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Silvercorp Metals (NYSE:SVM)

Q1 2013 Earnings Call

August 03, 2012 11:00 am ET

Executives

Jonathan Hackshaw

Rui Feng - Chairman and Chief Executive Officer

Analysts

Alexandra Syrnyk - BMO Capital Markets Canada

Brad Humphrey - Raymond James Ltd., Research Division

Operator

Good morning. My name is Gail, and I will be your operator today. At this time, I would like to welcome everyone to Silvercorp Metals Incorporated Fiscal 2013 First Quarter Analyst Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mr. Jonathan Hackshaw, Investor Relations Director of Silvercorp Metal Incorporated. Sir, you may begin your conference.

Jonathan Hackshaw

Thank you, operator, and good morning, everyone. Welcome to Silvercorp's analyst conference call for the first quarter of fiscal 2013. Joining me today on the call are: Dr. Rui Feng, Silvercorp's Chairman and Chief Executive Officer; Mr. Myles Gao, Silvercorp's President and Chief Operating Officer; and Ms. Maria Tang, Silvercorp's Chief Financial Officer. We will begin the call with a review of our financial, operating and development highlights for the quarter. After this, we will open the call up to questions. At this time, I'd like to invite you to follow along on the accompanying presentation slides, which are available as part of the webcast or on Silvercorp's website. To advance to slides, please click on the forward arrow.

Turning to Slide 1, during today's call, forward-looking statements will be made relating to future production, development and exploration, capital expenditures, business expansion plans and other items. Such forward-looking statements are subject to risks and uncertainties, many of which are detailed on our 2012 Annual Information Form filed on SEDAR. There can be no assurance that such forward-looking statements will prove to be accurate, as actual results and future events can differ materially.

Turning to Slide 2, I will now review the first quarter financial highlights, which are expressed in U.S. dollars. In this quarter, the company recorded net income attributable to equity holders of the company of $6.1 million or $0.04 per share. Adjusted net income was $8.1 million or $0.05 per share after excluding the withholding tax accrual of $2 million for anticipated dividends from the company's subsidiary in China. Adjusted net income of $17.5 million lower compared to $25.6 million or $0.15 per share in the first quarter of fiscal 2012, primarily due to lower sales, higher production costs and higher general and administrative expenses.

Turning to Slide 3, in the first quarter of fiscal 2013, cash flow from operations was $19.3 million or $0.11 per share compared to $33.9 million or $0.19 per share in the first quarter of fiscal 2012. After paying dividends of CAD 4.3 million and capital expenditure of $20.5 million, the company ended the quarter with $142.3 million in cash and short-term investments and no debt.

Turning to Slide 4 and our first quarter operational highlights. The company produced, in total, 1.2 million ounces of silver and over 2,600 ounces of gold. And our flagship producer, the Ying Mining District, Silvercorp mined over 181,000 tonnes of ore during the quarter, 6% more than in the first quarter fiscal 2012.

Metal production totaled 1.2 million ounces of silver, 800 ounces of gold, 13.7 million pounds of lead and 3 million pounds of zinc, compared to 1.6 million ounces of silver, 800 ounces of gold, 20.6 million pounds of lead and 4.1 million pounds of zinc in the first quarter of 2012.

Grades were 227 grams per tonne per silver, 3.6% for lead and 1.1% for zinc compared to 303 grams per tonne for silver, 5.5% for lead and 1.5% for zinc in the same quarter of last year.

The lowered grades and the decrease in metal production were due to 2 factors: the first being a 5-day interruption in production because of power interruptions, which were necessary to facilitate nearby highway construction; and secondly, the Short and Distort attack last fall has caused management's time being inadvertently, but necessarily diverted to deal with the crisis, which caused delays implementing certain development plans with the SGX Mine, resulting in a gap in the mining schedule of blending ores from different zones with different grades. We expect the lower grade situation will be improved in Q3 fiscal 2013.

However, as a result of these factors, we have revised our production guidance for fiscal 2013 and now expect to produce in total: 5.5 million ounces of silver, 8,300 ounces of gold and 85 million pounds of lead and zinc.

Total cash and mining cost per tonne in the first quarter of 2013 were $69.02 and $55.47, respectively, compared to $60.02 and $48.66, respectively, in the first quarter of 2012. This increase in cash mining costs was due to the following: an increase in labor costs for both the company's employees as well as those of its mining contractors of approximately $5.40 per tonne; and secondly, the impact of the U.S. dollar depreciation versus the Chinese RMB of approximately $1.40 per tonne. However, compared to the fourth quarter fiscal 2012, total and cash mining costs decreased by 6% and 4%, respectively.

Moving to Slide 5. During the quarter, our consolidated cash cost per ounce in silver was $0.14; while in the first quarter of 2012, it was negative $6.12 per ounce of silver. As already mentioned, the higher cash costs that we saw for the quarter are a function of higher production costs and a decrease in byproduct metal credits. For the quarter, precious metal accounted to 71% of sales, which is consistent with the first quarter of fiscal 2012. This quarter, silver accounted for 63% of sales; gold, 8%; lead, 25%; and zinc, 4%.

