Great Panther Silver's (GPL) Q2 2016 Results - Earnings Call Transcript

| About: Great Panther (GPL)

Great Panther Silver Limited (NYSEMKT:GPL)

Q2 2016 Earnings Conference Call

August 4, 2016 11:00 ET

Executives

Spiros Cacos - Director, Investor Relations

Jim Zadra - Chief Financial Officer

Analysts

Bhakti Pavani - Euro Pacific Capital

Roger Davis - Private Investor

John Macgran - Shareholder

Elliot Koenig - Oppenheimer

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Great Panther Silver Limited 2016 Second Quarter Financial Results Conference Call and Webcast. As a reminder all participants are in listen-only mode, and the conference is being recorded. After the presentation there will be an opportunity to ask questions [Operator Instructions]. I would now like to turn the call over to Spiros Cacos, Director of Investor Relations.

Spiros Cacos

Thank you, Kila. Good morning everyone and thank you for taking the time to join our call today. With me here this morning is Jim Zadra, Chief Financial Officer. Unfortunately our President and CEO, Robert Archer could not be present this morning as he is traveling to Mexico to attend the funeral of the General Manager of our Topia Mine and pay his respect to the family.

Before we begin, I would like to mention that some of the commentary on today’s call may be forward-looking statements. You should be cautioned that actual results and future events could differ from those noted in today’s presentation. I would like to remind you that the conference call is being recorded and will be available for replay after 10:00 A.M. Pacific Time. Replay information and the presentation slides accompanying the conference call and webcast are available on our website at www.greatpanther.com.

I will now turn over the call to Jim Zadra.

Jim Zadra

Thank you Spiros and good morning everyone. I will start this morning’ conference call with highlights of our second quarter and then provide an overview of our financial results and conclude with a Q and A session.

Our team at Great Panther continued the trend of strong operating results in the quarter of 2016 delivering on target metal production with cash cost and all-in sustaining cost reductions of 74% and 43% respectively when compared with the second-quarter of 2015. We are on track to meet the company’s annual guidance of $4 to $4.2 million silver equivalent ounces and have taken the step of issuing improved cash cost and all-in sustaining cost guidance for the year based on our cost performance in the first half of 2016 and favorable outlook for the rest of the year. After significant production growth of 30% in 2015 which was driven by the ramp up of our San Ignacio Mine. We stated our intention to maintain production levels in 2016 and devote a continued focus to further the cost reductions realized in the previous year. In this regard, we have seen almost consistent reductions in our cash cost each quarter for the past year, past year and half and in the second quarter our cash cost was further reduced to an impressive US$1.72 per silver payable ounce net of byproduct credits. Our all-in sustaining cost came in at an equally impressive US$7.19.

The reductions in our cost combined with a significant risk in silver and gold prices since the start of the year have combined to drive substantial increases in our cash flow and operating margins, our second quarter mine operating earnings before non-cash items increased 96% to $11.5 million. We also saw similar significant improvements in our cash flow from operations. The improvement in operating cash flow combined with proceeds from an marketing offering announced in April contributed to further strengthening of Great Panther’s balance sheet. We closed June 30 with $28.8 million in cash and cash equivalents and $49.4 million in net working capital and no long-term debt.

In addition now through the end of the second-quarter we closed bought deal offering for proceeds of US$29.9 million. The Guanajuato Mine Complex or GMC accounted for approximately 75% of our total production in the second quarter of 2016. Metal production from the GMC was approximately 774,000 silver equivalent ounces representing a slight decrease over the same quarter of last year. A decrease was largely attributed to lower grades at San Ignacio reflecting variations in the resource block.

San Ignacio accounted for 60% of the overall metal production from GMC contributing over $467,000 silver equivalent ounces in the quarter. This is up from 31% in Q2 of 2015 and is a testament to the successful commissioning and ramp up for San Ignacio which only commenced production in July of 2014. Cash cost for the GMC was negative US$1.19 for silver payable ounce, as lower cost were further offset by higher by products credits from an increase in gold sales and higher realized gold prices. The significant decrease in cash cost for the GMC also contributed to a 75% reduction in all-in sustaining cost to US$2.22 per payable ounces from 893 when compared to the same period last year. The decrease in all-in sustaining cost is also reflection of the reduction in capital expenditures due to timing of CapEx and development programs. We expect that these expenditures will increase in the second half of the year which will bring all-in sustaining cost more in line with our guidance.

