Sierra Metals Inc.
Q4 2018 Earnings Call Transcript

Published: 29 Mar 2019

[Operator:]

Good morning. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the Sierra Metals Inc., Fourth Quarter and Year End 2018 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there'll be a question-and-answer session. [Operator Instructions] Thank you. Mike McAllister, VP of Corporate Development, you may begin your conference.

[Mike McAllister:]

Thank you, operator and good morning everyone. Welcome to Sierra Metals Q4 year-end 2018 results conference call. On today's call, we are joined by Igor Gonzales, our President and CEO; Ed Guimaraes, our CFO; and Gordon Babcock, our COO. Today's call will be followed by a question-and-answer period. Today's accompanying presentation is available for download both through the webcast and from the company's Web site at www.sierrametals.com. Thursday's press release, the financial statements and the management discussion and analysis are also posted on the company's Web site. Before I turn the call over to Igor, I would like to indicate that this earnings call contains forward-looking information that is based on the company's current expectations, estimates and believes. This 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 conclusion, forecast or production in the forward-looking information and material factors or assumptions that were applied in drawing a conclusion are making a forecast or projection as reflected in the forward-looking information is contained in the company's annual information form which is publicly available on SEDAR or EDGAR via the Form 40-F or on the company's Web site. Please note that all dollar amounts mentioned on today's call are in U.S. dollars unless otherwise noted. With that, I would like to now turn the call over to Igor Gonzales, our President and CEO.

[Igor Gonzales:]

Thanks, Mike, and good morning everyone. I will begin today with the Slide number four, with some highlights from our fourth quarter and year-end results followed by Gordon Babcock, our COO, who will provide [Technical Difficulty] results. Then we will have Ed Guimaraes, our CFO, who will provide information on our financial results. We will conclude with a Q&A session where myself, Gord, and Ed will be happy to answer questions. Before I begin Q4 and year end highlights, I would like to provide an update on the strike currently taking place at our Yauricocha Mine in Peru. On March 7, the Minera Corona, which is our company that runs the Yauricocha Mine has dismissed two of its mine contractors as part of its operations decisions. March 11, the Union announced a strike for March 19. The claim was to reinstate contracted workers, which is normally a responsibility of contract or management, not a responsibility of Corona management. We have been in conversation with the Union on a regular basis, almost on a daily basis since that date. On March 15, the Labor Authorities declares the call for a strike non-proceeding. March 19, the Union goes on a strike. March 19, the Labor Authorities declared the strike illegal. On March 19, Corona had stopped all activities to ensure personal safety of our non-union workers, which is about roughly 40% of their workforce. So, 60% of the workforce is on a strike, while the other 40% is not. On March 26, the Labor Authority, however, declares the new [indiscernible] legality, which is immediately appealed by Corona and that's where we're at. And we continue the conversations both with Labor Authority and Union to try to settle this dispute as soon as possible. We cannot provide an estimate in date at the moment as there are several parties involved and have -- and we have to follow an established legal process here in Peru. Turning now to the highlights for the, [Technical Difficulty] strong year of financial performance with revenues of [Technical Difficulty] million and $90 million of operating cash flows before movements in working capital. The company also reported net income attributable to shareholders of $0.12 per share. Looking to Slide number five. You can see that we had a solid year of operating performance with an increase in total tons processed as well as increase to the production of all metals payable except ore lead. These increases in production help to lower our all-in sustaining cost across all three mines. Turning now to Slide number six, during 2018, the company released the results for three positive preliminary economic assessment for all of our mines. These studies provide a basis for our growth programs at all three mines which were initiated in 2018. The capital expenditure budget approved by our Board of Directors for 2019 is in the order of $83 million. It's our largest to-date with $44 million of that going towards growth and exploration. This program will be funded through 2019 EBITDA and existing cash balance. Furthermore, the company recently put in place a $100 million senior credit facility which provides the company with ample flexibility to make prudent investments. These capital investments support our growth plans and provide excellent returns on the investments being made. Turning now to Slide number seven, we're pleased with expansions planned, progress made across Yauricocha. We have completed work on a new seven kilometer underground tunnel and all the ancillary facilities associated with, which communicates in timeline with the mill and allows faster turnaround times and the ability to move greater volumes of ore and waste from the mine to the mill and to the waste dumps. We also completed the refurbishment of the Mascota shaft on time and on budget. Looking ahead into 2019 represents a critical year at Yauricocha for project improvements and exploration. We continue to work on expansion plans which should see the first phase of expansion completed in 2019 having now received approval for the EIA study. We can now move forward with obtaining the construction permit for the next phase of the tailing deposition facility and permit for an expanded waste rock facility. Once those two permits are in hand and their work completed, we can then complete the final submission for an IDS permit, which is required for any potential expansions at the Yauricocha. At our Bolivar mine, we completed construction -- we have early construction completion at the Piedras Verdes Mill and expect to deliver on our goal of 20% increase in production to 3,600 tons per day within the first half of 2019. Additionally, further infrastructure and development improvements will see the production push to approximately 4,000 tons per day in the second half of 2019. At our Cusi mine, the successful addition of an additional Ball mill will see the capacity increase from 650 tons per day to approximately 1200 tons per day during the first half of 2019. Development plans are in place to further increase production to approximately 2,400 tons per day by Q1 2020. Looking now at the Slide number eight. Exploration remains a key component of our growth plan, and we continue to have success in 2018. At Yauricocha, we have the discovery of porphyry depth, which we continue to drill and further define. The discovery of Contacto Oriental and Contacto Sur Medio zones as well as a new zone between Cuye and Esperanza are demonstrating the potential for larger continual ore bodies at depth. At Bolivar, we discovered an extension to the Bolivar Northwest zone called Cieneguita zone. And at Cusi, we continue to develop and explore the Santa Rosa de Lime Zone and discovered large mid grade silver stock ore within -- area within that zone. Drilling will continue in 2019 with many high value targets set to be drilled with new discoveries and extensions expected. Sierra Metals is at an inflection point. We continue to improve our per share value and are profitable at today's metal prices. And we're still planning for further growth at all three mines. We continue with our aggressive exploration programs with a goal of adding additional reserves and resources and extending our mine lives. The company has a solid financial position and the liquidity to support our growth programs which always represents a very prudent use of capital and provide for excellent return on investment for the company and its shareholders. With that, I will now ask Gordon Babcock to provide us with our operational update.

