Q1 2023 Gatos Silver Inc Earnings Call
Per tax assets related to property plant and equipment mine development and historical net operating losses in certain cases, the best spaces will also not calculated correctly as.
As a result, the algae JV understated the valley of the deferred tax assets and its net book value at December 31, 2021, and overstated. It at September 32022.
The graphs at the top show that the shifting of some of those assets earlier into 2021 resulted in higher income in 2021 offset by lower income in 2022.
The net impact of that shift however, it's minimal under netbook value.
At the end of the restated periods less than.
$4 million.
Slide five shows the impact that the got the silver level.
As previously disclosed it was necessary to take an impairment on the value of our investment in the LTE JV related to the 2020 Technical report reserve areas Yes.
The adjustments associated with the restatements increased impairment from $51 6 million to $8 3 million.
The result of three main factors.
The first is related to the increase in the book value specifically the increase in the net book value of the LTE JV described previously.
Currently the accounting recognition of a priority dividend payable to our joint venture partner was changed.
Certainly there were several changes to the fair value model.
The cumulative impact of those changes was a $29 million increase to the impairment at the end of 'twenty one.
Those changes also led to a reduction in book value at the end of the restatement period September 30 of 2022 of just over $30 million.
Slide six shows the financial results of the algae JV for the first quarter.
Realized metal prices during the quarter were strong but revenues were impacted by a $13 6 million negative provisional revenue adjustments on open sales, which resulted in revenues of just under $70 million for the quarter.
The other impact on net income was higher depreciation and amortization.
We depreciate assets based on tonnage so the highest tonnage processed during the quarter plus the capital that was added from the tailings dam rays and the paste plant in 2022 drove the DD&A number higher.
The final result was net income of $12 $7 million for the quarter.
Slide seven shows the financial results for Captisol that we.
We had expenses of $5 $5 million for the quarter net income of $8 million.
It's important to note that we incur expenses to help manage the JV.
And the JV management fee of $5 million.
Or one and a quarter million dollars per quarter is recorded as other income.
As we announced last Friday, we have reached an agreement in principle on the U S class action lawsuit and allowance for our portion of the funding.
Which is estimated at up to $7 9 million, where the risk coming from insurers was accounted for in 2022.
Some of our additional costs associated with levels. It may be accepted by the insurers. So the actual disbursement may be somewhat lower.
Slide eight shows why we are so confident that this asset generating consistent strong cash flow period over period.
The algae JV produced $157 million in cash flow from operations in 2022 and $40 million in the first quarter of 2023 alright.
Our rate of sustaining capital spending is now decreasing as the operation has settled into an optimization phase.
You can see the quarterly spend has dropped from about $20 million in the third quarter of 2022 down to $11 million in the most recent quarter.
The combination of continued strong operating cash flow and decrease in capital spend has also led to record free cash flow and low all in sustaining costs.
The lower silver grades expected for the remainder of the year and slightly higher capital spending we expect all in sustaining costs will increase in subsequent quarters, but we expect to remain within our current guidance range fully yet.
During 2022, the joint venture started distributing dividends do the partners with $29 million received by GSI after accounting for the priority dividends and withholding taxes.
I will now hand, the presenting detail. Thank you through some of the operating factors that contributed to our strong cash flow.
Thanks, very much Andrea.
Slide nine shows a few key metrics of the Cerro Los Gatos operation since the processing plant started up in 2019.
The feasibility design for the project was 2500 tonnes per day and since the middle of 2021, we have continued to optimize well beyond this level.
And we know what the plan is still has more capacity.
We think we can increase ore production from our underground mining through additional long haul stoping.
The most out of our new paste plant.
By increasing our mobile fleet productivity.
We do expect that silver feed grades which are shown in yellow in the graph.
The decrease towards reserve grades over the coming quarters and years as we move deeper into our deposit.
And we do expect base metal grades to increase somewhat as well.
We are continuing to push down on costs at the same time as we increase our production.
Last year, we saw big cost improvements related to our new renewable energy contract and we have multiple continuous improvement projects currently underway to continue to offset the inflationary pressures that have been impacting both us and <unk>.
Our peers.
We were really happy with the last all in sustaining cost marker on that bottom graph, showing our fourth quarter performance and we expect our all in sustaining cost to increase over the next few quarters.
But we do continue to expect to finish the year within guidance in the 11% to $13 per payable ounce range.
Turning to slide 10.
The figure shows a long section through our deposit.
There are currently six surface drills and three underground rigs actively drilling at the mine.