At the Topia Mine in Durango, overall metal production was slightly lower than in second quarter of 2015 due to lower throughput in light of seasonal factors. However, improved grades in recoveries combined with more favorable foreign exchange rates, reduced cash cost per silver payable ounce. At Topia to US$10.35 while all-in sustaining cost declined to US$1149 from US$1377 in the same period last year.

Revenues from second quarter of 2016 increased 33% to $25.6 million compared to $19.2 million in the same quarter 2015 due to improved silver and gold prices and higher unit metal sales. The improved metal prices alone contributed to a $2.8 million increase in revenues and margins. Mine operating earnings before non-cash items were $13.2 million an increase of more than 96% over the second-quarter of 2015 again credited to the higher realized metal prices and lower unit costs. General and administrative expenses from the second-quarter of 2016 at $1.8 million were in line with those comparative periods while exploration evaluation development expenses increased by about 900,000 due to higher development costs at our operating mines and higher exploration and valuation program associated with our projects.

Despite strong mine operating earnings, operating cash flow and adjusted EBITDA, we recorded a net loss in the second order of $1.7 million as a result of primarily non-cash charges. The first of these is a foreign exchange loss of $6.3 million which is mainly associated with mark to market accounting of our investment in our Mexican subsidiaries which is by way of U.S. dollar denominated loans and advances. The second is an impairment charge related to the termination of the option agreement with Nyrstar for the Coricancha mine in Peru. Since the announcement of an at-market offering in April of this year, we raised approximately 7,000,000 in gross proceeds from this facility. In addition in July, we concluded a bought deal offering for gross proceeds of US$29.9 million. These financings, along with strong cash flow generated from our operations in the first half of the year, has significantly enhanced our cash and their networking capital positions.

The use of proceeds from these two offerings was intended for the growth and development of our business. Even with our operations generating healthy levels of free cash flow, we will continue to seek investment opportunities to drive further growth which includes investment in our existing operations, possible investments in our portfolio of exploration projects and will continue to seek acquisition opportunities in the Americas. In this regard, we recently increased our planned exploration drilling at her operating mines by seven 7500 m for 2016.

In summary, Great Panther delivered another strong quarter of metal production was substantially lower, cash costs and all sustaining cost from a your ago were on track to achieve our production guidance of 4 to 4.2 million server equivalent ounces for 2016 and as noted we are reducing her 2016 cash cost guidance previous a range of US$ 5 to US$ 7 dollars per silver payable ounce to US$ 4 US$ 10, and similarly reducing our all-in sustaining cost from US$13 to US$15 per silver payable ounce to US$12 to US$14. While we are increasing drilling meters, we are not changing our guidance for overall capital and exploration evaluation development expenditures due to cost savings and deferment of previously planned expenditures that will offset the cost of the increase in drilling meters. We will continue to focus on operational efficiency, improved grade control for the remainder of the year while building on successful achievements obtained in previous quarters.

With the current cash position of approximately $66 million Great Panther is in a much stronger position to capitalize on growth and strategic opportunities. With the upturn in metal price and apparent change in sentiment in stock market, we believe that we have entered into a more positive environment for the mining industry in particular we have seen the silver gold ratio readjust from 85 to 1 to 65 to 1 with the recent strong performance of silver. Great Panther continues to display tremendous leverage to silver prices and is well positioned to take advantage of continued strength in the sector. Finally as noted earlier, our President and CEO, Bob Archer cannot be with us today due to the unfortunate passing of Topia’s general manager, Javier Ramirez.

I would like to take a moment to remember Javier. He ran Topia since we started operations here over 10 years ago and successfully managed through two major downturns in the silver market. He was a close and valued member of our management team and will be sorely missed. I will now open the call up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Bhakti Pavani with Euro Pacific Capital.

Bhakti Pavani

Good morning, guys and congratulations on the quarter – great quarter.

Jim Zadra

Thank you, Bhakti.

Bhakti Pavani

Quick question on San Ignacio. How much, I know on the press release you did mention that San Ignacio is expected to be producing 700 tons per day, what is it currently producing there? How many tons per day?

