Sierra Metals Inc.
Q4 2014 Earnings Call Transcript

Published: 27 Mar 2015

[Operator:]

Good morning. My name is Mike and I will be your conference operator today. At this time I would like to welcome everyone to the Sierra Metals Q4 and Fiscal Year 2014 Year-End 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] At this time I'd like to turn the call over to Ms. Victoria Vargas, Vice President, Investor Relations.

[Victoria Vargas:]

Thank you, Mike and good morning everyone. Welcome to Sierra’s fourth quarter and 2014 year end conference call. On the call we are joined today by Audra Walsh, President and CEO; Ed Guimaraes, CFO along with Thomas Robyn, Senior Vice President, Exploration. At the end of this call, there will be a question and answer period. Today’s presentation is available for download both on this webcast and on the home page of the company’s website. The related press release is also posted on the company’s website. 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 non-historical is forward-looking. For more information, refer to our detailed cautionary notes in yesterday’s press release and the disclaimer on the slide 2 of today’s presentation. Please note that all dollar amounts mentioned in this call are US dollars unless otherwise noted. With that, I will turn this call over to Audra Walsh, our President and CEO.

[Audra Walsh:]

Thank you, Victoria and good morning everyone. I will begin with a brief overview of our fourth quarter and 2014 year end results. And then Ed will take us through financial results for 2014, followed by Thomas giving us a recap of the 2014 exploration results and exploration budget for 2015. I will conclude our remarks by providing a summary of our production and CapEx guidance for 2015. Before I begin, I would like to take a moment to thank all of our employees in Mexico, Peru and Canada for their commitment over the last year in delivering another outstanding year of financial and operational results for our shareholders. This has been a team effort and I am very proud to be leading this company. As we begin the presentation, I will move ahead to Slide 4 which summarizes our operational results. 2014 was a record year of metal production, driven by increased throughput at all of our mines. In 2014, the company’s metal production exceeded the high end of our guidance, for silver, gold, lead and zinc while copper production was within the guidance range. Our 2014 fourth quarter production of 875,400 silver ounces was the highest of any quarter in the history of the company as was our ore throughput. For 2014, the company produced 3.1 million ounces of silver and 11.8 million silver equivalent ounces, which compared to 2013 represents a 19% and a 26% increase respectively. Consolidated metal production for 2014 for silver, copper, lead, zinc and gold increased by 23%, 42%, 29%, 5% and 40% respectively compared to 2013. The increase in silver production was due to higher plant throughput at all three mines and higher recoveries at Yauricocha and Cusi. The increase in copper production was due to the ramp up from 1000 tons per day to 2000 tons per day at Bolivar during quarter four 2013, which resulted in higher throughput for the full year of 2014. Higher lead head grades and throughput at Yauricocha contributed to the increase in lead production in 2014. Also, the increase in zinc production was due to the increase in throughput at Yauricocha. The increase in gold production during 2014 was due to higher head grades and recoveries realized at the Bolivar and Cusi mines. Cash costs per ounce of payable silver at Yauricocha and Cusi decreased by 134% and 15% respectively during the fourth quarter of 2014 compared to the same period in 2013. The reduction was due to an increase in ounce of payable silver and by-product credits due to the increase in throughput. Cash costs per pound of payable copper at Bolivar increased by 9% during the fourth quarter of 2014 compared to the same period of 2013. The decline in silver prices impacted the by-product credits at Bolivar during the fourth quarter of 2014 compared to the same period in 2013. On an annual basis, cash cost per ounce of payable silver at Yauricocha was a negative $21.25, a decrease of 76% compared to 2013. At Cusi, the cash cost per silver payable ounce decreased 43% from $15.70 in 2013 to $8.92 in 2014 and was attributed to higher plant throughput which resulted in higher ounce of payable silver and lead by-product credits. Bolivar’s cash cost per pound of payable copper remained consistent with 2013 as the increase in the pound of payable copper was offset by the decrease in the by-product credits due to the declining silver prices. The cash flow generated from operations during 2014 was $60.1 million, a significant increase as compared to the cash flow of $26.7 million in the previous year despite lower commodity prices. The investments made to increasing milling capacity at our Bolivar and Cusi projects in Mexico really helped us boost the company’s metal production during 2014. The consistently strong performance of Yauricocha mine combined with the growth at our Mexican mines resulted in the company achieving an exceptional year of metal production and low operating costs. Now I will turn it over to Ed for the financial overview.

