Sierra Metals Inc.
Q3 2015 Earnings Call Transcript

Published: 16 Nov 2015

[Operator:]

Good morning, my name is Mellissa and I will be your conference operator today. At this time I would like to welcome everyone to the Sierra Metals Inc., Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Mike McAllister, Director of Corporate Development. You may begin your conference.

[Mike McAllister:]

Thank you, operator and good morning everyone. Welcome to Sierra Metals third quarter conference call. On the call today we are joined by Mark Brennan, President and CEO, Ed Guimaraes, CFO; and Matt Wunder, Vice President of Exploration. Today’s call will be followed by a question-and-answer period. Today’s presentation is available for download both through the webcast and through the home page of the Company’s Web site at www.sierrametals.com. Also Wednesday’s press release is also posted on the Company’s Web site. Before I begin, I would like to remind everybody about our disclaimer that certain statements made 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 notes in Wednesday’s press release disclaimer and on Slide 2 of today’s presentation. Please note that all amounts mentioned in this call are in U.S. dollars unless otherwise noted. With that, I will now turn the call over to Mr. Mark Brennan, President and CEO.

[Mark Brennan:]

Thank you, Mike. Good morning ladies and gentlemen. I would like to begin with an overview of the third quarter for the Company. Following my remarks Ed will take us through our financial results for the third quarter then I'll take us through the production results and project highlights and finish with Matt Wunder giving us an exploration update. Third quarter has been a turnaround and transformational quarter for us. After the new management team reviewed the operations, we realized several areas were needed to rejuvenate and modernize the safety, mine practices and methodologies at the mines. We started this process in the third quarter to implement best safety practices, modern methodologies, which has met the temporary decline in Yauricocha's output due to the operating restructuring that will allow for new future growth plans. Bolivar in Q3 continue to perform very well with Bolivar seeing a 9% increase in copper equivalent production over the same period last year, while Cusi having record silver equivalent production, a 75% increase over Q3 2014. We continue to have great assets with strong production growth profiles and excellent properties for potential ground field resource growth in the near-term. We continue to be a low cost producer that continues to make money even at these depressed metal prices. We continue to have a strong operating balance sheet and finished the quarter with $32 million in cash and cash equivalents which we allows us to complete our CapEx projects which will benefit the company as it continues to grow for years to come. Turning now to Sierra's third quarter results, silver equivalent ounce production of 2.4 million ounces where copper equivalent production of 16.2 million pounds in Q3 2015 represents an 80% decline from the previous two record setting quarters of record silver equivalent production. This is mainly a result of reduced throughput in Yauricocha but as previously mentioned, this has seen as the short-term decline while we restructure our operation and implement best practices and modern methodologies. Total tonnage throughput of 452,000 ounces in Q3, represents a 5% increase over Q3 2014. Silver production of 691,129 ounces was a 13% decrease over Q3 2014 due to reduced plant throughput of 14% at our Yauricocha mine which was partially offset by higher throughput at our Cusi and Bolivar mines. Copper production for a total of 4.7 million pounds which is an 11% decrease compared to Q3 2014. This decrease again is mainly due to the reduced throughput at Yauricocha, as well as lower head grades which were down 38% and recoveries which were down 15% at Yauricocha, with lower head grades at Bolivar which were 6% as compared to Q3 2015. Bolivar however saw copper production of 3.9 million pounds which represents the 60% increase over the same quarter last year driven by higher plant throughput. Lead production decreased by 12%, zinc by 36% and gold by 5% compared to Q3 2014 due to lower head grades for metals except for gold offset by increased recoveries at Yauricocha, lower recoveries at Bolivar offset by higher head grades and at Cusi we had a higher head grades and recoveries for lead offset by lower head grade and recoveries for gold. Our base metal productions at all three mines still provided healthy by-product credits which kept cash costs low. The quality of our assets operated by our skilled teams has enabled us to continue on the path of falling within our 2015 production guidance. Cash cost per ounce of payable silver increased from negative 24.26 to $3.33 at Yauricocha and cash cost increased from 6.34 to 10.65 at Cusi in Q3 2015 compared to 2014. Increased costs were mainly due to the decrease in throughput, silver grades and recoveries in by-product credits due to lower metal prices. We also saw an increase in operating cost at Yauricocha related to dewatering of the mine, improving safety and our implementation of best practices and conversion to modern mining methodologies. Cash cost recovery for copper payable pound increased from 1.74 to 2.14 due to a reduction in plants throughput, decreased head grades and recoveries in lower by-product credits from declining metal prices as well as increasing equipment maintenance costs. Cash flow generated from operations before movements in working capital was 1.5 million for the quarter compared to 19.9 million in Q3 2014. This was mainly due to lower throughput and higher cost at Yauricocha as well as lower commodity prices which caused the deceased in revenue at all three mines. Investments made at Bolivar and Cusi have helped increase the company's metal production during the first nine months of 2015. Investments we made in Yauricocha today while reducing production in the near term will in fact help to increase production as already being seen currently and should continue to increase over the next 24 months, strong performance in Yauricocha in the first six months, as well as growth at Bolivar and Cusi for the nine months 2015, have allowed the company to have strong metal production and remain a consistent low cost operator. I would like to now hand over the call to Ed Guimaraes, our Chief Financial Officer for a financial overview.

