Q4 2020 Gatos Silver Inc Earnings Call
Okay.
Thanks.
[music].
Yeah.
[music] investors.
Ladies and gentlemen, thank you for standing by and welcome to your kind of silver Q4, and year end 2020 earnings call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this time simply press Star and then I'm for one on your telephone keypad. If you require any for the rest if that's at all based on strong Sheryl I would now like to hand, the conference over to your speaker today.
Mr Steven or.
CEO. Please go ahead.
Thank you I'd like to welcome everyone to silver is year end and Q4 of 2020 earnings call.
Before I get started I just want to remind participants on this call that I will be making forward looking statements with regard to future events.
By their very nature subject to some degree of variability.
So turning to slide number three.
Our initial public offering in October of 2020 raised 173 million net proceeds to continue adding value to got this others share of Los Gatos mine.
On the Los Gatos District.
In March we completed the purchase of 18 five.
Per cent.
Additional interest in the Los Gatos District, and we now are 70% owner of the entire district, and we're now turning our attention to district scale resource growth potential.
Got the silver has the second largest mineral rights package of our in production peers at 103000 contiguous sectors.
<unk> span a distance of about 60 kilometers along the mineralized trend and we've reactivated drilling its share of Los Gatos.
And our 100%.
Owned incentive malaria project and soon after.
Which is rezone this closest to share loss got us and I'll speak more on that later in this presentation.
But we're not just an exploration company, we've demonstrated that we know how to build and operate mines Antero, Los Gatos was built on time and below budget and.
And we capitalize the properly knowing that we're not just building in mind, but we're developing an entire district.
And we think this has already paid dividends for the processing plant is operating at its 2500 ton per day design rate and as of January the underground mine achieved its 2500 ton per day design rate.
So we believe the commissioning has gone quite well given the challenges got the silver has had to prevent COVID-19 outbreak of Covid.
Cerro Los Gatos mine.
Turning to slide number four.
We devote a significant amount of attention to environmental social and governance factors that lets got us from that recognized its importance for the last 10 years.
All of our achievements would not have been impossible without the support of the regional government regulatory agencies and surrounding communities and we recognize that it is essential for conductor operations in a manner that protects on employee safety does not harm the environment and ensures that the local communities benefit not only from <unk>.
Employment opportunities.
Also through educational assistance medical care support and provision of sustainable clean water.
We're very proud of our safety record at the mine through Q1 of 2021, our lost time injury frequency.
Zero.
Over 99% of our employees reside in Mexico, and 60% of them reside in Chihuahua state.
This devotion to improving the lives of those impacted by a project has been recognized by the Mexican government and local communities, where we have never had any opposition to the project.
Turning to slide five this is a summary of our performance during 2020.
Given the challenges of COVID-19 management, we were relatively pleased with Sarah Lowe Scottish performance last year and I'll speak more about this performance in detail later in the presentation.
Turning to slide six.
Despite interruption by Mexico's Gov.
Government mandated suspension for COVID-19 during April and a portion of May.
Last year.
Did achieved record production of 652739 or 10.
We also achieved record silver zinc and lead recoveries through the processing plant.
And the third and fourth quarters of 2020 for profitable.
Key to this achievement was effective COVID-19 management at the furlough status project.
All of this position the company to take advantage of increasing investor interest in silver and silver equities.
It allowed us to successfully complete an initial public offering in late October of 2020.
Turning to slide seven.
This covers the 2020 mine operations this.
This is a fully mechanized mine that uses long hole stoping, and mechanized cut and fill mining methods.
Following the Covid 1919 mine suspension in April and May.
We increased the mine production rate at a more moderate rate to ensure that we could maintain COVID-19 prevention program protocols irrespective, we achieved our 2500 ton per day design target in January of this year.
As we increase the units in terms of more tonnes and metal ounces in pounds. The unit costs are getting closer to those expected in the feasibility study.
Slide eight.
The standout performance came from our processing plant. This plant is fully instrumented with an on stream analyzer that is monitoring silver lead and zinc recovery in real time during the concentrate production will automatically adjust reagent addition to adjusted to changing conditions to maximize Rick.
Covered.
When I call your attention to the table.
