Q3 2021 Sierra Metals Inc Earnings Call

Hello, and welcome to the Sierra metals third quarter 2021 financial results call. My name is Emma and I'll be your operator today, if you'd like to ask a question at the end of the presentation. Please press star followed by the number one on your telephone keypad, if you'd like to attract your.

Question for any reason please press star followed by the number two it's now my pleasure to hand, the call over to Mike Mcallister, Vice President of Investor Relations to begin. Please go ahead.

Operator.

Everyone welcome to obscure metals third quarter 2021 results conference call on today's call. We are joined by Louise Mark Casey.

Joe.

Yeah Morris our CFO.

We are assuming that all published materials have been read and as such todays presentation highlights the key issues of the quarter. However, I would like to highlight that as always we are open for questions at the end of the presentation, which can expand upon other issues that might be of interest to those listening.

In the interest of time, we are allowing all participants to ask two questions and we are asking participants.

With respect.

Respect this request further questions can be addressed through email or follow up calls after the conference call.

The accompanying presentation for today's call is available for download through the webcast or from the company's website at Sierra metals Dot com.

Yesterday's press release, the financial statements and the management discussion and analysis are also posted on the company's website.

Before I turn the call over to management 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.

This forward looking information is subject to a number of risks uncertainties and other factors actual results could differ materially from our conclusions forecasts or projections.

And in the forward looking information.

Additional information about the material factors that could cause actual results to differ materially from their conclusions forecast or projection in the forward looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection.

Collected in the forward looking information is contained in the company's annual information form which is publicly available on SEDAR or Edgar.

<unk> 40 off or on the company's website.

Please note that all dollar amounts mentioned on today's call are in U S. Dollar on my other men unless otherwise noted.

I would now like to turn the call over to Luis <unk>, Our CEO, who will provide us with the third quarter highlights.

As well as an outlook for the remainder of the year afterwards, Edgar merits, our CFO will take us through the quarter's financial highlights with that I will now turn the call over to Louis Mark Casey.

Yeah.

Thanks, Mike.

Good morning, everyone.

Turning now to highlights on slide four.

After I read in yesterday's press release, you are now aware that Q3 was an exception of many difficult quarter for the company.

We have been dealing with the reform appreciable effects of COVID-19, which includes delays for mine development.

Infill drilling.

Clinton is high personal tomorrow infrastructure backlog.

Which has affected throughput great metallurgical performance.

Jeremy Good chip Jodi culture, and foresee no bank contracts.

The Bolivar mine has experienced many patients on mine development.

During the past year.

Which is heavily impacting.

Impacting.

Throughput head grades and recoveries.

While these issues have believed to be temporary in nature.

We are very focused in improving the current few patients.

Currently conducting a comprehensive review of all of the operational processes, but they will leave our money from.

From geology to the mining as well as have been meal.

We intend to incorporate the findings of these reviews, including Bolivar mine operations to allow for a return to a normal semi unprofitable or the state of operations have been Mike.

The early findings and contingencies coming from this review.

Being created.

<unk> will leave our mind budget currently be prepared.

Its stakeholders with an updated projection of the Bolivar mines.

Operations potential going forward.

Despite the significant challenges in the quarter, including lower throughput on metal production.

A stronger metal prices have supported revenue.

Additionally, floating exchange rate of working with favorable hooking to offset the large associated cost of COVID-19 Jody.

Jody culture, which benefited the company.

After reviewing the nature of different mutations Morningstar what.

Taking into consideration previously revised production guidance.

We felt it was prudent to lower the EBITDA and Capex guidance.

Greece cost guidance for Bolivar.

To better reflect the expected outcome for 2021.

Turning now to slide five.

Well, that's some guidance remains unchanged with popular equivalent production.

The range between 110 to 116 million pounds.

However, due to the previously mentioned and rapidly changing issues at our Mexico operations.

Really at the Bolivar mine, we have lowered our EBITDA guidance range.

$30 million to $140 million to now range between $105 million to $110 million.

We have also lowered our capital expenditure guidance.

