Q4 2022 Fortuna Silver Mines Inc Earnings Call
Okay.
Greetings and welcome to the Fortuna Silver mines fourth quarter, and full year 2022 financial and operational results call.
At this time all participants are in a listen only mode on a question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
I would turn the conference over to your host Mr.
Mr. Carlos Baca director of Investor Relations. Please go ahead.
Thank you and good morning, ladies and gentlemen, I would like to welcome you to the Fortuna Silver mines fourth quarter, and full year 2022 financial and operational results call.
Hosting the call today on behalf of our tune out will be Jorge <unk>, President and Chief Executive Officer.
And also our Chief Financial Officer said sort of electrical Chief Operating Officer, Latin America, David Whittle, Chief operating Officer of West Africa, and Paul Williams Senior Vice President exploration.
Today's earnings call presentation will be available on our website.
Fortuna 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. This forward looking information is subject to a number of risks uncertainties and other factors actual results could differ materially from a conclusion forecast or <unk>.
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.
Additionally, information about the material factors that could cause actual results to differ materially from the 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 and 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 <unk>, President and Chief Executive Officer, and cofounder of <unk>.
Thank you Carlos and greetings to all.
Safety first we close of the year.
With a strong trend of improvement on key safety performance indicators.
Each year over year continue coming down as a result of multiple initiatives implemented across the business.
Our kpis for total recordable injury rate closed the year at two three down from $3 two in 2021 and below the industry average of 2.9.
Lost time injury rate also showed a strong improvement ending the year at 0.39.
Down from 2.53 in 2021.
We recorded five lost time injuries in the year down from six in 2021.
However, all these work with tainted by a fatal accident at the Orleans, They don't mind in January 2022.
Safety is a precondition for business.
We remain firmly committed to a zero harm work environment.
On December 21st we made public or position statement on the adoption of the global industry standards for tailings management.
Our commitment to generate shared value over the long term for our stakeholders involved adapting strategically our business practices and standards.
Enabling us to better cope with risks opportunities on heightened expectations.
We can see their tailings management to be Paramount through responsible mining and the adoption of <unk> allows us to refine our approach to safe tailings management in a way to ensure operational excellence.
On March 14th we informed of positive news coming from Mexico with the court granting a permanent injunction through our San Jose mine.
Effectively protecting the 12 year environmental impact of the recession of the mine.
<unk> <unk> Chief operating officer for Latam, We will expand on this later on the presentation.
Okay.
Our business generated adjusted net income of $7 2 million.
<unk> per share in the fourth quarter in line with analyst consensus.
And for the full year.
$42 4 million or 15 cents per share slightly ahead of the analyst consensus of <unk> <unk>.
Net income.
However was negatively impacted by noncash impairment charges net of taxes, I think to $164 million.
For a more yet a multiple in data on sense lets say mines.
Luis our CFO will expand on the Bourbon analyses drivers later in the presentation.
We generated free cash flow from ongoing operations of $4 4 million in Q4, and a healthy $69 1 million for the year. This after servicing sustaining capex and corporate expense.
Okay.
Production for the year was well within the range provided in our 2022 guidance.
We delivered 259000 ounces of gold and $6 9 million ounces of silver or 402000 ounces of gold equivalent.
Measured against 2021 or two names on an exciting growth path.
We have grown our gold equivalent production from 305000 ounces of gold.
402000 ounces in 2022, and these you anticipate further growth to approximately 450000 ounces.
Our guidance.
Despite persistent inflationary pressures throughout 2022, all of our mines performed within the AC range provided in our annual guidance. The only exception was the Lindo mine, which recorded <unk> $1142 per ounce of gold marginally above guidance.
Main consumables, such as diesel cyanide cement and explosives have experienced increased costs to varying degrees depending on the mine on location for.
For example at early narrow mining Argentina year over year cyanide costs increased by an average of 34%.
Yeah, there are multiple mining boom Kina Faso, 44%.
At our Diamond mine in Peru year over year diesel costs increased by an average of 60% and as early in their own minds, 34%.
We have observed easing of inflationary pressures those far conditions remain challenging.
Annualized cost increments at their minds over the past two to three years range from 6% at <unk>.
Two 8% at San Jose at 12% and 17% that yet.
