Q2 2020 Fortuna Silver Mines Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to your Fortuna Silver mines, the second quarter 2020 financial and operational results call. All lines have been placed on a listen only mode and the floor will be opened for your questions and comments. Following the presentation at this time, but it's my pleasure to turn the floor over to your host Carless book a pocket.
<unk> Investor Relations manager, Sir the floor is yours.
Thank you answered.
Good morning, ladies and gentlemen.
I'll give you some fortuna silver mines into our financial and operational results goal for the second quarter or what anybody.
They need to use you know webcast presentation, which will be controlled by us to go no go presentation disposal or website Fortuna silver Dot com. Please on the Metro stop then click on the financial Sopped up in under acute do 20, Britney click on the earnings call Web link.
Okay. That's all I know, Brent <unk>, CEO and director and we are not CFO will be hosting the call cylinder home offices Lima, Peru.
Before I turn over the call support Oh.
I'd like to indicate that this earnings call contains forward looking information that is based on the company's current expectations estimates and believe.
These forward looking information is subject to a number of risks uncertainties and other factors actual results could differ materially for my conclusion forecast for 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.
Additional information about that material factors that could cause actual results to differ materially from that conclusion forecast or projection in the forward looking information and the material factors or assumptions that were applied in drawing the conclusions or making a forecast or projection as reflected in the overlooking formation.
He is contained in the Companys annual information form and DNA, which are publicly available on SEDAR.
The company assumes no obligation to update such forward looking information, but future except as required by law I would now like to turn the call over 200 pedagogical I noticed that prescient CEO and co founder Oh Fortuna.
Thank you Carlos and good morning tool.
Presenting an introduction to our second quarter results and disclose it starts whose upper operations and development projects in this unprecedented covina environment, we're leaving NIM.
And then during the call over to Luis who will take you through the financial statements.
If we move on to slide six [noise].
Oh the webcast presentation.
In slide 600 presentation.
The operational and financial results of the company for the quarter or Mark by the industry wide suspension of activities dictated by the government seen Mickey good andina they do.
During the quarter, this, especially Mexico impacted or San Jose mine for a total of 53, they I mean, Argentina construction or maybe little grow you what's called for a Brooks and must be seeks do they.
They do we managed to continue growing with milk processing that are you in my mind, taking advantage of surface ore stockpiles and produced that capacity.
In spite of all of these we reported new drew a free cash from ongoing operations.
On May 20, we close the successful 69 million both deal equity financing I said the end of June we you'd have a total liquidity available for hundred 32 million.
The company is adequately funded to meet its capital demands on mundane financial flexibility during these uncertain times.
That's something you end of June or Lindero construction is 97% complete.
The project is largely now in the preproduction and commissioning phase with relatively minor construction activity I'm going when they are I'm sorry plants.
In March we drew or consolidated middle production guidance for the year.
They are uncertain operation on environment, we face in the three countries, which hosts or operation does not support reinstating guidance at this time.
We have implemented streak cemetery brought two goals uncovered screening processes at all or operations up to this date, we have conducted over 9000 serological an over 3000 molecular tests.
We have detected close to 200 confirmed Cobiz cases, I'm happy to report besides passing the one confirmed cases and one so SPIG gates.
So do they all are operations are operating at capacity.
Moving on to slide seven.
[noise] seems like service, we shared with you or key safety performance indicators, we pretty syndicate the eyes.
A 12 month rolling average to better at present trend unless you can appreciate we are delivering solid and consistent improvement year over year.
Slide eight.
As you're going to appreciate.
In slide eight or Q2 production for both gold and silver was dramatically impacted by the cover the industry wide suspension in Mexico in particular, both silver and gold production is down 47 per cent compared to year.
By brother Blade and think production remains stable that as it got human mine operated the meal at capacity during the quarter.
Slide nine.
[noise] silver accounted for 49%, though sales on goal for 28% for a combined 77% breaches metals contribution.