[Gordon Babcock:]

Thanks, Igor. Turning now to the operational highlights. As seen on Slide 9, in 2018, the company had strong annual -- consolidated annual production of 2.3 million tons, 16% increase over 2017. This was achieved with the help of the record consolidated quarterly ore throughput in Q4 2018 with a record quarterly throughput from both Bolivar and Cusi. The company achieved this increase despite significant rainfall events experienced at the Bolivar mine which caused interruptions to production during Q3 2018. In 2018 consolidated production of copper increased 27% to 34 million pounds, Silver increased 17% to 2.7 million ounces, Zinc was flat at 76.8 million pounds, Lead decreased 7% to 27.7 million pounds and gold increased 25% to 7743 ounces compared to 2017. The Yauricocha mine maintains solid production rates in 2018 with an 8% throughput increase compared to 2017. Zinc equivalent metal production increased 7% due to higher throughput, higher grades for metals except Zinc, and higher recoveries of Lead and Zinc. Bolivar had a tougher third quarter as previously mentioned with significant rainfall events, but still realized the 16% annual increase in production over 2017. Higher ore throughput, higher gold and silver head grades resulted in a 16% increase in copper equivalent production in 2018 as compared to 2017. At Cusi, the mine was able to see the benefit existing mill operating at capacity rate of 650 tons per day for the second half of the year and saw total ore process increase 112% in 2018 as compared to 2017. Silver equivalent production increased 48% compared to 2017 thanks to the 108% increase in Silver production offset by lower production of other metals. Turning to Slide 10 and looking at the accomplishments in 2018 and outlook for 2019 having completed the PA studies for the 3 mines which had very favorable economics. We're working on expansions of production at all three mines. Additionally, we are also working to complete current life of mine plans by midyear 2019. The company is also focused on including reviews of plant optimization strategies, mineshaft and infrastructure improvements and review of processing plant efficiency. I'd like to take the opportunity now to speak to the current situation in Yauricocha and offer some highlights via an updated forecast. With regards to Yauricocha, we made an assessment based on a worst case scenario solely on Yauricocha now bearing in mind that we do have the opportunity of third party ore to supplement what we have on a shortfall basis for the Yauricocha. We've set a date at April 15 for a restart and we're looking very pessimistically view here. So we're looking at a 4% reduction in production of tonnage in the operation with the opportunity coming from outside sources. Generally, we run between 12,000 to 20,000 tons coming from outside sources, so that number would probably go down to 2%. In the case of metal production, the forecast has been redone based on a higher NSR and what we're predicting is our metal production will be within the guidance position. We have the third party opportunity as I mentioned before. We also have plans to improve the contractor position in the operation to improve development advance. Recently, we've just completed an optimization plan with [indiscernible] of SRK in sublevel cape techniques and block cave techniques, so is the mining practice leader in North America for this methodology. We've made a site visit to the Yauricocha where I spent a week at site plus two days in a workshop in Vancouver. So we're moving forward to optimize the operation and carry on improving the whole asset. At Yauricocha mine, the Yauricocha tunnel has now been completed. This new tunnel will enable the mine to have a direct run to the mill as mentioned before, which will result in a faster turnaround, the cycle time to control locomotives. In the long run, this will allow us more capacity to handle larger volumes of waste in ore. This tunnel also provides another ventilation inlet to the mine, which will benefit the current ventilation system. Future plans in the next few years are to change the locomotive, it's a 40 ton capacity clay locomotives with 220 cubic [indiscernible] and that's how we're planning to make those improvements. Turning now please to Slide 11. Work continues to progress at Yauricocha, on the thinking of the Yauricocha, two we targeted 1270 level to cut the loading pocket below the 1170 working level. At this time, we are at the loading pocket construction, we're in the phase