[Ed Guimaraes:]

Thanks, Audra. Good morning everyone. I would like to start by reviewing our cash flows which provide the clear perspective on our financial performance. I have summarized the changes in cash for Q4 2014 on Slide 6. During Q4, operating cash flow before income taxes paid was $16 million. We spent $11 million on capital expenditures in Mexico and Peru and we paid $4 million of income tax in Peru. We paid $3.7 million of interest and principal repayments on our debt as well as $3.3 million of dividends to our non-controlling interest shareholders in our Corona subsidiary. This reduced our cash balance from $46.7 million at September 30, 2014 to $41.3 million at year-end. On Slide 7, we show the same build-up of our cash flow for the entire calendar year. Our annual operating cash flow before income taxes paid was $72.3 million. We spent $40 million on capital expenditures in Mexico and Peru, $11.6 million on income tax in Peru and $0.7 million of special mining duties in Mexico, $14.8 million on interest and principal repayments on our debt, and $7.1 million on dividends to our non-controlling interest shareholders in our Corona subsidiary and $1.5 million of dividends to our common shareholders. This reduced our cash balance from $44.9 million at December 31, 2013 to $41.3 million at year-end. The $40 million of capital expenditures in 2014 were focused on key development projects and processing plant expansion. Total expenditures at Yauricocha were $15.9 million and included tunnel and shaft construction, mine development and exploration. At Bolivar, we spent $7.4 million on mine development and exploration, including the power line project. Capital expenditures at Cusi totaled $16.7 million and were mainly directed toward mine development and exploration and increasing the mill processing capacity. Turning to the financial highlights on Slide 8. Despite declines of 21%, 8% and 10% in realized silver, lead and copper prices respectively during the fourth quarter of 2014 compared to the fourth quarter of 2013, the company recorded revenues of $40.9 million which was a 12% increase from the same period in 2013. Revenues of $172.6 million in 2014 increased by 20% compared to 2013 despite declines in realized silver and copper prices of 19% and 7% respectively. The increase in revenues was due to higher plant throughput at all three mines as well as higher head grades and recoveries for silver, lead and copper at Yauricocha. The increase in revenues and decrease in costs contributed to significant increases in earnings and net income in 2014 compared to 2013 on both a quarterly and annual basis. The adjusted EBITDA for Q4 2014 was $15 million, representing a 21% increase compared to the fourth quarter of 2013, and the adjusted EBITDA for the full-year 2014 increased by 35% over 2013 to $74.2 million. The decline in silver and lead prices in the fourth quarter led to a decrease in adjusted EBITDA for the fourth quarter compared to the previous three quarters in 2014. Turning to the balance sheet and liquidity on Slide 9. We ended the year in a strong financial position with $41.3 million of cash and $49 million of undrawn credit facilities which combined give us total equity of over $90 million. The company’s net debt was reduced by 16% during 2014 to $40.6 million at year-end compared to 2013. The company has principal and interest payment obligations of approximately $17 million in each of the next four years. Metal prices have weakened thus far in 2015. We will continue to monitor the price environment and its potential impact on long-term cash flows and we will set initiatives to protect our cash balance accordingly. I would like to highlight the sensitivity of our profit to changes in 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. At year-end, the sole to US dollar exchange rate was 2.98 and the Mexican peso to US dollar exchange rate was 14.74. Thus far in 2015, the sole and peso have weakened further against the US dollar both by 3%. A 10% decrease in the value of the sole and peso against the US dollar would result in an increase of 2.7 million and 1.7 million in the company's net income respectively. We are confident that our financial position together with future cash flows from our three producing mines and available loan facilities will be sufficient to support the company’s financial commitments for the next year. With that, I will turn the call over to Thomas for the exploration update as we remain focused on unlocking value in this area given the success we had last year.