Quarter over quarter, we continue to realize higher silver and gold price it with $17.
And 1720 cents per ounce respectively.
We observed with expectation that consolidation or what is configuring deep Lucky story bull market for precious metals and mining equities.
Moving on to slide 10.
[noise] or sales EBITDA and net income world negatively impacted by the shortfall seed production.
For Q3, we expect a significantly improved quarter.
With a limited impact of three weeks of suspension of production I think are you in my mind during the month of July.
Moving onto slide 11 lease.
[noise] San Jose all in sustaining cost was driven higher by lower metal production during the suspension period.
And then Caylloma higher all in sustaining goes was driven by significant drops you think can lead prices of 29% and 12% respectively.
Moving onto slide 12.
<unk>.
[noise] follow holiday along with the same theme of suspended activities or rate any investment execution was also impacted by this expansion during the period.
More notorious is this more figure of 5 million executed I mean there.
Which again was suspended for almost a little over two months during the quarter.
Moving onto slide 13.
[laughter].
Slide 13.
Shows a glance so for free pipeline and here I got high like once again and the relevance of her lindero probably.
Ah people that were lucky low cost a gold production growth.
Slide 14.
Yeah.
Slide 14 shows a simplified or schedule.
They industry wide suspension in Argentina took effect on March 19th.
I know and mobilization back to the project for the resumption of construction initiated during the second half of me effectively over two months of suspended construction.
On July 16, we announce.
They're successful commissioning of the primary and secondary crushing circuits and they start or forced stacking on the heap Leach pad.
We're currently.
On the early stages of their ramp up phase of mine production crushing then.
Leach pad operations.
Our next milestone is the start of irrigation, which is planned for later in this month of all those early September a delayed.
We plan to be commercial operations in Q1 2020.
For 2020.
Hey, we expect a goal do they production.
In the range of 25 to 28000 ounces of gold.
Okay.
Slide 15.
[noise] [noise] [noise] from a slight seeking 15, a non works we're gonna Sherwood use some updated or photos of the little construction.
And on a pre production activities.
Okay.
Here again, I can add that a I suppose the end of June or remaining break funding requirements for Capex preproduction working capital and B D spend a at around $55 million to $60 million.
Slide 16.
In the coming slides, we show a you know it preproduction activities, we have a they initial mine a benches prepared on in production or mine.
Has already achieved the 40000, dawn breezy and and mining capacity.
Okay. Prior to the suspension in March two they owe operating only under one shift.
And more than two they seems the resumption operating on only under one shaped we'd five drugs.
We have already achieved a 20000 tons per se. So we're pretty satisfied with the performance of the mining team fleet.
And.
That is advancing well.
Next slide.
These are Ah.
Views of the.
Leach pad.
And Uh huh.
Bonds area.
We started.
Okay.
Pre commissioning of that.
Bumping on solution management systems.
The bonds.
And.
In preparation for it.
Irrigation.
So although the pre commissioning activities I did pumping.
You are taking place and the Leach pad is receiving a crushed ore every they still under one shift up to now.
Next slide please.
These are some photos showing a crushing operations.
Next slide please primary and secondary crushers.
Next slide please.
Yeah.
I might have a delay on my end.
Slide 15.
Team.
It does our views seems like for dean of the.
They're sheree and.
I don't know variations your goods.
Yeah.
We have some distortion of they agree web address the marine.
Yeah.
On the process area and solution ponds, that's a view of the area that's under pre commissioning.
Next slide please like twin.
One.
[laughter].
Here, we have a view of the JV our plant the already assumed the final stages of piping and electrical some pre commissioning activities have initiated already.
Okay uncertain tanks and portions of the.
Hey solution handling circuit.
But there's still some finishes and piping and electrical than we expect to conclude this month of all those.
Next slide.
[laughter] view this hard plant.
