Orvana Minerals' CEO Discusses F3Q13 Results - Earnings Call Transcript

Aug.14.13 | About: Orvana Minerals (ORVMF)

Orvana Minerals Corporation (OTCPK:ORVMF) F3Q13 Earnings Call August 9, 2013 ET

Executives

Michael Winship – Interim President and CEO

Daniella Dimitrov – CFO

Analysts

Christos Doulis – Stonecap Securities

Operator

Good afternoon, ladies and gentlemen, welcome to the Third Quarter 2013 Results Conference Call.

I would now like to turn the meeting over to Mr. Michael Winship, President and Chief Executive Officer. Please go ahead Mr. Winship.

Michael Winship

Thank you, Jessica. Good afternoon, ladies and gentlemen.

During this conference call we will discuss our financial results for the third quarter of June 30, 2013 and provide an update on our operations. The financial results for the third quarter were released earlier today and are available in their entirety on our company website and SEDAR. A presentation should be available on the company website although we understand there may be some technical difficulties with that. So if it’s not there we apologize, it should be up shortly.

We would ask you to please note our forward-looking statements on slide two, and take a moment to read it in its entirety.

Today joining me on the call will be Daniella Dimitrov, our Chief Financial Officer of Orvana Minerals. Once we have completed our presentation we would welcome any questions you might have and the operator will explain how you may participate as we draw to a close. I note that this call is being recorded and will be made available on our website for replay.

So I would like to highlight some of our achievements during the third quarter and update you on our three projects in operation at EVBC in Spain, Don Mario in Bolivia and Copperwood at Michigan. And after I have done the operations update then Daniella will provide a summary of our financial results.

We were once again able to report record gold production at our flagship operation in Spain at the EVBC. Our production numbers have been increasing steadily quarter-on-quarter and when compared to our second quarter our gold production increased by 17%, copper production was up 31% and silver production was increased by 41%.

The alternative production schedule which we quickly implemented by our team in response to the hoist incident which occurred at June in our Boinás Mine is outperforming our expectations in terms of tonnage of the ramps and gold production having exceeded our production projections for the month of July. We produced 5,700 ounces in July, which is well over what we had initially expected.

In the last three weeks we have moved over 2,000 tonnes per day from our mining team using the haulage ramps at both Carlés and at Boinás. So again we are well over what we expected to do and have a very good support from our staff through to our miners at the Boinás Mine.

We have been working with top international contractors towards returning our hoisting system into action by the end of this calendar year with updated fail-safe technology in place.

At the Don Mario UMZ Mine our mine metal grades have been above plan and though we have faced some challenges with copper recovery our precious metal production increased by nearly 60% when compared to the second quarter. We are very positive with our decision to suspend the leach precipitation floatation circuit at Don Mario. This increase – this move rather has allowed us to continuously run our floatation-only circuit which operates at about double the throughput of our LPF circuit. And so in turn on a quarterly basis we would expect to see a minimum of a 5% increase in production as a result of this.

And the additional benefit of suspending the LPF operation is that our unit cost will be reduced. Our cost per tonne milled was approximately three times higher for the LPF circuit as compared to the sulphide floatation circuit only. The last highlight from Don Mario was that the union negotiations have been proceeding well over the last month and we would hopefully expect to reach resolution with those annual salary negotiations shortly. We expect not only to meet our production guidance overall for Orvana Minerals for fiscal year 2013, we plan to surpass our gold guidance.

So if you are able to follow along with our slide deck we are moving on to slide five of the presentation please. So in the third quarter of 2013 our record production numbers at EVBC were achieved primarily due to a slight increase in tonnage mined and milled as well as higher than average head grades. Gold production was a record of 18,439 ounces of gold.

As I indicated earlier in the highlights in response to the hoist incident the company has put in place an alternative production schedule which incorporates our pre-hoist methodology of ramp haulage for the Boinás skarns as well as increased oxide mining at Boinás Mine which has a higher grade. In addition the Carlés Mine which was unaffected by the hoisting incident has been optimized to continue to provide additional tonnage performance under that operation. So currently we expect that these repairs to put the Boinás hoisting system back into place will take about six months to the end of the year at a cost of about $3.5 million.