Jim Zadra

It’s producing approximately, I would say it’s producing close to 600 tons per day.

Bhakti Pavani

And the 700 tons per day, is this expected, I mean for this year as well as the next year or do you intend to increase production from San Ignacio next year.

Jim Zadra

Well we haven’t issued any guidance or outlook for 2017, at this time, I would say the growth in San Ignacio is will start to level off in the back half of 2016 and you know we expect to maintain at that point we may expect to maintain fairly consistent production levels into 2017.

Bhakti Pavani

Okay. I guess we are...

Jim Zadra

We are still in the process of drawing up our plans for 2017 and we will provide further guidance later in the year early in 2017.

Bhakti Pavani

Okay fair enough. With regards to cash cost and all-in sustaining cost, would it be fair to assume that because of the higher net gold credits that helping you to have lower cash cost and I guess if you continue with San Ignacio production which has higher goals that should continue help in 2017 as well?

Jim Zadra

Well with respect to the second half of the year it’s –we’ve reduced our guidance for a cash cost and all-in sustaining cost because we’re seeing more favorable costs than we anticipated at the start of the year. I think, I am comfortable in saying that we on the all-in sustaining costs, we are comfortable with the lower end of our revised guidance and and that’s mainly because of you know what you just said that you know gold prices have increased and we are seeing higher gold production that’s favorably impacting the byproduct credit.

Bhakti Pavani

Okay fair enough. Also with regards to the capital expenditure plan for the second half of 2016, how is it divided between GMC and Topia? What percentage of the capital spending is allocated to each of the mines?

Jim Zadra

It’s hard to give a exact number back to you because it really depends on timing. As you will note from our press release in the MG&A that one of the projects ahead of us is the tailings dam projects for Topia which has the potential to increase the CapEx for Topia fairly significantly. However, there is uncertainty as to where how much of that will fall in 2016 and 2017. So it’s really hard to give you an exact number. We are still kind of in the planning stages on the Topia tailings dam. But even then if you take all of the CapEx and the exploration and development which is expensed Guanajuato or the GMC will still account for a higher proportion. So I hope that gives you somewhat from an answer to your question just recognizes very hard given you know the nature of capital expenditures is that they are large and sometimes it’s hard to peg the timing within a quarter or between a couple of quarters.

Bhakti Pavani

Right, yes, no, fair enough. With regards to cash cost I mean at Topia, is there any room to bring it down further at all?

Jim Zadra

It’s a good question. Certainly, if we can improve grades that would bring cash cost at Topia down further. And you know right now in the mine plan there isn’t any such improvement in grade. Any further improvement in grade sort of forecasted or anticipated, what we have seen is you know we did significantly improve the grades at Topia from last year, so certainly in our planning for 2017 that something will be looking to do once again. But right now our mine plan for Topia is kind of locked in, so I don’t expect you will see significant increases or significant improvement since Topia’s cash cost in 2016.

Bhakti Pavani

Got it. Last question, the 7500 meter drilling that you mentioned, that you are planning to increase in the second half of the year, does that include a drilling that’s [indiscernible] and Guanajuato [ph] or no?

Jim Zadra

No, that’s just that – our operating mines.

Bhakti Pavani

Okay, that is for my question.

Jim Zadra

It’s predominantly GMC, so San Ignacio and Guanajuato

Bhakti Pavani

Got it, thank you.

Jim Zadra

Allright, thank you Bhakti.

Operator

Your next question comes from Jay Sasalski [ph] with Rodman & Renshaw.

Unidentified Analyst

Hi guys, thanks for taking my questions. Would you be able to just walk us through the CapEx for the remainder of the year, I men just kind of give us the breakdown assuming that the tailings end it’s completed at Topia?

Jim Zadra

Again, it’s a tough one because we are still sort of planning out the project and it’s hard to say when the expenditures would fall but you know for the year-to-date we have about $1.5 million and for the first half of the year we had about $1.5 million in CapEx for for consolidated operations.

Unidentified Analyst

Got you and should we expect significant downtime well that’s being completed or how should we look at that?