And as our plant, it's not a critical path for initial gold production, which is scheduled for September.
Okay here, we believe it needs to come into this year quit.
Thirdly, yeah.
But is not a essential or critical path as I said for initial little production.
So a we expect to be concluding with ER.
Piping and electrical activities here as well.
In the month of Ah September or if it stretches in October I delays.
So with that we are concluding with ER.
The photos, we share on the web cast then I'll know that Luis take you through.
Hey financial results.
Thank you.
[laughter].
[laughter].
Thank you called <unk>.
Slide 24.
So sales for the second quarter were 44.5.
<unk> million dollars down.
34% from 2019 due to.
Lower metal production compared to prior year I spoke to explain due mostly to probably 19 related constraints.
Our silver and gold production was impacted by either garmin needed a temporary.
Suspension at Dallas, San Jose Mine.
Stoppage in fact that are approximately 40% of the expected production for the quarter.
For the quarter, we reported a 1.3 million dollar operating losses compared to $15.7 million of operating income in 2019.
The operating loss was driven by the drop in sales and a significantly higher charge from stock based compensation expense in Q2 2020.
That will show later slides 27 that charge was.
$5.7 million in the quarter compared to <unk>.
Point $7 million in Q2 2019.
This increase was due to a rise of our share price in the quarter.
The operating loss was offset by $2.2 million. So I didn't think peso denominated investment gains from cross border trade insulting <unk> Boston income before income taxes, all point $6 million.
Net loss for the quarter was $5.7 million.
After deducting $6.2 million of income tax provision.
For Q2.
Adjusted EBITDA was 9.9 point $4 million, 65% below that 77.4 million recorded in 2019.
It is relevant to know our adjusted EBITDA includes the pool stock based compensation charge.
You didn't decide and therefore, they need a is a 54%.
And also scored its Brad and.
His prepared remarks in spite of how complicated quarter. All the reasons as previously discussed managed to maintain slightly positive or neutral free cash flow from ongoing operations.
And year to date free cash flow from ongoing operations.
Was $14.3 million.
Now onto the next slide please slide 25.
When breaking down or sales performance for the quarter. We can appreciate at the largest impact came from lower silver and gold production expanding the bulk of it leaves quarter over quarter of $23.4 million.
Next slide slide 26.
Here are the.
Doubled on slide we show adjusted operating income for the quarter.
Oh $1.5 million.
We had a full reconciliation of our adjusted figures that you end up representation and ER or the end of the the news really.
The main item of adjustment above operating income is a 2.7 million dollar foreign exchange loss stemming from the balance sheet of our arginine or exceed it.
That sounds I'll say the impact of that temporary shutdown on EBITDA was partially offset by higher pricing compared to 2019.
Okay, Youre not significantly lower base metal prices drove the sharp called <unk> EBITDA in the quarter.
At both operations you need cash cost remain below our original guidance for the year and below the prior year.
Okay. So it's not going to say in particular the unit cash cost here.
[laughter] $66 per tonne excludes $1.7 million caused during the temporary suspension, which are treated for accounting purposes, I care and maintenance and included under the line item denominated other expenses in our income statement.
Slide 27.
No slide.
Flights.
It shows the law execution in our DNA inspired does he announced caused on expense reductions in our Q1 earnings call.
As I mentioned before the large <unk> charge on stock based compensation expenses related to the appreciation of or do not share price up over 100% in the quarter.
The calculation of the effective tax rate yields an abnormally high percentage due to the R&D press consolidated earnings days in the quarter.
This was further accentuated by the negative impact that the devaluation of the Mexican that's all had on our income tax provision in the quarter.
Well, if approximately $2 million.
I live, which 1.2 million was 80 for tax effect.
Okay.
Next slide slide 28.
Well here, we were highlighting a two items that had been previously disclosed the amendment that governance granting let me show inflexibility up to you won 2021.
And 69 million dollar equity financing for which the closing was announced on May 20.
