Q4 2022 Fortuna Silver Mines Inc Earnings Call
Speaker 2: Greetings and welcome to the Fortuna Silvermines fourth quarter and full year 2022 financial and operational results call. At this time all participants are in a listen only mode and a question and answer session will follow the formal presentation.
Speaker 2: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Speaker 2: I will now turn the conference over to your host.
Speaker 2: Mr. Carlos Baca, Director of Investor Relations. Please go ahead.
Speaker 3: Thank you Ali. Good morning ladies and gentlemen I would like to welcome you to the Fortuna Silvermine fourth quarter and full year 2022 financial and operational results call.
Speaker 3: Hosting the call today on behalf of Fortuna will be Jorge Alberto Ganoza, President and Chief Executive Officer, Luis Dario Ganoza, Chief Financial Officer, Cesar Velasco, Chief Operating Officer, Latin America, David Whittle, Chief Operating Officer, West Africa, and Mr. Seth
Speaker 3: and Paul Wieden, Senior Vice President, Exploration.
Speaker 3: Today's earnings call presentation will be available on our website, FortunaSilver.com. As a reminder, statements made during this call are subject to the reader advisories 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 US dollars on this other...
Speaker 3: actual results could differ materially from a conclusion forecast or projection in the future.
Speaker 3: Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking information and the material factors or assumptions that were applied.
Speaker 3: 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 MDNA, which are publicly available on CDER. The company assumes no obligation to update such forward-looking information in the future, except as required by law.
Speaker 3: I would now like to turn the call over to Jorge Alberto Ganoza, President, Chief Executive Officer and Co-Founder of Fortuna.
Speaker 4: Thank you, Carlos, and greetings to all.
Speaker 4: Safety first, we close the year with a strong trend of improvement on key safety performance indicators which year over year continue coming down as a result of multiple initiatives implemented across the business.
Speaker 4: For KPI, for total recordable injury rate closed the year at 2.3 down from 3.2 in 2021 and below the industry average of 2.9.
Speaker 4: Lost time injury rate also showed a strong improvement ending the year at 0.39.
Speaker 4: down from 0.53 in 2021.
Speaker 4: We recorded five lost time injuries in the year, down from six in 2021.
Speaker 4: However, all this work was tainted by a fatal accident at our Lindero mine in January 2022.
Speaker 4: Safety is a precondition for business and we remain firmly committed to a zero-harm work environment. On December 21st, we made public our position statement on the adoption of the Global Industry Standard for Tailings Management. Our commitment to generate shared value over the long term for our stakeholders is a great
Speaker 4: The adoption of GISDM allows us to refine our approach to safe tailings management in a way to ensure operational excellence.
Speaker 4: On March 14th, we informed of positive news coming from Mexico with the court granting a permanent injunction to our San Jose mine.
Speaker 4: effectively protecting the 12-year environmental impact authorization of the mine.
Speaker 4: Cesar, our Chief Operating Officer for LATAM, will expand on this later on the presentation.
Speaker 4: or business.
Speaker 4: generated adjusted net income of $7.2 million.
Speaker 4: or 2 cents per share in the fourth quarter, in line with analyst consensus.
Speaker 4: and for the full year.
Speaker 5: 42.4 million or 15 cents per share, slightly ahead of the analyst consensus of 14 cents.
Speaker 6: Meri Nkum
Speaker 7: However, it was negatively impacted by non-cash impairment charges net of taxes adding to 164 million dollars coming from our yaramoco, lindero and san jose mines.
Speaker 8: Luis, our CFO , will expand on the impairment analysis drivers later in the presentation.
Speaker 9: 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.
Speaker 10: Production for the year was well within the range provided in our 2022 guidance.
Speaker 11: We delivered 259,000 ounces of gold and 6.9 million ounces of silver or 402,000 ounces of gold equivalent.
Speaker 12: Measured against 2021, Fortuna is on an exciting growth path. We have grown our gold equivalent production from 305,000 ounces of gold to a total of Twitter and Google and group comments including the
Speaker 13: to 402,000 ounces in 2022, and this year we anticipate further growth to approximately 450,000 ounces in our guidance.
Speaker 14: Despite persistent inflationary pressures throughout 2022, all of our mines performed within the ASIC range provided in our annual guidance. The only exception was the Lindero mine which recorded ASIC of $1,142 per ounce of gold marginally above guidance.
