Q2 2021 Fortuna Silver Mines Inc Earnings Call
At this time all participants are in a listen only mode and we will open the floor for your questions and comments. After the presentation. It is now my pleasure to turn the floor over to your host Luis Canosa director of Investor Relations, Sir the floor is yours.
Hi, Matthew Thank you by the way.
We can also use our CFO, it's Carlos Baca director of Investor Relations right now speaking.
Good morning, ladies and gentlemen, I would like to welcome you to Fortuna silver mines and to our financial and operations results call for the second quarter of 2021.
Hosting the call today on behalf of Fortuna will be Jorge Alberto <unk>, President and Chief Executive Officer, Andrew <unk>, Chief Financial Officer.
Today's earnings call presentation is available on the featured presentation box on our homepage.
<unk> silver Dot Com as a reminder, statements made during this call are subject to the reader advisory as included in yesterday's news release and in the earnings call presentation.
Financial figures contained.
In the presentation and discussed in today's call are presented in U S dollars unless otherwise stated.
Before I turn over the call 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 a 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 additional information about the material factors that could cause actual results to differ materially from the conclusion forecast or projection in the forward looking information.
Material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward looking information is contained in the company's annual information form and MD&A, 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 to Jorge Alberto I know, it's our co founder of Fortuna.
Thank you Carlos and good morning tool.
I will start the presentation on slide six.
Which our shares or second quarter highlights.
Yeah.
In spite of Covid 19 related challenges at lean data, which have led us to revise the guidance for the year.
Our second quarter results continued to reflect the strength or weakness with record sales of 420 <unk>.
Liam EBITDA of $55 million, and then EBITDA margin over sales of 46%.
Adjusted earnings of 12 cents per share came in largely in line with analyst consensus.
We maintain a liquidity position of 122 million with a debt to EBITDA ratio of zero point too.
Our healthy balance sheet, plus the incremental planned contributions to free cash flow from Lynn Liddle and get a multiple in the second half as to our ability to fund singular construction under various price met those scenarios.
Linda produced 19500 ounces of gold in the theory.
The dramatic surge of Covid cases in Argentina during the quarter impacted lean data leading to a 16 day.
The stoppage spread over the three months in.
In addition continued restrictions in the country inferred or our ability to support the ramp up.
Which relies on a foreign vendor technicians.
This entry issues seem to the country have been partially resolved or the last couple of months.
Today, we have a specialized technicians on site for all stages of crushing including the H P E R.
And we're working to get our superior technicians for the stacking system in the country in this third quarter.
On July 2nd.
We closed the <unk> acquisition.
We're working on a 100 day integration plan, which is advancing well and in many instances.
Exceeding our expectations.
With this acquisition for Q&A cementing a diversified low cost production platform sourcing precious metals from four operating mines and with a robust permitted development project getting sick whaler.
Where we expect that construction decision this third quarter as we close the mining convention negotiations with the cut the work over them.
We provided.
The production guidance on July 19th which incorporates they get a multiple goldmine contribution.
For the second half of the year.
Don downward revision of gold production at lean data.
I mean, there are gold production is 50000 ounces lower.
100000 ounces not.
The 50000 ounces are not lost but postponed for next year as we do not believe this year, we will be able to make up for the days of stoppages.
The slow ramp up.
Due to the reasons described in the second quarter.
Okay.
Our revised consolidated guidance for silver it does not change from there you know on space at six 8% to seven 6 million ounces.
And for gold is revised to 194 to 223000 ounces for 2021.
The gold equivalent production guidance is 283 to 323000 ounces.
Still representing a year over year increase of 90% to 116% in terms of gold equivalent production.
Slide seven.
In slide seven we share a 12 month rolling average performance on our <unk>.
Safety kpis or trend of improvement on safety performance.
Has seen a flattening and in some cases, we observe a reversal of gross operations.
The start of operations at <unk> or at the onset of the Covid pandemic last year has weighed heavily on heavily performance at these particular mine.
We have had than a lost time injury.
AG season in the second quarter.
You know we have in place.
Cultural change initiative.
We're committed to and we have you know, we're displaying and implementing our initiatives.
To continue.
With this success, we enjoyed and lowering and improving performance on safety Kpis.
Slide eight.
Okay.
Yeah.
We pre released production for the second quarter, our gold equivalent production in the quarter was 56000 ounces of gold.