As Bert will gold Council figures up to Q3 2022 margin compression for the industry can be observed.
Showing an 11% annualized increase in ASIC.
The inflation since 2020.
In Q3, 2020% to 50% of global mine supply West produced at an all in sustaining cost of approximately <unk> hundred dollars per ounce only eight seven quarters ago that figure was $1100.
Our flagship singular mine construction in the Wild West Africa remains a primary focus for management for the second half of 2023, we have provided production guidance for <unk> of 60 to 70000 ounces of gold at <unk>.
All in sustaining cost in the range of 801 from a tightened ranging from 880 to $1080 per ounce. That's all in.
David will further expand on that later in the presentation.
And on the exploration front.
Would highlight our success with the delivery of growth in resources at the sunbird deposit one of six deposits, making the singular mineral inventory on December 5th we reported a new sunbird open pit resource estimate of 279000.
Gold ounces at an average grade of 266 grams per tonne and indicated category glass half a million ounces of gold at an average grade of three seven grams per tonne in the inferred category.
On Monday, 13th we reported fresh results from the Sunbird infill program, but.
Well, we are as VP exploration is here with us and can provide an exploration update so Paul do you want to go ahead. Please.
Thank you.
Some of the latest data deposits shaping up as potentially the largest.
The current focus in some burdens on the exploration drilling to upgrade and expand.
406000 ounces of gold.
By the end of Q2 2023.
Two drill rigs turning on that program.
I've seen that news release this past Monday.
The data are consistent.
Based on that what was previously modeled optimized show.
We've also extended mineralization approximately another 100 basis.
The optimization show.
Several high grade intersections such as apartments.
<unk> gold 28 meters downhole holidays GLC 66.
In addition.
Furthermore, extending saw great sites themselves.
Great shoes.
In Q3 potentially.
Attention sitting up the foundations for future development.
Okay.
The regional exploration will continue into Q3.
Hi, great history that Youll and barrage of prospects, which we highlighted at the center of the news release.
Mid term target generation will continue once again.
Interbody system.
This improvement.
Peter Corsa.
Question worker Adherend bucket continues to generate new investments.
Underground drill testing of western strike extensions 50 caused mineralization.
Okay.
Realizations approximately in the business to the deal.
And there's also onboard.
It's continuous.
Maybe to prove <unk> juices teas depth extensions of the four kilometer long and the last thing.
During Q2 targeting down to projections of ore shoots wondered three some 200 to 400 basis below the previous drilling previous modeling kind of.
By the way.
Additionally.
Asia looks range working out.
<unk>.
<unk>.
That's right.
And finally in Mexico will consider as they continue statistical did extensions with Morgan strike extent.
Plenty of exploration work on that will start to <unk>.
Alright, thank you.
Thank you Paul we.
We will move on to an update then from the Chief operating officers, we can start with Latam says at least.
Thank you Jorge.
And as you have already mentioned last Tuesday, Fortuna announced that the Mexican federal administrative court.
Favorable permanent injunction Dominion <unk> Catherine.
Which allows the San Jose mine to continue operating under the terms of your regional 12 year environmental impact statement permit.
Which the court reconfirmed in November of 2022.
Alright.
Sure.
We will remain in effect.
Boeing for continued operations at this time for the same money upfront.
Up until the court rules in response to the resolution issued in January 2023 by the same or not.
San Jose's EIA.
Yes.
Although uncertainty.
That it could be in one and a half to two.
Two years.
Moving down to Peru, despite social unrest on numerous road locates throughout the country operations I think AUO memory has been unaffected.
2023 annual production guidance.
These two remaining.
I will now discuss the original results of our three operating mines from Latin America.
The fourth quarter of 2022.
Mark.
Second quarter consolidated.
<unk> gold production of over 35000 ounces.
For the full year Latin America achieved record gold production of 153319 ounces in <unk>.
14% increase compared to 2021.
<unk> silver production was $6 9 million ounces, achieving the higher end of annual guidance.
All three mines to lever production results in line with that.
Our mining plans.
Reserves estimates.
In Argentina.
And then in dental mine delivered another consistent year with gold production totaling 100.
<unk> thousand ounces.
He is directly related to an improvement in the performance of the three stage crushing and stacking system.
Throughout 2022 management implemented numerals high impact optimization initiatives to better capture efficiencies, allowing the operation to offset some of the cost increases from inflationary pressures on key.