of excavation. This pocket will handle waste in ore from two streams in a multi-feed races configuration, 3 loading points will be excavated on the 1170 level each having a grizzly cover an independent discharge points for locomotive, track haulage and track dishaulage equipment. The infrastructure on the 1170 level as noted will feed three races, two dedicated for ore and one dedicated for waste and related apron feeders on the 1210 level. And that will also include a conveyor loading pocket drift to feed the loading pocket on that level at 1210. The mine will be able to accommodate as mentioned before waste high humidity ore, poly metallic ore and have the optionality in dealing with different ore qualities such as copper ores and oxides. A mobile rock maker will handle any oversized muck encountered on the grizzly platforms. And the company estimates this facility will be operational in 2021. Please turn to Slide number 12, it concerns Bolivar. The installation of new refurbished mill at Bolivar's Piedras Verdes plant was completed ahead of schedule and now provides the company with flexibility in the term of growing size and tonnage. The company expects to deliver on our goal to the 20% increase in production to 3600 tons per day within the first half of 2019. Additionally, further infrastructure and development improvements will see production push to 4000 tons per day in the second half of 2019. Please turn to Slide 13. The successful addition of an additional [indiscernible] the Cusi plant in Mal Paso will see the capacity increased to approximately 1200 tons per day during the first half of 2019 allowing for an 85% increase in production. Furthermore, development plans are in place to further increase production to approximately 2400 tons per day by Q1 2020. I may add some comments here. Our plans are to improve the crushing circuit, we have in place and in-hand a grizzly feeder, a new crusher, C96 metso crusher and in plans are a purchase of another HP300 crusher from metso as well as a screen and the installation of the 12.5 by 16 Ball mill. Please turn to Slide 14, expiration has been and continues to be a very important part of the company's growth strategy. We have committed significant resources to exploration in the past and continue that commitment going forward with a view to grow that mineral reserves and resources for the company. Share metals drilled over one 125,000 meters of drilling, in 2018 across all three mines and plans to drill over 50,000 meters in 2019. These recent developments and meter drilling program will be added to mineral reserves and resources calculations at all three mills with upcoming NI 43-101 technical reports are completed and we're expecting those completions to be at the end of Q2 for Yauricocha at the end of Q4 2019 for both Bolivar and Cusi. We expect to see a significant growth in reserves and resources as well as the extension on one lines of all three mines. Additionally, we expect to include a new reserve for the Cusi mine which is a change from the previous resource position within [indiscernible]. Please turn to Slide 15, during Q4 2018, the company drilled 58 holes totally 10,537 meters at the Yauricocha, expiration drilling was carried out at the copper-moly porphyry mineralized zone at Cuye and Catas ore bodies as well as permitting definition drilling continued at Antacaca zone, Esperanza zone, Angelita zone as well as the Yoselin zone within the Cachi Cachi area. Initial highlights at Yoselin, which is a small ore body in cuerpo chico included 1.2% ounces of silver, 4.8% lead, 0.09 copper and 8.5 in zinc, further assay results were pending, but we continued to drill the Yoselin zone in 2019. Part of the program for 2019 will include level development under 1070 level with drill platforms to highlight areas such as Yoselin. Please turn to Slide 16, at Bolivar, the company drilled 6258 meters from surface and within the mine, 2,183 meters were drilled within the mine at the El Gallo area which is in [indiscernible] and 3865 meters at Bolivar west to explore the extension of the ore body to the northwest. Please turn to Slide 17, at Cusi, the company drilled 1781 meters to support the development of the Santa Rosa de Lima system in Promontorio to further verify the size and continuity of the ore zone. We also drilled 2497 meters of surface diamond drilling to explore the depth of the mineralized structure of San Nicolas in the area of the San Juan mine. With that, now I turn the call over to Ed Guimaraes, our CFO for financial update.

