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Executives

Catalin Chiloflischi - Director, Corporate Communications

Lenic Rodriguez - President and CEO

Salvador Huerta - CFO

Analysts

Dan Rollins - RBC Capital Markets

Brian Post - ROTH Capital Partners

Dudley Baker - Common Stock Warrants

Christos Doulis - Stonecap Securities

Garrett Goggin - Gold Stock Analyst

Kent Neale - Stonecap Securities

Lawrence Lepard - EMA

Aurcana Corp. (OTCQX:AUNFF) Q1 2013 Earnings Call May 17, 2013 1:30 PM ET

Operator

All participants please standby, your conference is ready to begin. Good day ladies and gentlemen. Welcome to Aurcana Corporation First Quarter 2013 Webcast and Conference Call for Friday May 17, 2013. Please be advised that this call is being recorded.

I’d now like to turn the meeting over to Mr. Catalin Chiloflischi. Please go ahead.

Catalin Chiloflischi

Welcome everyone to Aurcana’s first quarter 2013 operational update and conference call. And thank you very much for taking the time to be with us today. Today’s conference call will be presented by Mr. Lenic Rodriguez, President and CEO of Aurcana Corporation who will be providing investors with an overview of our first quarter results as well as an update on La Negra and Shafter followed by about 30 minutes of questions.

For those of you who have joined us today on the webcast, we have included a number of slides to support today's discussion. If you would like to ask live questions after the presentation, you would have to dial in to the teleconference. Questions asked on the webcast online will be responded individually after the event. While we will be making every effort to answer all questions today, I would like to encourage everyone who didn’t have their questions answered, to contact us by email or telephone after the teleconference.

As a reminder, in today’s call we will be making forward-looking statements and will be discussing forward-looking information that involves unique risks concerning the business operations and financial performance of our Company. Please refer to the webcast slides for a complete forward-looking statement disclosure.

With that, I’d like now to turn the floor over to Mr. Lenic Rodriguez, President and CEO of Aurcana Corporation. Please go ahead Mr. Rodriguez.

Lenic Rodriguez

Hello everyone and welcome to our call today. I’d like to take this opportunity and provide you with an overview of the first quarter results as well as an update on the ramp up effort on Shafter and actions to increase production of La Negra.

.

Let me start by telling you that once again, Aurcana was able to increase its first quarter silver equivalent production by 21% to over 590,000 ounces compared to same quarter one year ago. The increase in production was achieved by mainly 30% more ore than one year-ago to a total of 171,000 tons.

Despite lower silver prices our quarterly revenues were also up by about $1 million to a total of $12.8 million, compared to $11.9 million in first quarter of 2012. Our total earnings from mining operations in the first quarter of 2013 were $4.8 million, slightly less due to lower metal prices. Our total cash cost per silver ounce net byproducts for the first quarter was $7.79. With an increasing capacity at La Negra we should be on track to maintain a low cash cost going forward. We view these as an important strategic advantage for Aurcana, especially in these markets.

When compared with the last quarter of 2012, we were able to increase recoveries to about 80%, and this trend continued for last three quarters. However, considering the seasonality production was slightly lower by about 5% in the first quarter, compared to the last quarter of 2012.

In the first quarter, we were also faced with less milling days due to Easter holidays, additional downtime in the mill, in light of the work missed out to complete the expansion to 3000 tons per day, as well as ongoing mine development work that resulted in processing lower grade ore.

The company ended first quarter with higher inventories of concentrates than in the fourth quarter of 2012, due to the fact that concentrate buyers were closed for Easter week during the last week of March. These resulted in lower quantity of metal being sold in the first quarter of 2013 than in the fourth quarter of 2012.

While mine development continues, La Negra is now well-positioned to take advantage of the new expanded capacity of 3000 tons per day. I am glad to say that we have already started see the mill operating up to the new capacity in the second quarter. The company has initiated at La Negra a 5000 meters diamond drill program to continue to define the discoveries of significant gold mineralization announced in the February 11, 2013 News Release.

Moving on to Shafter, I’m pleased to say that our number of initiatives now being completed, we’re starting to see complete improvement in our operations, especially during the last six weeks. With installation of the first brand new fully automated tailings filter press that has just been commissioned and in operation and of the second CCD tank, we are now targeting to achieve a running rate of 600 tonnes per day by the end of second quarter.