Jim Zadra

At this point, we don’t expect any downtime but if that changes, we will clarify, we don’t expect any impact to our production guidance. So that implies we don’t expect any meaningful downtime and if for some reason that changes it’s something that will sort of advise the market of as soon as we become aware of it.

Unidentified Analyst

Awesome, thank you so much guys.

Jim Zadra

Thanks Jay.

Operator

Your next question comes from the line of Roger Davis, Private Investor.

Roger Davis

Good morning, gentlemen. I have a couple of questions I would like to ask. The first one is I am very, very concerned about this $12 million loss that the company has reported concerning this along I guess to a subsidiary or whatever. I wonder if you could go into a lot more detail. I think that this is just devastating the stock. The stock was down again this morning despite the incredible financial results which were amazing. Is this something that’s ongoing? Is it going to happen again? Is it reversible? Whatever become a real loss or is it just a paper [ph] loss. I am very confused about you know where this is coming from, it’s an incredibly large figure $12 million. So I wonder if you could go into more detail on that?

Jim Zadra

Well for the quarter it’s more in the order of $6 million. I think you are probably referring to the six-month period.

Roger Davis

It’s $12 million, yes.

Jim Zadra

And I would say that you are not the only one who struggles with this. Even you know even professional accountants, you know, this does leave them scratching their heads. Essentially what it is is when we capitalize our Mexican subsidiaries and made our investment into our Mexican subsidiaries and operations, we did that by way of a loan rather than putting in capital as equity. So that loan sits on the books of the Americans – sorry of the Mexican subsidiaries and it’s denominated in U.S. dollars. And each quarter, the Mexican subsidiary keeps its books in Mexican pesos, each quarter end they revalue that loan on their books in Mexican pesos terms at the prevailing foreign-exchange rate. So it’s essentially on the Mexican subsidiaries book it’s a mark to market loss and going back to couple of years when the peso was strengthening or when the peso had seen some. Periods of strengthening, the Mexican subsidiary actually saw gains.

And that’s really what it is, so it’s really a paper loss or paper gain on the books with Mexican subsidiary and when we consolidate up the results it’s consolidated up into the consolidated financial results of Great Panther. So it is something that we always see and can swing from gaining the loss depending on how the peso moves against the U.S. dollar, and as I said before we have seen periods when it’s gain. It does unfortunately, it unfortunately is often times when the biggest factors in our results but and we have to account for it that way. There’s no way around it. But I think everyone should keep in mind that it is really paper accounting and it’s not a cash item if you and really doesn’t change or impact the economics of the business. So I hope that helps.

Roger Davis

Yes, I kind of get it. I guess you are basically saying it depends and the peso has weakened again here in the third quarter, so if that trend continues, we are going to see another loss I guess again in the third quarter at least the paper loss share?

Jim Zadra

Right and it really is where the peso ends at the end of the third quarter relative to where it started at the – where it was at the beginning of the third quarter. So you are right, if you see the peso at a weaker at level at the end of the third quarter than it was at the start of the quarter more likely than not we are going to show another paper loss. If it strengthens then you know more likely than not will show a paper gain.

Roger Davis

But basically very long period of time this kind of wear on and it just causes quarterly gyrations?

Jim Zadra

Yes.

Roger Davis

Yes. Okay one other question. Go ahead.

Jim Zadra

No, go ahead, sorry.

Roger Davis

One other question I had, I notice that there can be gigantic differences between the amount of product that is sold during any particular quarter compared to what is actually produced and I understand that that mostly has to do with the timing of shipments. I was wondering if you would consider the possibility, as no one of the other companies I saw did that, I guess that was that. And when you report the quarterly production reports, would it be possible to report the amount of product actually sold at that time because that gives a much more clear indication of how the quarterly results are going to be for that quarter. You can’t really go in production, you know this quarter we had way more sales and in the first quarter we had very less sales, so it can dramatically impact you know the quarterly results. I don’t know whether it’s possible, I know some companies don’t report that and another is the least one. I know this past quarter that when they reported good production several weeks ago that they also reported the number of ounces of product sold?

