Great Panther Silver's (GPL) CEO Robert Archer on Q4 2016 Results - Earnings Call Transcript

| About: Great Panther (GPL)

Great Panther Silver Limited (NYSEMKT:GPL)

Q4 2016 Results Earnings Conference Call

February 28, 2017, 11:00 AM ET

Executives

Spiros Cacos - Director, IR

Robert Archer - President and CEO

Jim Zadra - CFO

Analysts

Heiko Ihle - Rodman & Renshaw

Bhakti Pavani - Euro Pacific Capital

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Great Panther Silver Limited 2016 Year End 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 conference over to Spiros Cacos, Director of Investor Relations. Please go ahead.

Spiros Cacos

Thank you, Shakira. Good morning everyone, and thank you for taking the time to join our call today. With me here this morning are Robert Archer, President and CEO; and Jim Zadra, Chief Financial Officer.

Before we begin, I would like to mention that some of the commentary on today’s call may contain forward-looking statements. You should be cautioned that actual results and future events could differ from those noted in today’s presentation.

The commentary also makes reference to various non-IFRS measures definitions and reconciliations of which are included in the company's MD&A for the year-end ended December 31st, 2016.

I would like to remind everyone that this conference call is being recorded and will be available for replay after 10:00 A.M. Pacific Time today. Replay information and the presentation slides accompanying this conference call and webcast are available on our website at www.greatpanther.com.

I will now turn over the call to Bob Archer.

Robert Archer

Thank you, Spiros. Good morning everyone. I'll start this morning's conference call with our year end highlights and then provide an overview of our operational and financial results, discuss our outlook for 2017, and conclude with a Q&A session.

Before we start, I'd like to remind everyone that we commenced reporting all financial results in U.S. dollars in the third quarter of 2016. Therefore all dollar amounts expressed in this presentation and the associated financial statements and MD&A are in U.S. dollars unless otherwise noted.

In 2016, our industry witnessed a significant rebound in metal prices and general market sentiment. Consequently, Great Panther Silver reported strong financial results for the year with the continued ramp up in production at our San Ignacio mine; we set a new annual record in gold production and increased our mine operating earnings by more than 400% to $22 million.

Cash cost and all-in sustaining costs for AISC were substantially reduced by 51% and 20% respectively, while revenue, gross profit, adjusted EBITDA, and operating cash flow have all shown significant increases when compared to the previous year, primarily due to favorable foreign exchange rates and higher metal prices.

Despite these positive developments, we reported a net loss of $4.1 million for 2016. This was primarily due to unrealized foreign exchange losses of $11.1 million recognized in the first half of the year prior to our conversion to U.S. dollar reporting and underlying changes in the functional currencies of some of our operating subsidiaries.

Going forward this change should significantly minimize the past mark-to-market foreign exchange gains and losses which were often the problem factor making up our net income.

The improvement in market sentiment and in our share price provided the backdrop for a bought deal financing and ATM offering last summer that together provided net proceeds of $33.1 million. These financings combined with an improvement in cash flow from operations contributed to further strengthening Great Panther's balance sheet such that we closed the year with $56.6 million in cash and short-term investments, $66.6 million in net working capital, and no long-term debt.

We also closed the year on a positive note by signing an agreement with Nyrstar to acquire the Coricancha Mine Complex in Peru, marking a significant milestone for the company as we expand geographically into the second largest silver producing country in Latin America.

Turning now to the operation highlights for 2016. The Guanajuato Mine Complex or the GMC accounted for approximately 77% of our total production in 2016. Metal production from the GMC was approximately 3 million silver equivalent ounces, representing a 3% decrease over the previous year due to lower grades at San Ignacio.

Despite the slightly lower grades, San Ignacio continues to play a major role at the GMC contributing approximately 60% of the production and containing the bulk of the resources for the operation.

Cash cost for the GMC was $0.85 per payable silver ounce in 2016, mainly due to an increase in byproduct credits from record gold production and higher realized gold prices. The significant decrease in cash cost to the GMC contributed to a 48% reduction in AISC to $5.20 per payable silver ounce. The decrease in AISC is also reflection of the reduction in exploration, evaluation, and development expenditures.

Last week we announced an updated 43-101 mineral resource estimate for the GMC, illustrating that we had once again successfully replaced what we had mined in the previous year, while upgrading most of the resources to higher categories.