On slide six, I guess to confirm my points about the production performance that EVBC is under this alternative production schedule we could see that we had some very good performance in July where we produced 5,651 ounces of gold, 0.6 million pounds of copper and nearly 20,000 ounces of silver. So in terms of EVBC we fully expect to achieve our guidance for the fiscal year 2013 of 63,000 ounces of gold, 6 million pounds of copper and 200,000 ounces of silver.

Moving on to slide seven, our cash cost, net of product revenue for the third quarter were $846 per ounces of gold sold, up 8% from the second quarter and total production cost for the third quarter which includes depreciation of all the amounts capitalized were $1,178 per ounce of gold sold, up 9% from the second quarter. The increases were due to higher operating costs per milled tonne as a result of higher direct mining costs primarily due to higher backfilling ground support, stope preparation and higher contract costs associated with the increased mining of oxides.

I will come back later to address some of the cost saving measures that we are undertaking to drive down those costs.

Moving on to Don Mario, I direct you to slide number nine. As I summarized earlier the suspension of our sulfuric acid plant and LPF circuit at the Don Mario Mine was quite a positive move in light of this metal market. The cost benefits and increased production will be realized as a result of this decision.

The company will continue to process transitioning sulphide ore now by the floatation only circuits throughout the remaining quarters. In addition the company is currently evaluating certain reagents which may allow us to process the oxide ore through its floatation-only process. So in the coming next few months we will be trying chemical reagents that may allow us to process through that circuit the oxide ores that we are continuing to stockpile.

As noted in this earlier press release we have experienced intermittent work stoppages at the UMZ Mine during our annual negotiations. However in the last part of July and into August negotiations have been proceeding normally with no work disruptions and we are as I indicated focusing on finalizing the annual negotiations hopefully very shortly.

Turning to slide number 10, in the third quarter 3,380 ounces of gold, 2.6 million pounds of copper and just under 245,000 ounces of silver were produced at UMZ. Our gold production increased by 60%, copper was up 10% and silver increased by 63% compared to the second quarter.

So looking at the total year 2013 we expect to be over our previous guidance on precious metals, both gold and silver and maybe slightly under in terms of our guidance on copper.

Improving and stabilizing performance continue to be our highest priority. In the third quarter gold product cash cost for gold per ounce was $925, copper cash cost per pound sold was $2.15, and the cash cost per ounce of silver sold was $16.12. The significant decrease in cost when compared to the second quarter are generally due to higher volumes of metal produced and approximately $600,000 reported in the second quarter associated with sales completed in the first quarter of fiscal 2013, which resulted in a higher cost to sell in the second quarter.

So I’d now like to head to Northern Michigan and talk about our Copperwood project. So looking at slide 13, it’s been an excellent year in terms of advancing the Copperwood project, particularly in the permitting front. We have all of our major permits in place and our last major milestone that was received was the wet land permit in February 2013 and then subsequently the safe dam permit in May of 2013.

So at this point the only permits outstanding would be normal permits like building permits associated when you are in the construction phase. Optimization and engineering work has been continuing in an effort to drive value for the project. And where we find ourselves now is that the Copperwood is shovel-ready and we are investigating value realization options to advance the project which includes partnership, financing and other development opportunities.

So at this point I am going to turn over the call to Daniella who will provide a summary of our financial results.

Daniella Dimitrov

Thank you, Michael. I now refer you to slide 15, with strong sales in the quarter of over 20,000 ounces of gold, 4.1 million pounds of copper and over 300,000 ounces of silver we recorded revenue of $35.4 million, notwithstanding the continued downtrend in metal prices in the third quarter.

We reported net income of $11.3 million and an adjusted net loss of $654,000. The adjusted net loss excludes five non-recurring items that are mostly non-cash. They are as follows: The unrealized gain from our outstanding derivative of approximately $33 million, including the tax and the tax effect thereof; number two, the non-cash impairment charge of $6.4 million that we took in connection with the suspension of the operations of the LPF plant at the UMZ Mine in Bolivia that Michael referred to.