[Ed Guimaraes:]

Thanks, Gord. Turning now to Slide 18, the company finished 2018 on a very strong note with record ore throughput along with strong metal production enabling the company to earn revenues of $232 million compared to $205 million in 2017. Adjusted EBITDA also increase to $90 million which is $10 million more than the $80 million achieved in 2017. In 2018, the company through operating efficiencies and higher production was able to reduce its all in sustaining cash costs across all mines when compared to 2017. Yauricocha all in sustaining cash costs were $0.73 per zinc equivalent pounds compared to $0.78 in 2017. Bolivar's were $2.13 per copper equivalent pounds compared to $2.66 in 2017. In Cusi's, we are $22 per silver equivalent ounce versus $34 in 2017. Looking now at Slide 19 and our cash flow. During 2018, our operating cash flows before movements in working capital were $90.1 million. We paid $29.5 million in taxes in Peru, invested $49.3 million on capital expenditures in Mexico and Peru and paid $36.6 million in principal repayments and interest on our credit facilities mostly in Peru and in Mexico and pay dividends to non-controlling shareholders of 2.9 million. We also had proceeds from the issuance of revolving credit facilities of 25 million leaving us with a cash balance of 21.8 million as of December 31, 2018. Sierra's Board and Management team do not believe that the current stock price reflects the value of the company and initiated a normal course issuer bid in December 2018 with a 1.5 million share target. To-date, the company has repurchased and canceled the total of approximately 40,000 shares at an average price of CAD2.51. The company has been in a blackout period during February and March until we filed our year end financials. Now that that has been done, the share buyback program is expected to recommence and with the credit facility proceeds, we should be able to steadily buyback our shares throughout the whole year. The company's financial position on liquidity remain healthy and the Board and the Management team are committed to investing in its operating mines to improve future cash flows. The company is in good financial health and we maintain a strong balance sheet with $21.8 million in cash. Our total debt was $56 million at the end of the year with a net debt of $34 million. Subsequent to year end, the company announced the closing of 100 million senior secured corporate credit facility in March. The facility has a six-year term with a two-year principal repayment grace period and has a rate of three-month LIBOR with 3.15%. This corporate facility will provide the company with additional liquidity and will offer financial flexibility to fund future capital projects in Mexico as well as corporate working capital requirements. The company will also use certain proceeds of the corporate facility to repay existing debt in the near-term. Also of note, the company has subsequent to year end fully repaid the corona amounts payable to BBVA Banco Continental as of January 2019 and is also fully repaid [indiscernible] loan in Mexico as of February 2019. The company's focus for 2019 remains on allocating operating cash flows towards efficient growth capital, provide funding for the significant capital expenditures planned in 2019 as well as mine development, plant improvements, deepening of the Yauricocha shaft and brownfield exploration drilling. Management will continue to review metal prices and adjust the capital expenditures should metal prices experience any dramatic changes within the year. With that, I will now turn the call back to Mike.