[Thomas Robyn:]

Thank you, Ed and good morning ladies and gentlemen. 2014 was a good year for exploration at all three of our properties. Slide 11 summarizes our 2014 exploration results. At Yauricocha, underground drilling in 2014 resulted in expansion and upgrading the mineralization at both the Central and Cachi Cachi mines, the results of which will be incorporated in an updated reserve and resource estimate expected to be released during the second quarter. Deep drilling in the Central mine has also provided confirmation of the continuity and large vertical extent of the orebodies at depth. On the Catas orebody, for example, we’ve intersected multiple zones of high grade copper and zinc to a depth of 1145 meters from surface, which is over 500 meters below our current working level at the mine. Planned exploration in 2015 will continue to delineate the extension of mineralization of various orebodies of the Central mine and further explore the potential extension to the Northwest and Southeast. Drilling in 2015 will also follow up on the success of expanding mineralization to depth at Yauricocha’s Cachi Cachi mine. One of the more interesting developments from our 2014 program was the discovery of five mineralized chimney bridges in an area of just 400 meters west of the Central mine. Our initial drill testing in 2014 intersected multiple mineralized bodies and we returned grades of up to 181 gram silver and 10% zinc. We will be following up with exploration drilling from both surface and underground in the year ahead. At Bolivar, underground drilling in 2014 was successful in expanding the copper, gold, silver mineralization at Bolivar and Northwest which lies approximately 1.5 km northwest of the Ogio [ph] where we are currently mining. Bolivar Northwest is only 500 meters from the Alta Ley mine and workings can be extended from there to connect the two. Exploration in 2014 also focused on the La Sidra silver gold quartz-vein system which has a 2.5 km strike length. High grade silver and gold occur over a 500 meter length in surface sampling and limited drilling has also encountered high grades of gold and silver. The 2015 exploration program at Bolivar will be directed towards resource expansion at Bolivar Northwest as well as the Alta Ley in stepped-up zones, both of which are also proximal to the Central mining area. We will also be conducting surface exploration drilling on several targets, including La Sidra as already mentioned and two other promising targets known as Lilly Norte and Nathalie Fault. At Cusi, surface and underground drilling in 2014 concentrated on expanding and upgrading the resources for the Promontorio and Santa Eduwiges Mines and by testing for depth extension of several of the veins. In addition, underground development work at the Promontorio mine exposed several hundred meters of mineralized shoots some of which lie outside the current resource estimate. The 2015 program will focus on expansion of the currently defined resources as well as surface exploration drilling of five high-priority target areas. Turning to Slide 12. The 2015 exploration program is budgeted at $9 million to drill over 75,000 meters. Our priority is to continue expanding and upgrading the reserves and resources at all three mines and follow-up on a number of promising exploration targets. Over 16,000 meters are allocated at Yauricocha, 21,000 meters at Bolivar, 37,000 meters at Cusi, and 4000 meters at two regional projects in Mexico. 2015 is going to be a very busy and an exciting year on the exploration front. Now to Audra for the company's 2015 outlook and guidance.

