Sprott Resource Hldgs Inc. (OTCPK:SRHIF) Q4 2017 Results Earnings Conference Call March 5, 2018 8:30 AM ET
Steve Yuzpe - Chairman
Rick Rule - CIO
Michael Staresinic - CFO
Mike Harrison - Managing Director
Michael Clark - Chilton Investments
Good morning ladies and gentlemen and thank you for standing by. Welcome to Sprott Resource Holdings Inc. 2017 Annual Results Conference Call. [Operator Instructions]. On behalf of the speakers that follow, listeners are cautioned that today's presentation and responses to questions may contain forward-looking statement within the meaning of the Safe Harbor Provision of the Canadian Provincial Securities Laws.
Forward-looking statements involve risk and uncertainties and undue reliance should not be placed on such statements. Certain material factors, or assumptions are implied in making forward-looking statement and actual results may differ materially from those expressed or implied in such statements.
For additional information about factors that that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements please consult the MD&A for this period and other filing with Canadian Securities Regulators.
I'll now turn the conference over to Mr. Steve Yuzpe. Please go ahead Mr. Yuzpe.
Thank you, Nicole. Good morning everyone, and thank you for joining us today. With me is our Chief Investment Officer, Rick Rule, our Chief Financial Officer, Michael Staresinic and Managing Director, Mike Harrison. Our 2017 annual results have been released and are available on SEDAR and our website.
2017 was a transformational year for the company. In February, Sprott Resource Corp. established a business combination or completed a business combination with Adriana Resources Inc. and the combined entity continued forward as Sprott Resource Holdings Inc. or at SRHI.
With the addition of Rick Rule as Chief Investment Officer and Mike Harrison as Managing Director, management took steps to reposition the portfolio by exiting legacy investments such as union agriculture and taking an active decision to refocus the portfolio on a few material holdings in the mining and energy sectors.
To support this objective, we raised an additional $45 million in capital and subsequently completed a pivotal transaction through the purchase of our Chilean copper producer, Minera Tres Valles or MTV.
We acquired a 70% interest in MTV because we believe the fundamentals for copper are very positive and MTV provides us with the strategic copper foothold in Chile, one of the world’s premier mining jurisdictions.
Because of the release of Friday -- of MTV’s technical reports is a very significant event for our shareholders, we will spend the majority of this call focusing on that development. I will now pass it over to Mike Harrison to provide you with some color on the reports before we look at our financial results for the year. Mike?
Thanks, Steve. Minera Tres Valles produced almost 6000 tons of copper cathodes in 2017. In the last quarter, they produced the cash cost per recoverable pound placed was $2.37 per pound. As Steve mentioned, the first phase of the technical studies have been completed and we issued a press release on Friday with the highlight of those studies, outlining property wide mineral resources and reserves that Don Gabriel Manto, as well as the enhancement of the metallurgical recoveries to the addition of [Indiscernible] to the as it is stacked.
The second phase of studies is well underway with a study on the underground Papomono Massive deposit. MTV will also be starting a study on the ancillary deposits shortly, in order to present a property wide mine plant.
We are pleased to note that MTV and their unions reached a three-year agreement that will provide stability and certainty as the company enacts their growth plan to reach maximum production of 18,500 tons per year of copper capital.
MTV hired an experienced underground project manager for the current underground operations and planning for future underground production from Papomono Massive. Sprott Resource Holdings nominated Joe Phillips as the Director of MTV. Joe has substantial projects, Mine building and operations experience and is currently working in Southern Chile.
We were pleased to attract Joe to the project. On slide seven, we show the Don Gabriel Manto reserves and the property wide mineral resources. Don Gabriel Manto is one of nine deposits defined in the mineral resource study.
Valle [ph] completed significant drilling on the property allowing Minera Tres Valles to demonstrate a substantial amount of resource in the measured and indicated category. Applying historical resource statement for the property mentioned in August, identified 39 million tons of 0.8% copper, based on a 0.2% cutoff grade for all deposits.
Using a higher cutoff grade to reflect the expected cost provides MTV with a higher confidence and a higher grade deposit, although the total M&A resources are above half of what was identified in the historic resource. We feel this provides us with a more realistic view of the mineral resources that will be used to define the mine plant in the near future, and we expected this through our diligence.
On slide eight, we show the relative location of the nine deposits to put things in perspective. Don Gabriel Manto to the southeast is currently under production using open pit mining contractors.
Minera Tres Valles are currently mining in the Mantos North and Papomono [Indiscernible] deposits Valle during their time to spend considerable amount of development dollars to develop a tunnel from one end of the deposit to the other, which provides for easy access to the working phases.
The crusher, heap leach pads and SX-EW plant are located 12 km to the West of the Papomono site portal. Given the relative ease to expand open pit production, Minera Tres Valles has accelerated the Don Gabriel Manto feasibility study in order to increase production as soon as possible, which provides more operational flexibility and we are commencing the growth plan immediately.