And number three, the non-cash de-recognition of a portion of the Boinás Mine hoist, of $3.5 million. This is the estimated cost to repair the hoist and as we incur expenditures to repair the hoist and receive insurance proceeds those inflows will be reflected in other income as we write the asset back up. Number four, a non-cash provision that we took at the UMZ Mine in respect of potentially uncollectable VAT of $1.4 million. And number five, this is the only cash item that’s non-recurring, is the union – is the payment that we made to our union employees in connection with certain historical events and activities at the UMZ Mine.

Adjusted EBITDA for quarter was $8.2 million and the adjustments to that are those that I just previously referred to.

Cash flows provided by operating activities in the quarter was $10.8 million and cash flows providing by operating activities before changes in non-cash working capital was $4.6 million in the quarter. Our capital expenditures in the quarter were approximately $4.3 million. Most of that was comprised of primary developments at EVBC. For the nine months ended June 30, our capital expenditures were just $17 million, again consisting primarily – most of primary developments at EVBC. That compares to approximately $40 million in capital expenditures in fiscal 2012.

We have continued to reduce our debt in the quarter and over the nine months ended June 30 of fiscal 2013, in the nine months ended June 30 we repaid over $11 million in principal and interest on our long term debt. I refer you to slide 15. And we also continued to reduce our short term debt. We made $3 million in principal repayments under our loan from our major shareholder Fabulosa in the quarter and subsequent to the end of the quarter.

These repayments of long term and short term debt as well as further deposits of cash in our restricted accounts for further repayment of debt has brought our debt, net of cash, cash equivalents and restricted cash set aside for debt repayment to $44.4 million at June 30.

As a result of an amendment that we completed to our loan from our major shareholder Fabulosa we have got now the ability to draw almost $9 million under this facility until September 30, 2014. In addition our principal repayments, which we have made in the last couple of months, those principal repayments will recommence on April 1, 2014.

In the meantime between now and April we will continue to pay interest and standby fees on that facility as well as principal payments if our financial condition permit us to do so. Our working capital excluding our cash balances was $7.4 million at June 30.

I will now turn the call back to Michael to make his concluding remarks.

Michael Winship

Okay, thanks Daniella. So as noted on slide 20, again we had a very strong third quarter with record metal production. And so our operations was committed to continue to ramp up our performance in production it is somewhat hampered over the next four months or so with regard to our hoist at Boinás. But we are looking forward to a very positive performance through 2014 where we continue to produce excess amounts of our metal compared to our initial plans.

Our focus remains on not only the operational and production side but reducing our costs. So we have a number of cost savings, have been in place for several months and in conjunction with the 2014 business plan we are already moving on a number of areas to control our costs and to drive them down.

As well we are going to continue to pay down our debt moving towards a much stronger balance sheet. So as an overall summary we are on target to meet our metal guidance and we plan to exceed copper and gold production.

We will now open the lines for any question you might have please.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions). And your first question is from Christos Doulis from Stonecap Securities. Please go ahead.

Christos Doulis – Stonecap Securities

Good afternoon guys. Great quarter, congratulations. Just wanted to get some clarity at – we didn’t have a lot of time between when this hit the tape and the conference call here. Just wanted to see if I could get some info on your forward-looking capital assumptions for the next quarter and then more importantly for fiscal ‘14.

Michael Winship

We can’t give you too much detail on 2014, Christos, as we are still working through our business plans and evaluating the projects that are being put forward by our operations. But in terms of the final Q4 we have very limited capital. Most of the capital would be in the area of sustaining mine development at our underground operations.

The only other significant area is around tailing, dam lifts. So we are in an annual process of doing that at Spain in their dry season and coincidently in Bolivia, in their dry season. So both those projects are under way, but it’s generally the Q4 capital deferred at a minimum.

Christos Doulis – Stonecap Securities

Okay, so we are talking $3.5 million for the shaft at EVBC and then like a minimal I mean you’ve got a $1 million at each operation or…?

Daniella Dimitrov

In terms of non-shaft capital expenditures, they would be online with this quarter and as Michael said we’ve got the tailings dam lift at both operations which…

Christos Doulis – Stonecap Securities

Okay, but – no that’s great. So I mean if I look at the 3.6 or whatever that you guys spent this – I think that was the number you spent.

Daniella Dimitrov

Yeah, we were 4.3 this year.

