Silvercorp Metals Inc. (NYSE:SVM)
F2Q13 (Qtr End 09/30/2012) Earnings Call
November 14, 2012 11:00 AM ET
Jonathan Hackshaw - Director, Investor Relations
Rui Feng - Chairman and Chief Executive Officer
Maria Tang - Chief Financial Officer
Brad Humphrey - Raymond James
Good morning, ladies and gentlemen, welcome to the Silvercorp Metals second quarter fiscal 2013 earnings conference call. I would now like to turn the meeting over to, Mr. Jonathan Hackshaw, please go ahead.
Thank you, operator, and good morning, everyone. Welcome to Silvercorp's investor conference call for the second quarter of fiscal 2013. Joining me today on the call are, Dr. Rui Feng, Silvercorp's Chairman and Chief Executive Officer; and Maria Tang, Silvercorp's Chief Financial Officer.
We will begin the call with a review of our financial, operating and development highlights for the quarter. And then, we will open the call up to questions. Presentation slides are available as part of the webcast or on Silvercorp's website. To advance to slides, please click on the forward arrow.
Before we begin, I'd like to draw your attention to the Slide 1 and remind you that during today's call, forward-looking statements will be made relating to future production, development and exploration, capital expenditures, business expansion plans and other items. Such forward-looking statements are subject to risks and uncertainties, many of which are detailed on our 2012 Annual Information Form filed on SEDAR. There can be no assurance that such forward-looking statements will prove to be accurate, as actual results and future events can differ materially.
Turning to Slide 2, I will now review the second quarter financial highlights, which are expressed in U.S. dollars. During the quarter, the company recorded net income attributable to equity holders of the company of $9.5 million or $0.06 per share compared to $18.5 million or $0.11 per share in the second quarter of fiscal 2012. This decrease is due to a combination of lower sales, higher production costs and fluctuations in foreign currency.
Turing to Slide 3, for the first six months of this fiscal year, the company recorded net income attributable to equity holders of the company of $15.6 million or $0.09 per share compared to $44.1 million or $0.25 per share in the second quarter fiscal 2012.
On Slide 4, in the second quarter of fiscal 2013, cash flow from operations was $23.9 million or $0.14 per share compared to $35.2 million or $0.20 per share in Q2 2012. After paying dividends of CAD$4.2 million and capital expenditure of $14.1 million, the company ended the quarter with $136.6 million in cash and short-term investments and no debt.
Slide 5, for the first six months period ended September 30, 2012, cash flow from operations was $43.2 million or $0.25 per share compared to $69.1 million or $0.40 per share in the second quarter of fiscal 2012.
Turning to Slide 6, on our second quarter operational highlights, the company produced in total 1.3 million ounces of silver and over 2,500 ounces of gold. At the Ying Mining District, Silvercorp mined over 205,000 tons of ore during the quarter, 13% more than in the second quarter of fiscal 2012.
Metal production totaled 1.3 million ounces of silver, 1,300 ounces of gold, 13.4 million pounds of lead and 3.4 million pounds of zinc compared to 1.4 million ounces of silver, 900 ounces of gold, 16.5 million pounds of lead and 3.2 million pounds of zinc in Q2 2012.
Grades were 224 grams per ton for silver, 3.4% for lead and 1.2% for zinc compared to 271 grams per ton for silver, 4.6% for lead and 1.2% for zinc in the same quarter last year.
Compared to the second quarter of fiscal 2012, production from our HPG, TLP and LM Compared to Q2 2012, production from HPG, TLP, and LM satellite mines in this quarter increased 10% to compose 43% of total production at the Ying Mining District compared to 33% in the prior year.
The comparable reduction in production from the SGX mine is also a result for mechanical problems with one of the shafts that impacted production for 20 days during the quarter. As a result lower overall grades were noted in this quarter, but the problem has been resolved.