Greece and consumption of fresh makeup syenite unsold for recapture.
And.
The optimization of the mine fleets trucking distance, reducing diesel consumption and improving productivity.
In the last quarter of 2022.
Project team.
The circulation strictly of the HP GR was initiated.
The aim of reducing brand new enrollment rates and improving global recovery of ore placed at the Leach pad.
In Mexico.
Jose mines, silver and gold production for 2010.
'twenty two.
<unk> totaled $5 8 million ounces of silver and 34124 ounces of gold.
Achieving the upper end and midpoint range all final guidance respectively.
Average head grades for silver and gold for the year were 191 grams per ton silver.
114 grams per tonne of gold.
9% and 12% decrease respectively, when compared to 2021.
But remaining in line with the mines mining sequence.
<unk> estimate.
Last year mining production using sub level stocking methods represented.
35% or four sent to the processing plant.
Our 2023 and is expected to reach 60%.
In Peru.
Oh My mine continue to deliver steady production in 2022.
Using one 1 million ounces of silver.
Feeding the upper range of annual guidance by 4%.
Zinc and lead production totaled $46 2 million pounds, and $34 6 million tons respectively.
Both exceeding the upper range of final guidance.
Base metal production benefited from higher mill throughput during the year and material mined at the levels of the animas vein, allowing for a significant improvement in ore grade.
And oxide sulphide ratios, therefore, boosting plant recovery.
Back to you Jorge.
Thank you Sir Sir we can move on to David in West Africa.
Cuts Jose.
Operations in West Africa countries, how they performed.
Performance at <unk>.
Today with EIA my calculator in Gulf production of over 100000 ounces.
The midpoint of annual guidance.
The guy Who's Consumptions tracking well with respect to our schedules and budgets.
So Paul projected mid 2020 right.
Hong guide worldwide inflationary and supply chain pressures did not impact budgetary expectations.
No the construction progress at <unk>.
Right.
Recent political disturbances in Vicky Tsai.
The impact on <unk> operations.
Safety performance of the year Ive kept my kind of mine was strong.
Unfortunately, yes.
Right.
Incidents buys in the fourth quarter.
The Rmi calendar ground, great control and brownfield exploration program continues with an encouraging outcome extending our planned mining boundaries on the western side of the orebody.
Construction progress at <unk> continues to track on.
Sorry continues on track and on budget.
As of the end of.
The project was 93% complete with approximately 160 million incurred.
<unk> $173 million capital budget.
The water storage stems complete and is currently sold in sufficient water for commissioning and operating activities.
And the pricing team plan structural mechanical piping, electrical and instrumentation innovations and nearing completion.
NHI nation, and commissioning activities of that weakness yet.
First ore to the crusher full commissioning is expected EMEA. The April followed by class or to the mail lightweight.
In parallel with the excellent progress on the ground operational readiness readiness stripes.
Well.
The mining technical processing, our maintenance teams are being recruited with all senior management positions currently payable.
My Durango mining contractor continued with on site mobilization on the establishment activities.
Together with the recruitment of key positions and equipment operators.
The first phase of grade control drilling has been completed with more than 12000 meter drill initial.
Results are bearing to align closely with the current geological models.
As of the end of February cleaning of the antenna Pacer has occurred.
Escalation of Yc's, taking place without even the 60000 cubic meters of Weiss.
Great and being utilized for the construction of the <unk>.
Preparations are currently underway for the start of the blasting operations.
To the first ore to be available for the commissioning of the <unk>.
Thank you.
Thank you Jorge.
Thank you David.
The team does a good job keeping our website.
David on the construction on gallery for say Gayla.
<unk>.
Two to visit the website and the construction gallery, so Luis you want to.
Briefing on the financials.
Yes. Thank you.
I will start addressing the impairments we have recorded in Q4.
We recorded a total impairment charges as Scott had mentioned over $188 $8 million before tax.
And the $164 $5 million net of tax.
And yet our muscle we have recorded an impairment charge.
$103 $5 million before tax.
The impairment is related to the write off of exploration and evaluation assets of $60 million.
And lower expected cash flows as a result of higher cost and lower reserves from the elimination of Crown pillar recoveries from our reserve base.