Jim Zadra

We can look at that. One of the challenges Roger is that we generally, we release our production results ahead of our earnings results and a lot of times there’s a fair bit of accounting involved. The production number is pretty is relatively easy to determine and we can pretty much – we pretty much have that number the day after we end the quarter. The sales number takes a little bit more work and we have to be a little bit more careful about measuring it. There is a lot of sort of accounting and reconciliation that goes into the sales number which kind of presents a challenge in terms of releasing it along with the production number because it’s – then we then go through the process of finalizing our financial results and we come up with a different number. We are at risk of you know potentially losing a bit of credibility there of announcing one number and then changing it three weeks down the road.

Roger Davis

Okay great and one other question. On the – some of the stock here that came after end of the quarter it was a 6% commission that involves about $2 million, will that become an expense item in the third quarter, do you know how that will begin, will the accounting rules will – will that be written off for that?

Jim Zadra

Accounting wise it’s netted against the proceeds of the offering, so it doesn’t, it won’t hit our P&L line and that’s a pretty much standard accounting for any financing.

Roger Davis

Okay. So, there won’t be a $2 million loss of coming during the third quarter regarding that?

Jim Zadra

Right.

Roger Davis

Okay, well thank you very much business.

Jim Zadra

Okay, thanks Roger.

Operator

Thank you [Operator Instructions] Your next question is from the line of John Macgran, Shareholder.

John Macgran

Just curious about kind of the total JV of growth for acquisitions and key things on the hedge, just kind of the general thoughts on that please.

Jim Zadra

Sorry John, you were breaking up. Can you ask the question one more time.

John Macgran

Sure, just [indiscernible] to the reception, sorry. Your general thoughts on growth long term, what the strategy is for acquisitions and keeping things unhedged with into your leverage?

Jim Zadra

The general question – the question was long term strategy for growth. As we stated a number of times, we are, we continue to look for acquisitions and opportunities to invest in growth. And you know that would include looking at our existing operations and as we – as I noted earlier on the call, we are taking the step to increase drilling and that’s a small step but we are looking at opportunities for more meaningful investment in our existing operations that could potentially increase productive capacity and you know secondly we are looking for acquisition opportunities. We have been for quite some time. I think we have been very careful to seek out something that’s a good fit and that is something that will enable the company to drive value and growth. So we are certainly continuing on that path. You know it’s bark in detail about exactly what we’ve looked at because a lot of this involves sort of confidentiality agreements and you know it’s also difficult to talk about specific opportunities even notwithstanding confidentiality agreements. So what I can say is we are definitely focused on growing the company and doing so in a manner that will enhance shareholder value, enhance our stock price and not just bring growth at the expense of it.

John Macgran

Okay thank you very much.

Jim Zadra

Thank you.

Operator

Thank you, Mr. Zadra, it appears we do not have any questions at this time.

Spiros Cacos

We got a couple of chat questions which I guess I can read out. First question from David Muriello [ph], what is your projection for silver prices?

Jim Zadra

David thanks for the question. For me personally, I always find it difficult to make productions – projection or predictions on silver prices. But it’s definitely been very encouraging to see the trend in silver and gold prices in 2016 and I think there is, there’s a lot of factors out there that are looking positive for you know continued strength in silver and gold prices in particular the economic uncertainties in the world and geopolitical and political uncertainties. And I’ve – you know we are seeing that you know central banks are still continuing the trend. I think we saw the Bank of England today announce further aggressive action that significantly impacted the pound and you know while there still are people calling for the Fed to raise rates this year you know that’s going to become more and more difficult when you know other economies around the world are going the opposite direction. So I think that bodes well for silver prices and for gold prices and you know like I said earlier, I like to stay away from making exact predictions on what the price will be. So I hope that helps.

Spiros Cacos

The next question is from Richard Cohen [ph]. Are you investigating selling silver direct to industrial users?

Jim Zadra

As we produce concentrate we – the nature of our businesses that will always sell to refiners. So you know I know there are industrial users out there that will enter into contracts but at the end of the day if you’re producing concentrate, the concentrate still have to be go through a refiner before ultimately going to the end user.

Spiros Cacos

The third question again is from David Muriello [ph]. How will the recent warrants issued effect profits?

Jim Zadra

There is really no accounting expense for the issued warrants. So essentially they will not, there will be nothing hitting the books if you will in respect of the warrants. The warrants are exercisable at US$2.25, so in the event that they are exercised, the impact would be that we would have additional cash proceeds from the – from the exercise of the warrants and the flipside of that is that the warrants would become shares issued.