Underground development continued during the first quarter. The main ramp advanced 524 feet. The company has engaged a contractor starting June 1st, 2013 to develop a further 1,500 feet of decline advance to access approximately 500,000 tonnes of mineralized material. The contractor is expected to complete this goal within the next three months.

On May 3rd, a brand new tailings filter press was commissioned at Shafter. This replaced a used low-capacity press that was contributing to operational delays. The timeline from purchase to commissioning was 21 days. The new press has operated to specifications and has provided an operational capacity of 600 tonnes per day at 90% availability.

A second new tailings filter press, of the same design and capacity has been ordered. A third filter press will be ordered shortly to achieve the design capacity of 1,500 tonnes per day. Delivery of the second press is anticipated in the third quarter and the third press in fourth quarter.

To increase overall silver recovery, the Company is installing a CCD circuit. The circuit involves the installation of six CCD tanks; two tanks have been purchased to date. Tank number one was installed in May 2013, six weeks ahead of the schedule. Tank number two is close to completion, estimated for end of June 2013. The remaining four tanks will be installed gradually by the end of fourth quarter.

As we continue our work to gradually complete all of the correcting actions during the course of this year our target is to continuously increase production and improve recoveries in order to achieve the 1,500 tonnes per day run rate during the first quarter of 2014.

In closing, I would like to reaffirm that the company remains able to grow organically for a few years and we are strategically positioned to become a senior silver producer. Thank you for your support and confidence in Aurcana Corporation.

We would now like to open the floor for questions but before we do begin, please keep in mind that Mr. Salvador Huerta our CFO is also here with us today and is available to answer any financial related questions. Operator?

Question-and-Answer Session

Operator

We will now take questions from the telephone lines. (Operator Instructions). Our first question is from Dan Rollins from RBC Capital Markets. Please go ahead.

Dan Rollins - RBC Capital Markets

Lenic, in your MD&A you mentioned that you’re going to require more capital investment into Shafter to get it up to design throughput levels. Could you maybe breakdown what you revised CapEx numbers for 2013 are at Shafter, La Negra and then in total exploration budget for this year?

Lenic Rodriguez

At Shafter, we expect to spend about $8 million to 10 million to bring the plant to the production of 1,500 tonnes per day. We’re also exchanging some of the equipment that we have there and some of the equipment that was over-sized is being sold and we are replacing it with appropriate equipment for the Shafter mine. And as far as La Negra is concerned, we are now buying (inaudible) which is a very important machine that will allow us to access the high grade mineralization stones of La Negra mine, that will cost us about $4 million and we have leasing facilities available to us to buy all of that equipment.

Dan Rollins - RBC Capital Markets

So how much in total are you going to spend at La Negra this year?

Salvador Huerta

Besides the $4 million, will be in the range for another $5 million growth for CapEx. So that’s $9 million.

Dan Rollins - RBC Capital Markets

Nine million and four, that can be covered by your current leases (inaudible).

Lenic Rodriguez

Well, yes.

Dan Rollins - RBC Capital Markets

And exploration?

Lenic Rodriguez

Exploration we have a 5000 meters exploration program at surface, that's going to cost us about $800,000 and that's being done through a contractor. And underground exploration is 15,000 meters but we do that internally. So that's much more competitive and will cost us about $600,000.

Dan Rollins - RBC Capital Markets

And how much are you spending at Shafter in exploration.

Lenic Rodriguez

In Shafter, one moment please. About $1 million at Shafter.

Dan Rollins - RBC Capital Markets

Okay, so you're spending about $20 million, this year correct, you spent $14.5 million in Q1, so you're telling you only have $5.5 million left to spend over the rest of the year to get Shafter up and running?

Salvador Huerta

Sorry this is Salvador, you mentioned that we already spent $14 million?

Dan Rollins - RBC Capital Markets

Yes, $14.5 million was spent as you are investing in cash flow in Q1.

Salvador Huerta

That includes the $6 million for the pre-operating expenses for this quarter.

Dan Rollins - RBC Capital Markets

Okay.

Salvador Huerta

Okay, so this is not related to CapEx, neither to the (inaudible).

Dan Rollins - RBC Capital Markets

Okay, but isn't Shafter under commercial production?

Lenic Rodriguez

Its equipment is by definition doing what it needs to be done, functioning as by the definition of commercial of production. Unfortunately we have some technical issues that we have to repair before we could really increase production. For instance the furnace that we have is fairly undersized and doesn't allow us to increase production as much as we would like to. So that's one of the (inaudible) that we have, that furnace has been ordered and should be installed probably by the middle of July.