At <unk>, we have recorded an impairment charge of $72 million.
Before tax.
It is related to lower expected cash flows as a result of higher cost to a large extent related to inflationary pressures team throughout 2022.
And the effect of <unk>.
Higher discount rates.
At San Jose, we have recorded an impairment charge of $9 $1 million before tax impairment related to higher costs as well as capitalized exploration expenses over the past few years, which fully replace depletion.
Also contributing to the impairment is the fact that the partial replacement of accretion we have seen has been at a lower head grades compared to the previous average head grade of the reserve.
As a result of the impairment.
For Q4 and in 2012, we recorded a net loss of $164 million.
After adjusting for the impairment and write down of our stockpiles at the Avino mine of $3 $8 million.
Net income was $7 2 million compared to 21 29 $1 million in Q4 2021.
The reduction in adjusted net income was mainly due to lower sales volume lower silver prices.
<unk> cost year over year across our operations the lower volumes were largely in line with our mine plan.
EBITDA for the quarter was $55 8 million.
$833 million reduction over Q4 2021 as explained before.
Mainly to lower sales of $34 million.
Free cash flow from ongoing operations that is after capex at our operating mines and corporate expenses was $4 $4 million compared to $46 8 million in Q4 2021, the drop in free cash flow is consistent with our reduction in EBITDA.
The higher capex execution quarter over quarter of $5 million.
For the full year, we have recorded a net loss of $135 $9 million compared to a net gain of $59 4 million in 2021.
The loss is explained by the impairment charges.
As previously discussed.
After adjusting for the impairment charges and other non recurring items adjusted net income for the year was $42 6 million compared to $106 million in 2021.
The decrease of $60 million.
And adjusted net income was a result of lower EBITDA of 31 million.
Depreciation and depletion of $50 million and lower taxes of $25 million.
Outside of the impairment charges the main items of adjustments to our adjusted net income in the year were $8 million of ore stockpile inventory write downs.
And $5 3 million dollar write.
Write offs of mineral properties.
Our free cash flow from operations for the full year 2022 was $69 $2 million down 17 million from the $86 million recorded in 2021.
The reduction in free cash flow was consistent with lower EBITDA of $35 million.
Higher capex of $25 million.
Partially offset by lower taxes paid and changes in working capital.
2022 we converted 28% of EBITDA into free cash flow compared to 31% in 2021.
Yes.
On our balance sheet and liquidity position in Q4, we increased our corporate facility by $50 million to 250 million.
At the end of the year puts us in a total liquidity position of $150 million comprised of $80 million in cash and cash equivalents and $70 million.
And drawn under the credit facility.
Our total financial debt outstanding as of the end of the year was $226 million.
And 146 million net of cash.
It's an increase of $60 million and 87 million over year end 2021, respectively.
During the year, we spent $251 million on additions to mineral properties plant and equipment.
Our cash flow statement.
Which was mostly comprised of.
$108 million in that particular project construction.
$9 $3 million of singular brownfields exploration.
$8 $1 million of Greenfields exploration.
And they haven't told me.
Capital expenditures, including brownfield.
Our operating mines, there is a $13 million balance related to capitalized interest capitalized management fees and advances to contractors.
As of year end, we had incurred hasnt been $47 million out of that 173 5 million construction budget.
Yes.
The amount remaining to be spent including project accounts payable as of December 31 was $38 million.
And finally between Q2 and Q3, we repurchased a total of $2 2 million shares under our share repurchase program at an average share price of $2 $68 per share.
Back to you.
Thank you Luis Carlos to you.
Okay.
Thank you we will now like to open the call to any questions that you may have.
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Okay.
Thank you we have a question from Adrian day.
With Adrian day asset management. Please go ahead.
Hi, Good afternoon I just wanted to ask you had mentioned when you were discussing impairments you mentioned at San Jose the lower head grades can you kind of quantify that.
Luis do you want to expand on this.
Yes.
The extension of life of mine.
San Jose today is mostly through with.
Victoria vein wage.
That's carry at lower a lower head grades with respect to average grade of the reserve.
That is that is in our reserve statement.
Hi, I'm not able to give you exact hedge rates out of the Victoria vein out of my head right now they're Adrian but.
I'm not sure if either Paul or assessor I wanted to jump in there.
I mean could you categorize it as meaningful marginal.