Turning to Slide 6. Sales for this quarter were $45.5 million compared to $69.7 million in the first quarter of 2012. This decrease was due to a lower realized silver price and lower metal production. As already mentioned, realized selling price for silver was $22.97 per ounce, a decrease of 23% compared to $29.99 per ounce for the same quarter last year.

I will now provide an update on the recent exploration and development activity for the quarter at each of our projects. Starting with the Ying Mining District on Slide 7. As already -- we released an updated National Instrument 43-101 technical report for the District reporting a significant gain in the reserves and resources reconfirming the value of the district to the company as a long-life asset. The new tailing sponsor for the number 2 mill in the District became operational and will support production of 3,200 tonnes per day for 20 years.

Development work on a 5,200-meter access ramp at the SGX Mine continued and is 21% complete as of the end of the quarter. This ramp is designed to follow the main asset in S7-1 vein and is expected to improve production capacity at SGX starting on the first quarter of fiscal year 2014.

The company also completed the development of over 11,000 meters of horizontal tunnels, 150 meters of vertical shafts and 15,000 meters of underground drilling.

At our LM Mines, a great deal of progress was made in development work at both the LM Mine and LM Mine West. Shaft 900 at the LM Mine became operational with tunnel development also having commenced at 5 mining levels.

At LM Mine West, the construction of Shaft 969 was completed during the quarter to the originally planned depth of 369 meters. However, due to encouraging drill results encountered at depth, the decision was taken to extend the depth of Shaft 969 a further 100 meters. The additional work is expected to be completed before the end of fiscal 2013.

In addition, the construction of a 4,800-meter access ramp at LM West continued during the quarter. As of the end of the first quarter, construction of 600 meters of the ramp was complete. Once Shafts 969, the access ramp and all the mining levels are completed down to the 500-meter elevation at LM West in 2014, the combined production capacity of the 2 mines is expected to yield 300,000 tonnes of ore per year.

To support the expected growth in operations at the LM Mine and LM West, the company has commenced the construction of a 3,000-square meter facility, which will include offices and a dormitory. During the quarter, the company also developed over 4,500 meters of a decline on horizontal tunnels and completed 12,500 meters of underground drilling at the LM Mine and LM West.

At the TLP and HPG Mines, the company also continued to advance development work in order to continue the ramping up of production and facilitate further underground drilling. In total, the company invested $9.6 million in exploration and development for the quarter at the Ying Mining District.

Turning to our GC Project in Guangdong Province in Slide 8. We continue to make good progress towards GC becoming our next operating mine in silver portfolio. Development to the main access ramp is now 50% complete, and the development of a 4,600-meter exploration ramp has commenced. The construction of a 1,600 tonne per day floatation mill, capable of producing silver, lead, zinc and pyrite floatation concentrates with an optional 10 gravity concentrate, is also well underway.

However, there have been 2 issues that have had an impact to the timing of completion for our development plans for GC. First, we've been constrained by the existing power supply capacity. To resolve the power constraint issue, Silvercorp started the construction of a 7 kilometer, 110 volt -- kilovolt power line and a power substation in late July, which are expected to be operational in November 2012. During the quarter, Silvercorp invested approximately $3.1 million in capital expenditure at the GC project.

Secondly, the Guangdong Provincial Safety Production Bureau introduced a new regulation, which requires a separate health and safety review of engineering designs for tailing and storage facilities, specifically. The company has, therefore, suspended construction at dry stack tailings storage facility until this review is completed, which we expect to be by the end of the second quarter of fiscal 2013. Construction of the tailing storage facility is, therefore, now expected to be completed by the end of the third quarter of fiscal 2013.

We now expected to declare commercial production in January 2013, which is about 3 months later than originally planned. Otherwise, we are still very excited about having another producing mine to our portfolio within the next couple of quarters.

Turning to Slide 9 and the weak BYP Mine. The progress was also made during the quarter, and the company completed 250 meters of a 265 meter deep shaft, which is expected to be fully completed in December 2012. The new shaft will facilitate the mining of the number 3 gold mineralization body and the number 5 zinc and lead ore body. The construction of a 1,500 tonne per day tailing-backfill facility is also well underway and is expected to be completed in January 2013.

Turning to Slide 10. Our most recent -- at our most recent additions, the X Mines. The company completed upgrades to the existing mill at the XHP project by adding additional floatation cells and zinc floatation circuits. The mill now has 1,000 tonne per day throughput rate and is able to produce both gold, silver, lead and zinc concentrates. Commercial production of the expanded portion of the mill will commence once the company has been granted an environmental permit.

Over 2,000 meters of tunneling and over 9,000 meters of diamond drilling were completed during the quarter at the XBG and XHP projects. For the next 2 quarters, the focus of the X Mines will be on mine development, but limited development or production. In the meantime, the mill will process the existing 60,000 tonnes of silver, lead, zinc ore stockpile to generate cash flows. This further support exploration and mining development.

And finally, turning to Slide 11. At Silvertip, we filed an updated NI 43-101 technical report this quarter, reporting an indicated resource of 25 million ounces of silver. The company is currently working on completing and submitting a Small Mining Permit application, which would allow for production of up to 75,000 tonnes per year.

