Fortuna Silver Mines' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.18.14 | About: Fortuna Silver (FSM)

Fortuna Silver Mines Inc. (NYSE:FSM)

Q4 2013 Results Earnings Conference Call

March 18, 2014 12:00 PM ET

Executives

Carlos Baca - Investor Relations Manager

Jorge Alberto Ganoza - President and CEO

Luis Dario Ganoza - Chief Financial Officer

Analysts

Benjamin Asuncion - Haywood Securities

Chris Thompson - Raymond James

Chris Lichtenheldt - Dundee Capital Markets

Marco LoCascio - Equinox Partners

Operator

Greetings. And welcome to the Fortuna Silver Mines' 2013 Year End Financial and Operation Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Carlos Baca, Investor Relations Manager for Fortuna Silver Mines. Thank you. You may now begin.

Carlos Baca

Thank you. Good morning, ladies and gentlemen. I would like to welcome you all to Fortuna Silver Mines and to our 2013 year end financial and operations result call. Jorge Alberto Ganoza, President and CEO; and Luis Dario Ganoza, Chief Financial Officer will be hosting the call from Lima, Peru.

Before I turn the call over to Jorge, I would like to indicate that certain information contained or incorporated by reference in this earnings call, including any information as to our strategy, projects, plans or future financial or operating performance constitutes forward-looking statements.

All statements other than statements of historical facts are forward-looking statements, the words, believes, expect, anticipate, contemplate, target, plan, intend, continue, budget, estimate, will, schedule and similar expressions identify forward-looking statements.

Forward-looking statements are necessarily based upon a number of estimates and assumptions that while consider reasonable by the company are inherently subject to significant business, economic and competitive uncertainties and contingencies.

Known and unknown factors could cause actual results to differ materially from those projected in the forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.

I would now like to turn the call over to Mr. Jorge Ganoza, President, CEO and Co-Founder of Fortuna. Thank you once again to everyone for joining us.

Jorge Alberto Ganoza

Thank you, Carlos, and good morning to all. I am joined on the call today by Luis Ganoza, our CFO. I will initiate the conference call and with assistance of Luis we will be giving a summary and analysis of our operations and financial results for the fourth quarter and year end 2013. Once concluded, we will address your questions.

The evolving story around Fortuna during 2013 has been the story of the Trinidad North discovery and the San Jose mine in mix. Well, there is nothing like higher grade discovery to energize our mining organization and struck to the attention and imagination of mining analyst and investors at large. The operation success has been underpinned by year-on-year of solid operational and financial performance in a difficult year.

So, 2013, we have seen a continuation in the steady decline of precious metal prices from their peak in mid 2011. The average realized metal prices in 2013 were $23.50 per ounce silver and $1,395 per ounce for gold. Grow over by 24% and 16%, respectively when compared to 2012.

This has been a driving year for mining industry, companies in the sector have been implementing change to operate in the lower price environment and in the process we have seen personnel lay-offs, starting exploration and capital spending, reserve reductions and balance sheet adjustments through impairment charges.

Although, we have not been immune, I am pleased to report that our company has been able not only to adjust to this new environment but position ourselves to drive in the years to come.

At the San Jose mine, as of December 31st, we reported a year-over-year increase in reserve of 12% for silver and 15% for gold, after production-related depletion and taking into consideration 18% lower silver price used in estimation. Silver reserves now stand at 23 million ounces and gold at 200,000 ounces almost. Silver reserves rate tail at 197 grams per tonne and gold rate increased by 7% to 1.7 grams per tonne.

Silver inferred resources at San Jose increased year-over-year by 39% to 35 million ounces and gold by 26% to 270,000 ounces. Silver rate increased by 9% to 202 grams per tonne while gold stayed without variation.

This inferred estimates included for the first time and initial inferred resource for a portion of Trinidad North discovery. With only six months of drilling at the time, we were able to incorporate 70 -- at a 70 grams per tonne silver equivalent in capitals, 1.9 million tonnes containing an estimated 60 million ounces of silver and 100,000 ounces of gold with a silver rate of 269 grams per tonne and a gold rate of 1.7 grams per tonne.