Speaker 15: Main consumables such as diesel, cyanide, cement and explosives have experienced increased costs to varying degrees depending on the mine and location.
Speaker 16: For example, at our Lindero mine in Argentina, year over year, cyanide costs increased by an average of 34% and at our Yaramoko mine in Burkina Faso 44%.
Speaker 17: At our Cayama mine in Peru year over year, diesel costs increased by an average of 60% and at our Lindero mine 34%.
Speaker 18: While we have observed easing of inflationary pressures thus far, conditions remain challenging.
Speaker 19: has been completed with more than 12,000 meters drill. Initial results appearing to align closely with the current geological models. As of the end of February , cleaning of the antenna pit has occurred. An excavation of waste is taking place with over 60,000 cubic meters of waste stripped and being utilized for the construction of the grompap. Preparations are currently underway for the start of the blasting operations in order for the first ore to be available for the commissioning of the circuit. Back to you, Jorge. Thank you, David. The team does a good job keeping our website updated on the construction gallery for SEGELA, so I invite you to visit the website and the construction gallery. So, Luis, you wanna give us a briefing on the financials? Yes, thank you. I will start addressing the impairments we have recorded in Q4. We recorded total impairment charges, as Jorge mentioned, of $188.8 million before tax and $164.5 million net of tax. At Yeramoco, we have recorded an impairment charge of $103.5 million before tax.
Speaker 20: 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 costs and lower reserves from the elimination of crown pillar recoveries from our reserve base. At Lindero, we have recorded an impairment charge of $70.2 million before tax. The impairment is related to lower expected cash flows as a result of higher costs.
Speaker 21: to a large extent related to inflationary pressures seen throughout 2022 and the effect of higher discount rates.
Speaker 22: At San Jose we have recorded an impairment charge of $9.1 million before tax. The impairment is related to higher costs as well as capitalized exploration expenses over the past few years which haven't fully replaced depletion.
Speaker 23: Also, contributing to the impairment is the fact that the partial replacement of depletion we have seen has been at a lower head rate compared to the previous average head rate of that reserve.
Speaker 24: As a result of the impairment
Speaker 25: For Q4 2022 we recorded a net loss of $160.4 million. After adjusting for the impairment and a write down of all stockpiles that the indelimine of $3.8 million adjusted net income was $7.2 million compared to $21.29 million.
Speaker 26: line with our mind blend
Speaker 27: EBITDA for the quarter was $55.8 million, a $33 million reduction over Q4 2021 as explained before due mainly to lower sales of $34 million.
Speaker 28: 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 the reduction in EBITDA.
Speaker 29: and higher CapEx execution, quarter over quarter of $5 million.
Speaker 30: 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.
Speaker 31: The loss is explained by the internal charges.
Speaker 32: 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 $106.0 million in 2021.
The decrease of $60 million in adjusted net income was a result of lower ISDA of $31 million.
higher depreciation and depletion of $50 million and lower taxes of $25 billion.
Outside of the impairment charges, the main items of adjustment to our adjusted net income in the year were $8 million of all stock fund inventory write-downs, and $2.5 million in
and $5.3 million dollar write-offs of mineral property.
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.
In 2022 we converted 28% of EBITDA into free cash flow, compared to 31% in 2021.
On our balance sheet and liquidity position in Q4 we increased our corporate facility by $50 million to $250 million which at the end of the year puts us in a total liquidity position of $150 million.
comprised of $80 million in cash and cash equivalent.
and $70 million and drawn under the great facility.
Our total financial debt outstanding at the end of the year was $226 million and $146 million net of cash.
This is an increase of 60 million and 87 million over year-end 2021 respectively.
During the year we spent $251 million on additions to the manual properties, plan and equipment as per our cash flow statement.
which was mostly comprised of
$108 million in the Seguilla project construction.
9.3 million dollars of Sejalab brownfields exploration.
$8.1 million of Greenfield exploration.
and $112 million of capital expenditures, including brownfields, at our operating mines.
There is a $13 million balance related to capitalized interest, capitalized management fees, and advances to contractors.
At the year end, we have incurred $147 million out of the $173.5 million construction budget at Segula. The amount remaining to be spent, including project accounts, failed.
as of December 31 was $38 million.
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 US dollars per share.
Back to you Jorge.
Thank you Luis, Carlos, to you.
Thank you Jorge. We would now like to open the call to any questions that you may have.