These hit that $100 million does that range between $75 million to $80 million.

This impact is due to navy federal of our Magnus I don't want to put you at the Bolivar mine in 2022.

As the iron ore trade markets normalize.

And where we compete they require detailed engineering.

Access process.

Finally, given the issues at the Bolivar mine, we self adjusted expected costs.

But this is now expected to be the range for 2021.

Cash costs for 2021.

Now expected to range between $1 67 to 175.

Up from the previously provided guidance of 152 to 140 per cooperative.

All in sustaining cash costs are now expected to range between 32047.

From the previously provided guidance of 50 to $74.

Corporate growth and tough.

I would like to mention that despite these challenges we have a strong focus on improving operations, but we are continuing to push for virtually every decision with growth at all three mines.

Scaling up production and reducing unit costs remain a priority.

Additionally, we are emerging from the house restrictions imposed by COVID-19.

We continue to see improvements in I mean, they really do for workforce or flex.

In Asia base continued to improve which should help us to return to more normalized operations.

Metals prices.

Expected to remain relatively strong during this period of transition.

Turning to slide six.

And looking ahead to the remainder of 2021 and 2022.

Despite the unexpected challenges, we're facing we continue to see encouraging growth opportunities for the company.

Jamie. This is still include the production of iron ore concentrate.

Hello, Nathan staged.

Selling off of production at Bolivar.

Continuous improvement initiatives have Jeremy question coffee.

While we are completing preliminary feasibility study.

We also continue with our launching of exploration brands, especially at near among opportunities, including <unk> just gone through.

Put your money.

We recently received permits as.

As we announced last few abnormal Buda and you have there won't be a lot of money.

We also plan to reactivate our Greenfield branch at our extensive land position in Peru and Mexico.

The company is making the necessary capital investments and infrastructure improvements to continue growing production improving costs.

We remain committed to a combination of sustainable operational and growth at <unk>.

More importantly to improving the per share value and if you do all shareholders.

With that I will.

Now I'll turn the call over to Ed for the third quarter financial results.

Thanks, Luis turning now to slide seven the company had a difficult third quarter due to operational challenges primarily at the Bolivar mine and the residual effects of COVID-19.

We reported a 6% decrease in our consolidated throughput and generated adjusted EBITDA of $17 4 million in comparison to Q3 2020.

We also reported an adjusted net loss of $3 1 million and we finished the quarter with approximately $58 million in cash.

These results are primarily due to the operational issues previously mentioned by Luis.

At Bolivar mine.

However, the company continues to expect that 2021 EBITDA of $105 million to $110 million will still reflect an increase of 8% to 13% improvement over 2020, a benefit of stronger metal prices.

Our revenue mix by metal continues to be led by copper followed by zinc and silver.

Copper is expected to remain a leading role in the companys metal mix of production and revenue.

In Q3, 2021, we saw an improvement in copper zinc and lead realized prices with a minor reduction in silver and gold realized prices copper.

Copper continue to improve in the first half of 2021 and remains currently strong.

Inc.

<unk> has seen growth in Q3 and has remained relatively strong.

Turning now to slide eight.

Compared to the same period in 2020 cash costs were higher at all mines.

The reasons have been previously disclosed in this call, but again this is mainly due to operational issues at our Bolivar mine and lower metal production across all mines.

We are also seeing increased treatment charges due to price participation escalators from off takers.

Unit costs were also affected mainly due to indirect fixed Scott, which still must be incurred despite lower metal metals production.

Looking to 2022, we expect to see higher labor costs from our Mexican operations of approximately $2 million per year because of recent legislation.

Changes excuse me.

Also we expect to see higher capex costs as we catch up on our backlog of infrastructure projects, which had been delayed during the past year due to the implications of COVID-19.

Turning now to slide nine.

We finished the quarter with $58 million in cash and have total debt net debt of $28 6 million.

The company has commenced the repayment installments of its debt facility in June of this year with initial installment of $6 $25 million.

We will continue to make quarterly installments with the last installment occurring in March 2025.