[Ed Guimaraes:]

Thanks Mark. Good morning everyone. I'd like to start by highlighting the successful refinancing at the remaining 48 million due on the Corona Acquisition Credit Facility with Banco de Credito del Peru. This is a very successful refinancing for the company where almost 20 million of debt principal repayments and 4 million of dividend payments through our non-controlling interest shareholders in Corona are no longer due for the remainder of 2015 and 2016. Additionally, quarterly principal repayments thereafter have been reduced from 3.4 million to 1.25 million. The new facility provides the company with increased financial flexibility during these difficult times of continued declining metal prices, and allows for the completion of the company's capital expenditure programs which will benefit the company in potential production increases and reduced risk exposure. Now I would like to review our cash flows which provide a clearest perspective on our financial performance this is on Slide 8. During Q3, operating cash flow before movements in working capital was 1.5 million. We incurred 9.7 million on capital expenditures in Mexico and Peru and we paid 3.1 million of income tax in Peru, and realized positive working capital adjustments of 16.4 million mainly related to a decrease in accounts receivable and inventories. This is partially offset by 2.5 million of interest and principal repayments made on our debt. This increased our cash balance from 29.8 million at June 30, 2015 to approximately 32 million as of September 30, 2015. On Slide 9, we show the same cash flow movements for the nine months ending 2015. Our operating cash flow before working capital adjustments was 35 million. We incurred approximately 30 million on capital expenditures in Mexico and Peru, paid approximately 10 million of income taxes in Peru and had positive working capital adjustments of 4 million. We paid 14.7 million of interest in principal repayments on our credit facilities, received proceeds of 8 million from the FIFOMI loan in Mexico and paid approximately 1 million of dividends to our non-controlling interest shareholders in Peru. This reduced our cash balance from 41.3 million at the end of 2014 to 32.1 million for the nine months ending December 30, 2015. The 29.2 million of capital expenditures for the nine months of 2015 have been focused on key development projects and processing plant expansion. Total expenditures at Yauricocha were 11.1 million and included tunnel and shaft construction, mine development, water management, safety equipment upgrades and exploration. At Bolivar, we have spent 5.8 million on mine development and exploration, including completion of the power line project. Capital expenditures at Cusi totaled 13 million and were mainly directed towards mine development, shaft construction, exploration and increasing the mill processing capacity. Turning to the financial highlights on Slide10, during the third quarter of 2015 the Company reported revenues of 28.4 million which was 36% lower than 44.5 million in the same period in 2014. Revenues of 109.1 million for the nine months ended 2015 decreased 17% compared to the same period in 2014. The decline in revenues for both the quarter and year-to-date was due to the approximate 23% decline in metal prices with the exception of gold and was compounded by decreased throughput in Yauricocha and partially mitigated by increased throughput at Bolivar and Cusi. We also experienced lower head grades for all metals except gold at Yauricocha. A decrease in silver and copper head grades at Bolivar and a decrease in gold head rates and recoveries at Cusi which all distributed to the decline in revenues. Adjusted EBITDA for the third quarter of 2015 was 2 million compared to 20.7 million for the same quarter of last. Adjusted EBITDA for the nine months ending 2015 was 34.3 million and that is down from 59.2 million for the same quarter in 2014. The decrease in adjusted EBITDA is due to the decreased metal prices, decreased throughput at Yauricocha and an increase in operating cost. Turning to the balance sheet and liquidity on Slide 11, we have ended the first nine months of the year in a strong financial position with 32 million of cash and 52 million of undrawn credit facilities, which combined, gives the Company total liquidity of 84 million. The Company’s net debt was increased by 11% during the first nine months of 2015 to 45 million at the end of Q3 compared to 2014, mainly due to the increase in cash on hand at September 30, 2015 being greater than the decrease in debt June same period. The Company has principal payment obligations on its loans and credit facilities of approximately 7.3 million to be paid in 2016, 11.8 million to be paid in 2017 and 2018, 8.1 million to be paid in 2019 and 28.5 million to be in 2020. Metal prices continue to weaken during the third quarter of 2015. We continue to monitor the metal price environment and its potential impact on long-term cash flows and we’ll set initiatives in order to protect our cash balances. I would also like to highlight the sensitivity of our process to changes in the exchange rates. Approximately 70% of our costs at Yauricocha are denominated in Peruvian Nuevo Soles, and approximately 60% of our costs in Mexico are denominated in Mexican Pesos. As of December 31, 2014 the Sol to U.S. dollar exchange rate was 2.98 and the Mexican Peso to U.S. dollar exchange rate was 14.77. Thus far in 2015, the Sol has weakened by 8% against the U.S. dollar while the Peso has weakened by 15% against the U.S. dollar. A 10% decrease in the value of the Sol and Peso against the U.S. dollar would result in an increase of 2.7 million and 1.6 million in the Company’s net income respectively, assuming that our operational performance during 2015 is consistent with 2014. We are confident that our financial position together with our future potential cash flow generation from our three producing mines and available credit facilities will be sufficient to support the company’s financial commitments for the remainder of the year and beyond. With that, I will now turn the call back to Mark for an operation and project update.