On the right hand side of this chart.
This shows the improvement of our metal recoveries for quarters 2020.
Silver recovery now exceeds the expected recovery from the feasibility study zinc.
Zinc recovery has achieved our expectations and led recovery also now has exceeded expectations.
I would now like to introduce Roger Johnson, our Chief Financial Officer.
To present, our 2020 financial results.
Thank you Steve I am on slide nine for 2020, our loss from continuing operations was $35 million for <unk> 80 per share.
You can see from this information that half of the loss was from the equity loss in almost got US joint venture Adam will discuss the Las Palmas for eventual results in a moment.
As Steve mentioned in loose Los Gatos joint venture was profitable in the third and fourth quarters of 2020, So I expect income and an empty JV for.
2021.
As for our operating expenses as we discussed in our recent Investor day presentation exploration, Los Gatos District is increasing.
In addition, we spent a modest $800000 in 2020 for the non large joint.
Joint venture activities on central area and for maintaining.
Exploration staff.
Our general and administrative expenses were almost $8 million in 2020, as we had higher costs associated with becoming a public company.
These include legal consulting costs additional personnel we've added.
Higher directors fees and stock compensation and higher insurance costs.
The arrangement fees. So you see here are similar to interest costs and they relate to <unk> provided loans from the Las Palmas joint venture.
A substantial portion of such fees will not we will no longer be incurred with the repayment of debt working capital facility that we announced earlier this month.
The interest expense you see here was for a convertible note provided by our majority shareholder. The Elektron. This note was converted to equity as part of our IPO and therefore, the cost is nonrecurring.
Now I will turn it over to Adam.
Thank you Roger.
Character on the attention to slide 10 on the presentation on recovering the lift out of a joint venture financial results here.
Here, we are at the table for the financial results for the year ended 2020.
To note that this is on a 100% basis throughout 2020, the silver share of these operating results was 51, 5%.
During the fourth quarter of 2020. This was our second consecutive profitable year for $2 9 million of income total scopes for adventure.
We had $121 $5 million of sales for the year ended 2020. This was comprised of approximately 21000 tonnes of lead concentrate net average grades of nearly 5300 grams per ton silver.
59%.
So also included 28000 tons of zinc concentrate average rate of six 619 grams, silver and 55, 6% zinc.
Average metal prices realized during the year were nearly $20 per ounce silver.
About $1 32.
Two primary payable metals of this operation.
Turning to operating expenses net of 126 nine for the year ended 2020. This was primarily consisted of $65 million and cost of sales $45 million in depletion depreciation depletion and amortization.
$10 million of G&A expenses of $3 4 million of nonrecurring costs related to the COVID-19 shutdown in April and May of 2020.
$2 1 million in royalty expenses and a small component just under $1 million for exploration expenses during the year.
Exploration expenses were initiated.
And hurt us in December when we commence detailed G definitional drilling program as previously announced.
Prior press releases.
Other expenses in the year consistent for about $12 5 million of interest expense non.
Nearly $9 million of noncash arrangement for your expenses and about a $1 million foreign exchange losses altogether. This resulted in a net loss for the period for about $27 7 million for the low status joint venture again on a 100% basis.
And with that I will turn it over to Steve or for our next slide.
So turning to slide number 11.
2021 will be a year of optimization at the Los Gatos project, we will be doing a number of sustaining capital projects to improve sales.
Efficiency and ability to sustain its production targets.
We will be building a paste backfill plant to replace the cemented rock fill backfill that's currently used.
Batesville plant will directly inject tailings into open voids in the mind, providing a stronger fill product reducing the amount of tailings placed on the surface tailings impoundment by about 50% and increasing the truck haulage capacity for more or.
We'll also be adding another lift to the tailings impoundment construction.
Construction of the paste backfill plant will meaningfully reduce the frequency of additional lift on this facility in the future.
The mine had to high geothermal gradient.
Which is not uncommon in underground mines last summer, we commissioned the first surface refrigeration plant for the northwest zone of the Cerro Los Gatos deposit.
The intake air during the warmer seasons, it's chilled to maintain a comfortable ambient air temperature in the mining environment.
Proved its efficacy in the northwest zone, and we will now build a second plant for the Central zone.
