Q4 2019 Earnings Call
Please standby.
Good day, ladies and gentlemen, and welcome to the Fortuna Silver mines fourth quarter, and full year 2019 financial and operational results call. After the presentation. There will be a question answer session. If he should require assistance during the call. Please press star zero and an operator will assist you at this time, it's my pleasure to turn the floor.
Robert to Mr., Carlos Baca, Investor Relations manager, Sir the floor is yours.
[music]. Thank you Tom.
[laughter] good morning, ladies and gentleman Jack to welcome you all to Fortuna silver mines into our financial and operational goal results call for the fourth quarter and full year 2019 today, we will be using a webcast presentation, which will be controlled by yes.
Don't know their presentation. Please go to our website Fortuna silver dot com gig on the Investor Stout, then click on the financial Sopped up and under Q4 2019 click on the earnings call webcast link.
[music].
Okay, and also breast C N C O in direct or at least ideal I know thats CFO will be hosting the call from lean up at all.
Before I turn over their coal to Jorge I would like to indicate that this earnings call contains forward looking information that is based on the company's current expectations estimates and beliefs.
These forward looking information is subject to a number of risks uncertainties and other factors actual results could differ materially from my conclusion forecast or projection in the forward looking information.
Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward looking information. Additionally, information about that material factors that could cause actual results to differ materially from the conclusion forecast or projection in the forward looking information and.
Material factors for assumptions now were applied in drawing a conclusion or making a forecast or projection as we take that into a forward looking information is contained in the companys I know the information for an M.D.N. eight which are publicly available on SEDAR.
The company assumes no obligation to update such forward looking information in the future except as required by law.
I would now like to turn.
The call over two horizontal then also prescient CEO and co founder all Fortuna.
Okay.
[noise], Thank you Cardinals and good morning tool.
That's Carla stated along with research CFO will be presenting our review of for Q4 and year in financial results.
The main developments across a broader you extend operations in Mexico, They do and Argentina.
Instead, they seek so they presentation.
[laughter].
Under highlights.
On their highlights for the year.
We're pleased to report strong financial results, which I know adjusted earnings of 28 million.
Free cash flow from ongoing operations of 30 court and a half museum.
And a robust davies emerging up 37%.
Equally you'd be available.
Stands at 123 million.
According to adapt we beat the ratio of 1.7.
These ratio is expected to be at 2.4 by mid year before the start of commercial operations have been data.
As of the end of January we never shows that completion of 89% with 280 million of construction spending and first though do you plan for the end of Q2 2020.
Announcing our December construction up.
[noise] a year strong a year of strong financial results.
And difficult challenges that we have a overcome what did you see the lexia and Oh by mine contractor at her San Jose mine in August.
These three was a loss, what's a build or any station at a time, where or when our efforts are showing sustained improvement year over year in safety performance indicators as we will show.
We played circle meet men do our culture and procedures conducive.
Let's see work environment, where older personnel goes back home safe and sound every day.
In the second quarter. This year, we will be releasing or 2019 sustainability report.
This is a much improved a comprehensive airport.
Number two or first voters report for 2018.
We expect this report will say I saw the baseline from which we can benchmark were progress on key areas environment, social and economic benefit to community.
Next slide.
In slide seven.
Well go Hilton safety has always been a priority for doing that started in three years ago. We recognized we could not achieving our objectives, we doubled our cultural change.
The plants, we implemented to be saying I ran during strong result, as we can show in these three graphs, which three cents trends over 40 years for total recordable injury rates lost time injury rates I'd say very do rate of injuries at gross or operations.
<unk>.
This is a process of continued leveraging an improvement across three countries involving over 3500 people to the.
Yes, I stated before in this presentation, we pledge <unk> commitment to our culture and procedures can do seem to see work environment, where owner personnel goes back home safe on some everyday.
Slide eight.
For 2019.
We met or annual guidance once again, I presume 8.8 million ounces of silver and 50500 ounces of gold.
Looking at the Q4 for litigation against Q4 last year, similar approach and what's up 16% angles essentially flat.
Next like.
In slide nine.
Our realized price for silver in Q4 was $17 on 30 cents compared to 14 daughters, and 60 cents per ounce a year ago.
The story it seems there for gold.
Where we realized a price.
1483 daughters, compared to 1200 36.
We look with anticipation or the price environment. These year, particularly for go as we plan for a significant increase in annual gold ounces produced you'd already into your new pro you're going into production.
In the second quarter.
Slide 10.