That's what I can mention or total liquidity position as of end of June is $182 million.
We.
Hi, this close we expect to.
To provide additional funding or between 55 and $60 million up to the point, where we start generating revenue I'd be NATO.
In Q4.
So we believe our liquidity position today, it says inadequate margin of safety considering the uncertainty that remain from upgrading their current environment.
Well the balance sheet I would also like to provide a comment on RMB 80 receivable at me little included in the long term receivables line item.
We carry a balance as of end of June of 36.5 million dollar where the total incurred di di on that cumulative basis. Since we started spending in 2017 has been 56 million.
The difference of $20 million.
Is that cumulative loss, we have recorded over this two year period, it is worth noting and half of that lost.
[laughter].
Pardon the interruption. This is the operator mr. bucket it looks like we've lost other speaker line.
Yes.
Yes, one second piece.
Not at full time, not well generally ideal.
Not at Omni channel.
What do you suggest.
I can try to dial back out to the number they came in at all if you'd like.
And he told me that your higher.
The initial or whatever.
Okay, they're gonna dial back eat.
Thank you everyone. Please hold for just one moment Ali reconnect our speakers.
Thank you.
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I'm not work [laughter].
I don't know political dollars.
Hello.
No.
Can you hear now.
Yeah. This is always going to loss, how we got disconnected from a goal we're back here.
So, but you catalogs.
[noise], Okay, we will now like to turn the call over 20 questions that you may have.
Ladies and gentlemen, the floor is now open for questions.
You do have a question. Please press star one on your telephone keypad at this time, if you're using a speaker phone, we ask that well posing your question you pick up your handset to provide the best sound quality.
Ladies and gentlemen, if you do have a question or comment. Please press star one on your telephone keypad at this time.
Well take our first question for from Trevor Turnbull Scotiabank. Please go ahead Sir.
Yes, Thank you guys.
Jorge I had.
Q2 quick questions.
Yes, maybe I'll start with the one for Luis he got cut off when he was talking about the VAT.
Receivables has there been an interest in your ability to get.
Pat receivables.
In Argentina, because of the Cardona virus or is that kind of business as usual in terms of I'm getting the house.
[laughter], yes, highpower, yeah, I'm, sorry, I wasn't able to gauge where exactly that I get a cut off but I just think workload. So we.
I was I was highlighting the fact that are are carrying balance to they said it takes some time either daughters, we have.
In a record the accumulated loss on this item since 2017 of $20 million, which has been offset to an extent buyer accumulated games on on our cross border trade.
Of 14.3 million dog now are going to your question we.
We are not where we will not be able to collect would be the up until that time. We started generating revenue. There was a an expectation initially that we could do so.
Well that construction phase, but a as we know there was a dependent or contingent on the procedure being.
Issued by the garment there is a a lot of.
Speaks to favor in a investments for investment in concrete, but it hasn't been a pluggables since there hasn't been a formality required to put in place. So our expectations ways that we start collecting upon the though the start of a revenue generation and abroad.
Yes.
Okay.
Thank you for that Louise So the my other question was far Jorge and relates to the commissioning and getting everything up to speed.
I remember that there was some commissioning concerns a with people needing to come into Argentina, but because of travel restrictions that that was getting delayed.
I couldn't remember if that was related to the H.P.G. ours, but it doesn't sound like that's a problem.
You mentioned the sard plant, it's not on the critical path, but is that still something that's contingent on being able to get people in a for the commissioning phase.
Okay, Yeah with respect to.
A foreign technicians required for commissioning.
We have identified a the H E. R. S. A critical the equipment that requires more and vendor support in the commissioning phase. They each be our has been free Commission is one of its installs and UNFI Commission.
But we still have to run it with low no. So is we decided and these was explained on or me a news release to a.
I think out over the critical path.
I'm place on on on stand by that entire series.