We're targeting to add up to six years to the mine life by mid 2024, So thats just over 12 months away.
The focus in the second half of last year was drilling to convert higher grade inferred resources, which are shown in green on this slide to the indicated status to add to the reserve and mine life.
That drilling was very successful in hitting mineralization and the new life of mine plan and reserves incorporating this drilling is expected to be announced before the end of the upcoming quarters. So thats in quarter three.
Last October we announced the exciting southeast Deeps discovery shown below the reserve on this image, which has the potential to significantly extend the mine life.
Drilling shows the mineralization in this new zone extends one kilometer along strike and our deepest reported intercept is more than 400 meters below our current reserve.
Our plan is to report conferred resources in this area in this in this year so in the upcoming quarters resource update, which we will complete.
Shortly we.
We need to drill.
We need to drill it out to indicated status before it can be converted to reserves.
So we currently have six surface rigs that are drilling to 50 meter spacing, which should convert that to the indicated category and we're aiming to have that ready for our 2020 for mineral reserves and mine plan update as I mentioned in mid 2024, So mid next year.
Turning to slide 11, while we are really pleased with the progress in and around <unk>. The biggest potential upside is in our district.
The joint venture holds the concession package that is roughly 50 kilometers by 40 kilometers and extend.
We currently have more than 45 individual prospects identified and most of these are in the <unk> shown in light green that runs from the Cerro Los Gatos mine up to the edge of the property in the northwest.
Left hand side.
Closer to the mine there are a series of large structures that appear to have all the right ingredients for minerals mineralization sitting between the sterile Los Gatos mine and the ester deposit, which is located less than five kilometers away, where we have a small increase resource already.
Detailed mapping of this area is already underway and we plan to drill more in this area in the second half of this year.
We also have a large structural feature real conscious basin shown in brown.
Immediately to the north east of Cerro Los Gatos.
The area is covered by some gravel, but we feel this has great potential to have big structures and the right rock types that could host more surplus capital size deposits.
The map on slide 12 shows some of our priority targets that are within a few kilometers of our current operation.
We have already made a good start with the Greenfields exploration. So far this year and are improving our understanding of the district and the <unk>.
Based on the mapping with our focus on mapping geochemistry and geophysics.
Shown on the previous slide and located about 22 kilometers north of our current mine. We have completed a drone survey in the Windsor area that is delivering high resolution images to aid and direct our district mapping.
The mapping and rock geochemistry completed already is promising and we expect to be drilling in this area later in the year as well for this year.
Back on the back on this map closer to the current mines or less capital. So we are in the process of conducting a mcnett owed to liver Geophysics survey.
To help us track structures through the basin.
Earlier this year, we identified meaning that is extended up through the epic classics, and the Santa Ana area, which fits with our premise big structures underneath the basin.
The zone is within a couple of kilometers of our current underground development.
Along are based in margin northwest and southeast of the Cerro Los Gatos mine, we have identified the port <unk> and San Luis targets is high priority for follow up and these areas are also planned for drilling in the upcoming quarters.
We're also really excited by the cascabel in mamba structures in between Cerro Los Gatos, and Aster and while we have started some drilling and haven't hit high grade there yet we have great structures, an alteration already defined and think that this area has all the right ingredients for a significant deposit to exist there.
Turning back to the Cerro Los Gatos operation and the table on the right.
<unk> 13 shows our 2023 production and cost guidance for the annual for the year with.
With silver production expected to be between seven four and $8 2 million ounces and silver equivalent at around 13 million ounces with all in sustaining costs similar to 2022.
We plan to continue our focus on driving operational performance improvements and Thats on both production and on costs.
And I'll, just turn to slide 14 to wrap up and over the last 18 months, we have been extremely busy as we have reset the foundation for this company.
We have built a new experienced management team in Vancouver.
We completed a new mineral reserve at Cerro Los Gatos with the filing of our technical reports, which was a very important milestone that we achieved late last year.
And then more recently following that update we had the big task of getting all of the financial statements finalized fixing up lots of historical issues and the process and culminating in the announcements earlier this week.
This has been a huge job for the team, including transitioning to a new auditor and getting successor financial statements filed this week.
We are now current on all our financial filings.
Now that this is behind US the team is really focused on delivering on the exploration and growth potential of this amazing district.
I'm really happy with how our new team has come together to achieve all of this and we are now focused on delivering the upside.
That ends the presentation material for today.
Yes.
Turn it back to the operator now for any questions. Thank you.