Total and cash mining costs per ton in the second quarter of fiscal 2013 was $62.56 and $53.27 respectively, compared to $57.23 and $45.74 respectively in second quarter of fiscal 2012. The increase in cash mining cost was due to the following: one, an increase in labor costs for both the company's employees as well as those of its mining contractors of approximately $3.80 per ton; secondly, an increase in mining administration and preparation cost of $2 per tone; and thirdly, the impact of U.S. dollar depreciation versus the Chinese RMB of approximately $1 per ton. Compared to the first quarter of fiscal 2013, total and cash mining costs decreased by 9% and 4%, respectively.
Turning to Slide 7, for the first half of fiscal 2013, the company produced in total 2.5 million ounces of silver and over 5,100 ounces of gold. On to Slide 8, for this quarter, our consolidated silver cash cost and cash cost per ounce of silver were negative $1.05 and negative $0.74 respectively, compared to negative $2.74 and negative $4.55 per ounces respectively in the second quarter for fiscal 2012.
However, compared with the first quarter of fiscal 2013, total and cash cost per ounce of silver decreased by $1.42 and $0.88 respectively, due to lower overall production cost in the second quarter of fiscal 2013. For the quarter, precious metals accounted for 71% of sales compared to 74% in the second quarter of fiscal 2012. This quarter, silver accounted to 65% of sales; gold 6%; lead 24%; and zinc, 5%.
Slide 9, for the six month our consolidated cash cost per ounce of silver was negative $0.31, while the same period last year was negative $5.39 per ounces total. Precious metals accounted for 71% of sales, of which silver accounted for 64% of sales and gold 7%; lead and zinc accounted for 24% and 5% of total sales respectively.
Turning to Slide 10, sales for this quarter were $45.2 million compared to $62.1 million in the second quarter of 2012. This decrease is due to a lower net realized lower price and lower metal production. The net realized selling price for silver was $23.15 per ounce, a decrease of 24% compared to $30.48 per ounce for the same quarter last year.
And just to be clear, the net realized silver price is after deductions for smelter and recovery charges and VAT. The realized silver price in the silver metal exchange before these deductions was $30.50, which was slightly more favorable to the realized silver price on the London Metal Exchange for the quarter of $29.80.
Moving on to Slide 11, I will now provide an update on recent exploration and development activity for the quarter in each of our projects. Development work on 5,200 meter access ramp at the SGX mine continued and was 27% complete as of the end of the quarter. This ramp is designed to follow the main S7-1 vein and is expected to improve production capacity at SGX starting in the second quarter of fiscal year 2014.
The company also completed the development of 7,300 meters of horizontal tunnels in 15,000 meters of underground drilling. To support the ongoing expansion work at SGX, the company has commenced construction of a new 5,000 meter square facility, which will include offices and dormitories.
At our LM mine, a great deal of progress was made on development work at both the LM Mine and LM West. Tunnel development on five mining levels at the LM mine continued in two new stopes along the 750 meter elevation commenced production, which contributed to the increase in ore mined during the quarter.
At LM Mine West, the construction of Shaft 969 is completed during the quarter and preparation for tunnel development work is underway. It is expected that Shaft 969 will become operational during the third quarter of fiscal 2013 and will start to produce ore beginning the third quarter of fiscal 2014.
In addition, in the second quarter of fiscal 2013, the company completed a total of over 1,000 meter of development work of a 4,800 meter access ramp at LM West. The access ramp has already been connected to existing tunnels at LM West, which has vastly improved the tunnels' ventilation and the hauling capacity. It is expected that this new access ramp will contribute to increased production by the first quarter of fiscal 2014.
Once Shaft 969, the access ramp, and all the mining levels are completed down to the 500 meter elevation at LM West in fiscal 2015, the combined production capacity of the two mines is expected to be 300,000 tons of ore per year. In order to support the expected growth in operations at the LM Mine and LM West, the company has commenced construction of a 3,000 square meter facility, which will include offices and dormitory.
