Sierra Metals Inc. (OTC:DBEXF) Q1 2016 Earnings Conference Call May 13, 2016 11:00 AM ET
Mike McAllister - Director Corporate Development
Mark Brennan - President and Chief Executive Officer
Ed Guimaraes - Chief Financial Officer
Gordon Babcock - Chief Operating Officer
Jim Young - West Family Investments
Good morning. My name is Keith. I will be your conference operator today. At this time, I’d like to welcome everyone to the Sierra Metals First Quarter 2016 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, we will have a question-and-answer session. [Operator Instructions] Thank you.
Mike McAllister, Director of Corporate Development. Please go ahead, sir.
Thank you, operator, and good morning, everyone. Welcome to Sierra’s Q1 2016 results conference call. On today’s call, I’m joined by Mark Brennan, President and CEO; and Ed Guimaraes, Chief Financial Officer.
Today’s call will be followed by a question-and-answer period. Today’s presentation is available for download both through the webcast and through the home page of the company’s website at www.sierrametals.com. Today’s press release, the financial statements and the Management Discussion and Analysis documents are also posted on the company’s website as well as SEDAR.
Before we start, I would like to remind everybody about our disclaimer. Certain statements made today by the executive management team may contain forward-looking information. Anything not historical is considered forward-looking. For more information, please refer to our detailed cautionary notes in today’s press release and to the disclaimer on Slide 2 of today’s presentation. Please note all dollar amounts mentioned in this call are in U.S. dollars unless otherwise noted.
With that, I will now turn the call over to Mark Brennan, President and CEO.
Thank you, Mike, and good morning, ladies and gentlemen. I’d like to begin with an overview of first quarter 2016 for Sierra as well as discuss the operational and exploration highlights for the quarter. Following my remarks, Ed Guimaraes will take us through our Q1 financial results. The management team will be available for questions at the end of the call.
On Slide 4, Q1 continued to be a transitioning period for the company, with Yauricocha restructuring program progressing well. Sierra had lower throughput in production than experienced in the record first quarter of 2015. However, the company has seen improved production of most metals on a quarter-over-quarter basis as these improvements take effect.
Management expects this trend to continue into the second-half of 2016 as the company continues towards the fruition of the restructuring and operational improvements program at Yauricocha.
The company-wide emphasis moving forward will be on the production of higher value ore, including ore feed from the recently discovered Esperanza Zone starting in the third quarter of this year at Yauricocha, current mining of higher grade zones at Bolivar and mining higher grade zones at Cusi. This emphasis should lead to improve operating margins and cash flow generation within a recently approved, but what is still a historically softer metals price environment.
At Yauricocha, the company continues to effectively move away from conventional jackleg mining to mechanized jumbo mining. Also the company is successfully moving to shotcrete and bolting with planned shotcrete placement now at 50% of target and a reduction in steel set installation by over 50% on a monthly basis. The water flow issues in the mine are also now under regular operating control with a drainage program in place and operating successfully.
Looking at development, Sierra is preparing to mine the upper portion of the Esperanza Zone at the Yauricocha starting in the Q3 of this year. In preparation for extraction of ore at Esperanza, the company is pushing development on the 870, 920 and 1070 levels. Drilling is currently taking place on the 870 level at the Esperanza Zone. Also the company had drifted within 25 meters of Esperanza at the end of first quarter 2016 and has successfully drifted into the zone following the end of Q1.
At Bolivar, we continue to look at operational improvements with the evaluation of new mining methodologies and techniques to continue the great progress made in throughput growth over the past number of years.
At Cusi, reduced development has led to record production during the quarter with metal production increasing by 35% and our AISC coming down to $12.50 per ounce.
Turning now to operational highlights on Slide 6, in the first quarter, Sierra had production of 2.6 million silver equivalent ounces or 17.2 million copper equivalent pounds, which represented a 19% decrease over the record Q1 2015. This is mainly a result of reduced throughput, lower head grades and recoveries at Yauricocha, due to the restructuring program taking place.
The suppressed throughput continues while we restructure operations, implementing best practices and operational improvements, and mechanizing the mine. However, worth noting, the company did see a 10% increase in silver or copper equivalent production and an increase of 2% in throughput quarter over quarter compared to Q4 2015. Also total tonnes processed to 476,000 tonnes represent 1% increase over Q1 2015’s record production levels due to good growth at Bolivar and Cusi.
