Q3 2021 Gatos Silver Inc Earnings Call
Can you say and thank you for standing by welcome to the Gara Silver third quarter 2021 earnings Conference 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 the fashion he will need.
To press Star one on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star Zero I would now like mechanic conference over to your speaker today, Steven or CEO. Please go head.
Thank you very much I would like to welcome all attendees to got to a silvers Q3, 2021.
Carl.
Now before I begin I'd like to notify our attendees that I'll be making forward looking statements and these statements are not guarantees of future performance. They involve risks uncertainties and assumptions regarding future events that are really quite difficult to predict.
So turning to slide number three.
The subtitle of this highlights slide is quite important.
We believe the Los Gatos District has been a unique modern day discovery and development story.
It is the discovery of an entirely new silver and zinc dominant district in an area that is surrounded by notable poly metallic mines, but the Los Gatos area.
It is not considered mineralogically perspective.
And that is a small exploration company.
Our success too.
To explore discover finance and develop.
The first mine in this district, while remaining private enduring a decade, where the precious metal sector was out of favor with the investment community. We believe is quite unique.
It also but we also recognize that despite our hard work over the last decade. This achievement depended upon a significant amount of good fortune.
Our success is due.
Now, we haven't mineral district, where the first mine that's been built commissioned.
And it's not generating significant cash flow.
It's operating and sustaining cost and build a cash reserve.
So we believe in the unconstrained value potential.
In the Los Gatos District, and more importantly in our responsibility to maximize that value through careful strategic initiatives to create an enduring mining complex, which will provide a foundation for gotcha silvers growth for decades, and it will provide a sustainable contribution cause.
The zinc, we finding business of our joint venture partner door metals mining.
So in 'twenty, so 2020 one.
It's been a year of financial and production optimization.
Building for the future through sustaining capital projects and a return to resource growth through exploration.
On the financial front during July got to sell the completed a successful follow on offering raising 133 million to retire its portion of the sale of Scottish constructions, though.
No.
Don't do a joint venture partner also contributed contributed its 30% sure extinguishing the entire Cerro loves got us Jim debt facility.
This now makes the Los Gatos joint venture net debt free and provides significant liquidity to use cash flow from sale of Scott us for strategic value, adding initiatives.
The company also secured a $50 million revolving credit facility with bank of Montreal, that's increasing our financial flexibility.
We qualified for this facility due to the strength of our Los Gatos District asset base.
And due to higher byproduct metal prices, we now expect our all in sustaining cost guidance for 2021 to be between 15 and $16 an ounce and $17 now that's reduced from our previous guidance of 17 to $17.
He said sprouts.
On the production front.
We again exceeded our 2500 tonnes per day design.
Design.
Processing rates, averaging 2544 tons per day.
And I'll touch on this later in the later slide but Q4 is.
Continuing the improvement trend in the processing plants production rate.
During October the <unk>.
<unk> plant averaged 2620 tons per day.
On the exploration front.
25000 meters of drilling were completed their what's got us on that exploration program with another 20000 meters remaining this program is converting the remaining 3.7 million tonnes of inferred resources that exist along the northwest and southeast extensions.
Is it Sarah Los Gatos deposit.
The program will most likely extend into early 2022.
An initial 5400 meter program was completed at our wholly owned Central area project and we are currently interpreting the results in designing the phase II program.
And we're still in the relatively early stages of the extra resource exploration program.
<unk> 7200 meters drilled during Q3 masters only about four kilometers away from Seattle, Los Gatos and its targeted to be the next development project in the Los Gatos District.
By the end of Q3, we had deployed a drill on another district targets called Cascabel.
And that's located between Easter and say, what's got US. This is a new target and its based on surface mapping from our exploration team.
Regarding sustaining capital projects, we expect to spend between $70 million to $75 million sale of Scott us by the end of this year this year.
These are projects that increased production efficiency and lower costs and got to a silvers President Dale Andres will talk about that in some detail later in the presentation.
I would now like to introduce Dale to discuss the details of our Q3 performance.