[Mark Brennan:]

Thanks Ed. I've already discussed the production highlights earlier in the call, but I'd like to take a moment to highlight some of the changes we're seeing at the projects and to discuss our projects and outlook for the company. If you look at Slide 13, the company is undergoing operational improvements to increase safety, development and productivity at the Yauricocha Mine in an effort to increase production in the coming years. The Mine is undergoing various training programs using modern drifting techniques such as blast-control, ground support practices, as well as the use of remote control Load Haul Dump equipment. These improvements, while causing some reduced production in the near-term, will enable the company to benefit from improved safety practice and future production increases. Turning to Slide 14, project developments at Yauricocha during Q3 2015, the total development advances for the Yauricocha Mine was 3,752 meters, all using conventional jackleg drifting techniques with ground support using steel sets and some conventional ground support techniques. Development advances at Yauricocha during Q3 2015, entailed level and access drifting, crosscuts, draw points and ramp development in areas at the central mine zone, Cachi Cachi, Mascota as well as three other areas of the mine. During Q3 2015, drainage holes were also drilled on the 920 level at Yauricocha, including the installation of various vibrating wire piezometers. A drainage hole was drilled at 283 meters on the 920 level of the Antacaca Sur area of the mine and we installed three vibrating wire piezometers at three different level locations in the drill hole. During Q3 2015, the Yauricocha tunnel was advanced to 135 meters and the Yauricocha shaft was advanced 51 meters. Turning now to Slide 15, at Bolívar in Cusi, mine development at Bolivar in Cusi totaled 1,600 meters. Most of these meters 783 meters were developed to prepare stopes for the El Fierro deposit, while 126 meters were developed to access the 1830 stope in the El Fierro deposit. The El Gallo deposit was developed 353 meters to provide access between the El Fierro and El Gallo deposits. Bolivar Development of 261 meters was performed at the Bolivar Northwest and Rosarios projects, including 79 meters to access the El Gallo and the El Fierro deposits. At the Bolivar mine the company continues to explore the La Sidra vein over a strike length of 1,300 meters during Q3 2015. 2,946 meters were drilled in 10 holes on the third stage of drilling of 2,400 meters in 9 holes will be executed during Q4 2015. During Q3 2015 at the Cusi property, mine development drilling totaled 2,139 meters, while exploration drilling totaled 703 meters in various different veins. In conclusion, the company has focused on maintaining our strong production levels at each of these three producing mines, while focusing on improving operating performance, strengthening its asset base and exploring organic and external growth opportunities to enhance and deliver shareholder value. Sierra is pursuing initiatives for the remainder of 2015 in order to meet our objectives of lowering production cost in the long term, increasing production of plant capacity, improving mine sequencing and implementing improvements through safety, design and the mechanized mining methodologies being used, maximizing operating free cash flow and continue to develop our three producing mines while aggressively exploring ground field targets in the near vicinity of our current projects. With that I will now turn the call over to Matt Wunder for an exploration update.

