Q1 2022 Fortuna Silver Mines Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Fortuna Silver Mines' Q1, 2022 financial and operational results call. At this time, all participants have been placed on listen only mode and the floor will be open for questions and comments. After the presentation. It is now my pleasure to turn the floor over to your house.
Carlos Baca, so the floor is yours.
Thank you Jenny.
Morning, Ladies and gentlemen, I would like to welcome you to Fortuna silver mines and to our financial and operations results call for the first quarter of 2022.
Hosting the call today on behalf of our tool that will be core fundamental and also pricing and Chief Executive Officer, Lisa <unk> Chief Financial Officer sits on the last call Chief operating Officer of Latin America, and fall Criddle Chief.
Chief operating officer of West Africa.
Todays earnings call presentation is available on the featured presentation box on our homepage at Fortuna Silver Dot Com as a reminder.
<unk> made during this call are subject to the rear 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 product conclusion 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 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'd now like to turn the call over to Jorge Alberto and also a cofounder of <unk>.
Thank you Carlos good morning tool.
Joining us today.
The business performed very well in the first quarter of the year, we realized silver price of $24 per ounce.
$1994 per ounce of gold.
We recorded net income of $27 million or <unk> 90 per share.
After adjustments for the unrealized losses on derivative contracts for a portion of our byproduct zinc production.
The write down of exploration investment.
At our prospects in central Mexico, or net and core adjusted net equal gaming at a record $33 million or 11 cents per share, beating analysts consensus of <unk> 10 per share.
Our adjusted EBITDA was $80 million.
With a robust margin over sales of 44% as of the end of the quarter. The company maintains a strong balance sheet with low debt leverage and liquidity available of $150 million, which is more than adequate to meet all of our capital growth plan.
With respect to key growth projects, the Gila or griddle, our chief operating officer for West Africa will be providing an update for you in a minute, but I kind of VAT construction is 48% complete as of the end of March.
So the latest report provided.
To me.
The end of April completion is at 55% the project remains on time and on <unk>.
For our first Gulf War in meat.
<unk> 2003.
Of note that together as well as the May then the current mineral research for that Sandburg discovery, comprising $3 5 million tonnes, averaging three two drops of goal for thought containing 350000 ounces of gold we made the news release.
On March 15.
Todd burden remains often with high grade gold intercepts in multiple directions, we plan to continue drilling safford another targets.
For all of this year the soccer discovery incremental.
What is already a high in the making with gold reserves for a decade.
Looking at our consolidated production all of our mines performed well and in line with our annual guidance projections for six two to $6 9 million ounces of silver and 244200 80000 ounces of gold.
During the quarter, we produced 67000 ounces of gold and one 7 million ounces of silver.
Compared to the first quarter of last year, we show a significant increase of 93% in gold production.
The increase is driven by contributions from the get a multiple high.
The ramp up completion of buying in the province of South deep.
Steven.
Silver production declined by 13%.
This is explained by lower head grades at our sample set by these lower grades are in line with reserves.
Matt.
In the quarter gold accounted for 71% of sales silver for 19% of sales.
10% buyback is made of byproduct that I think kind of work are you home on mining.
On the side of costs.
Ore mines performed within the ranges we provided for in our annual guidance are costs are quite competitive at all of our minds given the company resilience as we navigate through the accretions met those price cycle on short term price swings.
<unk> produced gold at an all in sustaining cost of $1078.
And a multiple on an all in sustaining cost of $1147 per ounce at our silver mines <unk> produced silver.
Audience sustaining cost of $17 eight.
At the San Jose at $15 per hour.
With 4 million ounces of gold equivalent mineral reserves diversified production from mines located in two of the most important mining regions in the world.
Competitive costs short term growth in the pipeline and a healthy balance sheet for tuna is well positioned to continue harvesting high value opportunities within the portfolio.
As we advance our business.
The company has put in place a non course issuer program for the repurchase of up to 5% of the shares issued in outstanding we intend to make use of the program. This year in doing so management, we'll be considering the timing of capital requirements. So for growth projects.
Of course, assessing the value of the call.
Because now we can have a center related us a quick glance so for Latam operations.