Minera Tres Valles will be selecting open pit mining contractor shortly and are aiming to commence higher production ramping up starting in April 2018. We have optimized the ramp up to balance ore production with the layback development.
In 2016 and 2017, Minera Tres Valles identified the potential for increasing recoveries by applying an oxidant, in this case Salt, prior to acid application in the heap leach.
After substantial testing including common leach test and test heap leaches – and test heap pads, Minera Tres Valles have shown the benefits of adding Salt that increases metallurgical recovery, reduces acid consumption and accelerate the recovery.
This last point is important and that we are reducing the time between crushing and capital production, thereby reducing working capital. The cost associated with this conversion between acid and saline acid, involve changing the pipes and pumps to corrosive resistant material, along with the change of extractive and adding water stages to the solvent extraction plant.
The prefeasibility level cost estimate is below our expectations that we have through diligence and the benefits have been supportive through the work of the qualified persons. We have been pleased with the preliminary results after our recent acquisition. We are pleased to be the 70% owners of a well-built mine and with good exploration potential in Chile
Thanks Mike. I’ll start on slide 12 with a look at our quarterly financial information. Our net asset value at December 31, 2017 was $150.8 million, that’s up from $137.8 million at March 31, 2017. We are using the March 31 period for comparison purposes because that is the first quarter we reported following the business combination of Sprott Resource Corp. with Adriana Resources.
Our NAV per share decreased to $0.22 per share in Q4 from $0.27 per share of the end of March 31, 2017 and total assets at December were $152.8 million compared with total assets of $140.2 million at the end of March 31, 2017. At December 31, our total liabilities were $2 million down from $2.4 million at March 31.
Turning now to our balance sheet and liquidity profile on slide number 13. As of December 31, 2017, our cash position was $36.2 million compared with $50.6 million at the end of the first quarter. The changing cash from March 31 is composed of several things, with the two most significant items being 30 million of capital raised in April 2017 and 42 million of cash used to purchase MTV in October.
Our working capital mimics quite closely our cash balances as SRHI does not carry significant receivables or payables. As of December 31, 2017 our investment portfolio excluding cash was comprised of the following; 91 million and four mining related investments including MTV, 15 million into energy-related investments and 9 million in an agricultural related investment.
Together our total cash and value of public company investments was 84.4 million at December 31, 2017. Turning now to the income statement on slide number 14. The comparatives used on this slide are for the three months ended September 30, 2017 as used comparatives from 2016 would exclude the results of operations of the company before the business combination of Sprott Resource Corporate Adriana Resources.
For the quarter ended December 31, 2017, we recorded net income of 10.7 million or $0.02 per share, this compared to a net loss of $10.5 million or $0.02 per share in the third quarter of 2017. During Q4, we recorded expenses totaling 1.5 million compared to 2.5 million during the third quarter of this year.
On an annual basis, SRHI recorded a $42.2 million loss or $0.07 per share primarily comprised of unrealized mark-to-market losses on the investment portfolio. A final comment before I turn it over to Steve for closing remarks.
Beginning with our March 31, 2018 quarter, the financial reporting of Sprott Resource Holdings will be significantly different than what is presented in our year-end financial statements. The Company no longer qualifies for investments and -- financial reporting and instead will be reporting under a more traditional approach which will include consolidating controlled interest in equity accounting for associates. Further information on this change is detailed in both the company’s annual financial statement notes and management’s discussion and analysis.
I now turn it over to Steve for closing remarks.
Thank you, Michael. After repositioning the business in 2017, we feel very good about our portfolio and its potential to create value. Our capital is now concentrated in three material producing assets in the copper, metallurgical coal and light oil factors.
We are very pleased with the fist technical report at MTV and believe that our assets had significant upside potential. These results are in line with our expectations and further reinforce the benefits of the Sprott approach to due-diligence and are reliance on both in-house technical experts, as well as third-party consultants and are fully committed to understanding an asset before we invest in it.
With $36 million in cash we are well-positioned to support existing Holdings as appropriate and/or pursue accretive new investments. We have made good progress in monetizing legacy investments and we’ll continue to look for opportunities to exit non-core investments in the future.
That concludes our prepared remarks. We will now turn it back to Nicole to take any questions you may have. Nicole?
Thank you. [Operator Instructions] Our first question comes from Michael Clark of Chilton Investments. Your line is now open.
Q - Michael Clark
Hi. This is Mike Clark. I’m with Chilton Investment Company. I can understand how 2017 was a transform year. We’ve been building a position in Sportt Holdings for the past few months. I wanted to be blunt with this question. Don't take it in wrong way. But given the work you've done positioning this portfolio, Rick, this is for you, how would you characterize this successful 2018 year in terms of results?