When measured against the previous quarter Silver production is up 49%. This difference is explained mainly by the 54 days of government mandated covid stoppages at the San Jose Mine in Mexico last year.
Our production.
Our gold production is up 337% explained by the same last of these at the San Jose mine and the fresh new contribution of ounces coming from the NATO.
Or byproducts, a sink and lead also exceeded growth with respect to last year.
This is also explained largely by the loss of our operation days.
Got you and my last year.
Slide nine.
Okay.
Depreciation metals made 85% of our record sales of 120 million seals.
<unk> contributed 40% to revenue.
In the period, we realized silver price of $26.85 per ounce.
On a gold price of $1812 per ounce.
Next slide.
Slide 10.
Okay.
For the comparison of our year over year quarterly financial performance and the takeaway.
Here is a significant rebound driven by improved covid conditions in Peru, and Mexico, plus the new contribution of lean there or to the business.
Sales of $120 million up from 44 million.
Adjusted EBIT totaled 55 million up from nine 4 million and adjusted net income of 21, and a half million up from a loss of 5.1.
Slide 11.
All of our all in sustaining costs that are all operations were aligned with guidance.
San Jose came in at $13 per ounce scale, Matt 18, and lean data at $1214.
Per ounce.
Even though we produced lower gold and better than our guidance plan called for.
The timing on the execution of capital projects over the year at lean digital health to offset all in sustaining costs.
Slide 12.
For the first half of the year, we have executed capital projects totaling $32 million out of an annual budget of $80 million for Latin American operations exploration investment amounted to $6.
$9 million for Greenfields, and brownfields budget for 'twenty 'twenty, one for Latam is $21 million.
Total approved capital for West Africa for the second half of the year amounts to <unk> 42, and a half million yet a mako sustaining capital and brownfield initiatives amounts to $22 million say whaler and boost food exploration totaled $95 million.
And the Fortuna Board approved in.
July.
And early works budget for singular of 11, and a half million dollars, which includes the <unk>.
All of these in anticipation of a construction decision later in the quarter.
Slide 13 please.
Okay.
Focusing again on lean data.
Here are the reconciliations of Dawn's grade.
And gold ounces mined for the second quarter continue to indicate a good correlation with the reserve model.
With differences of less than 5% for all parameters. So the conciliation of their reserve model to production continues to be extremely good.
Gold leaching response, as well as rate and consumption was within the expected parameters for the granular metric compositions and metallurgical type ores that we have placed on the leach pad are.
As of July 21st.
Ramp up of our operations continues.
And Pete operations are performing and delivering according to design.
Primary and secondary crushing systems perform then at 80% of design over the period with sustained base exceeding design parameters.
H B, our agro moderation in stacking system, the three work in tandem.
Operator at 72% of design capacity.
Today with foreign vendor support core and the on site for H B R and crushing circuit, which we expect to beat that final mile of these challenging ramp up of lean they don't.
And in slide 14.
We share with you the.
Asset portfolio.
In the portfolio pyramid it passed a rock school acquisition, where you can see our four operating mines our development project.
And the baskets of exploration opportunities that we have ranging from advanced explorations that are greenfields exploration sensible suitor, Santa Fe is both Sudan in Burkina Faso.
The Fe, Mexico Eagle landfall in Mexico, a large land package.
Covering 250, sorry, 160000 hectares in Cote d'ivoire.
And.
Cerro Lindo projecting in Argentina.
Bob what economy in Mexico, a solid <unk> in Argentina as well so.
Hum.
Certainly are in a robust exploration oh.
In portfolio and opportunities at the base of the pyramid.
So with that I will let Luis now take you through the financial results.
Okay.
Okay.
Yes, Thank you Jorge.
So on slide 16.
Just a moment.
On the Permian Slide 16.
Yeah.
So as Scott has mentioned we had the record sales in the quarter and overall, a strong financial performance across our main.
Financial metrics as a reminder.
And also as mentioned by Jorge resulting in a comparative period in 2020 were depressed due to the impact of the pandemic and related government mandated the stoppages.
So the emphasis will be mostly about the absolute figures in the quarter as opposed to the variance year over year.
Earnings per share were 99 cents in the quarter and adjusted earnings per share was <unk> 12 cents.
After adjusting for $3.5 million of Expensed amounts related to the <unk> section.
Other noncash nonrecurring items.
Adjusted EBITDA of $54.
9 million was.
At an all time high accept only for the $68 million recorded in.