[Matt Wunder:]

Thanks Mark and good morning. Slide 17 discovers a mine play exploration activities across the organization which include, scheduled drilling engagements in young mineralized zones, the expansion of these play out certain geological mapping and sampling, consolation of own resort data and the ongoing development of comprehensive 3D geologic models. Mine site exploration activities planned for the first half of 2016 include airborne magnetic and ready methods drilling, detailed throughput geochemical surveys, after an auto flood sort of analysis and the prior migration of targets to reveal details within that follow-up. So, our 18 target regional exploration initiatives across the organization, the 2016 initiatives for each concessionary area will include the consolation of all sort data, strengthen geochemical surveys, geological mapping and sampling and drill part of an allocation and prioritization for system for that follow-up. With that I'll turn it back to Mike McAllister.

[Mike McAllister:]

Thank you, Matt, that concludes the presentation portion of the call and we'll now open it up to questions from the participants, operator if you can please open up the line.

[Operator:]

[Operator Instructions] Your first question comes from the line of Alec Meikle from Cormark Securities. Your line is open.

[Alec Meikle:]

I think most of my questions have been answered, but I was just hoping if you could provide some color on the timing of this transition period and what we should be kind of looking for in terms of getting things back on track. Like is this going to be something that's going to be gradual or we're going to see some sort of major kind of quick improvements mostly at Yauricocha? Great, thanks.

[Mark Brennan:]

I would say this so I mean we've already seen some kind of fairly dramatic improvements to Yauricocha and yet again we're seeing very good production growth at Bolivar and Cusi. So really the focus of our attention right now has really been on Yauricocha. But no, the expectation that these are short to medium term terms of the most significant aspects. There will be obviously issues that will extend over the long-term and then some of the implementations they we’re doing now will have impact over the long-term. But I think that the kind of timeframe that we're looking at is the most significant issue that we've had Gordon Babcock our COO has had a tremendous job -- has done a great job in terms of making dramatic changes very quickly where they're most necessary. But again I think that for the most part, I think we're going to need to see the next the 2 or 3 quarters where we are going to see the ramp up coming to show strong growth.

[Operator:]

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

[Jim Young:]

I was wondering I had a couple of updates with respect to your CapEx that you're quoting. With respect to the tunnel and the shaft, can you just clarify what percentage are done at this stage and how much more additional capital expenditures will be required for both the shaft and the tunnel?

[Mark Brennan:]

Jim, this isn't something we are disclosing publicly at the moment, but I'll say to you that with respect to the shaft. We anticipate that sometime in the second quarter we should be complete with the shafts and not too soon thereafter our hope is that in the second to third quarter the tunnel. We're still working on our budgets, we're still working. The most important aspects that we have had to deal with at the Yauricocha in particular at the moment has really been focused on the miners themselves. We are focusing on the tunnels et cetera but we're right now just putting together budgets and there is where we are also looking at perspective contractors for each project that we’re working with to see how we go forward with them. So I hope that the next quarter I will be able to give a much better perspective once we have completed our budgetary process.

[Jim Young:]

Okay. And then with respect to Bolivar while year-over-year your production volumes increased nicely but sequentially you're so much flat which is a little surprising given the timing of the completion of the electric line, so I am just kind of just wondering what is the outlook for production -- looks like at the Bolivar operation?

[Mark Brennan:]

Well again, we believe that we're seeing some really good progress made at Bolivar and I guess in terms of we're seeing production growth, definitively now we've seen somewhat lower grades and then our hope is that we are working now to look to improve those base. And the Altera deposit provides opportunity we're hopeful, no guarantees, but we're hopeful we'll start to see better grading. The line that was implemented in the first quarter of this year has had a tremendous impact, it has been very positive in terms of our downtime as well as costs. So the expectation is that in the hope that we have as a management as that we're starting to look and trying to find higher grade areas where implementation or augmentation, excuse me of higher grade areas and that will be the most significant contribution we can make.

[Jim Young:]

So should we expect to see that in the fourth quarter of this year?