Turning to Slide 7, and looking at now Yauricocha, 207,580 tonnes were processed in the first quarter, representing a 6% decrease when compared to Q1 2015. However, as mentioned earlier, positive improvements from restructuring program at Yauricocha, include 7.2% increase in throughput and 13.4% increase in silver equivalent production over Q4 2015.
Looking now at Bolivar, 218,000 tonnes were processed which represents an 8% increase in record plant throughput compared to Q1 2015. However, lower head grades and recoveries encountered resulted in 18% decrease in copper equivalent production over the first quarter of 2015. The company expects to see improved production as a result of higher throughput, better head grades and higher recoveries throughout the remainder of 2016 by concentrating on known mineralized areas within the El Gallo Zone.
At Cusi, record silver equivalent production of 326,000 ounces, represents an increase of 35% over Q1 2015. Cusi also began production of zinc in Q1 with production of 600,000 pounds, which helped contribute to the increase in silver equivalent production. The company expects to begin shipping zinc concentrate from the Malpaso plant in Q2 2015.
Turning now to the exploration highlights on Slide 8, we are happy to report the exploration program at Esperanza Zone at the Yauricocha mine continues to progress well. Drilling indicates the upper portion of this zone consists of several well mineralized replacement structures. The Esperanza Zone is located 400 meters north of and along strike from the Central Mine and is well situated to be brought into the company’s mine plan quickly.
The exploration program on the Esperanza Zone is ongoing with 31 drill holes totaling 5,362 meters completed to the end of Q1 2016; delineation drilling including 29 holes totaling 4,700 meters, which targeted the upper 100 meters of the zone from the 870 level. The infill drilling program will provide the necessary details to create a detailed mine plant for the initial production from this area beginning in Q3.
Turning to Slide 9, in addition to the delineation drilling completed two exploration holes totaling 645 meters were also completed from the 870 level. Hole E-ESP-02 was drilled to test the depth extension of mineralization previously intersected in hole ESP-14 reported in January 27, 2016 press release.
Drill hole E-ESP-02 successfully intersected the mineralization approximately 30 meters south of hole ESP-14 and extended mineralization approximately 120 meters below hole ESP-14.
Looking now at Slide 10, you will see that the second hole - second exploration hole ESP-01 was drilled to test the northern extension of the mineralization previously intersected in hole ESP-10 reported in the January 27, 2016 press release.
Drill hole ESP-01 was drilled at an oblique angle to the mineralization zone and although this hole intersected two narrower zones, it did not intersect the broad range of mineralization as returned in hole ESP-10. It is believed that hole ESP-01 did not fully test the northern extension of the Esperanza Zone, as the zone may be offset to the east where tested. Additional drilling along the zone to the north will take place once access is available on the 1070 level.
Please see today’s press release for a full listing of significant composite intervals from the Q1 drilling at Esperanza. Access for drilling was previously limited to the 870 level resulting in steeper holes as the company drifted toward the zone from the 870 level. Future drilling will be targeted from the 1070 level as access becomes available in the coming period.
Drill stations are currently being prepared on the 1070 level and the company will focus on both the northern and the southern depth extensions of the Esperanza zone over the next 12 months.
The company is currently quantifying the extent of mineralization based on the existing holes and hopes to be able to provide an update on this progress in the very near term.
In summary, 2016 will be a very significant year for Sierra and we anticipate continued improvements to production at Yauricocha throughout the year as the restructuring and operational improvement programs begin.
Additionally, we anticipate further brownfield exploration success at Yauricocha and Bolivar. Sierra Metals is on the path to a stronger and better future benefiting the company and its shareholders. With that, I will now turn the call over to Ed Guimaraes our CFO, for the financial and production overview.
Thanks, Mark, and good morning, everyone. Turning to Slide 13, the company has realized an increase in metal prices from the lows experienced during Q4 2015. However, we’re still in a historically softer metal price environment realizing declines of approximately 9% in realized silver prices, 19% for copper and 19% for zinc during the first quarter of 2016 compared to the first quarter of 2015.
The company reported revenues of $23.7 million compared to $37.7 million for the same period of 2015. The decline in revenues was attributable to a decline in metal prices, decreased throughput and lower head grades at Yauricocha, decreased head grades and recoveries at Bolivar, a decrease in silver recoveries at Cusi and an increase in concentrate inventories at Yauricocha and Cusi.