Mineralization remains wide open and we continue to pursue it in three directions, to the north, depth and to surface for 300 meters above level 200. The relevance of this discovery is two-fold in our view.

First, these new ounces are located in the immediate area of existing mine and planned infrastructure therefore making them low risk in terms of capital permits and time to production. Second, it brings to the forefront the tremendous exploration potential that are solid 60,000 hectare concession package around the nine holes.

At San Jose, all of our reserves and resources lay in one vein in one ore shoot where I’ll review that based on the areas of multiple veins and gold anomalies concession holdings, we have an excellent chance to search more discoveries to time. In 2014, we will continue with exploration of Trinidad North with an initial 16,000 meter drilling programs and aimed to produce a new resource outlet in the second semester of 2014.

At our Caylloma Mine, we reported a year-over-year silver reduction of 24% to 14 million ounces after depletion. The main driver for the reduction in reserves was 18% reduction in silver price used of $24 for the [dimension] (ph) and are 9% increase in breakeven capital to $87 per tonne when compared to the capital used the previous year.

Silver grading reserves increased marginally to 137 grams per tonne. Lead grade increased 11% to 1.7% and zinc grade increased 16% to 2.5%. Silver inferred resources decreased to 204 million ounce. Our consolidated production for the year 2013 was 4.6 million ounces of silver and 21,000 ounces of gold, 3% above our year guidance for silver and 10% below for gold.

Silver accounted for 66% of sales and gold for 15%. The balance was made out by lead and zinc write-off. For 2014, consolidated production guidance was 6 million ounces of silver and 32,000 ounces of gold, representing 30% annual growth in silver and 51% in gold production metrics.

In September 2013, we commissioned expansion of our San Jose mine to a throughput capacity of 1,800 tonnes per day on time, on budget. Only two years after the start of operation at our 1000 tonnes per day back in September 2011. During the construction and equipment selection for this expansion, we were able to capture opportunities to transfer yet another expansion to 2,000 tonnes per day which we plan to materialize at the start of the second quarter 2014.

At these new targeted rate, our consolidated annual silver gold production is planned at 6.5 million ounces of silver and 35,000 ounces of gold plus by-product, zinc and lead. The base of discovery and current price of resource and reserves at the San Jose mine already suggest potential for an operation beyond 2,000 tonnes per day. During 2014, we will be working to assess the technical and financial liability of an expansion to 3000 tonnes per day.

For 2014, our Caylloma mine is planned to remain at steady state contributing roughly 2 million ounces of silver a year plus some 10,000 tonnes of zinc and 7,500 tonnes of lead. In mid 2013, the company successfully implemented a series of cost control measures, capital and operating costs and refocused exploration programs to higher reward targets.

For consolidated, all-in sustaining cash costs net of by-products for 2013 was $20.40 per silver ounce in line with revise guidance issued for the year. Capital spending in this expansion year was $60 million including the $10 million acquisition of the Taviche Oeste Concession which hosts the Trinidad North discovery acquired from Pan American Silver.

This capital figure of $60 million is down from the $70 million we guided at the beginning of the year. This reduction as part of our restructuring process that took place mid year. Q4, all-in sustaining cost at the San Jose mine was at low $10.80 per ounce net of by-product at Caylloma, all-in sustaining cost net of by-products for the quarter as well was $18.50.

Our guidance for 2014 is for our consolidated all-in sustaining cash growth of $17 per silver ounce net of by-products. This includes $40 million in sustaining capital spending at both operations, our lowest cost operation at San Jose, where we had issued an all-in sustaining cash flow guidance of $14.40 per ounce for the year, net of by-products.

For Caylloma mine, it’s going to operate in 2014 at an all-in sustaining cash cost of $17 per ounce net of by-product. At year end, we had liquidity of $19 million comprised of almost $50 million in cash and short-term investments plus an untapped credit facility of $40 million. The company is very adequately funded to meet its foreseeing capital requirements.