Spiros Cacos

The next question is formed Han Herro [ph]. The question is what is the reason why Great Panther share price is underperforming compared to other producing silver mines?

Jim Zadra

Han, I think you’re correct. In recent weeks, we have somewhat underperformed. I think part of that is that we saw such a strong run-up in the first five months of the year and I think, we feel we outperformed our peers on that run-up and I think possibly this is a bit of an adjustment. That said, we are continuing to deliver strong results. As I noted earlier in the call our cash cost and all-in sustaining cost are very low and I think within the peer group in the industry probably at the low end of the range, so I would think and hope that the market will recognize the performance and that the recent trend has turned around.

Spiros Cacos

The next question is from JJ Joe [ph]. Any color on letting the Coricancha option agreement expire or terminate?

Jim Zadra

I think the simple answer there is that we did a fairly significant amount of work on Coricancha in the first year of the option. And to extend the option agreement would have met another payment of US$1.5 million and a commitment to be do about $3 million of further exploration and evaluation work. And we very, very carefully evaluated making that decision and we felt based on the work that we had done in the first year of the option agreement that we felt we had sufficient information to evaluate the projects without taking the step to make further expenditures and in in terms of an option agreement – in terms of an option payment and exploration expenditures. You know the flipside of that is that we gave up the exclusivity that can with the option agreement and again it’s not, it’s something we very carefully considered and we felt this was the best route to go. We are continuing to consider Coricancha as along with a couple of other opportunities and essentially that’s the situation there.

Spiros Cacos

Okay, this is the last chat questions from Mr. Richard Cohen [ph]. How you studied the proposals of Hugo Salinas Price for silver becoming the currency for Mexico?

Jim Zadra

Hi Richard, I have to say that I haven’t, and also I really can’t give you an educated discussion on that topic.

Spiros Cacos

Okay, I will pass it back to the operator, Kila, are you there?

Operator

Yes sir. You do have an audio question from the line of Elliot Koenig from Oppenheimer.

Elliot Koenig

Hi guys, congratulations on your own excellent financial results and I was very sorry to hear about the passing, your mine manager in Topia. That being said, listening to the Q&A on the loan here, I am wondering what interest rate the loan accrues to the parent company and if there is any consideration of that loan since its sometimes due to foreign exchange considerations, puts a hole in your accounting that disturbs the investors and accountants by your own definition here, you know when that might be paid down?

Jim Zadra

Thank you, Elliot, it’s a good question. The loan bears interest at rate of 11% and the question as to the repayment of the loan, it’s for many reasons it’s for legal tax economic reasons that kind of structure makes lot of sense and it’s used, it’s used by other companies to structure their investment and foreign subsidiaries. From a legal perspective, it provides means to secure, to register security gains to the assets in the foreign jurisdiction. And it’s tax efficient in the sense that it creates interest expense in the jurisdictions that you are operating. The flipside of that is that it has this potentially negative accounting impact that really cloud results or can cloud the results. So we really have to balance you know legal and tax considerations versus accounting and at the end of the day, we think that prudent structuring of the investment kind of wins out over the accounting fiction if you will. Unfortunately that means that we will probably going to continue to see this but we will continue to evaluate that going forward and if it continues to be a significant issue from an accounting perspective perhaps we will reevaluate it.

Spiros Cacos

Thank you.

Elliot Koenig

Thank you.

Jim Zadra

Thank you.

Operator

That’s it. There appear to be no further questions at this time.

Jim Zadra

Thank you, Kila. In closing, I would like to thank our employees and contractors for delivering another solid quarter. In addition, I would also like to thank our shareholders, analysts and the financial community for continued support and confidence they have shown in us particularly through the challenging market for the industry in 2015 and the preceding years. It’s nice to see that that support has been rewarded with significant increase in our share price since the start of 2016 which is reflective in part of our strong operating performance. We will continue to focus on strong execution and trust that in more positive market environment we will continue to reward our shareholders. Thank you for your participation today and I look forward to sharing our progress with you again in the next quarter.

Operator

Thank you, Mr. Zadra. That concludes Great Panther’s second quarter 2016 financial results conference call and webcast.

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