[Mike McAllister:]

Thanks Ed. That ends the presentation portion of this call. We would now like to open the call to questions from participants. Operator if you could please open the line.

[Operator:]

[Operator Instructions] Your first question comes from Jake Sekelsky with ROTH Capital Partners. Your line is open.

[Jake Sekelsky:]

Hi guys. Thanks for taking my questions. Looking at the throughput increase at Cusi is 1200 tons a day, can you just provide some color on the source of the increased tonnage. I mean it looks like development work at Santa Rosa has been ongoing. So should we expect the majority of the increased amount of material to come out of that zone?

[Gordon Babcock:]

Yes. That's correct, Jake. That's exactly where it's going to come from. If we had the opportunity to pick up some other zones such as San Nicolas, we'll move on that front. But basically all the document that's been done on the sublevel k-plus sublevels, still think is in Santa Rosa [indiscernible].

[Jake Sekelsky:]

And I guess just dovetailing off that a bit -- has enough development work been done at Santa Rosa thus far to support the 1200 ton a day rate or is that something that's still ongoing?

[Gordon Babcock:]

Development in any mining operation is always ongoing. But to answer your question on the 1200 ton per day basis, yes, there's enough development that's done. Drop points are set up and it's a matter of drilling the stope so.

[Jake Sekelsky:]

Okay, perfect. And what are the expansion plans at Cusi for the remainder of the year. I mean it looks like you guys expect to have a reserve update towards the end of the year. Have you set a cut off date for this?

[Gordon Babcock:]

Yes. Basically speaking, we're going to max out, the reason we're going for Q4 is trying to max out our drilling on the ore zone. We want to fill in definition drilling to give us a better overview of where we can go in the future. The one set for Cusi is to operate in excess 2100 tons per day that gives us a positive cash flow at the grace that we have in central zone. Now, remember that this is a district so there's a great deal of opportunity that we haven't touched yet.

[Jake Sekelsky:]

Okay. That's helpful. And then, just lastly on the new credit facility. It looks like you guys consolidated some of the debt that you previously had under that. The remainder of the proceeds. I mean has that been earmarked for specific capital projects or is that just more for general working capital?

[Gordon Babcock:]

Hi, Jake. So essentially $30 million will be earmarked more for Mexican capital projects, nothing specific. But any shortfalls will go towards Mexico in that regard as well as the balance will go towards corporate in terms of just the -- it's working capital requirements.

[Jake Sekelsky:]

Okay, perfect. That's all for me. Thanks again.

[Operator:]

[Operator Instructions] We have a question from Heiko Ihle with H.C. Wainwright. Your line is open.

[Heiko Ihle:]

Hey there. Thanks for taking my questions guys.

[Igor Gonzales:]

No problem.

[Heiko Ihle:]

Hey. So in your 2019 costs and CapEx guidance, you mentioned an additional $8 million for deepening of Yauricocha shaft. You're attempting to reach a 1270 level this year as per your MD&A in past statements, but in your presentation on Slide 11, it also states that the loading pocket at below the 1270 level in the fourth quarter. So I'm a little confused. What level exactly are we on right now. What are we doing right now and how is that work progressing given that the plan still seems to be the spend an additional high seven figures at that site. And at what point in time do you think the cash flow impact will start to show?

[Gordon Babcock:]

Heiko to answer your question on the shaft, the concept, the idea was that we would take this shaft down to the 1270 level. Right now, we are at the 1210 level, we're cutting the excavation for the loading pocket. So the loading pocket is between the 1170 level and the 1270 level. And then with the lower part of the loading pocket complete then you'll have a spill pocket below that. So it's a fairly large excavation process that's going on right now.