I will now let Luis to take you through financial statements.

Luis Dario Ganoza

Thank you. For 2013, we recorded a net loss of $19.1 million compared to net income of $31.5 million in 2012. The loss was driven by an impairment charge at our Caylloma mine in Peru of $30 million pre-tax or $20.4 million after-tax, and a $7.7 million one-time non-cash income tax provision, reflecting the initial recognition of the Mexican Tax Reform.

Adjusting for impairment, write-offs and the initial recognition of this Mexican Tax Reform, our adjusted net income for 2013 was $9.4 million or $0.08 per share compared to $34.1 million in 2012.

The main driver for the reduction in adjusted net income was decreasing sales of 15% with respect to 2012, which was in turn the result of lower realized silver and gold prices of 24% and 15% respectively. Our recorded sales came down from $161 million in 2012 to $137.4 million in 2013, despite our increased total ounces of silver sold by 16%.

Our mine operating earnings decreased 41% to $41.8 million, reflecting the native impact of lower metal prices. For the fourth quarter of 2013, we recorded adjusted net income of $3 million compared to $8.5 million in 2012.

To understand the comparative performance for the quarter, however, it is better to compare adjusted income before taxes, which for 2013 was $6.5 million versus $8 million in 2012. The more modest drop we see in adjusted earnings before taxes in the context of a sharp fall in metal prices is a result of a material increase in ounces sold of silver and gold quarter-over-quarter and a significant reduction of unit cash cost at San Jose mine again when compared with a prior year period.

Lead realized prices for silver and gold fell 37% and 26%, while ounces of silver and gold sold increased 49% and 64% respectively when compared to Q4 of 2012. Along the same lines, unit cash costs came down at San Jose in Caylloma by 23% and 7% respectively. Also contributing to improved results quarter versus quarter, was lower selling, G&A of $1.5 million in Q4 of 2013.

The amount of impairments for 2013 was $30 million before tax, of which $50 million was booked in Q2 of 2013. Impairment testing conducted at year end or supposed to Q2 was based on 2013 updated reserves and resources and somewhat more conservative metal prices. Based on this, an additional $50 million impairment charge was recorded for a total amount of $30 million for the year.

The total after-tax impairment amount once again was $20.4 million and it was entirely related to a recurring book value of the Caylloma Mine. Cash flow from operations before changes in working capital, for 2013, decreased 34% to $40.9 million, reflecting as well the impact of lower metal prices.

Our total investment throughout the year in mineral properties, plant and equipment was $60.5 million which was comprised of $10 million for the acquisition of Taviche Oeste, $10.2 million of Brownfields exploration and approximately $40 million of equipment and infrastructure.

Our total cash balance including short-term investments for year end 2013 was $49.1 million compared to $64.7 million at the end of 2012. There is a reduction in our overall cash position of almost $60 million explained by conclusion of certain infrastructure project at Caylloma and the expansion of San Jose, as well as the fall in metal prices in the first half of 2013.

Carlos back to you. Thank you.

Carlos Baca

Thank you very much for listening to us. We would now like to turn the call over to any questions that you may have. Please state your name clearly.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Benjamin Asuncion from Haywood Securities.

Benjamin Asuncion - Haywood Securities

Hey, guys. Thanks for taking my questions. I just have few things here. Just to elaborate on the Caylloma impairments that you took in Q4. Can you give me a sense of what your, if you can on a cost per tonne kind of assumption that you had baked in going forward and as what you’re looking at to drive that impairment charge?

Jorge Alberto Ganoza

The cash cost -- the forecasted cash cost per tonne in exercise done in Q2 and the exercise done at the year end are quite similar and in the range of $88 per tonne to $89 per tonne going forward, Ben.

Benjamin Asuncion - Haywood Securities

Okay. So it was predominantly driven by lower future metal prices that you had layered in, plus the updated reserves. Is that correct?