The company continues to have a relatively strong balance sheet working capital and cash position to support capital expenditures debt repayment and growth initiatives.

Based on our current budgeting process and current strong metals price environment. This scenario has supported for a base dividend.

Policy of <unk> <unk> per share, which was recently declared in our press release dated November five 2021.

With that I will now turn the call back over to Mike.

That concludes the presentation portion of the call. We will now open the call up to the Q&A portion of the call again in the interest of time to allow questions from all stakeholders. We ask that you. Please limit your questions to two at this time.

Additional questions can be addressed after the conference call.

With that operator, please open the lines.

Thank you.

If you'd like to ask a question today. Please press star followed by the number one on your telephone keypad.

Our first question today comes from Heiko.

H C. Wainwright. Please go ahead. Your line is now open.

Hello, everyone. Thanks for taking my questions Hope you're safe.

Can you hear me.

Hello.

Thanks, Tycho, yes, we can hear you.

Perfect well, let's talk about the guidance revision for Bolivar for a second you talk about in the call delays in mine development infill drilling and high personnel turnover. Therefore, your all in sustaining at the midpoint or up 26, 8%. If you just taken all midpoint old midpoint new.

Really another 50 ish days left in the year, So obviously that Matt Morris the impact of higher costs in Q3.

You can get there.

Other words change is actually less but nonetheless my question still stands.

When you to either end of this figure.

Are there any effects that may be you wouldn't have known about it at the end of Q3, which is now 40 days ago.

Thanks for your question.

The underlying rationale or the reason for the higher costs.

It's all tied to grade mostly grade issues.

At the Bolivar mine and that as Luis mentioned was something that started.

More than a year ago in terms of the lack of due to COVID-19 and the lack of personnel.

The high turnover, we were having the lack of development.

And that was forcing us to go into higher tonnage areas throughput areas, but with much lower grades.

We're still working through this sequencing issue.

It's been a lot longer than we had expected and as Luis mentioned, we're doing a full comprehensive review.

From geology mine to mill and.

So.

We should know more about this over the coming weeks months.

But we want to get to the bottom of this.

Okay.

Fair enough and then just one more quick clarification.

And it's also building a last question a bit you're taking down your capex guidance by 20% to $25 million again, only 60 days left in the quarter 50.

How much of that is actually due to the magnet type iron ore plant at the Bolivar mine and.

We will do anything to lower cost for the project given the crazy cost deflation, we're seeing for everything from printers to used cars to workers.

Thanks, Tycho, Yes, Youre correct that primarily the revision in Capex guidance, which was due to the magnetite project. We were we're fast tracking the magnetite project when we had iron ore prices.

Above $200 per ton.

As those prices came down and with the almost tripling of bulk freight costs.

Okay.

It allowed us to or prudently to consider revising this fast track and <unk> and <unk>.

We're taking our time, we're doing a comprehensive detailed engineering right now.

We won't be the project.

And we should have the results of that in the coming weeks.

Early December and it didn't really make sense to start embarking on our capex.

Graham until we had that detailed engineering again, we were comfortable doing it when iron ore prices were north of $200 per ton, but it's much different now where <unk> got.

Iron ore at slightly around 100, and you've got freight bulk freight costs anywhere from 50 to $75.

Okay.

No.

The economics have changed but we believe that the freight costs should normalize I think this is a little short term blur.

In the in the system.

Freight costs I would expect to get more in line with historical norms over the next six to 12 months.

Perfect. Thank you. Thank you I'll get back in queue.

Thank you. Our next question today comes from Mark Reichman from Noble capital markets. Please go ahead, Mike Your line is now open.

Mark.

Thank you. Good morning. So my question is really just kind of piggyback on the last ones. So.

Despite the raise cost guidance at Bolivar. It seems like just given the first three quarters, you still would be expecting some modest improvement in the fourth quarter.

So I wanted to just to delve into it in terms of your expectations I know youre doing the study.

But beyond just the developing the higher grade.

Ore bodies, how long do you think it will it take do you think it will be a quarter or two before you kind of get back to normal and what would you kind of consider normal.

