerpos Pequenos areas that are contiguous to the main zones such as Esperanza, Rosaura, Catas leading to the increase in how better grade depth in the central mine zone has been very good. And so I think it's going to be -- not going to be issuing, Yauricocha is a good copper mine, but they're focused in developing the areas in the right direction here. And the sweetener for our operations in Cuerpos Pequenos the high grade silver, zinc and lead et cetera. That's what we're looking at and it's going to be very similar to 2018.

[Igor Gonzales:]

Just on what Gord indicated in parallel to our exploration program which had been mentioned we're also doing significant improvements in infrastructure at the mine because we know that that both in hand in hand such have been our production mines to exploration. So Gord is working for example in sharp improvements and upgrades deepening shafts and also very, very important in ventilation for the entire mine. So that's going to help us in the development of the resources and to be ready when they become a minable resource.

[Jacques Wortman:]

Okay. Thanks guys.

[Operator:]

And your next question comes from the line of Jim Young from West Family Investments. Your line is open.

[Jim Young:]

Hi, couple of the questions. First for Igor, welcome as CEO and since you've been on the Board for several years already know these assets, but my question is what are your plans to maximize the per share value for Sierra Metal shareholders over the medium term? Thank you.

[Igor Gonzales:]

Yes. Well, first of all, my plans basically are to be -- very solid and basic mining development program. In other words continue with our exploration results, improve the operations in general that's do an upgrade and optimization. And then, also make sure that our resource grows in a manner which can be auditable. And once we have that and look at into the expansion of our operating plans if necessary. So right now, we are reviewing all our equipment strategy, we are reviewing that and we won't commit to our Board and revise operating strategy that keeps the basic mining concept as the heart of this strategy.

[Jim Young:]

Okay. And another question is -- there has been some discussion, I think some talk about listing on the New York Stock Exchange, can we get an update as to where that stands?

[Ed Guimaraes:]

Sure. Jim, I can provide you with an update. Yes, so we were hoping to have the listing in place by early June and the reason we've kind of there has been a delay is, we wanted to include the Q1 financial results in our listing application as well as our management information circular as well which is just being finalized now.

[Jim Young:]

Okay, great. And next question is with respect to all-in sustaining cost of $12.84 that you posted in the first quarter of 2017, can you give us a sense us to where this is headed over the next couple of quarters?

[Ed Guimaraes:]

I expect these costs to remain fairly consistent with Q1.

[Jim Young:]

Are there any opportunities to bring these lower?

[Gordon Babcock:]

We'll increase throughout below, Jim, and our focus is to get that to where we were before, so our targeting [indiscernible].

[Jim Young:]

Okay. And the next question is really for Gord. Gord, can you give us a sense from Esperanza, how much of the ore is actually is being processed at the Chumpe mill at this point. And what is the value of this rock relative to other rock that is being processed at the mill because it's my understanding that the Esperanza ore is much higher quality and better grade, which would suggest it's a higher revenue per tonne, and in addition give a sense as to what the Esperanza north rock looks like relative to Esperanza? Thank you.

[Gordon Babcock:]

Yes. In reality, Jim, the Esperanza block is slightly better grade than the central mine zone. But, what is really interesting about the Esperanza zone is that literally contiguous to the Esperanza zone, we've been finding these -- we call them Cuerpos Pequenos are really high grade over lead, zinc, copper zones and that has been instrumental in blending with the Esperanza zone to bring us well over $150 a tonne range. So that's been the positive side of the exploration program. What we have been doing our definition drilling we find the blocks, we found the new zone towards the north under 920 level for instance for Esperanza zone and just before we get to that zone, we found more mineralized areas of higher [head-grade] [ph] intercepts. So, our concern in the past is, what do we do, we don't have anymore Cuerpos Pequenos, but this mine is proving to be fairly consistent and the delivery of the high grade zone has been very positive. That's how we have been able to maintain the grades.

[Jim Young:]

Okay. And Gordon another question, with respect to Esperanza, in the entire press releases you have indicated that it has been open to the north and open to depth, is that still the case or have you found any limitations in the Esperanza area at this point?

[Gordon Babcock:]

Yes. That's correct. Still open to depth, open to the north and we have got other things happening to the south of this mineralization going on, other mineralization zones coming to the play.

[Jim Young:]

Okay, great. And the last question I have is for Ed. Ed regarding the EBITDA that you posted $25.4 million, as I recall in the past that the first quarter has truly been a little bit seasonally lower EBITDA generation and I'm just wondering, post restructuring if this is still the case for Sierra Metals overall?

[Ed Guimaraes:]

Thanks Jim. Yes, historically Q1 has been a soft quarter and we did have rainy season and you could see even at Yauricocha with the [indiscernible] that -- they were significant but not necessarily disrupting the operations per se, we still maintain our concentrate deliveries and the mine was still producing. So, historically, yes, it has been a soft quarter. And we are hoping we are going to see Cusi possibly improve somewhat. Yauricocha is fairly consistent now.

[Jim Young:]

And the rain issue that you alluded for the first quarter, have they abated so far in the second quarter?

[Ed Guimaraes:]

Yes. They have.

[Jim Young:]

Okay, great. Thank you very much. That's all from me.

[Operator:]

Your next question comes from the line of Lee Cooperman from Omega Advisors. Your line is open.

[Lee Cooperman:]

Hi. Just another question, you own 82% of Yauricocha, is the 18% owned by one individual company or is it publicly traded and are you prohibited from attempting to buy the 18% to get 100%? Thank you.

[Ed Guimaraes:]

Thanks Lee. So, the remaining 18% is held, the 50% of which -- 9% is held with the Goggin's family, which were the previous owners of Corona. And the remaining 9% or 50% would be widely held on the Lima stock exchange. In terms of potential buyback or an increase if you will of our position that's a consideration as well as there is nothing really preventing us from doing so and we are evaluating this option as we speak.

[Lee Cooperman:]

Thank you.

[Operator:]

There are no further questions at this time. I'll now turn the call back over to the presenters.

[Mike McAllister:]

Thanks 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 materials can be found on our Web site. If there are any further questions or concerns, you may reach out to us at any time after today's call. Our contact information can be found on Slide 15 of today's presentation as well as on the company's Web site. Thank you, Operator. Please conclude the call.

[Operator:]

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