Thanks, Steve and I'll start on slide four.
At our Cerro Los Gatos mine, we're continuing our strong and unwavering commitment to health and safety and to the surrounding communities.
We finished the quarter with no lost time safety incidents and.
And we continue our constant focus on strengthening our safety culture.
Covid management protocols are also continuing to work well and we continue our daily screening and testing program.
The number of vaccinated employees is steadily rising as the rollout continues in Mexico, and we currently have over 70% of our employees that are either fully or partially vaccinated.
Community engagement remains a major focus and in addition to our continued focus on local hiring we are proud to support our local communities and we've completed various projects that will leave a lasting and positive impact.
During the quarter, we completed projects targeting mental health and wellbeing education and critical infrastructure.
We will continue to focus on improving the lives of those within our area of influence.
Turning to the next slide on our operations and then I'll talk about this over the next few slides. We are very pleased with another record setting performance in the third quarter.
In the mine, we produced a record 242000, and 904 tonnes from underground sources and both the northwest and Central Zone in Q3.
It's exceeding our second quarter record tonnage by about one 2%.
During August and September we did have some constraints and had to mine more tonnage from some lower grade areas in the northwest zone as we dealt with water conditions in the higher grade Central zone.
So there was some sequencing issues during the quarter.
However, the mine has consistently delivered expected feed grade to the plant since the shutdown in February caused by the storm related power outage events that we experienced.
We are continuing our development work underground access deeper and higher grade portions of the mines in both the northwest and central zones in <unk>.
Over the coming months, we will built significant flexibility into the mine plan as we open up access to new levels, which will allow us to further optimize as well.
Turning to slide six we also had record setting performance at our plant operations in the quarter.
We processed an average of 2500 44 tons per day through the plant.
That's per calendar day, and Thats above design capacity and our second quarter record and.
And we know that the plant has capacity on a daily basis to process up to 3000 tonnes per day.
We achieved excellent metallurgical results with recovery of silver at 89%. Despite the lower feed grades during the quarter and we continue to focus on driving that higher as you will see later with our October results, where we achieved a new monthly record at over 90% for silver recovery.
Okay.
Our site operating cost performance continues to be on track and helped by higher byproduct prices, we did lower our all in sustaining unit cost guidance to between 16 and $17 per ounce of silver for the full year.
We have already recovered from the mine sequencing issues that impacted production in the third quarter with strong performance achieved on both tonnes and grades for October and we expect to achieve our revised silver production guidance for the year of $7 4 million ounces.
We continue to expect sustaining capital expenditures to be within our guidance range.
Slide seven shows the summary of key performance metrics in the third quarter compared to previous quarters.
As we disclosed in our production release in early October we produced one 7 million ounces of silver.
Due to the lower grades in the quarter caused by the mine sequencing issues I discussed previously.
Looking at the bottom section of the table shows the breakdown of unit costs, you can see the split between operating costs byproduct credits and sustaining capital.
Considering the lower silver production compared to the second quarter, our cost performance with our all in sustaining cost on a byproduct basis, averaging $16 71 per payable ounce of silver.
For the third quarter.
It was helped by higher byproduct prices during the quarter as well as our continued efforts to control site costs.
Sustaining capital costs are back end weighted to the second half of 2021, and we do expect these costs to remain relatively high in the fourth quarter, but with overall unit costs for the year still anticipated and tracking towards the bottom end of our recently updated cost guidance range.
On an operating cost basis unit cash costs after byproduct.
Credits were $3 58 per payable ounce of silver.
Showing the cash generation potential of this high grade deposits as we finish some of our key sustaining projects in 2022.
Importantly, as we continue to further optimize the operation.
Turning to slide eight our focus in the fourth quarter is to complete our planned sustaining capital projects that are currently in progress such as the second refrigeration plant.
And a new underground dewatering system, both of which will support mine production and development work as we go deeper in the mine.
And together with the third lift of the tailings down to support future production, which will be complete by the end of this year.