[Heiko Ihle:]

Okay. So we are at 1210, right now.

[Gordon Babcock:]

Yes. We have to slash out the whole area to provide enough room to install all the steel infrastructure that steel infrastructure installation is in plan for this year. So, once the installation is complete then we go below that continuous sinking to terminate at the 1270 level.

[Heiko Ihle:]

Fair enough. And the cash flow question, I mean I guess with the strike at Yauricocha, is that delaying completion of any other work or these not the same unionized people that are striking?

[Gordon Babcock:]

Well, the whole operation is on standby right now. We're doing that for safety reasons. So in essence, if we're down for a week, no one's working in the mine for a week. So, it will slow us down. But, once we get back on -- in the work program, we'll be able to pick it up -- we'll pick up the pace and carry on. The thing is, Heiko, these programs are slated to be completed over the next two years, so what we don't do this year will move to next year. The main focus is to get the load and pocket in place, get that set up and running. And as I mentioned before, our offset in production based on a worst case scenario is not that far off the mark. We're still going to be able to maintain our guidance on metal as guided.

[Heiko Ihle:]

Got it. And the guys that are not striking but still not working are you paying them?

[Gordon Babcock:]

With most of those guys that are not striking, they are working on maintenance programs at the mill and in the mine. So, we have a small crew of people. So, yes, they would be compensated for their work.

[Heiko Ihle:]

Got it. Okay. Fair enough. Okay. So, on Page 6 of your slide deck, you highlight, and this is a very philosophical question. I'm not sure how much of an answer I'm going to get out of you. On Page 6 your slide that you highlight the MPDs for your three main assets. And you are adding them all together, the 400 million for Yauricocha, 214 for Bolivar and 90 to Mount Cusi that's just under 700 million. But this compares to less than 300 million in market cap as we're speaking here right now. Would you venture a guess to estimate the change in NAV given the depletion you've seen since those NAVs were put into place. My gut feeling is that the depletion should be much more than offset by all the drilling that has been done at the -- in the second half of 2018. And the commensurate extended mine life, I mean especially and I think the question is especially pertinent that you since you anticipate a new 43-101 for your biggest asset here to be released in the next three months.

[Gordon Babcock:]

That's correct, Heiko. With the drilling program that we've conducted and the development program in Yauricocha, Bolivar and Cusi. We expect to cover our depletion or mine depletion and we're going to be increasing resources at Bolivar as well as the Yauricocha, similarly at Cusi. And Cusi will move from a resource state, the idea is to move it into a reserve state. So we'll have a reserve in the basis of Cusi. So we've covered our tracks in the case of Bolivar, there's some excellent opportunity off to the west and improvements in grade and also the presence of more gold values. And in the case of Yauricocha, the focus has been to maintain our production, maintain covering our production depletion and move the asset forward with resources in an M&I basis.

[Igor Gonzales:]

Just to complement Gordon's response, we must keep in mind that the previous 43-101 had cut off date though mid-2017 and late 2017, third quarter 2017. So all the drilling performed since mid-2017 to-date will be incorporated in this new 43-101 that Gordon announced.

[Heiko Ihle:]

Reading between the lines of what you guys just answered to my question. Do you answer that you're hinting at is the NAV should be higher, but you're unwilling to quantify it. I mean I assume there is some internal calculations you guys are doing.

[Gordon Babcock:]

Well, Heiko, we believe that these assets are really undervalued we're dealing with. Three different mining districts, so there's opportunity that we can't even discuss that we haven't touched yet. In the case of Yauricocha, there is huge opportunity, in the case of Bolivar similar situation, in the case of Cusi, we're just starting to move forward.

[Heiko Ihle:]

Fair enough. I'll leave it at that. Thank you, guys.

[Igor Gonzales:]

Thank you.

[Operator:]

[Operator Instructions] And we do not have any telephone questions at this time. I will turn the call over to the presenters.

[Mike McAllister:]

Thank you, Operator. That will conclude 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, the materials can be found on our Web site at www.sierrametals.com. If there are any further questions or concerns, you can reach out to the management team anytime after today's call. Our contact information can be found in 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.