This revenue decline was also partially offset by increased throughput at the Bolivar and Cusi mines. Adjusted EBITDA in Q1 2016 was $4.4 million, compared to $14 million in Q1 2015. The decrease in adjusted EBITDA was due to decreased metal prices, decreased throughput, lower head grades and recoveries at Yauricocha and the increase in operating cost at Yauricocha.
Yauricocha’s cash cost for silver equivalent payable ounce was $8.47 versus $5.49 in Q1 2015. And the all-in sustaining cost was $14.78 versus $11.31 in Q1 2015. The increase in cash cost and all-in sustaining cost at Yauricocha during Q1 2016 were due to the decrease in plant throughput and ore feed head grades, caused by the decrease in available production from higher grade zones in the mine as well as additional costs related to the restructuring and mechanization which continues to be implemented at the mine.
Bolivar’s Q1 cash cost per copper equivalent payable pound was a $32 versus a $15 in Q1 2015 and the all-in sustaining cost was $2.21 versus $2.17 in Q1 2015. The increase in cash costs and all-in sustaining cost at Bolivar was mainly due to lower grades as well as an increase in mining costs and equipment maintenance costs incurred, which was partially offset by the increase in throughput and copper equivalent payable pounds.
Cusi’s Q1 cash cost for silver equivalent payable ounce was $3.77 versus $6.72 in Q1 2015 and the all-in sustaining cost was $12.50 versus $21.61 in Q1 2015. The decrease in cash cost at Cusi in Q1 2016 was due to increased throughput, increased lead and gold head grades and recoveries, as well as a decrease in sustaining capital expenditures related to stope and drift development within the mine.
Cash flow generated from operations before movements in working capital was $5 million compared to $14.7 million in Q1 2015, which was mainly due to lower revenues and thereby lower growth margins being generated.
Now, I would like to review our cash flows which I believe provide the clearest perspective on our financial performance. I have summarized the changes in cash during Q1 2016 on Slide 14. During Q1, our operating cash flow before working capital adjustments was $5 million. We incurred $3.9 million in capital expenditures in Mexico and Peru paid $1.6 million of income tax in Peru and had negative working capital adjustments of $11.4 million mainly related to the increase in concentrate inventory and accounts receivable.
We paid $1.9 million of interest in principal repayments on our credit facilities and received proceeds of $7.8 million from certain credit facilities. This reduced our cash balance from $25.1 million at the end of 2015 to $19.1 million as of March 31, 2016.
Turning to the balance sheet and liquidity on Slide 15, we have ended Q1 2016 in a strong financial position with $19 million of cash and $20 million of undrawn credit facilities, which combined, gives the company total liquidity of $39 million.
The company’s net debt increased during Q1 to $63 million. The company has principal payment obligations on its loans and credit facilities of approximately $8 million remaining to be paid in 2016, $13 million to be paid in 2017, $11.4 million to be paid in 2018, $7.7 million to be paid in 2019 and $28.5 million to be paid in 2020.
I would also like to highlight the sensitivity of our profit to changes in the 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 March 31, 2016 the Sol to U.S. dollar exchange rate was PEN3.33 and the Mexican Pesos to U.S. dollar exchange rate was MXN17.22. Thus far in 2016, the Sol and Peso have remained relatively unchanged against the U.S. dollar. A 10% decrease in the value of the Sol and Peso against the U.S. dollar would result in an increase of $3.8 million and $1.6 million in the company’s net income respectively, assuming that our operational performance during 2016 is consistent with 2015.
We are confident that our financial position together with the potential future cash flow generation from our three producing mines and the newly discovered Esperanza Zone and available credit facilities will be sufficient to support the company’s financial commitments for the remainder of the year and beyond.
I now turn it back to Mike.
Thanks, Ed. That ends the presentation portion of this call. We would now like to open up the call to questions from participants. Operator, please open the line.
[Operator Instructions] We’ll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Jim Young with West Family Investments. Your line is open.
Yes. I’ve got a couple of questions. First, you had previously given 2016 production guidance, but did not hear any mention of that today. Are we to assume that the production guidance is being maintained? And if so, can you give us a sense if you’re looking more comfortable at the lower-end of the guidance, the midpoint of the guidance or the upper-end of the guidance? Thank you.