Thank you Mark.

This is lee.

Terrific.

We are expecting that it's going to take US a couple of quarters to go back to normal.

But what normal means we should.

Asian.

And we can.

Rich.

The areas that we're planning to reach by then.

And we have more certainty OMB or that we are going to mine.

And let me go through well.

The differing delays.

We felt less mine development that we should.

We would have wanted to health.

So we are now only able to which.

Areas of the mine, which have.

Lower grade.

And we have limited flexibility.

In terms of the production, where we can make.

In terms of the infield drilling.

We have long days one week.

I wanted to do.

So the quality of the estimates of the resources that we're mining is also lower.

So sometimes we have some prices for what.

So we're fine.

Hello Betsy.

It's what has been driving.

The last quarter or so.

No.

We're doing now is where it was.

We're bringing strong lower drilling machines to get up to speed with the infill drilling.

And we are also bringing in some more.

Contractors wiedemann.

Go back to the usual might.

<unk> development.

We've highlighted.

This has prompted us to go into a very comprehensive review of all the processes they might reshuffle technical team right now there.

And we're going to engage with some.

Outside experts.

Who.

Through a more detailed review.

Hopefully in a couple of quarters, we should be back to normal.

That's very helpful. Thank you very much.

Thank you.

Just as a reminder, if you'd like to ask a question. Please press star followed by one on your telephone keypad.

Our next question comes from Leon Cooperman from Omega Advisors. Please go ahead lay on your line is now open.

Thank you just two questions.

One is do you have any ability or willingness to indicate any expectations for EBITDA in 2022.

You mentioned you thought a couple of quarters, we'd be back to normal.

What should we look at number one in terms of 2022 EBITDA expectations.

And secondly, I'm just curious is this an example of weak controls or philosophy communication. The last two quarters, you had major misses and made no attempt to educate the market before the report. So I don't know if this is a philosophy of communication or did you just didn't know what was going on in the business and whatever.

It's a philosophical question.

Hi, Thank you. Thanks, Thanks for your questions.

At this point.

At forecasting EBITDA for next year until we have this.

Comprehensive review completed.

On the Bolivar mine, that's really going to drive <unk>.

EBITDA for next year, usually we put out EBITDA in January.

Of every year and hopefully we'll have the answers by then by the <unk>, We don't I certainly.

Willing to push out the EBITDA guidance until we have a better.

Indication.

I don't like missing guidance as we've revised to in the past year, it's been extremely difficult.

And that was something that.

Was occurring and Thats to your second point these major misses.

We forecast <unk>.

Every every two months we have.

Update our forecasts.

For the year.

I guess, you can say that.

The mines in particular at Bolivar might've been a little optimistic in terms of how quickly they could have turned things around.

And we never saw that play out.

We did our.

Guidance halfway through the year.

<unk>.

<unk>.

The view was that we could we could make that up in the second half.

But when we got to the end of September we clearly saw that this trend was continuing and.

Debt.

It was.

We had to adjust guidance the guidance, we had no choice, but it is something that I take your point. It is something we need to to reexamine and make sure that better ability to forecast.

Okay.

We improve in that area.

What do you think you have the ability you just sitting that communicated.

The market has been working on she tailwind from that we still information for quite some time.

I think it's incumbent upon you know Mike or whoever is going to do it to make sure that people who are on the right track that's it and that's enough said.

Thanks, Lee and just just on that point.

We put out revised guidance when we have all the information available.

We presented to the board in a timely manner.

Again, this has been extremely difficult and it was.

A lot of discussions at the board level presentations, and we're continuing to to get to the bottom of the issues at Bolivar.

Thank you. Our next question today comes from Jim Young from Midwestern investments. Please go ahead, Jim Your line is now a ton.

Yeah, Hi, a couple questions here number one would be.

Can you help us understand the comments you made about these price statistic patients escalators are they the same as the Tcs Rcs.

And so can you just help us understand what these are number one number two though.

What.

Direction can we expect them to take how how they unfold in 2022 will it be at the same level or higher or lower.