Thank you.
And as Jorge mentioned earlier.
The company's three operating mines in Latin America delivered solid first quarter.
We had high absenteeism in January in all operations.
Despite of that operations managed to deliver according to plan.
Costs are.
Contained we've seen guidance for all operations.
At the middle lines in Argentina gold production exceeded 30000 ounces for the second consecutive quarter.
Compared to a year ago in data delivered 5% higher gold production, which is explained by the increase in performance of the three stage crushing and stacking circuits alone with a 7% higher head grades for the quarter.
Delivering according to our guidance predictions.
The San Jose mine in Mexico delivered lower silver and gold production versus comparable quarter, but it is fair to mention that it is in line with the mineral reserve estimates.
And finally.
In my mind in Peru.
At 17% higher silver production and 12% higher net production as we enter a higher grade portion of their research and level 16.
Deepest level of the mine.
Production is.
<unk> is on track to achieve the upper range of guidance.
Thank you.
Paul do you want to give us an update on West African operations. Thank.
Thank you Jorge.
Operations in a project in West Africa was solid in the first quarter and in line with guidance for the period.
Effective cognitive abided.
Ill effect on production, Gary Micah will progress to go on a project.
At Yamana Sky production for the quarter was 2% greater than the plan that 'twenty half naphtha golf.
In the mid to upper end of guidance for the period.
Costs were kind of a lot of the award of the guidance range and wants to add in 147 axis adult perhaps for the period.
The project is well placed to be de risked in the challenging environment in which we are developing them onto that.
Progress and costs are in line with the plan. We are forecasting the project to be completed on time and on budget in Q2 of 2023.
Phil This is a good outcome tonight, given the schedule inflationary pressures, we see in the market today.
Brooks on the ground are proceeding well and along with the scheduled with critical path items being advanced across the property as well as in the procurement space.
Orders have not from Q1.
The ongoing and steady progress of bulk earthworks in the plant thought and TSA areas ahead of the approaching let's say.
I was actually at the EPC contract to work upon him to start and the commencement of the precious client civils.
The commencement of the erection of the erection of task deal for the high voltage power one.
Fortunately the execution of the mining services agreement with minor NGL and the ongoing expediting a key supplier of items, such as the Sag mill and high speed Transformers, which parts remain on schedule.
We're extremely pleased with the reconciliation of progress against their plans at present and look forward to bringing you further updates as they develop.
Thank you.
Yeah.
Luis now to give us a run.
Our financial results and also expand on the topical issue, which is inflation so at least.
Yeah. Thank you. So so as was mentioned sales for the quarter were $182 $3 million. This is an increase of 55% compared to Q1 of 2021.
Higher sales were driven by the contribution of yet a multiple with $55 4 million of sales in the quarter.
Sales suddenly middle of $54 $1 million, which was 48% higher than Q1, 2021 and represented an additional $18 $1 million to our top line.
This was partially offset by lower sales had central sales, 17%, representing a decrease of $9 $4 million.
In sales.
That creates as.
That has been mentioned by <unk> was driven by lower production was broadly in line with our guidance for 2022.
Year over year, and key financial metrics reflect the expanded size of our business.
Adjusted net income of $3 $33 $4 million was up 21% and adjusted EBITDA of $83 million was up 32%.
Free cash flow from operations of $9 $6 million was impacted in the quarter by negative changes in working capital of $27 $9 million and timing of taxes paid.
The working capital changes.
Are to a large extent related to short term timing effects, which we expect to revert in the next quarter or two.
Our EBITDA margin in the quarter was 44% compared to 52% in Q1 2021.
The lower margins were the result of a decrease in margins at the San Jose mine.
And the higher general and administration expenses of $8 3 million.
This was comprised of $4 million of higher share based statements when compared to the first quarter of 2021 for which we recorded a credit of $4 million.
And $4 million higher G&A between the sites in corporate we did have some nonrecurring expenses in the quarter in the order of $1 5 million.
Moving forward, we expect quarterly G&A at corporate between six and six $5 million excluding share based payments.
An additional item worth noting on the income statement is a $4 $2 million loss on derivatives of which $3 5 million was unrealized.