And so we're currently running at the mine, the crushing and placing or in the leach pads, bypassing H E R.
What this glad we'd hbr, we're not counting on having a.
It is for in the technicians on site.
What we are have developed he's a plan to have a remote assistance through the commissioning, but because of that.
We have giving ourselves plenty of time for the commissioning period.
So I commissioning phase that.
You know under normal conditions would take a three weeks.
A work even ourselves almost three months.
Right.
And does there how we're meeting aiding their risk.
Oh, hey, commissioning, a without a onsite and vendor technicians.
So where basically allowing.
Plenty of time.
Okay to work with remote assist.
Hey.
With respect to the sorry.
It's hard it's yes. It has never been into critical path gold production there is a debate.
Between or Metallurgist on a how soon do we need it as you recall the purpose of it you know the purpose of the its heartland is to help us a keith.
[noise] copper in pregnant solution.
It would be low 500, yes.
It so.
The question is how fast.
It is the copper going to build and even if it builds I was 500 BPM, they're all their alternative ways to manage a cookery solution.
It's through a higher cyanide leach.
You know so we don't know.
Hey, if it's going to take among.
Three weeks or two months for the copper is to build to that green deca level five out of 500 bps.
That is why we believe we needed early but not on day, one and once again, what we're doing is ER developing that plan.
Hey, we the or.
In process Engineers to commission this remotely.
And with remote assistance, we have a our operators.
We have a couple of operators, we start experience and then we're preparing to work through with a remote assistance.
Through the commissioning phase Oh, sorry, I don't know that addresses your question sorry.
No. It does Jorge I knew that originally you were Ah.
Youre going to bypass your H.P.G., our circuit and and I guess, you are because you're already crushing on the primary and secondary circuits and then I didn't realize that the extra time for remote commissioning a use what gets us to ER.
Sure that being used in towards the end of Q4, so yeah that cleared it up thank you Jorge that's all I had.
No.
Thank you.
Well take our next question from Zacks Whitman with Laurentian Bank. Please go ahead.
Yes, thanks very much my question regarding that has been answered a like you.
As a reminder, ladies and gentlemen, if you do have a question or comment. Please press star one on your telephone keypad at this time well take our next question from Justin Stephens a P.I. financial please go ahead.
Hi, guys. Most of what I was going to ask has already been answered but for the presentation and.
Previous calls, but just a couple ones do you have everyone done on site, the you'll need to to complete commissioning Oh the.
Like that but leach circuit.
Or is there anything that you're still sort of waiting on fourth bad habits.
We have it did I hear a plan teen onsite.
Yes, hi, everybody who is under blind.
He's required to be on site under or May eight plan and he's onsite in Argentina.
At this time.
Great and so yeah, you the I guess them at the next critical path items won't be finishing that yeah I P work to get.
Believes plant up and running and then sort of the start irrigating the heat.
Killing the Dallas.
Yes, and we are.
A.
Pre commissioning, we'd wider as we speak.
The solution handling systems.
The ponds.
We're doing a war tests, we've walked wider on the heap.
Hey, Recirculating, a you know trespassing handling and solutions from onto bonds. So what does that work is taking place.
Yeah.
So I haven't really and nothing to report.
Outside of our plan on on on that matter, we have a high expectation.
That we will be able to meet.
Hey, or milestone for irrigation.
If not by the end of a these a mile thing you know you know 10 15 days. It early next at the very latest.
Great I think that's Oh my husband, that's a sounds good and best of luck with the commissioning.
Thank you.
Our next question will return to Trevor Turnbull Scotiabank.
Sorry, I had just one another.
Yeah, I had one other follow up Jorge.
I was wondering where things starting to ramp up on the construction and commissioning front.
Well you'd be able to start spending time evaluating some of the brownfields opportunities that lindero a is that something that is exploration able to resume and is the is that weren't something you're planning to be able to do early in 2021.
If you say a for certain 20, if anyone activity Trevor.