Significantly, the results from the surface drilling be conducted at San Ignacio in the fourth quarter of 2016 were not included in this resource update and will be added to the 2017 estimate.

I'll now continue with the summary of our Topia Mine in Durango. Topia's metal production was 17% lower when compared to 2015 due to lower throughput resulting from the two temporary shutdowns in the third quarter of 2016 and the plan processing suspension that commenced in December to facilitate plant upgrades and a transition to a new tailings storage facility.

Despite the lower production, which would ordinarily increase production costs, we reduced cash cost at Topia by 6% over last year. Favorable foreign exchange and higher byproduct credits associated with increased base metal prices were contributing factors.

As a result of the increase in capital expenditures associated with the aforementioned plant upgrades and transition to new tailings storage facility, AISC at Topia increased by 16% in 2016 to $15.31. These have been accounted for as sustaining capital expenditures and totaled about $1.6 million in the year or $3 per payable ounce of silver with most incurred in the fourth quarter.

Mining activities have continued during the plant shutdown and/or continues to be stockpiled on site. This material will be processed once the plant starts up again such that production at Topia for 2017 should consist of 13 months of mine door [ph]. The plant is expected to restart by the end of the current quarter.

Last December, we signed an agreement with Nyrstar to acquire a 100% interest in the Coricancha Mine Complex in Peru. The CMC is located in Central Andes of Peru, approximately 90 kilometers east of Lima and comprises a polymetallic mine, an operational 600 ton per day processing plant and supporting mining infrastructure. It's fully permitted, but has been on care and maintenance since August of 2013.

As most of you are aware, we had the project under option for a year and spent approximately $2 million on drilling, engineering studies, and environmental assessment. This work demonstrated substantial upside and we proceeded with the acquisition because we believe that we have the expertise and the discipline to capitalize on that.

Great Panther was built by acquiring cost producing mines in Mexico and successfully bringing them back into production and now we hope to replicate this success in Peru. We now expect the acquisition to be finalized in the second quarter as our plans for advancing the project are still under development, we will disclose those and update the resource estimate once the acquisition is closed and we take possession.

Based upon historical records and our preliminary assessment, we believe the mine has the potential for approximately 3 million silver equivalent ounces of production annually, which would booster our consolidated metal production by about 75%. Importantly, with a strong treasury, we're fully financed to bring the mine back into production potentially by 2018.

Turning now to our full year consolidated financial results. Improved metal prices in 2016 were the major contributor to $5.7 million increase in revenue to approximately $61.9 million and higher margins. Mine operating earnings before non-cash items increased to $9.3 million for the year a direct result of the increase in revenue combined with the decrease in cost of sales before non-cash items.

Adjusted EBITDA increased by 131% to $16.5 million when compared to the previous year, primarily due to the $9.3 million increase in mine operating earnings and a decrease in G&A expenses before non-cash items.

2016's net loss of $4.1 million reflected a 42% improvement over 2015, mainly due to a $17.7 million increase in mine operating earnings and decreases in G&A and EE&D expenditures.

As noted earlier, however, the net loss was mainly a function of the $11.1 million non-cash foreign exchange loss incurred prior to the change to U.S. dollar reporting.

Cash and cash equivalents increased significantly in 2016, mainly due to the $33 million in proceeds received from the bought deal offering completed in July and at the market offering initiated last April.

These financings along with the strong cash flow generated from our operations have significantly enhanced our cash and short-term deposits to $56.7 million and net working capital position to $66.6 million. This puts us in a very strong position to be able to pursue additional acquisition opportunities as part of our growth strategy.

In summary, Great Panther delivered strong financial results for the year with significant increases in mine operating earnings and cash flow and a very healthy balance sheet. Even though we were slightly off our production guidance in 2016, we expect metal production to be back up to 4 million to 4.1 million silver equivalent ounces in 2017.

Cash cost is anticipated to increase slightly due to increases in site costs including increased expenditures on definition drilling to reduce grade variability and improve mine planning.

Cash cost is expected to be in the range of $5 to $6 per ounce of payable silver, while AISC is projected to be $14 to $16 per ounce of payable silver, reflecting the capital expenditures on the new tailings facility in Topia.

As this work is currently in progress, AISC for the first quarter of this year is expected to be higher than normal. In Peru, we look forward to advancing the Coricancha Mine project as a first step in establishing a foundation in that country and rolling out a new phase of Great Panther's growth strategy.

I'll now open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

And your first question comes from the line of Heiko Ihle with Rodman & Renshaw.