In Q2 2013, the company also developed 5,000 meters of decline in horizontal tunnels and completed 12,500 meters of underground drilling at the LM Mine and LM West. At the TLP and HPG mines, the company also continues to advance development work in order to continue the ramping up of production and facility for underground drilling.
Turning to Slide 12, I would now like to touch on the adoption of a new mining method, the Ying Mining District. Traditionally, the mining method of the Ying Mining District has been predominantly resuing, using a ratio of 60% resuing and 40% short-hole shrinkage, with cut-off grades before mining dilution of 300 grams per ton silver equivalent at the SGX mine, and 150 grams per ton of silver equivalent at the HPG, LM and TLP mines.
For those of you, who are not aware that the resuing method is more selective and is used to mine narrow veins under 0.7 meter, while the shrinkage method is used to mine wider stopes ranging from 0.8 meters to 3 meters.
As you know, Silvercorp's tradition to mine narrow veins, however, following a reduction in the cut-off grades for the Ying Mining District Resource for the 2012, 43-101 Technical Report prepared by AMC Consultants, simply to make it more economical to mine in greater width. The company has started to gradually increase the use of the shrinkage method.
As such the mining that has been widening on the cut-off grades and then lower to a 150 grams per ton at silver equivalent at the SGX mine and a 110 grams per ton at silver equivalent of the HPG, LM and TLP mines. The adoption of this mining method commenced with effect from October 2012 and the company expect to gradually increase the use of its method of the Ying Mining District from 40% to 80% and reduce the use of resuing method from 60% to 20% over the next 12 months.
The benefits to the adoption of the shrinkage method are expected to be lower cash mining cost per ton, the short-hole shrinkage method of a cash mining cost of $32 per ton compared to $75 per ton for resuing method, plus development work required due to the increase in those mine tunnel development work was required to produce the same amount of ore. Higher tonnage produced, so as less tunneling is required, this is expected to have a positive effect on hauling capacity, and therefore, allow for an increase in production, and finally an increase in operational efficiency.
So by reducing the number of stopes required to produce the same amount of ore will result in a more focused and efficient mining operation. It should be noted that the impact to overall head grades for the Ying Mining District following the adoption of the new mining method is currently not known.
Turning to Slide 13, in our GC project in Guangdong Province, we continue to make good progress with finalizing construction at GC. As at the end of this quarter, all major equipment for the 1,600 tons per day floatation mill, including the jaw crusher, cone crusher, ball mills and flotation cells, has been installed and is currently undergoing testing in anticipation and production. Remaining work includes secondary concrete casting and installation of auxiliary power equipment. It is expected that the mill will be operational in third quarter of fiscal 2013.
The construction of a 5.8 kilometer long, 110KV power line and a substation began in late July 2012. As of the second quarter of fiscal 2013, the foundation work for 8 of the 13 power lines along with the substation's building framework has been completed. The power line and substation are expected to be operational by the end of third quarter of fiscal 2013.
As of the second quarter of fiscal 2013, the company has successfully completed and passed a separate health and safety review of engineering designs for the tailings storage facilities as reported in the previous quarter. Accordingly, the construction of the dry stack tailings storage facility resumed and is expected to be completed by the end of the third quarter of fiscal 2013.
As of September 30, 2012, 376 meters of the construction of the 618 meters main shaft was complete. The shaft is expected to reach its designed elevation of minus 370 meters in the first quarter of fiscal 2015. The main access ramp is now 65% complete, with a cumulative total of over 1,400 meters of the 2,200 meter ramp having been developed at the end of the quarter.
In addition to the main access ramp, the company has been also developing a 4,600 meter exploration ramp, which will provide access to all known veins within a horizontal distance of 250 meters. As of September 30, 2012, 804 meters of the exploration ramp was completed.
Assuming a positive final approval from the local registry authorities to commence operations at GC, the company expects to be able to commence initial production at GC in early 2013 as planned, processing ore stockpiles, and therefore, maintaining its production guidance of 170,000 ounces of silver and 2.7 million pounds of lead and zinc at GC for fiscal 2013.