Jorge Alberto Ganoza

Yes. We saw a reduction in reserves at Caylloma and at year end we were using somewhat more conservative metal price (indiscernible).

Benjamin Asuncion - Haywood Securities

Okay, perfect. And just looking at the fourth quarter cost at San Jose, and it looks like you delivered sort of the $63 per tonne, that improvement in cost, was that solely attributed to the increase in throughput from kind of 1,100 to 1,700 tonnes?

Jorge Alberto Ganoza

You mean the reduction in unit cost in Q4 San Jose compared to previous year?

Benjamin Asuncion - Haywood Securities

Sorry, I am looking at compared to third quarter, you’re around 72, so obviously timing the fourth quarter you’re around 63?

Jorge Alberto Ganoza

Yes. Absolutely it reflects the increase in throughput capacity as well as some more, I would say controlled gains in efficiencies also the result of the measures undertaken throughout Q3 in order to contain operating and capital costs.

Benjamin Asuncion - Haywood Securities

Okay. So is it safe to say then, I mean can you give us the sense of what as the 2000 tonne per day level when you get there kind of the end or the beginning of second quarter what sort of normalized cost per tonne level that you are going to looking at?

Jorge Alberto Ganoza

Yes. We are forecasting $65 per tonne for -- excuse me 2,000 tonne per day throughput mix, cash cost per tonne should stay within those ranges throughout most of 2014.

Benjamin Asuncion - Haywood Securities

Okay, perfect. And thanks for answering my questions. I will hop back in line if you are connecting else.

Operator

(Operator Instructions) Our next question comes from Chris Thompson from Raymond James.

Chris Thompson - Raymond James

Good morning, guys. Thanks for taking my question. Jorge, I just want to understand, maybe you can just provide a bit of color on what’s happening as far as surface access in the Magdalena community and how that sort of layers into the company’s ability to continue to I guess the strike length extension at Trinidad North?

Jorge Alberto Ganoza

Good morning, Chris. We are engaged in negotiation process with the community of Magdalena to gain access to Surface rights that will allow us to pursue the exploration of a North strike extension of the main Trinidad vein System. Negotiation is taking place with the new authorities, with new elected authorities that took office in January. And we are working with the assistance of the state government representative, which we view as favorable. And that is how this negotiation took place.

It is same dynamics and the same structure that took place a couple of years ago when we negotiated the pipeline for the ward that had to close in Magdalena town. It was the Magdalena representatives, company representatives and our neighbor from the state government, so that’s taking place. There is this working negotiating team. The three parties have agreed on a deadline of late April, early May to negotiate an agreement that will allow us to have access to Surface rights.

And the objective is not only to gain access to do drill platforms. And also start looking into building more long-term infrastructure that we could require for the future. We can carry the work. We plan to look forward to 2014 and for 2015 from the existing underground access.

So, 2014 program does not require any additional permits and for Surface rights. But, yes, of course, we would like to have -- we would like to gain the Surface rights to continue, we could -- extending the exploration beyond the immediate 500 meters that we can currently cover from underground access.

And we have identified potential strike length of roughly a kilometer and a half to two kilometers from the existing new boundary of resources to the North. There is a solidified outgrowth that we have recognized 2 kilometer for long strike. This is well within Magdalena surface rights and that’s why it is key to gain access from Magdalena. I’m hopeful that we will be able to reach an agreement. We just have to go through the process with them.

Chris Thompson - Raymond James

Great quarter. Thanks for the very comprehensive answer. Thank you.

Operator

(Operator Instructions) Our next question comes from the Chris Lichtenheldt from Dundee Capital Markets.

Chris Lichtenheldt - Dundee Capital Markets

Good afternoon everyone. Thanks for the call. Actually just follow-up on Chris’ last question there about the surface rights, you mentioned the deadline, late April and May, if that comes and goes, does that mean that didn’t the option of the possibility of getting land access is over or you start over with the new negotiation. How does that work?