[noise] under consolidated financial highlights for the period.
[noise] border sales adjusted EBITDA and adjusted net income were all higher when compared to Q4 2018.
Not shown in diesel <unk>, but there were sales for the year were 257 million DC is 2%.
Lower when compared to 2018.
Hi, I realized silver and gold prices for the year were offset by 7% lower gold production, how your tier Ses and lower by broke late announcing price.
Adjusted EBITDA for the quarter was 25 million, yielding an EBITDA margin of 36% net income at 11 million or seven cents for sure.
Next like.
In slide 11, we present, our all in sustaining cost on a gopro basis for the quarter and year or 2019 or consolidated all in sustaining cost 11, daughter, some 90 cents ground in line with annual guidance, a 13% how you.
As in 2018, the year over year increase is explained by higher cash cost that both are you all my San Jose mine.
Deteriorated commercial terms for concentrate on lower realized byproduct prices for or by drugs. So.
Let us think.
Slide 12.
Capital investments for the year total $216 million 188 million allocated to the Lindero construction and pre operation 20 million in sustaining capital at or two operating mines, and approximately 7 million brownfield and Greenfield exploration.
Slide 13.
These like pretty sense or.
Beer I meet with her current asset portfolio and 2020 guidance for mine then Brian.
Over the last 25 years, we have been doing something that he is not very popular in that market for mining equities, where investors I'd be largely sector risk of errors. We have been building a mine it he sort of view, but in our industry to provide shareholders with long.
During superior returns on acids and growth one must on SEDAR counter cyclical strat they used for capital allocation and that is precisely what we have done we did timing for acquisition and development of clean data.
Short term it has been difficult awareness.
Where we need to be yet.
We're very close but not very good.
We have been dealing with the near in complexity. So large construction in their remote location in a known mining jurisdictions like Argentina.
Despite all these were showing up 20% deviation in our capex forecast when compared with guidance provided back in 2017.
We plan for the NATO to take or consolidated gold production.
From 50000 ounces in 2019 to approximately 810000 into something like 20 and closer to 280000 <unk> full year for <unk>.
Well these at a time when gold price is trending to higher levels driven by renewed investor interest.
When prices are you internal rate of return for the NATO eating the low twentys.
Slide 14.
We provided an update to our construction schedule on February 13th we plan to initiate Specking afore early in the second quarter, we're targeting your April and we expect to see for schools in late May or June.
Next slide.
So the end of January I.
I mean did a reports in advance of 89% Stuart's completion for February where rate closer to 92% complete.
We forecast construction topics.
Between 314 to 320 million.
Increase of 28% comfort two or 2017 guidance as I stated before increasing this figure is largely driven by higher owners on indirect cost associated to the extension of where construction time.
Next slide.
You were providing a.
Right.
Hey.
Regarding conducting business in Argentina under current conditions.
Yeah. This is.
We've been addressing questions from a shareholder some investors regarding Dan the current business environment in Argentina.
And there they put laws and regulations, we have no restrictions on capital repatriation.
Through the use of officials ethics markets, where either company that the repayment.
For two now expects to fund those to 200 million or over 200, Amelia three intercompany that so we have the ability to access the official FX market services there.
There has been a that's the right direction thinking by Argentina authorities.
Early this year.
Yeah.
Using restrictions for repatriation of Scott.
Okay. So they even in distributions I love to official ethics market for up to 30% of convicted got it.
Relation that came into effect.
Early this year.
There are no restrictions to conduct a imports of capital goods that supply through official.
Fixed market.
So we have the ability to service their requirements for business.
Yeah accessing the official ethics, Mark we confirmed.
With respect to export duties.
But exports are subject to 8% duties and concentrate subject to a 5% dude.
[noise] Fortuna Threed subsidiary Mansfield, These Argentina, [laughter] company stability agreements, which perhaps export duties.
Got a a 5% for Lindsay.
Next slide.
Yeah, we present a.
A series of or updated photos.
For for the construction preproduction mining happening they don't comments back in September 2019, we currently have about a medium tonsil or meet grade ore stockpile.
And ER the mine hot.
Or did it full fleet its operational and that kind of report that eats achieving.
In late favor it seems like favor in early March <unk> are deciding and raised though mining.
Next slide.
Leach side on stocking system or at least five these are ready to receive Ah or.
Our computing and finalizing <unk>.
Nation, and commissioning initiation of pre commissioning activities on the second system.
Next slide please.