Heiko Ihle

Hey, good morning.

Robert Archer

Good morning Heiko.

Heiko Ihle

Congrats on yet another good quarter, and more important thanks for taking my questions here. Okay, so going through the 2017 capital expenses, you expect those to be $6.3 million to $7.3 million, so just going in on the 2016 actuals $4.8 impact, at the midpoint that's 42% increase at the high point of 52%, obviously very meaningful. And Bob you and I have spoken about this before, I'm actually in favor of the way you guys allocate your capital, but can you just sort of walk us through where exactly the money is going and what it's spend on?

Robert Archer

Sure. There's two main items really Heiko. One is the completion of the new tailings storage facility at Topia. So, it would probably be an additional $2 million or so allocated to that and that will be primarily in the first quarter.

The balances is mostly going towards drilling and associated mine development. As its where a lot of the drilling that we do is underground, particularly at the main Guanajuato Mines. And that requires a certain amount of mine development to support that drilling.

And the balances of surface drilling primarily at the San Ignacio. We will be doing some surface drilling at the Topia and planned later in the year for El Horcón and Santa Rosa projects as well. But the biggest chunk of it will be at San Ignacio, which is actually underway right now.

Heiko Ihle

Fair enough. And you scored kind of with the $2 million answered the question I was going to ask you on page six of the release, you mentioned the increase in sustaining capital expenditures [Indiscernible] Topia, can you just quantify the impact that that had on the quarter?

And then my second question was going to be the one you already answered with much of that is going to be spend in Q1?

Robert Archer

I might ask Jim to address the first part of that question. As to the actual impact on -- you're saying on a per ounce basis--?

Heiko Ihle

[Technical Difficulty] it was fine -- per ounce, it was fine.

Jim Zadra

Hi, Heiko, its Jim. We expect most of that expenditure is going to be incurred in the first quarter; some may bleed into the second quarter. And in terms of the impact on all-in sustaining cost, I would say it's probably going to be about a $3 impact -- $3 to $4 for the all-in sustaining cost in Q1.

And -- so we could see that getting up to sort of the $17, $18 range and that it should sort of come back down to the low teens.

Heiko Ihle

Makes a lot of sense. Cool. I'll just hop out of the queue. Thanks for taking my questions and congratulations again guys.

Robert Archer

Thanks Heiko.

Operator

[Operator Instructions]

And your next question comes from the line of Bhakti Pavani with Pacific Capital.

Bhakti Pavani

Good morning guys.

Robert Archer

Good morning Bhakti.

Bhakti Pavani

Congratulations on the quarter.

Robert Archer

Thank you.

Bhakti Pavani

Just quickly for the fourth quarter, the realized price of silver was $14.99, which seems a little low; could you maybe provide some color on that?

Robert Archer

Yes, sure. I'll ask Jim to provide the details, but it's essentially a mark-to-market type scenario because of the smelter contracts that we have. So, it's not -- you can't go exactly according to spot price for the quarter. But Jim you might want to provide a bit of color on that?

Jim Zadra

Sure. As Bob said Bhakti the contracts usually take two to three months to settle after the shipment or delivery is made. So, during that settlement period the contracts remain open to fluctuations in metal prices. So, as we saw some softening in silver and gold prices in the fourth quarter from the third quarter that meant these adjustments would have flown through in the fourth quarter and that impacts realized silver and gold prices.

And you'll see in a rising price environment, we'll generally report realized prices that are much higher than the spot price. So, it goes the other way when prices go up, and we should see that impact -- positive impact on the Q1 results.

Bhakti Pavani

Okay. Coming back to Topia plant production, in the MD&A you did mention about the restart of Topia plant before the end of Q1, just kind of curious does that in any way kind of impact the production at Topia Mine in the first quarter?

Robert Archer

Well, I guess it's -- it will impact looking the sense that the plant start running, we're not actually processing anything. The mines have been operating throughout the shutdown and we we're just in stockpiling ore. So, what we're actually mining hasn't been impacted, but the processing certainly will. So, depending on when exactly we resume operations that will dictate so much production we actually have coming from Topia in the first quarter.

Bhakti Pavani

So, with regards to stockpiling, are you guys confident that you would be able to process all of the stockpiling material in this year or do you think similar to last year, it might flow through 2018?

Robert Archer

At this point in time we're confident that we can process all before year end.