In Q1, 'twenty 'twenty, one and first quarter of this year.
And free cash flow from ongoing operations was $18.5 million, reflecting the capacity of our business to translate EBITDA results into free cash flow in spite of Covid related challenges said Lynn Liddle.
Also in relation to a free cash flow, we had a negative changes in noncash working capital items of $8.3 million in the quarter and $24.7 million year to date.
The amount year to date, they're related mostly to accounts receivable of San Jose and the natural build that book.
Counts receivable and leach pad inventory idling data.
We expect this absolute amounts to maintain or slightly come down in Q3.
The stronger recovery of our receivables towards yearend.
Our next slide slide 17.
No none.
So sales increased by $76 million over.
Q2, 2020 out of a total impact attributable to higher volume of metal sold or 51.8 million as shown in the bridge chart around two thirds is explained by Lynn Liddle.
30%, San Jose and the violence of around 4% would be coma.
Similar to the prior quarter, the largest single impact on our sales excluding the narrow what's the price of silver.
With an impact of $17.8 million as shown in the slide as well.
Slide 18.
Yes on the left hand side, we provide a breakdown of EBITDA by mine.
Mentioned before financial performance for Yamana, and San Jose continues at historical highs underpinned by higher metal prices as well as.
Delivery of production and cost performance within our guidance range.
The higher all in sustaining cost for San Jose shown on the right hand side of 26% compared to the prior year is to a large extent explained by changes in the gold silver ratio.
The impact this has on several silver equivalent production.
This effect is close to around $2 per ounce.
At Lynn Liddle, lower gold production of over 30%.
In the second quarter compared to our internal plan had a significant impact on EBITDA and cash cost per ounce.
However, all in sustaining costs for the quarter.
And for the first half of the year.
<unk> within the guided range in our news release of January 19th due to a slower pace of planned capex execution.
Yeah.
It is also worth highlighting.
Highlighting variable unit costs per ton, a little as well as key operational mine kpis are tracking well and within our expectations.
With.
Respect to a revised central guidance for Linda.
Given the lower revised gold production of approximately one third as mentioned by Jorge.
We're now expecting higher cash cost per ounce of about 50%.
And higher all in sustaining cost of just below 40%. Please refer to our news release of July 19 for more information.
On slide 19.
Yes here, we show the evolution of our liquidity and cash position as a remainder in Q4 of 2020, our credit facility was scaled down from 150 million to 120 million. This is reflected in the drop in liquidity in Q4.
Since the end of the Orlando construction towards year end 2020, we continued to show growth in our cash and liquidity position.
For Q2, 'twenty 'twenty, one we show the impact of our Roadshows on section in that segment at the top of the bar.
Without these transaction related payments, our total liquidity would have been.
In the range of $160 million.
We are currently working in put in place a new expanded credit facility, which we expect will be concluded in Q3. This will be a $200 million facility with a very similar structure to the existing one and importantly, it will bear a lower cost of interest.
Based on.
So I just Wanna comment based on our revised guidance and excluding any singular construction budgets in the current price environment, we expect to generate.
Between 80, and $85 million of free cash flow for the second half of the year.
Based on this and our expanded credit facility, our total liquidity towards the year end should be in the range of $250 million.
Given us plenty of comfort to launch construction activities have tequila.
Finally.
A brief comment on the information disclosed in the subsequent event note of our financial statements regarding payments done in relation to the closing of the <unk> transaction.
We have this closed $29.3 million in change of control valves and settlements of long term incentive units to non continuing executives and directors.
Out of this amount $5.6 million is actual change of control payments and the balance is the cash settlement of ours use psus and issues.
With that I'll pass it back back to you Carlos Thank you.
Thank you Luis we would now like to turn the call over to any questions that you may have.
Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we do ask that while posing your question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone. Please hold while we poll for questions.
Your first question is coming from Don Demarco Your line is live.
Thank you operator and good.
Good afternoon gentlemen.
Just a couple of questions from me first of all.
On the call. It was mentioned that some of the production that Linda has been deferred to 2022.
This year Linda was we're looking at maybe 100000 ounces can you give us any indication of how much higher the production at Linda might be in 2022.
We are.
In the budget in the year.
And Don we are in the process. So we have started the budgeting process.
And the but the message here is we have a capacity to produce.
And in the range of 150000 ounces I mean, we're not achieving that based on the grades that we have.
At the mine.
It's basically because the rate of production down.
So I.
I would expect.