Thank you at this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Okay.
Okay.
Thank you and your first question comes from the line of Michael <unk> of RBC capital markets. Please go ahead.
Yes.
Thanks, very much operator, and thanks, Taylor and team for the call.
Maybe just first on the filings.
Can you can you provide a little bit more clarity on.
Everything else that's outstanding from a regulatory perspective with respect to the OFC. You mentioned you filed for the removal of the management fees trading order is there anything else outstanding with respect to the PSX NYSE any other regulatory agency or the with respect to <unk>.
The credit facility.
Yes.
Thanks, Mike.
I'll start with the U S side on the New York Stock Exchange.
Since we just filed.
Late last night, we're informing them this morning.
We are now we expect to be taken off the delinquent filers list and we're now clear on we should be clear on the New York stock exchange. So there is nothing left on that on that front.
On the Canadian side, we still have an obligation.
To hold our annual meeting, which has now been scheduled for September six so there's still regulatory.
Commitments that we need to make to get current with our annual meeting, but it's just that it's scheduled.
We don't anticipate any issues on that side and Andrea I'm not sure if you'll comment on.
On the credit facility.
Regarding the credit facility.
Have had waivers all the filing of our financial statements in place plus the presentation of our financial Covenant calculations.
Rich.
<unk> provided to being by now so.
It's all within the timeline of the wireless 17 or out of line on the credit facility.
Okay.
Okay, great. Thanks.
That's helpful. Congratulations on getting all of this done.
Maybe flipping to.
Operations in the near term.
You reiterated.
Guidance for 2023 can you give a little bit of color on I know <unk> is pending here, but can you give a little bit of color on on what we should expect in terms of the grade profile over the rest of the year should we be expecting a steeper drop off in Q4 or will it be relatively.
Relatively smooth throughout the year in terms of seeing that lower grade.
Yes, Thanks, Mike.
What we've put out for guidance.
Is that we're going to see lower silver grades kind of reverting back towards the reserve grade as the year progresses.
And so I don't think will drop all the way down to reserve grade by the end of the year, but you can take that as guidance.
And I think from a silver perspective.
<unk> to be relatively flat over the remaining three quarters, we may see a slightly stronger fourth quarter, but.
Yes, it's going to be.
As we guided less and less in the first quarter for the remaining three quarters is our expectation and you'd see that from our guidance, we had 31% of the.
31% of the midpoint performance in Q1.
From a base metals perspective, and again as you can see from our run rate in the first quarter.
We expect slightly higher grades and production throughout the rest of the year and I expect that to remain.
Relatively smooth for the rest of the year.
Okay.
Thank you and again, if you'd like to ask a question press star one on your telephone keypad. Your next question comes from the line of Lukas <unk> of Canaccord. Please go ahead.
Hey, good morning, guys. Thanks for taking my question and congratulations on getting the financials yet.
Just a question on your balance sheet here. It says in the presentation you have $10 million that was at the end of May.
Obviously, you guys have just settled the class action lawsuit potential $8 million cash outflow there.
What can you tell us about dividends coming from.
The JV and why you wouldn't see one this quarter.
Yes, I'll start and then Andre can comment further.
It really is.
Very simple we are waiting for financials to be completed at the Lescott those joint venture.
Before the partners.
Agreed to move.
Cash pattern.
Back to the both both partners on a pro rata basis.
Now that we've.
Clearly the initial priority dividend.
Last year.
And I guess, the only other comment I would make is.
We're looking at the most tax efficient way to do that right now just declaring dividends, there's a 5% withholding tax and we're looking at other options that potentially can save that 5% and so that was the other reason, we we held back so the first part of the year.
We do expect that to continue now back on a regular basis going forward Andre Im not sure if you want to comment.
I think you've covered it though.
Okay. That's great. Thank you guys.
Thanks Lucas.
Sure.
There are no further questions at this time, Mr. Andres I turn the call back over to you.
Thanks, Operator, and I guess just in closing.
It's a tremendous accomplishment I really do want to congratulate the finance team as guarantor silver for getting this recent job done and mission accomplished the team is now looking forward to the future on our extension of mine life and our Great District.
We look forward to updating.
The market and everyone on that as we progress.
We should see second quarter production results and back onto a normal financial reporting schedule coming out of the second quarter, So really really pleased with that.
Thank you all.
We'll talk to you next quarter. Thank you.
Okay.
This concludes today's conference call you may now disconnect.
Thank you.
Yeah.