Bhakti Pavani

Okay. Going back to Coricancha Mine acquisition, in your prepared remarks, you did mention that the acquisition is expected to close in second quarter 2017, just kind of curious what -- I mean what are the reasons or [Technical Difficulty] date has been extended into the second quarter?

Robert Archer

We were actually just informed this morning by that change by Nyrstar and they had been trying to press for end of March closing. It looks like it's now going to spill over into April anyways.

And really at this point in time, everything -- most of things that need to be done rest with them because we're acquiring the company -- the holding company that owns the Coricancha Mine Complex.

This is largely a sort of legal regulatory process that they have to; of course, get all their financial affairs in their books in order. But we have to go through the whole share purchase arrangement and documents with shareholders. Things have to be registered with the governments. And just finding out that some of that requires advance notice in newspapers or documents sent out and things like that.

So, there have been a number of delays like that that things just taking a little bit more time than they had initially anticipated. So, nothing significant from the point of view of the operation or anything, it's just process.

Bhakti Pavani

So, it's primarily by Nyrstar that's what's causing the delay?

Robert Archer

Yes, that's correct. Yes, we really -- there's not very much that we can do at this point in time.

Bhakti Pavani

Perfect. Just one last one. You guys almost doubled the exploration drilling at GMC and specifically at San Ignacio, just kind of curious on the intend there, I mean are you seeing something different which you think would require more drilling. The circle [ph] drilling has almost increased four times. Also would that by any chance imply that you guys are leaning towards increasing production at GMC?

Robert Archer

Well, potentially the first parts is not that we're seeing anything different really. What happened last year as you may have picked up on was a delay in the permitting. We've been seeing a number of delays from my some of that in recent months and so the 2016 program wasn't finally approved until October. And that's when we were able to start drilling. So, none of that drilling was able to be used for the resource update and so consequently, that the budgeted drilling for 2016 was not drilled in that year. So, some of it is just carryover.

So, we've updated the table in the presentation to show the actual footage that was drilled in 2016. But the original budget was actually more than that. So, as I say, some of that has been carried forward into 2017 and we're discontinuing to drill right through. So, that's why the amounts are -- part of the reason why the amount is greater this year.

We did increase the amount of drilling though, just because we had cutback in recent years with lower metal prices and there was time to step that back up again to normal levels and so hopefully use that to better delineate the resources that we have.

That's been one of the issues with the lower grades recently is just we need to get better visibility on the grades in the veins and because there is a lot of natural variability anyways and so we just need better visibility on that and that requires closer space drilling.

Bhakti Pavani

Perfect. Thank you so much for the color. I appreciate it.

Robert Archer

Thanks Bhakti.

Operator

[Operator Instructions]

And we do have a follow-up question from the line of Heiko Ihle with Rodman & Renshaw.

Heiko Ihle

Hey guys, sorry I'm back.

Robert Archer

No worries.

Heiko Ihle

Okay. So, I was just thinking about something completely different. Can you tell us what Mexican peso exchange rate you're using in your 2017 forecast? I'm really only asking given the volatility since the election. I mean we've gone from $18 to $20 for the U.S. dollars.

And if you could also hint that are just qualify the impact of whatever 5% change in the peso please?

Robert Archer

I'll let Jim take that one.

Jim Zadra

Sure. Heiko, we're pretty conservative and we've budgeted in kind of the mid-19, but yes, you're very correct that we've seen a lot of volatility. We've also locked in a lot of our peso purchases for the year at prices well above $20. So, even if the peso goes significantly lower, we're sort of well hedged.

And in terms of a 5% change, off the top my head, I would say that 5% change is probably as much as $250,000 impact on our cost.

Heiko Ihle

Got it. Thanks a lot.

Operator

Okay. And Mr. Archer it appears we do not have any questions at this time.

Robert Archer

Thank you, operator. In closing then I'd like to thank our employees and contractors, our shareholders, analysts, and the financial community for their continued support and confidence that they have shown us throughout the year.

In this volatile metal price environment, Great Panther has demonstrated a continued, improving discipline in operational efficiencies and has capitalized on external growth opportunities.

With our strong balance sheet, the company is in a great position to advance the Coricancha Mine towards production and set the stage for a significant growth in 2018 and beyond.

We continue to seek additional acquisition opportunities as we believe that 2017 will deliver higher metal prices and enhance Great Panther's leverage and 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. Archer. That concludes Great Panther's 2016 year-end financial results conference call and webcast. You may now disconnect.

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