And that our ore production for.
Second in 2022 would be able to capture.
At higher rates.
Annual production.
Yeah.
Closer to what our target was this year right in the range of.
Between 120, and 150000 ounce right.
Okay.
The message basically.
This is not a an absolute loss of ounces, but rather a deferral I mean, the models are conciliating well the metallurgy.
Conciliating well.
It's just a very painful ramp up in Argentina, right now for the team.
Mhm, Okay. Thank you for that.
My next question has to do but the the rock school transaction.
And I see on the cash flow statement I see an item the promissory note $35 million commentary.
Can you give us an indication of the total transaction cost for the acquisition is it just the $35 million in that commentary note.
Or is it more than that and any other details in terms of what the major items, where it would be appreciated.
Yes.
So.
The promissory the promissory note really hum.
Is the violence.
Based on total total costs.
We paid out directly.
Oh by the Russell.
Time of closing and in there I mean, let me leave you with cash but in terms of our total expenses for total transaction cost.
The figure I mentioned of 20.
$29 million of cash payouts to.
For change of control items and settlement of long term incentives as the largest mt.
The rest really it would be related to legal expenses.
Advisory fees.
And.
These amounts will be fully disclosed in our Q3 right.
But certainly the largest component of that is the amount we the amounts we have disclosed in our subsequent events.
He has over 35.
Okay.
Yes, okay.
Okay. That's helpful.
Okay, well that's all for me.
Good luck gentlemen, getting your Mako added into your portfolio in Q3.
We look forward to Linda rebounding as well thank you.
Thank you. Thank you.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone at this time. Your next question is coming from Michael Anthony Your line is live.
Yes, Sir the mine that you just did the acquisition can you tell me exactly.
What precious metals they have.
If I understand your question, you're asking about the recent acquisition and the assets that we're bringing that.
That is right to their old gold assets the Euro Mechel mining so goes along the mine and the singular project you said gold only.
Yes, Sir well I've got one more well you all day.
Paying a dividend any tie this quarter or maybe in the future.
Not in this quarter.
The question of a D V. Then for US it's not a question of if but when really.
And and the purpose of a bringing in.
One of the purposes I'm, bringing.
The <unk> transaction is to build a portfolio of asset.
That can provide sustainability over the long term to provide investors with a return that is sustainable over time right.
Quality assets high margin assets.
That can be sustainable over time will make a dividend or a means to return to shareholders.
They know will overtime.
So for US it's a question of when we have our capital Brody.
An important capital breaking singular that's in the midst so far construction decision this quarter.
So you know I think that with the in this price environment once we launch that project.
The discussion of a D. V. Then this is one that the board will be engaging with right.
Right.
Hello.
This was a great quarter. It was a very strong color and I appreciate everything all the shareholders.
Thank you Sir.
Thank you that's all inflation.
Thank you. Your next question is coming from Ryan Thompson Your line is live.
Yes, hi, Jorge and team.
Thanks for the update just a question for me on when Darrow.
I see you stacked about one 5 million tons to the pad in the second quarter. If I just look at sort of the ratio.
Ounces produced ounces stacked.
And about 43% on my math.
Could you just talk a little bit maybe give a breakdown of how much of that one 5 million tonnes was coarse ore versus H pgi crushed and agglomerated ore in.
Are you seeing.
Differences in the metallurgical performance between those sorts of two.
Two types of ore types.
Yes.
For Q2 disclosure.
We provide a breakdown.
Of.
<unk> stocked our or.
And.
Yes, I'm here.
We provide a very detailed explanation here, where we are.
Trucked ore amounted four roughly.
The 800000 thoughts.
So.
In Q2.
Oh was not particularly a good quarter in terms of the.
Composition of the stacking mix.
Oh, they trucked ore from the run of mine and of course for stockpiles inflation on the Leach pad totaled 880, 800000 tons I need was 32% higher than our you know the plan at this stage, we have a completely stopped.
The truck stacking all the stacking is taking place with the.
Convey your stacking system.
So everything that's going to the Leach pad. These growing is running through the H P E R.
I remember Asian and convey your second so so.
That's an important development and that speaks about the you know continued improvements in reliability and mechanical efficiency, we're achieving with that are part of the system.
And.
No.
Or or metallurgical performance.
Based on the.
Types of ore that we are stocking insert themselves.
And b coarse ore and and conveyor.
Conveyor stock door again or.
Metallurgical performance on cyanide consumption.