The paste plant started construction in the third quarter and this is a key project for <unk>, which will improve flexibility in the mine plan.
Reduce operating costs and reduce the amount of tailings center the storage facility.
The project is expected to be commissioned in the third quarter of 2022.
We are targeting to achieve 2600 tonnes per day through the plant during the fourth quarter as we continue to implement various improvement projects and continue to access lower levels in the mine.
One of these improvement projects.
Geo metallurgical program to further increase our understanding of the various geological and metallurgical characteristics of our ore.
Which will help these optimization efforts.
I'd now like to turn the call over to Roger Johnson, our CFO to discuss our financial results.
Thank you Dale.
And good morning or afternoon to everyone.
Looking at costs on silver as financial results on slide nine I can sum up Q3, as our recapitalization quarter as we closed out $220 million of debt in the Scottish joint venture.
Transactions to accomplish this are a big reason, we had a $15 million net loss for the quarter.
Looking at the details explorer.
Exploration expenses were in line with our plans at $500000, our general and administrative costs were slightly higher than our average for the year and so we had higher costs from increased personnel.
And the costs related to a separation agreement.
Equity income from the JV was $1 6 million significantly below Q2.
As a silver price decline significantly and.
As just discussed by Dow our silver zinc and lead production were down due to lower grades.
We had some of our onetime.
LBJ costs associated with the debt retirement also were incurred a DLP J b.
We incurred a $10 million closing to retire a portion of its $220 million term loan provided by I don't want to the LG JV as a result.
<unk> million dollars loss for the quarter.
Turning to slide 10.
This slide graphically illustrates the changes in Godstone silver $13 5 million net income reported for Q2 to the $15 million loss in this quarter.
In addition to the one time $10 million closing D. Our portion of the algae JV earnings.
Post $17 million lower due to the lower production already discussed by Dale the lower silver prices.
Higher costs are.
The higher cost included a nonrecurring charge for costs on the algae JV balance sheet associated with pretty near term loan in place.
And a settlement fee.
A portion of the form our portion was $4 million. We also had the higher G&A costs.
Just mentioned.
As noted earlier in this presentation, we completed the following the follow on offering in Q3, netting a 126 million cars. We also borrow $13 million from our credit facility.
We contributed these funds and some of our own cash.
So the LPG JV.
As an initial investment in July.
Those funds were then used to repay.
The term loan.
On slide 11 in terms of the financial results for the LNG JV.
As I just mentioned Q3 sales decreased from Q2 on lower silver prices and as Dale noted on Corp.
Rage from all metals were lower in Q3 than Q2.
Q3 operating costs were slightly higher.
Primarily due to higher ore tonnage processed.
In addition, using the funds from the LNG from <unk>.
On silver dollar capital contributions the term loan or retire in late July as a result, the LNG JV is debt free at September 32021, with only $8 million of equipment loans outstanding.
In addition, the Doctor of silver is essentially net debt free with only amounts due under their credit facility understanding of $13 million.
With that ill.
I'll turn it back.
Thanks Roger.
<unk> 12 shows the 103000 contiguous sectors of mineral rights control by the last cuts will this joint venture.
We initiated three separate exploration and resource expansion programs and there are currently five active drill rigs turning with a six drill rigs being added this month.
Three of these drills are still focused on expanding and upgrading the resources at the Cerro Los Gatos deposit.
With one drill currently on the resource expansion program at the adjacent Esther deposit.
And one on the nearby Cascabel target.
The initial 5400 meter program it sounded malaria, which is 100% owned by silver finished in Q3, and we are still assessing the results before deciding next steps on this target.
We have tremendous upside potential with lots of drilling targets of mineralized zones already established and we're looking forward to drilling these additional targets in 2022.
The program at Cerro Los Gatos was expanded from 27000 meter program to 45000 meters with.
With the focus continuing on both the northwest and even more so on the southeast zones.
We've completed 25000 meters of the Cerro Los Gatos program at the end of the third quarter.
Based on the expanded program at Cerro Los Gatos, and the 19000 meter program, which we still have the majority to complete Esther.