Dan Rollins - RBC Capital Markets

So beyond the 8 million to 10 million in normal CapEx, there's no other CapEx there's no other CapEx at Shafter and you had $6 million of pre-development operating costs in Q1. Will you have sales from Shafter in Q2, or should we expect another $6 million to $8 million in pre-development capital, operating capital.

Lenic Rodriguez

We have mainly minimal sales in the second quarter, which Shafter would start producing sales in the third quarter of this year once that furnace is fully installed, which should be mid-July, probably it'll take not too long to commission it. And then we will be able to increase the sales at Shafter.

Dan Rollins - RBC Capital Markets

Okay would it safe to assume then in addition to your normal CapEx for Q2, expect $6 million in operating costs to be capitalized?

Lenic Rodriguez

Probably yes.

Operator

Our following question is from Brian Post from ROTH Capital Partners. Please go ahead.

Brian Post - ROTH Capital Partners

Looking at La Negra more in the near term, it sounds like that you had some downtime as you expanded the plant. Should we expect Q2 operations to be essentially full quarter production at the 3000 tonne per day rate with good recoveries, good throughputs et cetera?

Lenic Rodriguez

We expect to have a good production in second quarter for La Negra. The production is already at 3000 tons per day probably at (inaudible) available currently. The recoveries have improved from what they were last year around 80%. And we keep expanding that mine, we're expecting to be able to reach the high grade tons with these (reservoir) probably by the end of the year.

Brian Post - ROTH Capital Partners

Okay you did mention grades and in the prepared remarks, the written remarks that grade did dip to about 70gm per tonne as you did some underground work. Does that return back to kind of the 80 plus grams kind of going forward until you hit the high grade later in the year?

Lenic Rodriguez

That will happen later on the year. The northwest terrain is the richest part of the mine and it's currently not fully accessible for production. That's why we are buying this very small machine that will allow us to mine that part of the mine.

Brian Post - ROTH Capital Partners

Okay and then shifting gears if I may, the gold exploration program, obviously you are putting 5,000 meters worth of exploration to work there. Any idea when you will get the returns and when you may be able to formally incorporate that into the mine planning communicate its impact to investors?

Lenic Rodriguez

I think that will happen within the next 90 days, La Negra terrain is very steep. It’s very difficult to do drilling, so we have to disassemble and assemble the drill machines there at the mountain. But I can tell you that the drilling program has already started and we expect to have some results coming back from the certified labs within the next 90 days.

Operator

Our following question is from Dudley Baker from Common Stock Warrants.

Dudley Baker - Common Stock Warrants

Hi Lenic, tough times?

Lenic Rodriguez

Yes, that’s the startup situation. The market is getting brutal but our operations are moving forward.

Dudley Baker - Common Stock Warrants

I appreciate the efforts. Just a question for you; where it looks like you may need to raise some additional moneys to assist with the Shafter, and looking at the MD&A out last night, on page 17, I am looking at where we have got roughly 5.8 million warrants that were issued in connection with the previous private placements, not the listed warrants, but the private warrants, about 5.8 million, that will expire between June 30 and also on December 7th of this year.

They are slightly above the market right now for exercise price. But I am just going to suggest may be give some thought, if you need additional funds, even if you did a special deal and play roll the exercise price, reduce to down to may be 275 and so if it looks like 320 to 328, back at the envelop calculation, you could bring in about 16 million in cash. Yes, there would be a little dilution, but at least these are warrant holders that no doubt helped you out when they came in with the private placement.

It’s not me so I am not talking about myself here but it just a kind may be sort to speak free cash that might be available, to get a little creative just to try to bring those warrants in and set to go out having to borrow a substantial amount of money in repay it, maybe you could get creative with those warrants.

Lenic Rodriguez

That’s a good idea, Dudley; we will consider it seriously here after this call.

Operator

The following question is from Christos Doulis from Stonecap Securities.

Christos Doulis - Stonecap Securities

Lenic, I’m just curious, now that at least have some operating experience at Shafter although still a little bit a, kind of a (inaudible) troubles here, any idea of what your per-time operating costs are for mining underground there at Shafter?

Lenic Rodriguez

Well, you are taking into account that given the low production yet at Shafter the cost per tonne are high. We haven’t achieved that stability numbers yet. So we expect to achieve those numbers probably by the end of the year and the fourth quarter. I don’t have numbers in hand, but we express of course that if we increase production those cost per tonne per ounce, we will jump significantly.