[Audra Walsh:]

Thank you, Thomas. Moving on to Slide 13. The consolidated production guidance highlights the continued production sets the company expects to maintain in 2015. We anticipate our 2015 ounces of equivalent silver to be between 10.9 million and 12.6 million ounces of equivalent silver. We expect the cash cost per silver payable ounce to remain in approximately a negative 14 to 17 at Yauricocha and a cash cost per ounce of payable silver to be between 6.15 and 7.50 at Cusi. At Bolivar, guidance projects the cash cost per pound of payable copper to be between $1.20 and $1.40, which represents a decrease of approximately 12% compared to 2014 due to the ramp up of 2500 tons per day at the Piedras Verdes mill in the second half. For 2015, our projected capital expenditures are estimated to be between 30 million and 40 million. However, the company may change its capital spending plans for the balance of 2015 and 2016 depending on commodity prices, the financial position of the company and the result of feasibility study and other factors. The major components of the capital expenditure budget relate to the continued enhancement to the mine infrastructure at Yauricocha, increasing mill capacity at Bolivar and providing greater access to the underground mining areas in Cusi. In summary, the company expects to continue expanding and upgrading the mineral reserves and resources at all three mines through mine development and exploration and continue to deliver solid production and financial results during 2015 and beyond. We are a low cost producer with a naturally hedged production profile given our diversification across five metals. Our strong financial position allows us to maintain our capital investment in mine development and exploration at a time when many producers are cutting back on these expenditures. This should position us well for future growth for years to come. With that, we are happy to answer any questions. Please note that some of our management team members are online in different locations so there may be a brief pause after you ask your question. Now back to the operator for questions.

[Operator:]

[Operator Instructions] The first question is from Ali Khan with Edgecrest Capital.

[Ali Khan:]

I guess I will start my questions with Yauricocha. In the press release that you are seeking permits to increase the throughput at the plant to 3000 tons per day. Just wondering if you are targeting this increase for the second half and whether the CapEx and production increases are included in the guidance.

[Audra Walsh:]

Hi Ali, thank you for the question. In regards to Yauricocha, yes, that is correct. We are planning for the increase in the second half and we do include the production increases as well as capital related to that within our guidance.

[Ali Khan:]

And on to Bolivar, now that you have the grid connection, can you provide some granular details on the steps needed to upgrade the mill capacity?

[Audra Walsh:]

At Bolivar, at the moment we are working on our safety for thickness redesign and that should be done in early April and we’re going to turn and look at our 40-foot thicker redesign which we’re targeting end of May, early June. And so we plan to be able to start getting up to a steady 2500 by the third quarter of this year.

[Ali Khan:]

So I guess production is going to be backend loaded but do you realize immediate cost savings in the first half?

[Audra Walsh:]

So with Bolivar, we’ve planned for the power line in our budget we completed in March and we hit that target. So we do have within our budget a decreased cost of not having to have the backup generators running.

[Ali Khan:]

And what about the magnetite recovery circuit, do you expect to start it any time soon?

[Audra Walsh:]

We did an economic analysis of the magnetite circuit last month and at this moment, with the current prices and where they are at, it’s not an economic decision that we would take. However we are keeping our eye on it to determine when is the right time to start it up.

[Ali Khan:]

And going on to Cusi, I guess, this is the much awaited catalyst for you guys. Do you have a timeline for the release of the PFS?

[Audra Walsh:]

Ali, we are looking at – very carefully to make sure we make the right decision on how we want to grow it and what we want to do. At this moment, I don’t have a timeline for the release.

[Ali Khan:]

But is there going to be an updated resource estimate this year for Cusi?

[Audra Walsh:]

Yes, we do plan to do an updated resource estimate.

[Operator:]

The next question is from Cliff Hale-Sanders with Cormark Securities.

[Cliff Hale-Sanders:]

Just a couple of quick questions to follow up on that. The first one is really, I just want to make sure I understand what’s going on at Yauricocha. Obviously unit costs in Q4 on a per ton basis looked very impressive for them at $41, $42 a ton. The guidance for 2015 is a bit of an uptick back to the higher 40. Just wondering there if that’s more conservatism built in there, or is there some sequencing issue at the mine as my first question?

[Audra Walsh:]

Okay. Thanks for joining us today. As far as Yauricocha, the fourth quarter we did have higher production within our mine plan, that was – it was a planned mining sequencing, and so the production of the higher 40s is due to the mine sequencing as well. So it’s really in line with the mine plan.