The unrealized portion was comprised of $4 $1 million of sync and led derivative contracts offset by $1 million of unrealized gains from diesel hedges.
Moving on we have provided a comment.
On the news release, and our MD&A on inflict inflation effects so far.
We are seeing rising prices for certain key consumables, including cyanide explosives and steel components, our operations and of course fuel.
In Q1, the total impact with respect to our cost guidance has been modest we have seen however, a trend throughout the quarter and into April for some of these items, we should expect a higher impact in Q2, but based on the more recent data points, we expect all in sustaining cost.
Our operations to remain within the range of annual guidance. We are monitoring these trends closely and the outlook could certainly change.
In the case of <unk> in particular are diesel is a significant portion of our cost structure between 16 and 18%.
Noting we have hedged approximately.
55% of diesel consumption for 2022 at levels that are 30% below the average prices we saw in March and 50% below spot prices, we were seeing in April .
On the balance sheet and liquidity requirements.
And as Scott had pointed out we closed the quarter with $110 million of cash and cash equivalents and liquidity of $150 million, which includes $40 million debt remained undrawn at the end of the quarter under our $200 million revolving credit facility.
Our total net debt, including the outstanding convertible debenture of $46 million is $96 million, which provides for very modest debt leverage on.
On the singular construction we have.
The $35 million in the quarter and close to $70 million on accumulative basis, our expected spend for 2022 remains approximately $110 million.
Back to you.
Thank you Carlos.
Okay.
We would now like to turn the call over to any questions that you may have.
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 ask that while paging. Your question you. Please pickup your handset and listing on the speaker side.
To provide optimum time quality, please hold while we poll for questions.
Okay.
Thank you. Your first question is coming from Trevor Kent.
Trevor you May ask your question.
Great. Thank you.
In my model it would appear that your operating cash flow is set up to offset the capital expenditures you've got planned for the rest of the year and so my question was about the drawdown of the line of credit in Q1, and then subsequent to quarter end a bit more I was just wondering if this is insurance against the potential inflation.
Our operating risk.
Or perhaps what is this somehow related to having extra cash on hand for the share buyback program.
No it really has to do with more of.
Timing of.
Of.
Our treasury Trevor.
We pay the alternative of drawing down on the facility or repatriating from from the sites the bulk of our cash sits in the at the sites.
We will always be assessing.
The use of our facility as opposed to moving cash which creates friction right.
In most cases trigger tax events. So that's really the logic behind the drawdown draw down you have seen.
Right I guess I.
I didn't have that visibility into exactly when.
The Capex is going to get spent and forgetting that you do have to move money around when you talk about repatriation is that kind of specifically with respect to Linda Aero that you talk about the most having the effect of friction.
Yeah.
It would be beyond India <unk> is.
Creation is built into our intercompany funding plan.
On the drawdowns drawdown of Q1 is above and beyond.
Funding that's already taken place.
Okay.
And then I guess also just sort of related to funding while I've got you Louise.
Do you have a minimum cash balance target, while you're under construction that youre thinking about.
I would say $100 million of figure with which we feel comfortable.
Okay.
And then my last question.
Kind of on this theme.
Have you thought about any forward gold sales I've seen some of your peers do.
<unk> very short term 181 year 18 months forward sales.
They've had pretty good luck I think with the timing of that is that something that Fortuna is considered.
Honestly, we have not we typically I mean as we as you know we will not engage in forward sales of either silver and gold and up to now it hasnt changed forever.
Okay.
That's all I had thank you. Thank you very much Louise.
Thank you. Your next question is coming from Don Demarco of National Bank Financial Don Please pose your question.
Oh, hi, Thank you operator, and good morning, gentlemen, My first question has to do with.
The spend to grow I think that we and our model her her previous messaging, where we're looking at about $110 million to be spent in 2022.
We just allocated that's equally between quarters, but I see that in Q1 year, a little bit ahead of it.
25% per quarter spend rate.
Can you just give us an update are you still expecting to spend about $110 million in 2022, and and how should we allocate that across quarters.
Okay.
Yes, so the expectation on the total amount hasn't changed I mean the.