Christos Doulis - Stonecap Securities

Okay, now just a follow up on the CapEx, I noticed, so you have 9.8 at Shafter and then you have 2.2 of mine development. Is that 2.2 in the quarter? Is that all associated with La Negra?

Lenic Rodriguez

Yes it is.

Christos Doulis - Stonecap Securities

Is that the kind of the level of sustaining capital we should expect going forward at La Negra?

Lenic Rodriguez

Yes, actually this year we are spending mine sustaining capital due to this (inaudible) and some other expenditure but usually our sustaining capital of La Negra has been quite minimum.

Operator

The following question is from (inaudible).

Unidentified Analyst

I would like to know what the share price where it is, why officers and directors haven’t gone into the open market and bought additional shares hand over feast?

Lenic Rodriguez

Well, that’s the question that you have answer each of the officers and directors but I can tell you that I will take an additional position in the open market next week.

Operator

The following question is from Garrett Goggin from Gold Stock Analyst. Please go ahead.

Garrett Goggin - Gold Stock Analyst

It's Garrett with Gold Stock Analyst; regarding your cash flow for 2013 with the CapEx that you spending and then the $15 million short term note that's due this year. How are you going to finance it basically?

Lenic Rodriguez

Well look we are lucky enough to have a very productive mine at La Negra. I can tell you that we have no shortage of offers to Aurcana on non-diluted basis and we're considering which one would be the best one for the company.

Garrett Goggin-Gold Stock Analyst

Are you perhaps selling a stream or?

Lenic Rodriguez

No that's something that I am not at liberty to discuss publicly.

Garrett Goggin-Gold Stock Analyst

Should we be expecting news at any point in the future?

Lenic Rodriguez

Probably yes.

Operator

The following question is from Dan Rollins from RBC Capital Markets. Please go ahead.

Dan Rollins- RBC Capital Markets

This is a follow-up to my recent question, also to Christos Doulis’ question. Could you maybe just clarify how much was spent totals, how much was spent at Shafter in Q1 and how much was spent at La Negra in Q1 including exploration on capital?

Lenic Rodriguez

Well among the section of the PP&E, we can see that the total of the $9 million, the column called assets in construction basically means $6 million from Shafter as operating expenses and the royalties from CapEx and the rest of the CapEx is properly allocated in each column such as in mine development and other minor assets for La Negra.

Dan Rollins- RBC Capital Markets

Also with respect to the loan from your concentrates buyer, what is the recourse on that by year end, its 15 million; if silver prices were to decline significantly from here? You’d really not able to make a payment. What type of recourse would there for that concentrates buyer, just on the concentrate itself?

Lenic Rodriguez

Yes the concentrate itself, yes.

Dan Rollins- RBC Capital Markets

So there is nothing on the mine?

Lenic Rodriguez

No.

Dan Rollins- RBC Capital Markets

And just with respect to Shafter, I know in the past there has been some troubles with, or difficulties getting skilled labor or underground labor in there, trained miners. How is that improving?

Lenic Rodriguez

Well one of the actions that we are taking is really to have these contractor to help us with the development of the decline, so that we can train our local miners so they can be more stable working force and we will be do the mining. They will cut down with the development. That's the plan. Yes, we continue having some high turnover. I believe that those actions going to help us quite a bit.

Dan Rollins- RBC Capital Markets

Okay and just with respect to the recoveries you’re seeing right now with the first CCD tank installed and on the Q4 call, you had mentioned you are probably around that 50% range hoping to get to mid-80s once all these tanks were in place. What type of improvement have you seen to date with the first tank in place?

Lenic Rodriguez

Well the first dug in place is not really just operational. They will be both tanks operational probably by the end of the year. I can tell you that with the filter pressure, we had a very dramatic increase in recoveries in (inaudible) circuit.

Operator

(Operator Instructions) Our following question is from Kent Neale from Stonecap Securities. Please go ahead.

Kent Neale- Stonecap Securities

I guess I have to follow-up to Dan's question around the labor issue. So how many total employees and total contractors, do you now have working on the site at Shafter?

Lenic Rodriguez

We have currently 153 employees at Shafter, workers and employees. The contractor I think is going to bring about 20 additional miners.

Kent Neale- Stonecap Securities

Okay perfect and then just changing gears slightly; so when that contractor starts up in June, so along with all your employees and everything else operating in capital, what would be sort of the total cash outlay per month at Shafter; it's all in including everything.