Christos Doulis – Stonecap Securities

4.3 that’s right, sorry about that. Okay, so similar kind of number?

Michael Winship

If I could Christos, the only thing on your comment on the three point million, $3.5 million hoist recovery cost is we do expect that will be recovered all the $700,000 in time with insurance. So it’s just a question of timing.

Christos Doulis – Stonecap Securities

Okay, no, no, I think that’s likely as well. But just while I got you I just wanted to chat, I noticed a very brief little comment, of course and I have lost it in the MD&A where you talked about looking at regional opportunities, in terms of M&A. Can you provide any color on that, like are you guys looking at private companies, public companies, you are looking at assets in production, assets that you could put into production, just curious what you were referring to?

Michael Winship

I think you know that no CEOs like to disclose what their M&A targets are, for obvious reasons. But through a strategic planning process we’ve looked in areas where we are already operating or have projects and certainly in Spain we are expanding our operations there. We have additional brownfields opportunities. So logically that would be a good place for us to look in that country where we have a call it a center of gravity of expertize, not only on the technical side but also in the sustainability side dealing with local communities and so forth.

Christos Doulis – Stonecap Securities

Okay, well, obviously you guys are loath to discuss specific details of M&A. Let me just ask you one simple question regarding that then, would you be looking at development stuff that you guys can put into production or would you prefer to try and acquire already producing assets that you guys think, that maybe having challenges and you guys then bring a strong team to – that’s what I was trying to get at?

Michael Winship

Sure, well as you are aware in this market there is quite a few companies are facing challenges and we are fortunate in that we have cash flow from two operations. So we believe that there could be some good development projects that are, well we know there are development projects coming available and there may be some of the junior mining companies as well that would be suitable for some of M&A activity.

Christos Doulis – Stonecap Securities

Okay, and then finally guys, before I leave here, just wanted to touch briefly on Copperwood, obviously the biggest challenge you guys will face once you have all the necessary permits in hand et cetera is financing. And so I just wanted to get kind of an idea where your heads are at in this metal price environment relating to that project, I mean is it time to try and find a partner?

Michael Winship

Yeah, I think I would imagine most people on this call would understand it’s a very difficult market for financing, with these types of metal prices. So certainly a go-alone approach would be challenging for us. So I’d say our primary focus is in areas of partnership and possibly opportunities if there is private equity out there and other larger companies that are in a better cash position that would advance the project.

Christos Doulis – Stonecap Securities

Perfect, thank you very much gentlemen, and lady.

Michael Winship

Okay, thank you Christos.

Daniella Dimitrov

Thank you.

Operator

Thank you. (Operator Instructions). The next question is from Wade Woodman, a shareholder. Please go ahead.

Unidentified Analyst

So I just wanted to know about the issuance of warrants that were to have 500,000 shares whatever, could you just elaborate on that, is it for operating costs or what?

Daniella Dimitrov

Thank you for the question. So we have a facility, a short term debt facility of a maximum of $11.5 million and we’ve had this facility in place for at least almost a couple of years now. This facility was set to be repaid last year and we were able to extend it to the beginning or at the beginning of this year and have obtained subsequent extensions and as well as delays in our repayment obligations of this facility.

Looking into the upcoming next few months and as Michael said due to some timing issues on repairs of the hoist in Spain and receipt of insurance proceeds we thought that it would be prudent to extent this facility in to 2014, both from a maturity perspective as well as the draw-down period as well as obtain further extensions on our obligations to make principal repayment, which were prior to this amendment, they were a $1 million a month.

So in connection with the extension of the maturity of this loan, the extension of the draw down period of this loan, the delay in the principal repayment and a reduction in monthly principal repayment from a $1 million to $0.5 million the company agreed to issue $0.5 million warrants to our major shareholder who is the lender under this facility.

Unidentified Analyst

Okay, thank you.

Michael Winship

Thank you, Wade.

Operator

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Winship.

Michael Winship

Okay, thank you Jessica. We appreciate the questions and comments we received. Again make apology for getting the presentation up so short of time notice with regards to the call but in summary again we feel very positive as a management about Orvana has progressed in the third quarter and the improvements we are seeing already through into August. Thank you for your attention. Good afternoon.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.

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