To summarize, while the company faced some challenges this quarter, a great deal of exploration and development work was completed, and it is the continuous development of our assets, which will help us to extract further value in the years to come. Keeping in mind the current cost of growth that the mining industry is experiencing, it is important to remember that Silvercorp has built a portfolio of assets with a long-life mineable reserve for less than $300 million. It is our experience and an ability to buy small assets with resource potential and develop them at a lower cost that has been and will continue to be our strategic advantage. As we move forward, we believe that the company will continue to be successful because of this strategy.

That concludes our comments on our first quarter of fiscal 2013. And I would now like to open the call up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go to the line of Alex Syrnyk with BMO Capital Markets.

Alexandra Syrnyk - BMO Capital Markets Canada

I just have a question regarding the costs side. The comments were mentioned that quarter-over-quarter costs improved. Are you seeing a stabilization in some of that labor cost inflation that had been experienced in over the past year or so?

Rui Feng

Okay. This is Rui, a very good question. I think [indiscernible] in terms of our labor costs escalation increase, right?

Unknown Executive

And then to add what Rui just said is the increase is partially because the benefits, the Social Security are in before, we don't have the requirements to give everybody the social security starting this year. We, basically, gave everybody the full Social Security. That's the reason that's why the cost has increased, which hasn't been done already.

Alexandra Syrnyk - BMO Capital Markets Canada

Okay, great. And then in terms of the grades at SG or in the Ying Mining District. A lot of that grade or miners saying is that grade issue was predominately at SGX? And then as well, would you like to comment on the grades at BYP? Because I noticed that they've kind of come down as well and your outlook for them for this year seems to have come down.

Rui Feng

I think it might be greater would be, we used to have a guidance for like 3 grams.

Unknown Executive

3 grams. Right now, it's around the 2 points [ph].

Rui Feng

2.5, 2.6, 2.6 grams. No, 2.5, 2.6 grams is [indiscernible].

Alexandra Syrnyk - BMO Capital Markets Canada

Okay. But during the quarter, they were lower there at 2.2 or something, so they've come up a bit?

Rui Feng

Yes.

Operator

[Operator Instructions] And we'll go to the line of Karen Sanderhulg [ph] with Commodity Fund.

Unknown Analyst

I have just a few questions. I was wondering why do you deduct the VAT charges from your silver sales? And I was also wondering how you get -- your reports, the realized silver price. You subtract the VAT charges from that? I was wondering why you do that? I'm not sure, I haven't seen that before.

Unknown Executive

So basically, we exclude VAT from our recorded sales already. It's -- it does not work.

Rui Feng

Okay, let me answer this question. When we do ourselves, we have signed contract. The contract price is based on Shanghai, silver exchange price, which including VAT. So for the VAT is a wash and so the government will take a VAT net like you do to the sales. You take away the VAT and deduct all of VAT credits and then by a different way, you have to pay 100% to commerce [ph].So the VAT is a wash. The reason we deduct that is because when you pull the project in Shanghai, silver expense, the price include the VAT.

Operator

We'll go to the line of Brad Humphrey with Raymond James.

Brad Humphrey - Raymond James Ltd., Research Division

Just a couple of quick questions. I know you're not going to be giving us the SGX on its own anymore. But just out of curiosity, could you tell us what the grade was at SGX in the quarter?

Rui Feng

This quarter, last quarter?

Brad Humphrey - Raymond James Ltd., Research Division

Yes, the past quarter.

Unknown Executive

For the first quarter.

Rui Feng

It was -- around 295 or 300 grams.

Brad Humphrey - Raymond James Ltd., Research Division

Okay. And so we expect it to improve over the rest of the year. Is that going to be gradual, or should we expect the same kind of grade for Ying in the second quarter as we saw in the first quarter?

Rui Feng

Yes, I think the second quarter will be probably kind of the same as the first quarter. And then the third quarter were started to come, right?

Brad Humphrey - Raymond James Ltd., Research Division

And then it'll average out to some around 250?

Rui Feng

Yes, yes. And hopefully after that, the grade will fall out of schedule, the 43-101 report, which is for the whole district, it will be around 295, 300 grams, 300 grams ahead of grade.

Brad Humphrey - Raymond James Ltd., Research Division

Perfect. And any idea about the timing on that Silvertip Small Mines permit?

Rui Feng

The timing is tough because the Canadian engineer take a long time to finish that report for submission. So we're almost finished at publication, right?

Brad Humphrey - Raymond James Ltd., Research Division

Right. But it hasn't been submitted?

Rui Feng

I think we have submitted, yes.

Again, the government changed the regulation. Before that format is quite simple. And I think early this year, you needed to recycle 30 grams or 95, within the design, engineering design. And therefore, we'll have to redo a lot of new design. Because at the time, last year the market was not like that.

Operator

We have no further questions at this time.

Jonathan Hackshaw

Okay. Thank you, operator. To wrap up, I'd like to thank you again for joining us for today's conference call. We look forward to reporting to you again when we release our results for the second quarter of fiscal 2013 in November. So thank you very much and wishing you all a very enjoyable long weekend in Canada.

Operator

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

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