Well the.
Sure.
Go ahead.
Just going to say that.
Yeah.
Sure.
We're not going to get an exact.
Number on that but what I can say is that.
The projected <unk>.
The remaining life of mine that San Jose is still based on those.
Lower head grades with respect to our historical production is still contributing significant.
Margins and free cash flow not at the same rates secondly, as before but I.
I mean for instance.
And our current mine plan.
Based on our production guidance for the year you can appreciate lower head grades and lower production with respect to 2022 and penetrate into lower with respect to 2021, but nonetheless this.
The current price environment, we are still predicting a healthy free cash flow out of San Jose in the range of $25 million to $30 million.
Right.
I think the additional color I could provide on what those lower head grades and fly for San Jose moving forward at this stage.
Okay. Okay I appreciate that and one other question. If I may also on the impairments I build in Barrow you mentioned the impairment was.
Mostly due to higher costs, I mean, none of us knows what's going to happen too.
Costs going forward, but assuming cost stay where they are.
Does this affect Melissa thanks to either your production your annual production or maybe even your ultimate.
Reduction from the mine.
In terms of volume.
No.
The guidance we have provided.
Already for the year for 2020 already incorporates our view us to inflation trends in.
In the new year right.
Right.
So there is no new information here with respect to what's already been shared as part of our guidance for 2020.
Either in production or on cost.
Okay, I'm, sorry, I didn't express myself clearly do the Hyatt will have higher costs.
Make any of the or hunting.
Noneconomic that you were expecting to be economic.
Okay.
I think.
I think our reserves.
I think or we're gonna update or reserve inventory as we publish every every year.
In the coming weeks.
But we do not expect any significant deviation to what you are being seen in the reserve.
If you look at our production for 2022.
San Jose de Levered, 575, 8 million ounces of silver.
The full year of 34.
And ounces.
<unk>.
If you look at our guidance for 2023 San Jose.
Is delivering.
Delivering a game between $34 37000 ounces of gold.
Five three to five 8 million ounces of silver if you look at the reserve average grade.
The Victoria vein comes later in the life of the mine and the remaining life of mine so.
Yeah.
The grade in the reserve.
We provide each on average and in the later years.
The lower portion of great that make that average right.
So youll see a bit of a decreasing grade.
Leasing production for 2023, we're still seeing some seeing similar figures in line with what we have in reserves.
But certainly.
From the <unk> perspective, we've been investing heavily in exploration.
For a number of years at the tune of $9 million to $10 million, a year and that exploration investment has not been able to offset it.
The depletion at the mine.
And the only marginally successful with the exploration today and that has weighted on the environment and also the cost inflation.
That.
And that we see.
Uh huh.
At the asset level has also weighed on that right. So it's a mixture of things there Adrian.
Okay. Okay. Thank you. Thank you.
Thank you.
We have had a question come in from Dave Kranzler.
What do you expect generally to be the annual sustaining capex at <unk> once it is fully ramped up.
David do you want to tackle that one.
Yes.
Certainly pool budget.
Rajiv.
So we put forward for this year.
We have been signing and cost.
So again a lot.
Paul.
Between.
And.
On the 19th.
All of those.
Yes.
Obviously, you had stated interest to Europe .
As keira.
With 71 chasm gases, obviously expecting.
He asked about how to quantity on that end.
With the exploration work that pool is timing, we would expect that the mine plans to be quite dynamic time for the next well certainly providing some growth expectations.
Sorry in terms of life of mine that environment, we would be expecting to be.
There are a lot of that CASM.
Announce.
So spending.
Yes.
Maybe just to complement on David's answer in terms of an absolute dollar figure.
Capex subsidiary.
For the life of mine rate consistent with the numbers.
Implied in ASIC, just provided about Davis shouldn't in that $16 million to $20 million range.
Thank you if there would be any questions or comments sees indicate so now by pressing star one.
Okay. We have no further questions in queue, So I'll hand back to Mr. Carlos Baca.
Thank you Ronnie.
If there are no further questions I would like to.
Thanks to everyone for listening to today's earnings call good.
Dave.
Thank you ladies and gentlemen, this does conclude today's call.
Okay.
Yes.
Thank you.
You may disconnect your lines at this time and have a wonderful day, we thank you for your participation.