We are looking at bringing in additional drill rigs as we plan for 2022, and so we will be turning the attention more from Cerro Los Gatos and Esther towards the district targets.
We are continuing work on a new resource model and life of mine plan incorporating drill results from the single dose crowds Cerro.
Cerro Los Gatos program drilled to date.
And just finally for me overall, we're very pleased with our third quarter performance, particularly on throughput and costs.
And look forward to a return to higher grades and production in the fourth quarter.
With that I'll turn it back over to Steve.
Thank you Dale.
You referenced the record average process plant throughput in October beginning in the fourth quarter, but there has been improvement on all fronts. The silver grade during the month of October averaged 316 grams per ton with zinc at an expected four 5% and lab.
Two 6%.
We also achieved a monthly record average silver recovery.
Just over 90% that's a record for this project.
And so accordingly, our October silver production was just under three quarters of a million ounces at about 745000 ounces and we expect to be at or near our seven 4 million ounces for the 2021.
Sure.
That completes our presentation.
I'll now turn it over to the moderator to take.
Questions.
Thank you.
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Moment compile the Q&A roster.
Okay.
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Alright, there first question Ken.
Comes from the line of Ryan Thompson with BMO. Your line is open.
Hey, guys. Thanks for the update just a couple of questions for me.
Maybe just starting on the operations realized in the third quarter.
Typically coincides with rainy season in Mexico, and you flagged some water issues, which caused some issues getting into the higher grade zones. There.
Sort of water issues did they get exacerbated with the rainy season, and Thats something that we should sort of be thinking about in Q3 or was it sort of a one off just how should we be thinking about that.
Yeah, I'll take that at scale.
Yes, there is.
The rainy season, it's re charges the water that's in.
The underground aquifers and water table as opposed to seeing a direct and immediate impact in the mine. So we don't see that direct and immediate impact it really is.
What were impacted.
Third quarter is opening up new areas, it's really opening up those areas that.
Through through faults and fractures in the rock.
And especially as we first open up those production headings, we have to deal with the water.
I, just really want to highlight again the key.
<unk> sustaining project that is going to be finished by December we're making really good progress on it.
And.
That's targeting one of the major zones of inflow that makes its way through to the northwest and the central zone. So as we're able to drop that water out.
And dropped that water table down and thats, keeping clean water clean so it doesn't go through the workings.
Pumped directly to surface and as soon as the temperatures.
Got it.
It had a good range, we can discharge that directly.
As that water table drops below where not just our current workings, but our future workings.
We will really start to see the benefit of that project and so that's what I'm really looking forward to in 2022, but just to directly answer your question no no immediate impact from the rainy season.
Okay got it thanks for that.
Very helpful.
And then just a couple of quick ones more so on the financial side of things.
As you guys flagged in your presentation, the third quarter brought.
Quite a few sort of one time items. There is there any thought going forward of presenting it.
Adjusted EPS number with your earnings results.
This is Roger let me take that.
You bring up a good point Ryan I think that this was an unusual quarter for large items.
That will take it onboard to consider presenting adjusted earnings in the future.
Okay.
That's good to hear that would definitely.
Be helpful.
And then just one quick follow up.
Do you have any sort of projections or can you give any guidance in terms of.
When you think the JV could potentially be paying dividends to the parent company.
Yes. This is Roger also.
As you know we are looking at some fairly significant potential for expansion.
We actually don't have that study done and we don't know what the cost is going to be.
What we'd like to do is.
Wait a while to see.
We will be very successful in operations I'm not concerned about that at all.
But if we're if we can see the point, where we're going to need to make.
A significant amount of contribution for additional capital for that we certainly don't want to go out and raise money again.
So I would say, we're at least six months away before we'll be making a determination on that.
Okay.
Thanks for that Roger that's all the questions that I had I'll turn it over.
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Alright. So there are no further question that concludes today's conference. Thank you all for joining you may now disconnect.
Thank you Jerome Thanks, Paul.
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