Jorge Alberto Ganoza

What I have conveyed to you regarding a suggested date for the completion of the negotiations is what these three-party group has produced, with the three-party group being confirmed by Magdalena representative, a company representatives and the state government representative. Of course, this can stretch for longer, yes it could. It does not mean that there is a break and we start functioning again. But they believe that within a couple of months, few weeks, we can however reach an agreement. Past performance is no measure of future success but we look at our past dealings with Magdalena.

It took us six, seven months the first time we engaged them to be in access to build two kilometers of pipeline through the property, once we engage in negotiations like we are now. At the time, what we agreed to as to contribute in the range of $50,000 to $100,000 in infrastructure projects and system with purchase of one vehicle for the municipality that's part of the agreement. So we have dealt with them in the past successfully and a win-win situation for all. And I expect that this time will be the same. I have no reason to believe that we should not be able to reach an agreement for all parties.

Chris Lichtenheldt - Dundee Capital Markets

Okay. And if the negotiation is successful, is that enough to allow you to then put a drill hole like a 1.5 kilometer out to test what you think might be the boundary, you'll have enough access to do that?

Jorge Alberto Ganoza

I can’t tell you what we aspired to get out of this one negotiation and now depending on how this plays out at the end, it can be structured in different way. So I don't want to get ahead of myself. I can tell you what results that we would like to get in this negotiation with our neighbors here. We’d like to get access, not only to drill holes but gain access to drill holes and eventually we'll built some permanent supporting infrastructure for example a ventilation raise for us, for example and things like that.

The core for our infrastructure will always be in the near area of the San Jose Mine where we control the surface right. But potentially we continue pursuing the North extent with underground workings, it will be helpful to have ventilation rig bores and other small infrastructure as we stretch to further to the North, not just drill last content.

Chris Lichtenheldt - Dundee Capital Markets

Okay. And then just lastly for me. Outside of this negotiation, can you just remind us when we would expect to see more assay results from the separate drilling that you're continuing to do, what’s the timing of that?

Jorge Alberto Ganoza

News flow will be steady throughout the year. We're drilling from underground so that goes a little bit slower. So every three months, at least, I would expect that every three months we can be releasing information.

Chris Lichtenheldt - Dundee Capital Markets

Okay. That's great. Thanks a lot.

Jorge Alberto Ganoza

Okay.

Operator

Thank you. Our next question comes from Marco LoCascio from Equinox Partners.

Marco LoCascio - Equinox Partners

Good morning, guys. My question relates to the estimated CapEx at San Jose for 2014. I'm wondering how much of that is you have marked for just in course the Trinidad North discovery and working towards bringing that into the mine plant?

Jorge Alberto Ganoza

If you look at our budget, we have a mine development of -- budget of $7 million for 2014. The capital budget allocated to incorporate to build infrastructure -- to initially incorporate Trinidad North to the existing infrastructure is roughly $5 million over two years.

Marco LoCascio - Equinox Partners

Okay. So the 2014 portion is included in that $7 million of mine development?

Operator

Excuse me speakers, can you hear that.

Carlos Baca

Yes. I think they lost lines.

Operator

They may have muted I think.

Carlos Baca

(Indiscernible) Hello?

Marco LoCascio - Equinox Partners

Yes. I am here.

Jorge Alberto Ganoza

You are back. Okay.

Marco LoCascio - Equinox Partners

Sorry about that. I was just asking, so the -- in the $7 million of mine development for this year that includes the portion of that $5 million that only spend in 2014?

Jorge Alberto Ganoza

The $7 million mine development figure for 2014 includes roughly $2 million to $2.5 million that articulated to the work-related to incorporate in Trinidad North into a 15 network of underground infrastructure.

Marco LoCascio - Equinox Partners

Okay. That's all I have. Thank you, guys.

Operator

Thank you. At this time, we have no further questions. I would like to turn the call back over to our speaker for closing comment.

Jorge Alberto Ganoza

If there are no further questions, I would like to thank everyone for listening to today's earnings call. We look forward to you joining us next quarter. Thank you very much.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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