And by the way. These are the first surface refrigeration plants installed at an underground mine in Mexico.
As previously released we expect to produce between 700 579 million ounces of silver and 2021 and.
And between four five and 5000 ounces of gold.
Between 40% and 42 million accounts have led and <unk> 49 to 52 million pounds in zinc and an all in sustaining costs of between 17 from $17 56 for.
Silver ounce.
This guidance is conservative and it assumes we will be maintained on all our COVID-19 prevention protocols throughout 2021.
Which does not hinder the productivity in the mine and increase our costs.
All employees continue to be tested when they return from their break for their 20 day work location and we still consistently.
<unk> test positive for those who test positive return home before coming to site and we somehow have to cover for their options. While these stringent prevention protocols in their productivity and increased costs they've allowed us to continue operations and we have never.
Had the COVID-19 outbreak at Cerro Los Gatos.
Turning to slide number 12.
In terms of exploration.
And you see on this map.
The outline of the intersecting rectangles shows on a 103000 contiguous sectors mineral rights.
Of course.
The oval the Darko.
Purple low volt with the Red Star is sort of on Los Gatos deposit, where we currently have three active drills.
Two are on the southeast extension of the deposit and one on the North West extension.
The objective for this program is to convert that.
The current three 7 million tons for.
Resource to measured and indicated and we believe we will do that and we believe will add more inferred because.
Deposit is still open along strike.
A fourth drill is active it gotcha silvers for 100% on sensible area project, which is depicted in the lighter colored just outside of the Los Gatos mineral rights package.
And last week, we received permit approval to begin drilling at Easter and we will be mobilizing Fitzgerald.
Los Gatos dedicated to a definition style program to expand the ester resource.
Quantity and quality the objective define a large enough measured and indicated resource to complete an ni 43, 101 compliant feasibility study.
In retrospect had we not proactively acquired every available mineral right. When we first started exploration we would not have had the good fortune to discover.
A deposit like sales, Los gatos, but an entire district that so far contains 14 separate discoveries.
That's a silver is a story about growth and more importantly organic growth.
It is very rare for a resource company to control an entire district and even rare to have discovered the district sales of mine and just to be in the early stages of defining the vast riches in this district, we've only explored 15% of this massive land package.
Turning to slide 13.
We consider ourselves extremely fortunate to have accomplished an IPO of that raised $172 5 million in proceeds and resulted in the largest precious metals financing on the New York stock exchange and the Toronto stock exchange in 2020.
We also have some of the most respected institutional funds in the finance sector, if our shareholders.
The market understands what a unique asset for Los Gatos District is and we understand our obligation to continue delivering value we've been able to discover and develop this district in the span of 10 years and in resource development terms, that's a relatively short period.
Every decision this.
This management team, our board of directors and our joint venture partner Dow on make.
It is done through the lens of ensuring that we build an enduring silver and zinc district for the future.
There is a complete strategic alignment between Dora and got to silver to ensure this district continues to increase its mineral resources and metal production for decades.
That completes my presentation at this time.
We are available to take any questions.
Thank you at this time if anybody has a question. Please press star one on your telephone keypad.
Okay on that would be star one on your telephone keypad participate a moment to compile the Q&A Rev share.
Yeah.
Thank you have a question from Doug grow from from asset.
Asset management your line is open.
Thank you operator, and thank you folks for the presentation today.
I have a question with regard to how you look at your operating costs.
Relative to your various metals that you produce.
You're indicating an all in sustaining cost of $17 to $17 50.
For gold and I believe that's on a byproduct basis would you have that on a I'm sorry for silver $17 50 for silver.
Do you have that on a silver equivalent basis as well.
Hi.
Thanks, Doug.
Im going to turn that over to Roger Johnson to answer.
Yes, Doug.
Doug we do have that available.
Uh huh.
I can get that for you I don't I don't have that right off the top of my head.
Can send up to your debt okay.
Okay, that's fine and then.
I'm going back to a presentation you had earlier in the month of March I think it was at the BMO Conference.
I believe it's on page 20.
You profiled production.
Production costs as well as free cash flow profile for the Los Gatos Technical report on a 100% basis.