Quarterly expense.
Can be a bit volatile, sometimes depending on different factors.
We expect to be at to be the balance to be spent relatively even over the next three quarters.
But again that can vary a bit not necessarily you too.
Deviations in execution, but rather just management of payables and turned on advances.
Two contractors.
Okay. Thanks for that and my next question has to do with your multiple and Paul.
Congratulations on a strong improvement in costs quarter over quarter from Q4, NSE improved quite a bit into Q1.
But I'm reading in the MD&A that you're.
Youre expecting <unk> to be on track for the high end of the cost guidance. Yes, Q1 was below the lower end of the cost guidance. So can you just maybe add a little bit more color on.
<unk>.
What drove those LOE costs in Q1, maybe was there some fuel subsidies in country or something.
And then what our expectations should be in order for the cost sort of climb to be within guidance or at the high end of the guidance range for the year.
Thank you.
Are there.
Thanks, Tom.
Thanks.
Q4 award more than all of us.
We had a tough quarter there from a production perspective that obviously reflected in the call.
The nature of the hard guide that drove the project in Q1 has got a good start to be Ross.
There is a component in that in the cost.
Specifically, where there has been some.
Sustaining capital preferred in small amounts.
Hum.
Help things.
I think we're taking forward for this for the holiday.
The cost of our mines.
Go off on.
Got it.
Hard.
To continue on the path that we've had for Q1.
I think it's probably okay.
Got it.
Okay, great. Okay, well, thanks for that I appreciate it and good luck with the coming quarters. That's all for me.
Thank you. Your next question is coming from any more let's say he's a private investor.
<unk>.
Yes, I'm curious about how you start plant is doing at linde narrow and specific.
<unk>.
On the financial side you.
Your account copper in your financials as a byproduct and then secondly, how much of a science.
Cyanide is being recovered through the plant and does that lowering your AR.
Daryl.
Yes.
Yes. Thank you.
Hey.
<unk> has been operating as planned.
We have been able to recover it.
<unk> significantly.
<unk>.
Making up.
Or or introducing some savings.
And we expect to capture some of those benefits along the year.
Which will offset at some points on.
Pressure.
Inflation pressure on home prices for our site.
Yes, and then the.
Second question I have is your.
He is running at 400 cubic meters per hour right now when do you plan to go to 600 and.
Do you feel that a 600 cubic.
A meter per hour flow rate would increase your recovery.
Yes.
Yes, we're running the system 400 cubic meters per hour, yes, we see the opportunity to increase it.
Draw down of inventory in the file increasing hello.
Remember that we're just in the second lift right now.
Okay.
And.
We are continuing expanding.
The liner.
The first phase so.
Well likely be operating at 400.
The remaining of the year.
The inventories.
Are not an issue at this stage in their design. They expansion was a benefit that we saw in the transition from from year to year, three which would be something in 2023.
Right.
Okay. Thank you very much.
Thank you Sir.
If there will be any final questions or comments. Please indicate so now by pressing star one on your handset.
Okay. Next question is coming from Dan Moran is a private investor.
Andy.
A follow up on the.
Permitting concerns.
San Jose.
Yes.
I am also secondly, curious why we haven't seen more drill results from.
The <unk>.
It's something I've always look forward to.
Anyway any any comments are welcome. Thank you.
The Permian at San Jose.
The mine is operating under the permits granted in the months in the month of December .
So.
We have nothing new to report on that front, so we have our permitting and operating.
Regularly under the Permian.
With respect to two singular drilling.
We are implementing drill rigs.
So again that we're bringing on additional drill rate.
And.
The program is being expanded.
We're allocating additional funding to continue.
Pursuing.
The opex.
Areas that we still have in Sunbury.
Other targets.
We're looking to provide that exploration.
A.
<unk> two in the second half of this month, so look forward to that.
Yes.
Thanks very much.
Thank you Sir.
There are no more questions in the queue I'm going to hand back over to Carlos <unk> for his closing remarks.
Thank you Jamie if there are no further questions, we would like to thank everyone for listening to today's earnings call. We look forward you to joining US next quarter have a good state.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.