[Cliff Hale-Sanders:]

So there is nothing to change there. What I want to know is based on your guidance, what level of I guess built into that sort of 47 number that you have, FX rates, are you fairly conservative relative to where they are today or should we expect some improvement if things stay as depressed as they are today?

[Ed Guimaraes:]

I think a good basis would be using where they are today.

[Cliff Hale-Sanders:]

And Ed, since you piped in there and Audra, you can also add to this, just looking at your balance sheet, obviously you have additional credit available to you right now, with the cash, if I am reading the balance sheet correctly, you have about 30 million of loans payable over the course of the next year. Not to say it’s too tight but what level of tightness in the balance sheet would you view as prudent or are you comfortable going to in the downside case scenario if the market does not improve over the next 12 months as a way to guide the one you might have to look at trimming some of your expenditures both on the CapEx and on the exploration front?

[Ed Guimaraes:]

Thanks, Cliff. Well that’s something we're constantly focused on and I think from a level of comfort maintaining a cash balance of above $25 million is prudent. We are in the works of -- we have a very good relationship with our current lenders. There is a strong appetite out there to look at refinancing as well from other potential lenders. So that’s something I'm considering as well. But again that's all driven by commodity prices going forward and the amount of CapEx that we would ultimately trim down if you will to create that buffer.

[Cliff Hale-Sanders:]

And just going on from the CapEx, obviously the underground infrastructure at Yauricocha has been underway now for, if my memory is right, a couple years. Just wondering if you give us a bit of a high-level view of where the status is on the new tunnel and how much more work actually has to be done on the underground working there to complete all the new infrastructure?

[Audra Walsh:]

I will take that one. As far as the Yauricocha tunnel, the phase one went from La Sidra [ph] to Cachi Cachi and we completed the earth works in December of 2014 on that. On phase two, going from Cachi Cachi to Chumpe, we will finish that one at the end of this year. And so the tunnel is expected to be finished this year, and there still will be some infrastructure work that has to happen in early the first quarter of 2015. As far as Yauricocha shaft, the borehole to the surface is completed and we plan to have the functioning at the lower level at the end of quarter two and we’re about 37% on that one. I was at the site on Wednesday and very excited with the progress that they made, done a really good job in really controlling costs. As far as Cachi Cachi, we are 76% completed and we should finish that one in quarter two.

[Ed Guimaraes:]

Cliff, if I may as well, just to go back to your previous question, you did state correctly that on our balance sheet we’re showing current loans payable of 30 million. I just wanted to point out that included in the amount is 11 million of revolving lines of credit which would show -- in essence would reduce that from a cash flow, we’re looking at about 17 million of interest loan repayments.

[Cliff Hale-Sanders:]

So you could circulate that one if necessary.

[Ed Guimaraes:]

Exactly. I just wanted to clarify that.

[Operator:]

[Operator Instructions] The next question is from Jim Young with Stanley Investments [ph].

[Unidentified Analyst:]

Hi, I’ve got several questions. I guess first to start off is to follow up with respect to the new tunnel and shaft at Yauricocha, you talked about the timelines. Are both the tunnel and shaft also either on budget, ahead of budget or exceeding budget? Can you just clarify that please?

[Audra Walsh:]

So our costs are on track for what we budgeted for them. So we are on track with that.

[Unidentified Analyst:]

And then secondly with respect to your production guidance for 2015, at the low end of 10.8 million silver equivalent ounces, that’s about 8% down from your 2014 guidance and it just seems that and your upside is 12.6 million, and just seems that with improvement at Bolivar, at Cusi and at Yauricocha, I guess I am just trying to reconcile why your low end guidance would be down 8% from 2014’s actual results?

[Audra Walsh:]

Thanks, Jim. Part of the problem with the silver equivalent ounces is the prices that you have to use to calculate where it ends up being. So that is part of that fluctuation as well.