And I believe you indicated that.
You are expecting to produce about 7.8 million ounces of silver and 2021 and I believe it's about five 5 million ounces of silver equivalent from your lead in.
And zinc.
Is that correct.
Yes.
Go ahead, Roger Yes. This is Roger again.
Doug.
<unk> that you were referring to yes, those were the numbers that were in the technical report.
You can tell from the numbers that we are now providing this guidance now right on these numbers on these numbers our lower base.
Based upon where we are where we are with the mine plan and.
And the dewatering matters we've been.
Addressing okay, and then I.
I believe in this.
Presentation, you indicated a day.
Silver operating cost on an equivalent basis of about $14, an ounce I think thats from the technical report.
So I guess for my question is going is.
How are the costs tracking with regard to the technical report are they are they higher or the lower what are you finding.
So that goes on.
For that question Okay great.
So.
The costs are higher.
And.
And the ramp up has been slower than we anticipated in large part due to COVID-19 management efforts.
We.
Have what we've seen.
On the ground in terms of.
COVID-19 impact in Mexico has been dramatically different than what has been reported by the end of 2020, we were having between 40 and 50 employees test positive everywhere.
Location and when those kind of.
Numbers are testing positive it has an adverse impact on the productivity at the site and interestingly enough.
There's the immediate released today that.
On Mexico.
Has admitted to underreporting by over 60% the number of deaths in Mexico and the deaths are actually closer to 312000 in the second highest in the world just behind the United States, but even higher than Brazil, and that's a country that has a population of 127 million people.
So it is a very serious issue down there and when we put together our guidance for 2021.
We did so with the assumption that we're going to have to maintain stringent protocols and we are going to have to deal with this all through 2021.
We clearly hope that is not the case.
But we have no basis to assume it would be anything different than that.
So accordingly, you see.
On much more moderated.
Guidance.
Just because this is what we think we're going to be dealing with.
So Steve do you have on the estimate in terms of the Covid cost for 2021 approximately based on.
Last year, yes, Steve Steve for Nike and I take that one.
Absolutely sure.
Sure.
So going back to the per ounce.
It's about 50 per silver equivalent ounce.
With you on looking at it on a fashion.
Okay.
So just on testing alone we we have book.
The molecular testing we have on our clinic at site and of course are poised for tested prior to them stepping on site.
But.
Those with testing cost debt last year about $5 million.
Okay.
Yes.
I did a quick calculation on your 50 per ounce and Roger I guess thats about $5 million right yes.
Yes.
Between five and six between five and six months, Okay, and then sorry to.
Take all this time here, but do you expect to have free cash flow this year and about how much.
Yes. This is rob.
Let me, let me take that too.
Steve and then you can jump in if you need to.
So we.
We're not projecting cash flow and timing of our guidance as you can see we haven't published it but I can give you a little help on that on.
We do have we do expect to have.
Generate enough cash flow on to make all of our debt payments.
For some pretty significant debt payments with our term loan.
On out there.
We also need to make some.
<unk> and our vendor vendor accounts.
And we'll then be able to establish amounts on the need to go into the reserve reserved matters for these term loans as well.
And <unk> got our capital estimates and.
And our production cash numbers, which you've been talking about so you from you can probably calculate what pretty closely what the cash flow is going to be.
And we've also talked to you about the pandemic costs that we've got built into that.
But if you wanted to put into the cash flow say, maybe a $10 million number for paying down our vendors as well that's probably the only number you can't calculate from what we've got.
I'll give you.
An idea.
On that you should be able to come up with the GAAP will be cash flow positive even after we make debt payments.
Okay great.
Got it used for.
To that we are cash flow positive.
The problem is that with the conditions of the debt facility and the cash sweep component of that there won't be any dividend that comes out.
Joint venture for free.
Yes.
Okay. Thank you.
Again, if anybody has for your question. Please press star one on your telephone keypad.
Okay. Thanks share one on your telephone keypad.
I have no further questions at this time.
Okay. Operator, thank you very much I'd like to thank everybody on the call for your time today on this completes our presentation.
Thank you everyone for joining us today. This will conclude today's conference call you may now disconnect.
All right.
Yeah.
Okay.
[music].