Okay right now we have a 1200 nine calm.
A that I'm aware only hosting a about half of that population because of the social distancing measures. We have implemented the grow you.
So every bad east stake in by either a construction personnel or a operations personnel at this stage.
Okay, and we expect that we'll continue to be the case.
It until the end of year every time, we conclude a construction task and we mobileyes construction if people.
Okay. Those bets are taking by a mine operations personnel were pushing for the initiation of night shift work really working only would they ship.
So we won or be able to two Ah you know and get our nine ships going and ER.
Yeah soonest someone from construction leaves the where these taken by an operator, so that will continue to be they gave likely until the end of a year. So expiration will resume 2021.
Okay, Yeah look forward to it thanks Jorge.
Well take our next question from Garden, Okay. When gold stock analysts. Please go ahead.
Well. It appears you no longer has a question as a reminder, ladies and gentlemen, if you do have a question or comment. Please press star one on your telephone keypad at this time again, that's star one on your telephone keypad.
Well take our next question from Ryan Thompson with BMO. Please go ahead.
Okay, all right if I could just a follow up on covers question can you, maybe just touch a little bit on exploration not the other two assets.
Yes.
Expiration at a or San Jose mine has resumed.
Hey, he is a a priority for us.
Hey over the last.
Year and a half two years, we've been are.
Doing that on mining and revisiting a they then sees a work that we have done throughout the years generating new ideas. So we're currently drilling from underground I'm from surface.
Okay testing and new ideas.
Okay and on both the underground and surface.
So we have one really a drilling underground looking to build it into two rigs and would have a one rig on surface and testing and new lenient mens and and structures. So.
We know that we enjoyed a significant exploration success at San Jose up until 2016 I'm seems then we've been on a certified dry spell at San Jose. So a we're doing different things were trying different ideas.
We have been looking at the broadly with different ice.
Okay, and a one of the first things we have done.
It is a resume exploration activities at San Jose I got you will now we have suspended exploration and we have a substantial.
Resource base at Caylloma and ER.
Hey, resumption of exploration adopts it will likely take place it in the first half of 2021.
That's helpful and maybe just a quick follow up on Kilmer I know that you have some silver rich starts of areas and in the mining silver prices sort of I'm doing what they're doing what is the thinking there and how long do you think silver prices sort of need to to stay here before you could actually sort of.
Hey, good concrete decisions, maybe chase after some of those area.
Yes, we the commission it just to bleed into perspective.
Yeah, when we had those songs in production those areas is sourced 5% throughput at the meal.
Contributed 50% of the silver we produce.
So a there are significant contributors to to silver.
And and we decommission those areas when Ah silver it dropped below $20.
Okay Bucking one was that.
Long ago.
Too long ago.
Yeah, so <unk>, but when silver fears through the 20 dollar.
Yeah.
Mark is that we started decommissioning those zone, so we will need to see sustained.
At prices above $20.
Okay for us to.
Incorporate or reincorporate those areas indoor mine plans now those are a narrow veins.
Is that they require im conventional labor intensive mining.
And ER.
I will.
It's not only that imitation of prices, but also the fact that they are labor intensive right. So are those narrowly and those who board high degrees of make any station that they will not so we would also need to see a meeting all garbage restrictions and probably due to bring those I think.
Hello, bringing those things into production. So it's a combination of price and the corporate environment for sure are those me right.
Okay. Thanks, a lot. So that's very helpful and good to hear that you've got to the drills. Turning out then okay I got thanks for the uptick.
Well, it's more ladies and gentlemen, if you do have a question or comment. Please press star one on your telephone keypad at this time again, that's star one on your telephone keypad.
I'm sorry, there appear to be no further questions at this time.
Uh huh.
Thank you Karen.
I would like to thank everyone for listening to today's earnings call and we look forward to you joining us next quarter have a good day.
Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time and have a great day.
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