<unk> consumption all of that is striking according to or or or planned.
Construction on recovery rates.
Yeah.
So in the.
The key the key.
Change that we'll see in the third quarter is a significantly higher contribution of.
Okay.
Convey your stacked ore.
As we have a gain stopped already.
Okay coarse ore stacking rate that was always a temporary measure.
We decided to implement.
Annoying and last year around the March of last year June of last year.
It is a complex system running H b year information and stocking and we were doing it alone we didn't have the benefit of a foreign vendor technicians.
For any of the three components of the system those they have been to HPE or the westborough, agglomerate or <unk> and the superior stacking system.
So.
And now we're working with technical support onside at least for the H P R and off overtime or operators have gained more.
More and more experience is taking longer than anticipated or game, because we're doing it alone.
And but that's a significant change Ryan right in the this is the last quarter.
It has been in the last quarter Youll see.
In any way significant amounts of <unk>.
Trucked ore.
Based on the Leach pad.
Okay No that's.
Good to hear that those stacking system sound like Theyre, starting to perform a bit better here.
Maybe just switching gears a.
A little bit.
Going over to West Africa, you mentioned.
<unk> on the mining convention for Sequela could you, maybe just dig into that a little bit more than just provide us.
Some more color on those negotiations.
What we should expect there.
Yes, we are.
In I'll say the first round.
Negotiations with the countrywide government.
Yeah and.
We are.
Getting back to them on and these are first a draft of the convention.
Yeah.
It is not far from where the team expected we would land.
But it is a negotiation, it's a process and we're doing it with a lot of.
Care and on them on a respect for.
The country and the authority.
And we expect we can you know.
Have a.
Ah and agreement.
Between the parts.
In a way that will allow us to lounge. The construction of the project towards the end of this quarter, but we are currently engaged with.
From an <unk>.
In the negotiations.
Perfect. Thanks for that and maybe I'll just ask one more.
Are you able to provide any commentary on euro mocha performed in Q2 I know that.
So if the deal didn't close until Q3, but if you could make any comment.
On how it performed in Q2 or even just the.
In the month of July or anything would be helpful. There.
Q2 year on Marvell had a small shortfall in in ounces.
Due to the sequencing of some Oh great.
In the plan.
And they were in some extremely high grade areas.
And in those high grade areas do carry high variability as well.
In this place that variability played against the plan.
But we understand it.
As a local event and we the main these out of those premium high grade zones right now.
So in July we are already seeing it.
Performance tracking in line with with the short term and.
And long term plan.
Yeah and.
You know, we all know yet a mockery so quite a reliable asset.
And we.
We don't see these are small shortfall in Q2.
So anything of concern or a change in trend.
Rather a feature.
Uh huh.
Hum.
A particular area extremely high grade area and am I right.
Got it okay. Thanks, Thanks for the update alright, that's all I have today.
Thank you.
Thank you. Your next question is coming from Adrian Day. Your line is live.
Yes, good afternoon.
Had a couple of questions if I may.
Can you remind me please what's the anticipated capex since the gorilla is oh. So if you have any of the major capex items over let's say the next 12 months.
And then given that do you have any any plan the scope for financing.
Mhm.
Good morning Adrian.
Wondering if he made at Taco Bell for Sequela.
It is approximately $150 million, that's part of the feasibility study.
Uh huh.
A big chunk of the Capex around $65.70 million.
Our.
Yeah.
Mhm capsulate within the EPC agreement that we are aiming to.
Execute with.
Pardon.
For the execution of the project.
So.
Hmm.
And as is usually the case with these projects.
And they're the bigger capital expense, so as you start seeing flow through.
Towards a half to two thirds of the construction right.
And this is probably a year and a half construction right.
Okay in terms of in terms of financing.
As we mentioned during our prepared commentary, we believe we have plenty of comfort to launch into construction activities based on on our the corporate facility, we are putting in place on our existing cash availability.
As just the ongoing free cash generation.
Okay.
Okay.
I know you've got enough, but you always run a very conservative balance sheet, which which I like.
You think you've got enough without any additional.
That's it.
Yes that is an absolute yes.
Okay, great. Thank you.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone at this time, please hold while we poll for questions.
There are no further questions in the queue at this time.
If there are no further questions 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 great day.
Yeah.
Thank you ladies and gentlemen, this does conclude todays event you may disconnect at this time and have a wonderful day. Thank you for your participation.