In the second quarter of fiscal 2013, the company completed 7,500 meters of diamond drilling using five underground drill rigs currently on site at the GC project. During the quarter, exploration, mine development, mill and facility construction expenditures at the GC project were $7.3 million, with development expenditure of the project now totaling $40 million as at end of this quarter.
Turning to Slide 14, in the BYP Mine, the company released an update at 43-101 technical report for BYP and reports have indicated resources of 292,000 ounces of gold, 187 million pounds of lead and 408 million pounds of zinc.
As of the end of the quarter, the company had completed the excavation work for a 265 meter deep shaft that will facilitate the mining of the Number 3 gold mineralization body and the Number 5 zinc and lead ore body. The installation of shaft equipment and construction of the head frame is currently underway. In addition, the construction of 1,500 tons per day tailing backfill facility is well underway and is expected to be completed in the fourth quarter of fiscal 2013.
Turning to the X mines, and the XHP and XBG projects on Slide 15, construction of 286 meters incline shaft and a 225 meters incline shaft, respectively, are underway with completion expected in the first quarter of fiscal 2014. During the quarter, approximately 1,400 meters of tunneling and 6,300 meters of diamond drilling were also completed at the X mines.
In that, the X mines will continue to focus on the executions of an exploration program that will include surface and underground mapping and systematic sampling, surface and underground diamond drilling, with the goal of to defining a 43-101 compliant mineral resource. Exploration and mine development at the X mines will be partially supported from cash flows generated from limited tunneling ore and existing ore stockpiles.
Turning to Slide 16, in our other projects, I'm starting with Silvertip in Northern BC, the company is continuing with it's preparation of the Small Mine Permit application to be submitted to the British Columbia Ministry of Energy and Mines. A Small Mine Permit will allow the 75,000 tons per year mining operation.
And turning back to China, copper-rich project, because of that wide exploration project recommends our first diamond drilling program at RZY in this quarter period, and completed five diamond drill holes as well as 833 meters of drilling. The company plans to fund up to $32 million in exploration and capital expenditures for the RZY project, but it really is early phase for this project.
So turning to Slide 17 and to summarize, we are beginning to see gradual improvements in our operations that we spoke to you in the last quarter. And we have raised our production guidance for this fiscal year. We continue to expect a steady, gradual improvement in the next two quarters, and are fully focused on ore operations, especially at GC project and getting it into production in early 2013.
That concludes our comments on our second quarter fiscal 2013. And I would now like to open the call up to questions.
(Operator Instructions) And your first question is from Brad Humphrey from Raymond James.
Brad Humphrey - Raymond James
Just a really quick question on the mining method, could you tell us what the dilution rate was before and what you expect it to be going forward at the Ying mines, given the new mining method?
The dilution rate with the shrinkage method will be up to almost 50%. I think the resuing method will be almost 50%. With this shrinkage, more shrinkage and dilution we reduced and we are mining much wider ways now, and we used to do mining average about 0.6 meter wide. And looking forward we probably be able to mine average over 1.2 to 1.4 meter wide (inaudible). So the dilution will be around 15% to 20%, we estimate. And the AMC 43-101 Report has take into that really effect are already in technical reserve.
Brad Humphrey - Raymond James
Can you remind me, what's the grade look like going forward?
I think we're looking forward to like 200 on average, to be around the 250 grams to 260 grams silver, like 8.5 ounce of silver. So we look forward like next year we'll be able to produce meaning some at 8, 8.5 ounce of silver. So with the recovery rate we will be able to produce about 7 ounces of silver.
There are no questions registered at this time.
Okay. That's great.
Thank you, operator. To wrap out, I'd like to thank everyone for joining us again for today's conference call. We look forward to reporting to you again when we release our results for the third quarter of fiscal 2013. Have a good day and good bye.
Thank you. Bye.
Thank you. That concludes today's conference call. Please disconnect your lines at this time and we thank you for your participation.
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