Thank you.

Okay sure Tim Yes.

Tcs and Rcs and the price participations. These are something that the smelters and the off takers filled in.

So they want to ensure should should metal prices start to increase they want to participate.

In the upside.

And when we.

Looking at Bolivar.

We locked in our contracts for the <unk> 2021 year back in June of 2020.

Metal prices were.

Hovering around copper I should say was hovering around $2.75 a pound.

So if we think about it.

The formula and not to get too.

Too detailed.

Granular but.

Essentially the formulas work that for every $100 per ton rise in copper price.

At $10 per Boe.

Sure.

Pound rise in the PCR assay.

But you can see that.

In our copper price went from if we talk in tonnage we went from around 6000 tons.

$1000 a ton to $10000.

We were actually hovering $10500 a ton so based on that formula It adds another $400 approximately.

To the Tcs Rcs.

So that's extremely significant.

And to answer your second part of the question will be to continue.

Because of the Bolivar operational issues, we do have there likely that we will.

Complete our 2021 commitments in the first quarter of 2022, just because of the great issues that the concentrates were not at the level that we anticipated. So we will likely see these tcs rcs continuing into.

I'd say April of 2022 before they reset again and go back to a much more normal.

Prices for costs I should say, so so Ed if you set the 2021 prices back in June of 2020.

What is the June what I would assume that the.

The 22 patients have been set already so can you help us understand relative to 2020, we.

When you set those.

Two for 2021.

Will the relative cost be going forward a normalized basis.

I think they're going to be they're going to be much lower than the $450 a ton or whatever you were saying there will be in the range of 60 to $100 a ton. So you should see a significant decrease in the <unk>.

Okay. Thank you very much.

Thank you. Our next question today comes from Alonso Checker from Rs <unk> Company. Please go ahead. Your line is now open.

Thank you.

Morning, Jason.

So I had a couple of questions.

Yeah.

Did the COVID-19 related issues.

Great.

Yes.

Public on their side.

Why haynesville being parked coil.

<unk>.

It looks much worse.

Meanwhile, relate the pool.

So all sorts of other miners.

Paul.

Oh Wow.

Regarding D Bob Chiusano Diamino.

Oh, the integration toll in Bolivar the.

The tunnel.

We understand what's going to haul, bringing some operating costs of the mine. So we just wanted to understand what's the Hudson.

Okay.

Sure.

Regarding <unk> and Bolivar.

And Catherine harder because <unk> already had about block or file.

Of infill drilling and development in place by the time we.

Starting with Joel.

Coffee has compounded the issue is that.

Bolivar.

Place.

So that's.

We are now.

Okay.

Why three feet.

Jody.

We're seeing a much better position.

So.

I mean, it's.

Chris You mentioned operating normally now.

And we'll see.

The simulation issue.

We should have sold ships have been felt in 2020, but due to Colby.

Before and now it's already been solved.

But due to the backlog.

In.

We believe at the <unk>.

Beginning now.

Now this seems just got worse over time, so now we are putting enough capital and resources to robust.

It should be.

Regarding the timing would you say that's good news.

The integration following the first three kilometer tunnel.

We have driven two kilometers already we are short one kilometer.

In less than one year, and we should be finalizing that tunnel.

We are also driving the connecting tunnels from Bolivar West.

No the CFO so eventually by 'twenty two.

Three we should have these operate.

Operator.

There is a connection.

Terms of including some of each lender with treasury side, like crusher or something else that should take a bit longer.

Okay.

Thank you very much.

Thank you.

Okay.

Thank you. This concludes today's Q&A session.

Now hand, the call back to Mike Mcallister for any closing remarks.

Operator that concludes today's call on behalf of management team I would like to participate at all I would like to thank all participants for joining us.

A replay of the webcast and all materials can be found on our website at Sierra metals Dot com, but is there any further questions or concerns you may reach out to with after today's call or information can be found in today's presentation as well as on the company's website. Thank you operator, please conclude the call.

Thank you for joining today's call you may now disconnect your lines.

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