[Unidentified Analyst:]

So if you use constant silver prices where would the low end be?

[Ed Guimaraes:]

We don’t have that readily available, Jim.

[Unidentified Analyst:]

Okay, and at Bolivar, where – could you clarify how much in cost savings do you expect to see from having the power line operational for the next three quarters?

[Audra Walsh:]

So the annual costs to do the backup generators is just over 1 million – 1.2 million. So if you extrapolate from that, you can see about where our savings is, as far as the backup generator. On top of that, for the diesel costs. On top of that, Jim, of course, you get the improved efficiencies of having the steady state line and we’ve incorporated that into our budget after March of this year, with the higher throughput in the later quarters.

[Unidentified Analyst:]

And if you think that you can get up to 2500 tons per day at Bolivar by the third quarter, what above and beyond 2500 tons a day, what are your plans and how much additional capital expenditures would that require to get to that – are you thinking 3000 tons a day, 4000 tons a day or et cetera, what’s your though process with the future of Bolivar?

[Audra Walsh:]

Yes, it’s a good question, Jim. We are doing an engineering study right now on where we are going to go and you actually quite named the two different stuffs that we are looking at, one which is 3000, the other one which is 4000. We haven’t finished detailing that study out on what the costs are going to be, but we are definitely planning a second step after this year.

[Unidentified Analyst:]

And when would you expect this engineering study to be concluded?

[Audra Walsh:]

It should be done at the end of this quarter, early next quarter.

[Unidentified Analyst:]

And then at Yauricocha, looks like in your MD&A, you said that the 43-101 is going to be released by March 31. Can you give us some sense as to what the preliminary information shows?

[Audra Walsh:]

Jim, I cannot.

[Unidentified Analyst:]

Will that be released by the 31st?

[Audra Walsh:]

That is our plan, yes.

[Unidentified Analyst:]

And is there any plan for updating the 43-101 in 2015 for Bolivar?

[Audra Walsh:]

We’ve have discussions and we haven’t made a final decision on that yet.

[Unidentified Analyst:]

And lastly at Cusi, why the delay for pre-feasibility study?

[Audra Walsh:]

Cusi is a very extensive orebody and we want to make sure as we go through this that we do the best we possibly can in figuring out what the size and step be, and with the new information that we received in 2014, it allowed us to continue to advance our thinking and we want to just make sure that as we step, we step it right and we do it with the appropriate due diligence.

[Unidentified Analyst:]

So do you think that this is something that we could expect to hear more about by the end of the June quarter or is this going to be a year end 2015 or even a 2016 issue?

[Audra Walsh:]

Jim, it’s difficult for me to put a timeline on it, as we put a lot of money into exploration as we are finding out new information, it’s giving us a lot better understanding of where we are going to be. And so I can’t put a timeline to it right now.

[Unidentified Analyst:]

I guess lastly, can you just update us with your thoughts with respect to a time table for value creation at Sierra Metals given that Alberta [ph] Fund 2 terminates in October of 2016?

[Audra Walsh:]

So just a correction, that Fund 1 is the one that is going to be in October of 2016. Jim, I mean as you pointed out, we would agree that our share price like many companies, has lots of upside potential, and as a management team, we are excited about that. At this moment, what we can control is our operation and we are working really hard and making sure operations perform that we have a strong balance sheet, that we are delivering value through organic growth. That’s where our main focus is. It’s on what we can control. On top of that, we are in discussions with strategic planning with our board on a quarterly basis looking at opportunities and seeing what we can do to unlock the value of the company. End of Q&A

[Operator:]

[Operation Instructions] There are no further questions at this time. I will turn the call back over to the presenters.

[Audra Walsh:]

Thank you, operator. Well, I’d like to thank everyone for joining us this morning and we look forward to talking to you again soon as we reveal how we have started off in 2015. Thank you.

[Operator:]

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