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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 on Up entrepreneuring out on Pride &
You mentioned that San Jose the lower head grades. Can you kind of quantify that?
Luis, do you want to expand on this?
Yes, I mean the extension of life of mine at San Jose today has mostly to do with Victoria Vane which does carry a lower head rate with respect to average rate of the reserve.
Yes, I mean the extension of Life of Mine and San Jose today has mostly to do with Victoria Vane which does carry a lower head rate with respect to average rate of the reserve. I remember when I started to love this I said, how democratic! I said, yes. Why is this happening.
That is in our reserve statement.
I'm not able to give you exact head rates out of the Victoria vein out of my head right now there Adrian, but I'm not sure if Paul or Cesar want to jump in there.
I mean, could you categorize it as meaningful or marginal or...
Well, the...
I was just going to say that
We are not going to get an exact number on the hay grid, but what I can say on my end is that the
The projected life of mine, the remaining life of mine at San Jose is still based on those lower head grades with respect to our historical production. It's still contributing significant margins and cash flow, not at the same rate certainly as before. So that's why we're keeping the record …
But I mean for instance.
In our current mine plan, based on our production guidance for the year, you can appreciate lower head rate, lower production with respect to 2022, and in 2022 lower with respect to 2021. But nonetheless, in the current price environment, we are still projecting healthy pre-cash flow out of sample sales.
if I may, also on the impairment. Adeline Barrow, you mentioned the impairment was...
mostly due to higher costs.
I mean, none of us knows what's going to happen to costs going forward, but assuming costs stay where they are.
Does this affect, will this affect either your production, your annual production or maybe even your ultimate production from the mine?
in terms of volume.
No, I mean the guidance we have provided already for the year, for 2023, already incorporates our view as to inflation trends in the new year, right? No, I mean the guidance we have provided already for the year, 2023, already incorporates our view as to inflation trends in the new year, right?
There is no new information here with respect to what's already been shared as part of our guidance for 2023, either in production or in cost.
Okay, I'm sorry, I didn't express myself clearly. Will the higher costs...
make any of the awe uneconomic that you were expecting to be economic?
I think now we...
I think we're going to update our reserve inventory as we publish 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 delivered 5.7 million ounces of silver for the full year and 34,000 ounces of gold.
If you look at our guidance for 2023, San Jose is delivering again between 34,000-37,000 ounces of gold and 5.3-5.8 million ounces of silver. If you look at the reserve, average grade...
The Victoria Vane comes later in the life of the mine, in the remaining life of mine. So the grade in the reserve, it's...
What we provide is an average and in the later years we have the lower portion of grades that make that average, right?
So you'll see a bit of a decrease in grade and a decrease in production. For 2023 we're still seeing similar figures in line with what we have in reserves.
But certainly from the impairment perspective, we've been investing heavily in exploration for a number of years at the tune of $9 to $10 million a year and that exploration investment has not been able to offset the depletion at the mine. We've been only marginally successful with the exploration to date.
That has weighted on the impairment and also the cost inflation that we see at the asset level has also weighted on that. 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 Seguela once it is fully ramped up?
David, do you want to tackle that one?
Certainly for the budget that we've done and also we've put forward for this year, we have an all-in sustaining course.
there at Saugala for between $880 and $1,080 an ounce.
or between 8.80 and 1,090 dollars per ounce.
Obviously as for in first year of commissioning with 71,000 ounces, we're obviously expecting the As for in first year of commissioning with 71,000 ounces, we're obviously expecting the As for in first year of commissioning with 71,000 ounces, we're obviously expecting the
And with the exploration work that Porter's doing, we would expect the mine plans to be quite dynamic over the next few years as well. And certainly provided some great expectations.
So in terms of life and mind at the moment we would still be expecting to be below that $1000 an ounce audience sustaining area.
Maybe just to complement David's answer in terms of an absolute dollar figure, CapEx and Segala.
for the life of mine, right, consistent with the numbers.
implied in ASICS just provided by David should be in the 16 to 20 million dollar range.
Thank you. If there will be any questions or comments, please indicate so now by pressing star 1.
Okay, we have no further questions in queue. So I will hand it back to Mr. Carlos Baca.
Thank you, Ali. If there are no further questions, I would like to thank everyone for listening to today's earnings call. Have a good day.
Thank you ladies and gentlemen, this does conclude today's call.
You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.