Great question and thank you for it. The first critical task was making sure that our internal processes with regards to due-diligence worked well, and that we didn't repeat the often times repeated mining failure of drinking here on Kool-Aid [ph]. We acquired a private asset and we acquired an asset based on material on public information that we assume to be true in a highly competitive bid. The press release which you saw very recently released details the fact that the internal processes that we undertook were accurate processes and our assumptions are economic assumptions have largely been corroborated by third-parties. The data that we’ve gathered is essential to the mine development plan that you will see unfold over the next six months.
So, from here an American parlance we’re on the blocking and tackling. From a strategic point of view we knew we wanted to be in Chile. We knew we wanted to be a copper. We thought when we saw this asset; that we wanted to be in this asset. But we participated aggressively in the extremely competitive market and made some assumptions internally -- technical assumptions internally that have taken us now three months to verify. I’m delighted to say that they have been verified.
Successful 2018 for me would be really to see the mine through to a transition in mine plan to have complete the internal disposition of assets which are no longer core assets, to have initiated an exploration program at MTV, one of the reasons that we bought it was very, very, very large lantana in a part of Chile that you haven’t had access to for 25 years. Access was really afforded by the very bad five-year period of time that we went through.
So at the same time that we develop the mine plan that will see through the part of the property we have data on, there’s whole bunch more of the property that needs to be explored thoroughly. If we can accomplish all those things and my suspicions by the way that we can, I think we'll have a very successful 2018, to the extent that we were able to develop a second core asset in 2018 that would be icing on the cake. But you can’t rush the ability to take advantage of opportunity. You can't force money into a market that isn’t ready to accept it. So don't read into a second strategic asset as my saying, I think that we will or won't accomplish that. We will continue to be disciplined but determined. And the process that brought us MTV will bring us the next project in time.
I think all that’s fair, but you would agree with me that the security right now trades at over 30% discounts to NAV. So, again as you look at 2018 where would you like – where do you would expect the NAV to the common? How do you close those gaps so Sprott Resource Holdings is looked at in more of legitimate way?
I’m sorry, I’m misinterpreted the question. I’ll try again. I think in fairness that looking back over 20 years, Sprott Resource Holdings or then Sprott SEP [ph], existed in a very disciplined fashion, to take transactions from the street where Sprott thought that we do bring more than money, affect those changes and move them on without going into elaborate gory detail, we lost our way for 10 years. And frankly the expectations associated with Sprott in this investment came to be in anticipation of failure.
We have returned to our roots. We’ve taken private assets that was undercapitalized where we believed that we could bring more than money with the intent to tuning up the asset as we believe we can. The focus on the disposition of non-core assets that is moving Sprott from being a passive holding company going back to the roots that yielded as an example PBS Coals and restoring in a market, the sense that Sprott is an aggressive but a suitable manager of assets, I think will do very, very, very well.
I remember well a point in time when first of all our NAV was hired in this now and we traded at three times NAV and while I'm not suggesting that we may ever again get to it three times multiple. I have a high degree of confidence that as we at once dispose of non-core assets and we show that we can manage this asset in competitive fashion that the discount that you see in NAV will disappear.
Just one last follow-on question, we’re entering in fairly exciting time for inflation related to assets right now. When you look at the book of potential business can you touch on the top three opportunities that you see next year in terms of additional assets that you might purchase?
That’s a highly speculative question. We are going to be fairly optimistic. We need to understand that we have the good fortune of operating within a group that has globally established brand-name and natural resource investments. And here at Front-end [ph] Bay we see virtually every opportunity offered up to the Canadian Street. In terms of in-bounds we are not opportunity weak. But the truth is that we need to pick and choose those opportunities not just in the context of opportunities that have good economic parameters, but rather opportunities that suit our own skill set.
We’re very much focused on taking on opportunities where we certainly bring money but we also bring more than money and it would be highly speculative from my point of view to talk about what the first three opportunities that we might encounter in the next 24 months. Or I can tell you my preferences, I have a long and successful experience in Chile, the country has been very good to me. This is the first time in 20 or 25 years that private assets have been available on one of the main mineralized trends in Chile. And I’m also extremely attracted to copper. If this team [ph] proves that it can buy and turn around and operate high-quality copper assets in Chile, if around 2 was another high-quality copper asset in Chile I would describe myself as thrilled, but I don't think its the management team job necessary to thrilled me. So my preference would of course to be more of the same, but the truth is that the market doesn’t care much for my preference.
Thank you. I’m showing no further questions. At the time I’d like to hand the call back over to Mr. Steve for any closing remarks.
Thank you for joining us today. And we look forward to a successful 2018. Our next call will be held at the end of the first quarter. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. That does conclude today’s program. You may all disconnect. Everybody have a great day.