Lenic Rodriguez

I don’t think we are able to answer that question right now. But it can be answered in a follow up call if you wish.

Kent Neale- Stonecap Securities

Sure, thank you so much.

Operator

The following question is from Jim Dalen from Jim (inaudible) Asset Management, please go ahead.

Unidentified Analyst

Yes, I am having little trouble on the evaluation that market is putting on your company, to me it seems like La Negra is worth more than within the whole market capitalization of your company is. And that Shafter the market is putting in a value of zero. And so what I am wondering is in these times does it makes sense continue putting money in Shafter in the short term instead of just like spending even more money on La Negra?

Lenic Rodriguez

Well, let me tell you that we have two wonderful mines. La Negra is a very large CRD deposit that just keeps growing and we expect to announce very significant results both from the exploration and engaged mining development associates to calculate the reserves at La Negra. This information that’s usually required by analyst to put a proper evaluation on our properties, Shafter is probably second highest greatest pure silver mine in North America. Both are wonderful mines, I am pretty sure that any company would like to have in their portfolio. So we have no plans to probably slowing down, but just moving forward.

Operator

The following question is from (Frank Vogel from Bater Bank), please go ahead.

Unidentified Analyst

Hi Lenic, two questions; first of all can you give us a little bit more detail on the increasing in the cost per ounce while most of the other companies make progress and bring the cost per ounces down in the first quarter? And the other one, the reverse was mentioned for more than less for (inaudible) American Stock Exchange listing purposes. Can you give us an update on this progress and what is in there?

Lenic Rodriguez

Okay, regarding the cost per ounce, we have to consider that in Mexico, there was a general increase in salaries of 8%, few months ago that has impacted our cost per ounce. Also the Mexican peso has been reevaluated from 13 pesos per dollar to about 12 pesos per dollar. That has impacted our cost downtime mix as well.

Unidentified Analyst

But that’s the only reason, because of I mean 8% and the currency is probably not, the increase in cost per ounce what I see here?

Lenic Rodriguez

And we also have to increase our work force at La Negra by 20 additional personnel. We expect this cost per ounce to come within line in the second quarter at the expanded production of 3000 tonnes per day.

Unidentified Analyst

And the second question was regarding (inaudible) on your listing.

Lenic Rodriguez

The board has not made a decision yet whether to list in the U.S. Exchange yet. What we are working on now is to move to fewer exchange in Canada to the TSX, that’s supposed to only take three to six months.

Unidentified Analyst

But I mean, I can remember at the last conference call we had, you mentioned, or you (saw off) the reverse split, just for that reason, mainly for that reason.

Lenic Rodriguez

It’s one of the reasons, but that has to be subject to the board approval and that approval has not been secured.

Operator

The following question is from Lawrence Lepard from EMA, please go ahead.

Lawrence Lepard - EMA

Hi Lenic, can you tell me, have you given any guidance for silver production out of Shafter in calendar of 2014 for the entire year, and then maybe what you would accept the year as a run rate of silver production assuming that you are able to execute your plan?

Lenic Rodriguez

We are not giving any formal guidance at this point in time. I have been making some forward-looking statements in the public domain. And I would ask you just to double check in those comments.

Lawrence Lepard - EMA

Okay. You can’t repeat those here?

Lenic Rodriguez

I would rather not. I mean I haven’t begun giving those in some other forums, and they are there for the record.

Operator

Thank you. The following question is from Dan Rollins from RBC Capital Markets. Please go ahead.

Dan Rollins - RBC Capital Markets

Given as that in the MD&A you did mention that you’re going to have to look for other funds to basically fund development of Shafter and just given silver prices where they’re trading now, weakness in the basing of prices. Wouldn’t it be prudent right now to sort of just cut back on the exploration budget given, you do have significant amount of resources ahead of you at La Negra and you do have enough mine life right now, how you do at Shafter? Wouldn’t it be simpler just to sort of save that 2 million and spend it once you have a debt facility or a financing package in place?

Lenic Rodriguez

That has already partially happened Dan, the exploration program of Shafter is we don’t hold them until we secure additional funds and we expect that we happen in the short term.

Operator

Thank you. There are no questions registered at this time. So, this is all the time allocated for today’s call. However, the company would like to remind everyone that unanswered questions should be addressed by email or telephone at the contact information provided. Thank you and have a nice day.

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