[Mark Brennan:]

And if the guys are smiling, Jim, that's really something we're focusing on. We're trying to bring in as quickly as we can. I will leave that when I'll open for now.

[Jim Young:]

Okay. And then with respect to the exploration results at Bolivar when can we expect to see some results being released given the positive drilling that you alluded to earlier?

[Mark Brennan:]

Again there is a lot drilling going on and when we feel that we have sufficient data of a material nature then we'll put something out. As mentioned we're looking at numerous areas at Yauricocha right now. We're looking at Bolivar. We're looking at Cusi. We don't want to come out and just be putting out results at anytime or any -- we would like to have substance behind what we put out. So we believe we had a clear plan to wait until we have clearly defined objectives and concepts to prove it prior to disclosing.

[Jim Young:]

Okay. And is Gordon on this call?

[Mark Brennan:]

Gordon Babcock is not on the call unfortunately he had equivalent that he had, it got improved that he couldn't make the call.

[Jim Young:]

Okay, because I just wanted to with respect to the first question about the timing of this transition period, when you alluded to some short, medium and then longer term issues, can you just elaborate what are some of these a little bit more with respect to the timing and when we could see production increasing out of Yauricocha given that different parts of the mine that have been down due to watering and other safety related issues? Some updates would be really helpful.

[Mark Brennan:]

I guess in terms of the again when -- please feel free to read our MD&A and our disclosure documents, because there is a limitation that it goes through what you'll have to rely on to a large extent. But at the same point, the issues such as dewatering, that's been an ongoing process as we go deeper in the mine, the, as we go deeper in the mine we have greater incidents of water as you would expect. We've actually put in drainage programs now down to the deeper levels, down at the 10-20 level, where we're now mining around the 90 level and frankly the -- what we're finding is that the -- we're getting a lot of incidents of issues with respect to mud slides or issues where we have drain -- issues with water. So, I think in terms of dewater issues being in a area that was a very critical issue which we have now put behind us. As discussed essentially we moved to these new methodologies that I believe will start reaping benefits right away. Moving to [indiscernible] and bolting and screening will be a much more efficient and safe way to mine, it's what's been implemented throughout North America and now we're now bringing it down into Yauricocha, but in terms of about the exact timing of that Jim, you'll have to wait and see how that progresses.

[Jim Young:]

Just to clarify, did you just say that dewater issues are behind you?

[Mark Brennan:]

No, I'm saying the dewatering will always be -- as we move deeper in the mine, the dewatering issues will always be an issue, but what we believe is we now have a -- we're now implementing programs that are putting these issues behind us from the perspective of -- they're no longer as critical as they once were, they'll always be critical, they'll always be important, but we feel we have a good handle on them at the moment.

[Jim Young:]

Okay. And then with respect to your reserves, when can we expect to see a new 43-101 report in depth report for Yauricocha and then Bolivar and Cusi?

[Mark Brennan:]

At this point the -- I don't have a timeframe for you on those. I expect they will see -- yes, at this point Jim, I'd say -- suffice to say, I don't have a timeframe for that right now.

[Jim Young:]

Well, Yauricocha should be coming up somewhat in the near term, is it?

[Mark Brennan:]

Not necessarily, why do you say that?

[Ed Guimaraes:]

Jim it is Ed Guimaraes. As part of the refinancing of the credit facility, we are not necessarily required to present the NI 43-101 reserve report to the banks which was the main driver, unless there's material changes. So, to Mark's point, this is something that we're reviewing and we're not in a position to say when we're definitively going to have that up. There's no requirement as in the past to have something there.

[Jim Young:]

That's what I guess was the -- thank you for the clarification there I was in the impression that the 43-101 was required on an annual basis for Yauricocha.

[Ed Guimaraes:]

Yes, and that's not the case in our industry due to the refinancing.

[Operator:]

There are no further questions at this time, Mr. McAllister I'll turn the call back over to you.

[Mike McAllister:]

Thank you, operator and thank you everyone for participating today. A transcript of the call will be available on our Web site www.sierrametals.com and you are also -- our contact information is available on the last page of the presentation. Should you have any other follow-up questions please feel free to reach out to us. Thank you operator, that concludes the call.

[Mark Brennan:]

Thank you, very much ladies and gentlemen.

[Operator:]

And this does conclude today's conference call. You may now disconnect.