Primary secondary crushing suit, which are currently under a commissioning we though we are running or two primary and secondary crushers.
Yeah.
As part of hot commissioning or do you.
Thanks, Larry.
But there's very crusher, which is the H.B.E.R.
Yeah were high pressure grinding role.
On the pre commissioning it's been a the crusher they fear has been a lounge.
Yeah.
Already.
We don't vote as part of pre commissioning activities.
We expect to be a running the crushed it tertiary crushing system, we or in line with primary secondary and tertiary crushing systems. This month.
Next slide.
Yes, I didn't know view, both or a.
Processing facility.
If we then theory facilities as well, maybe our plan SARC lab or power plants.
I'd say lab.
80, outlast these ah.
On a.
I think I'm on the electrical installation.
At this stage we are expecting.
Hey, commissioning for me on this.
SARC Lucky isn't to say.
Basically mechanical installations are 90% concluded.
We are advancing with piping and electrical.
With that I turn the goal to Luis So you can take you through or.
Results for the period.
Thank you.
On slide 25 US has been discussed what I call. It here, we had a strong fourth quarter driven by higher sales of 16% over Q4 2018.
We reported quarterly net income of $19 million compared to $2.2 million in Q4 of 2018.
And after adjusting for non cash and certain nonrecurring items, we recorded adjusted net income of 10.9 million daughters.
Oh significantly above the 4.4 million in 2018.
As a Jorge mentioned, that's well adjusted EBITDA increased 11% to $25.1 million free cash flow form on going operations was $6.4 million.
Down 46% over 2018.
Mostly to timing issues on our sales and trade receivables as well as an accumulation up you receivable at our San Jose mine.
For the full year 2019, we recorded adjusted net income of $28.4 million, that's 26% below 2018, that's ever sold them slightly lower sales.
Hi production cash cost over the prior year and the higher share based payment expenses and exploration and evaluation cost.
Our I know EBITDA of $95.4 million was 16% below the prior year.
And we generated annual free cash flow from ongoing operations for the full year $34.5 billion, which was impacted by an accumulation of E. T receivable in Mexico off around $10 million in the year [noise].
[noise] next slide slide 26.
When breaking down our sales performance for the quarter, we can see the highest impact came from a higher silver and gold medals prices, which were 19 and 20% above Q4 2018.
That's where a lot higher silver and think production [laughter].
Moving onto the next slide slide 27.
When looking at our comparative segmented results over Q4, 2008, and 18, we can see that does strong results in the quarter were driven by that sounds lets say mine, which saw improved EBITDA of 34%.
As we have discussed these results were in turn driven by higher sales, which more than offset an increasing production cash cost at both San Jose. Thank you Omar.
Production cash cost, sometimes let's say in Q4 was slightly above our annual guidance range.
But we remain within guidance for the full year.
Okay, you're my Gosh cost was in line with the guidance both for Q4 and a full year.
On slide 28.
The bulk of the increasing total DNA of 9.4 million daughters for the quarter.
Comes from share based payment expenses related mostly to a higher share price.
We do have hired you any expenses at the operating mines for Q4 as shown in the first line item.
Where are the increase is due mostly to expenses of a non recurring nature.
Moving forward, we expect an average of $2.5 million per quarter on this line item.
Corporate Gionee, we expect average quarterly expenditures in line with the amount we see for Q4 of 2019 of 3 million dollar.
Our effective tax rate on an adjusted basis was 23% for the quarter and 46% for the full year.
The lower effective tax rate in the quarter reflects.
Higher deferred tax credits related to the recognition of that convertible debenture.
The positive impact on movements in foreign exchange affecting our income tax provision.
Although not included in this slide there are two additional items pertaining to financials that merit a comment the first one being the $11 million of investment gains in Q4.
He said gains denominated in Argentina passes and related to trades, which constitute part of our strategy to bring daughters into the country as we seek to obtain the best possible exchange rate under current market conditions.
We do not expect any further significant gains in relation to the streets in Q1.
The second item for things that EPA receivable in Argentina.
So what does the p. incurred as of yearend 2019 accumulated basis is $49 million and accumulated foreign exchange losses report recorded so far amounted to $14.9 million.
Which 12 million took place in 2019, we expect to begin connection of the D. As we start generating revenue at the middle.
And even though they laying the schedule that's increase our exposure, we do anticipate that once in operation, we should be able to recover.
Within a 12 month period.
Our next slide slide 29.
We provide a summary ofer.