Hi, Jim. Thank you very much for that. Yes, we are currently well in line for our guidance. And at that point, I’ll leave it at that, but we’re very comfortable with our guidance that we provided to the Street.
Can you give any further clarification? Are you comfortable at the midpoint or at the upper-end of the guidance or at the lower-end of the guidance?
Maybe I can just say that, that I’m very happy with where we are right now, Jim. And with that, I think one can draw their own conclusions.
Okay. Secondly, with effective costs, you showed some nice sequential decreases in cost at Yauricocha in the all-in sustaining cost of silver and at Bolivar. Can you give us a sense over the next couple of quarters, will these cost decreases continue or will cost continue at the current levels?
We have Gord Babcock, our COO in the line. Gord, do you like to address those?
Sure. With regards to declines, as far as what we can anticipate, with the ways things are going right now, I think we’re going to probably maintain where we are, but focus is to bump-up production in the future. That is dependent on series of areas being available, in all areas of the mine, including Mexico as well as Peru. We want to maintain status quo.
Okay. And then, third, I didn’t hear any mention of any 43-101 reports being scheduled for this year for Cusi, Bolivar, Yauricocha. Can you share any information with respect to expected timing for these upcoming - potential upcoming reports?
I think, as we mentioned particularly as it refers to Yauricocha, I think we would like to bring out to light the consequence of the Esperanza Zone to our operations. So we are working now to quantify Esperanza and quantify our resource and reserves at Yauricocha. And I would hope to have something out in the not too distant future, Jim.
With respect to Bolivar and Cusi, we would expect to - we anticipate having a 43-101 for each mine probably by year-end or first quarter of next year.
Okay. So for Yauricocha, then would we expect something by the end of the second quarter or by the end of the third quarter what - can you give us further clarification there?
I think we made some substantial progress on that and I think that we should - we were looking at something out in the near term. It will be a function of making sure, Jim, that the - the old expression here, where we have the - we only have one time to make a good first impression.
And we believe that Esperanza and Yauricocha for that matter has some significant contributions going forward. And we want to make sure that we have all your ducks in order, which means that generally we want to make sure that we have the highest standard of reporting. And so we’re just going through that process right now. So I’m hoping it will be in the near-term.
Okay. And then speaking of Esperanza, you mentioned production is expected in the third quarter. Can you give further clarification? Are we looking at September, October or really like - what months are - I’m sorry, would this be in like July or August or when in the third quarter can we expect production coming out of Esperanza?
Gord, do you want to respond?
The target is for the production to begin in July. Right now, for an update, we’re drifting on the ore zone, so we are doing some delineation work on targets. And we have to target the two zones, which is split between the two zones. So we are actually drifting on the ore zones now. And the target is to layout a production plan for July. We can fast-track them and certainly do it, so –yes.
Gordon, how long do you expect it’s going to take to ramp production coming out of Esperanza, if you expect to see production beginning in July, will it ramp quickly or this going to take several months?
Well, right now, the process is to learn more about the ore zone. We have definition work that’s been done on drilling. So now, we are actually drifting on the ore zones themselves. It’s learning the - this is a new area to the mine, so it’s a new concept. It’s not like the regular Central Mine zone where we’re doing sublevel caving. Those are the new zones, so we have to finish off the drifting. So as we do the drifting, we’re going to be generating revenues from the drift mark, all of [that ultimately] [ph].
So we’re pushing to start things off in July and look forward from that point on. And it’s all going to depend on how the zone pans out basically. It’s a little premature to say something right now. But the target is July, hope that helps.
Okay. And then, if we can move over to Bolivar for a minute, you mentioned back in the fourth quarter release about the El Fierro deposit and La Sidra veins. And then you mentioned them again in this quarter. When will you have some more specific information to share with us?
I’ll just take it, Gordon. We are working on that now, Jim. And I would expect more information out of Bolivar I think in the next quarter or two.
Okay. That’s all my questions for now. Thank you.
[Operator Instructions] There appears to be no further questions at this time. I’ll turn the call back over to Mr. McAllister.
Thank you, operator. That concludes today’s call. On behalf of the management team, I would like to thank all participants for joining us today. A replay of the webcast and all materials may be found on our website at www.sierrametals.com. If there are any further or follow-up questions or concerns, you may reach out to us after today’s call. Our contact information can be found on Slide 15 of today’s presentation or on the company website.
Thank you, operator, please conclude the call.
Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.
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