Liquidity position at year end, and our projection of liquidity over the coming quarters since weve transitional in mid on towards their commission fee based on the updated scheduled for the project.
Our liquidity position as of yearend 2019, what's the hundred $23 million.
We expect to maintain a minimum liquidity of between 30 and $45 million through the start of commercial operations based on our existing credit facility and free cash flow generation.
On top of these were looking to put in place a short term completion facility at the asset level as we go fully into that commission fee.
With that I conclude my prepared remarks and back to your Carlos.
[noise], Thank you to east.
We would now like to turn the call over 20 questions that you may have.
Thank you and ladies and gentlemen, if you'd like to answer the question. At this time is star one on your Touchtone telephone. Please make sure. Your mute function is turned off to layer signaled to reach our equipment again that star one at this time, if he'd like to ask a question.
Paul It's just a moment.
And we do have a question coming through from Justin Stevens with Pi financial.
[noise] Justin please check your mute button on your phone we cannot hear you at this time.
Again, ladies and gentleman that star one on your Touchtone telephone if you'd like to ask a question star one at this time please.
And just in your line is open again could you Chicken me then please.
Hello can you hear me now.
Hello No.
Yes, we can hear you okay, sorry about that thanks, guys. You answered most of my question I was mostly wondering.
On power at Lindero, you guys have a power purchase agreement from a contractor right. So the diesel generation has done another fixed price per kilowatt hour.
Okay.
We are responsible for its sourcing or the fuel for the power you marriage.
Oh go a we are.
We are currently contemplating.
Price protection or hedging during that deep.
It taking advantage of whereas.
And.
Oil.
Been trending now.
Yeah.
Yeah. So yeah, maybe because you a supply if you're sourcing all the diesel for the site that you could theoretically realize.
Some of this sort of a recognize some of these lower prices and lock them in going forward.
Yes.
Yes, great.
Although not yet just the timing on that first Doria poor I guess will depend on how quickly you can you are gate after stocking, but the current plan is to stock you said in April.
And then when do you think you'll be irrigating.
Yes, absolutely.
Okay, Sean and it's a function of available surface area on the.
They are based on the leach but.
If there are several factors there one nice or ability to have a.
Smooth.
The commissioning of a I'm placement or from the start.
On the Leach pad. It we have a commissioning curve that we are working under a you know they delays that we have a being ah.
Encountering.
Yeah on the unfortunate.
It also creates a opportunities and give time for us they were not just sitting there. So you know the primary crushing the secondary crushing. It for example, we are stressing the equipment.
Okay, we already a are advancing with ER.
Yeah, we'd addressing issues that otherwise we wouldn't be dealing with in the commissioning phase.
Hey, we didn't diversity, we didn't operation.
For example that smalls deals and corrections.
Yeah on structures and shoots that our deep because.
They have the.
Startup commissioning so we are gaining time when primary we're gaining diamond secondary.
Okay, and we're gonna start doing the same with tertiary soon.
Yeah. So you know we are we Oh, you know we have a curve for the commissioning and operation ramp up of.
Okay or systems to start placing more on the leach pad.
Okay and ER, we believe we can start irrigating you know relatively soon and that's that or is gonna be closer to plastic we expect weekend regenerating.
And not solutions.
Is that weekend started when marine Yar by late May or June no.
Okay, No that's sounds good and you currently I'm, assuming you've got to everything that you need.
On site now there's nothing that's really outstanding yet.
And.
In terms of supplies human.
Yes, I bought supplies and equipment everything has been transported to site. Yes, yes. Yes is there was always don't they don't have everything there's ups who buys it.
Exposes we're drilling and blasting every day for seen September cyanide, we have.
Yeah.
You know due to our concerns on on a supply chain.
It due to the Cardona virus, we are.
Taking action to to guarantee or he supplies to site.
Yeah, and I'm just on the stockpiling are you still sort of mostly running a.
Moving waste and some of the lower grade or to expose a hybrid or have you started moving but some of the higher grade ore yet.
If we are going to start now yeah.
Building he he still a smaller im.
Higher grade stockpile.
Okay in preparation for only a week to two weeks of or.
In the higher grade stockpile.
Yeah I.
Again, the idea was to minimize re handle.
Ignore mine plan.
Or my plan has a mid grade stockpile, we manage for that first years meet grade stockpile. So we have basically accomplish that through these said preproduction phase we have the primary the higher grade ore expose we're gonna start building that's more.
Hi, Great stockpile, just to small and then it we're going to start slowing down or mining rate.
I don't feel it or crushing circuit with these ready to start thinking though.
Right and then once once you put sort of that for the the drainage layer like the liner on top of the liners have I'm, assuming sort of low grade.
First thing down will be some of that high grade from both a pet as well as not stockpile.
Yes.
Yes right.
Perfect well that is it for me then like us.
Thank you.
We'll take our next question from Adrian day with that 80 am.
Engine from Lindero.
Just one is on San Jose I'd I don't I, obviously, you you got you'll stay cool.
Which which was you know essential but I noticed you can't just say all you in negotiations with the Mexican authorities on on a potential settlement or are you just pursuing it didn't look colds and.
And then the second question will be Okay. OMA do you have any sense of the next you know the next several quarters, what the mix up sell the says zinc et cetera might be.
Okay. Thank you for the questions agent.
<unk>.
We are pursuing it three in light of action.
With respect to or to the royalty clean.
In Mexico or San Jose My.
First it or the legal once we have as you mentioned, we requested an injunction who do they do a court.
And they or request for an injunction was first admitted by the court.
And second the court issued a first it temporary space.
That is later moved into on March 2nd moved into a permanent state of execution.
So in.
The DG EM and Mexican mining authorities have a period to appeal that.
I believe late this week early next week is there deadline.
Okay that appeal.
Yeah.
Likely take a several weeks even amongst to get a result.
Okay.
But ER or legal team in Mexico believes that our arguments are sound and ER.
Hey, or legal position is strong.
And the reflection of that he's in the continued.
Yeah.
It was solutions, we have been getting these core.
Second yeah, there is a a thoughts on what school in Mexico, and administrative court, where we have enough I have an injunction, but we haven't filed a request that they'll sort these removed description of the royalty from or type.
Yeah. The administrative court hearing this case, we presented these requesting front the court.
Last year.
And.
That is a process that is ongoing.
I'm sorry.
Directly to your question is it diagnosed creations with it the authorities.
Yes, we would like to have a agreement with authorities, where we can settle these out of court.
It is our strong view that are they.
There's no legal basis for the royalty.
But you know, we we would agree who do a reasonable settlement to lease out of course, we feel sorry, I personally met already in two occasions, we did secretary of mine. So Mexico, we have had a.
Conversations.
We have worked towards up and to achieve these negotiation the Mexican law allows the authorities to engage in these type of these cautious I negotiations individual settlements.
He is not an easy process I see.
It involves a authorities and not only from the secretary of economy and mines, but also other branches will gorman.
Okay, but we're working towards that as well. So those are the three line. So functions. We are working on all day that you'd be show corked administrative court.
And.
I know you need strictly solution, we do afforded.
Okay.
With respect to kinda humor.
Okay.
Here so we.
We changed the revenue composition of Caylloma by are focusing more on the base metal songs.
And leaving behind the silver someone so these mine or just a remote refresher yeah, those silver songs where narrow veins.
Yeah very labor intensive.
ER, we the related higher operating costs.
So we believe that to return to those it narrow range.
Okay, you'll know that kind of help.
Hey.
Increase and even double or silver output from the quarter in those 2 million ounces. We present said that my would require sustain prices above EUR $19.
So at this stage we are monitoring these closely.
Okay, but we're not there yet.
So for the a year for 220, and a mean or loans, what we have he's a medical I'll boot composition similar to a new being seen over the last year. So does not.
In South, Louisiana around 20% silver no revenue composition today, yes, yes.
Alex.
Okay.
But that there'll be no difficulty going back to those silver rich.
Areas they use.
Maybe to be Reos for a brief operation.
Yeah.
I would if I have to provide a ballpark figure to you today, he likely take a several months.
To a opened up and and ER and prepare those area for production back again no.
We made three months.
Okay I appreciate that thank you.
[noise] getting ladies and gentlemen that star one on your Touchtone telephone if you do have a question star one at this time, please well pause just another woman.
Like give everybody a final opportunity if you'd like to ask a question that I start one on your Touchtone telephone.
And Mr. Bocca there appears to be no further questions at this time I'll turn the call back over to you for closing remarks.
Thank you Tom.
No further questions I would like to thank everyone for listening into todays earnings call and we look forward to joining us next quarter, how about great day.
Ladies and gentlemen, thank you for joining us today on todays conference call. We appreciate your participation you may disconnect at this time and have a great day.
Great.
[noise] [noise] [noise].
[noise] [noise] [noise].
[noise] [noise].