Q3 2023 Fortuna Silver Mines Inc Earnings Call
Greetings and welcome to the Fortuna Silver Mines' Q3, 'twenty to 'twenty, three financial and operational results call.
At this time all participants are in a listen only mode and the floor will be open for questions. After the presentation. If anyone should require operator assistance. During the conference. Please press star zero when Youll find keypad. Please note. This conference is being recorded I will now turn the conference over to your host.
Okay, Berchtold Guy knows the CEO of Fortuna silver mines Jorge over to you.
Thank you Ian good morning to all and welcome again.
In addition to myself, we have on the line Louisa do Yoga and also Chief Financial Officer Since Saturday Last School, Chief Operating Officer, Latin America, and David Whittle, Our Chief operating officer for West Africa.
For your reference during the conference call. We have provided our third quarter results presentation available on the landing page or for website under future presentations.
Yeah.
As we will be making forward looking statements during the call. Please refer to our cautionary statements included in the presentation news release, MD&A and the risk factors in our annual information form.
Technical information in the presentation has been reviewed and approved by Eric <unk>, Our senior Vice President of technical services and qualified diverse.
Financial figures is contained in the presentation and discussed in the goals are in today's call are presented in U S dollars.
Unless otherwise stated.
Yesterday before market open we reported record production and financial results are noteworthy results are the successful outcome of two years of hard work and focused execution on our strategic plan we.
We have placed ourselves in a strong position to deliver shareholder value today and into the future.
Iraq School acquisition in mid 2021, we have successfully expanded and consolidated or presence in two of the most exciting mining regions in the world of West Africa, and Latin America, we have a balanced asset portfolio that offers multiple value enhancing opportunities.
Now let me tell you why the achievements of this quarter are so important I see this as an inaugural quarter due to the start of contribution before.
Our fifth and flagship mindset Gila.
So we are comparing performance versus the previous second quarter, which I believe helps better to see the impact and the change in the business.
Production and financial results are highlighted by record figures across all relevant metrics of the business World.
Gold equivalent production of 128671 ounces.
An increase of 38% compared to the second quarter of this year.
Sales of $243 million, an increase of 53% compared to the second quarter net.
Net earnings of 27, and a half million dollars.
Or nine cents per share.
Adjusted net.
Earnings of 10 cents per share beating.
Analyst consensus.
And a notably large free cash flow from operations amounting to $70 million compared to nine and a half million dollars in the second quarter.
Our consolidated cash cost was well below $900.
And <unk> was $1312 per gold equivalent ounce.
We continue tracking well to meet the upper end of our guidance range for the year powered by the yet a multiple cellular unveiled online contribution.
The record financial performance was mainly driven by say gala, our flagship mine contributing full quarter production for the first time in.
In addition, we also benefited from higher gold production had yet a multiple related to higher grades and new extensions of <unk> 55.
As well as an overall steady performance across the mine sports portfolio.
We observed abating inflation in consumables on a recorded gains from continued optimization initiatives.
In terms of a singular mine, we were still ramping up production during the third quarter by the end of September the process plant was exceeded.
Exceeding nameplate capacity of 154 tons per hour by 13%.
Looking forward in the fourth quarter, we expect to benefit from steadier production at higher throughput rates.
The mine recorded gold production of 31498 ounces.
At a cash cost of $395 per ounce.
And <unk> of $788 per ounce industry, leading cost.
Over the coming months, we expect cash cost in ASIC to gradually gravitate towards our guidance projections in the rates in the range of $500 for cash cost them a thousand dollar for AC.
This is explained by higher predicted stripping in our plans and longer haulage distances as Pete operations of about <unk>.
David will provide further insights into our operations subscale and yet our multiple.
And later on.
As we transition out of two years of intensive investment and then there are cash harvest face capital allocation becomes a topical issue for us.
Our priorities are to continue strengthening the balance sheet through debt reduction.
Our leverage ratio currently stands at a low 0.5 times net debt to EBITDA. However, we want to see that ratio well below 0.5 under different conservative scenarios.
Another priority is ensuring exploration programs remain well funded with a focus on high value opportunities in the portfolio on reserve replacement of their minds.
Currently we have 11 drill rigs turning a grocer brokered piece and we remain open to other avenues to continue enhancing shareholder value.
For example, with our bank lenders, we're in discussions to lease certain covenants to become active again on our share repurchase program.
In September we completed the acquisition of chess of resources and the <unk> Gold project in Senegal.
The <unk> suite is an exciting advanced stage exploration opportunity and a very strategic fit for us.
It complements our advanced product pipeline and San Diego is a near neighbor countries to our existing operations.
We're making best use of time here and are already drilling with three rigs exploring for additional <unk>.
Also during September and October we had good news at our San Jose Mine in Michigan.
We announced receipt of a positive Mexican court ruling reinstating, our 12 year environmental impact of authorization.
The court did not give any credit to the surprising January ratio evolution issued by the Mexican environmental agency somewhere in that.
Or mine has operated normally through all of these Sarah with semi or not and we hope this noise is behind us now.
In September we announced the discovery of a new high grade mineralized structure at San Jose named ESC.
The discovery hole intersected nine nine meters at one two kilogram silver equivalent per ton within a broader halo of mineralization.
<unk> is located.
East of the main Trinidad Victoria system, where production takes place.
And some 200 meters.
From existing underground infrastructure.
She is a blind discovery, meaning it does not have any recognizable surface exploration and.
And we are currently drilling with two core rigs working to gain better geologic understanding of these new zone.
On health and safety across the business, we recorded one LTI.
As of the end of the quarter or year to date LTI frequency rate stands at 0.38, and a total recordable frequency rate at 0.86.
This compares to zero point, 22, and $2 37, a year ago, respectively.
Worth, noting is the achievement of where you get a multiple mine team, which in the quarter recorded three years free of lost time injuries.
Year to date, we have no reportable events on the environment.
I would now let David answer, yes, I'll provide a high level overview of our business and performance in West Africa, and Latin America, we can start with you David.
Okay. Thanks for that.
Our operations in West Africa performed strongly during the third quarter of 2020.
<unk> demonstrated excellent safety performance with no significant incidents.
<unk>.
All of the month or quarter King was also the <unk>.
498 counts as adults you should follow the successful completion of the processing plant performance in August.
Operations is now exceeding nameplate capacity.
<unk> guidance was increased by approximately 40%.
110 to 120000 ounces on the mine also achieved a milestone in the Volcker Ids, we usually have some doubts.
In the fourth quarter, <unk> 500, and 326 homes are all below average guidance, we alright.
On $1 million 156540 tons of waste.
So a few points right.
Full price stance was 310000 students in light.
Yes.
As 383 grams per tonne.
Mining operations focused on the.
In order to access the higher grade areas and to source of fishing.
With a completion of the processing plant performance.
At the <unk> pit.
<unk> programmable Greg consult early place.
So shipping and storage commenced on the whole road construction continues as planned.
The cooler.
Initial great consulting.
And should be completed in the fourth quarter of this year.
Pricing for plant operations ramp up beyond the knife fight also to you the 154 tons per hour during the quarter, achieving an average right.
362 tons per hour.
In September an average throughput of 174 tons per hour was reached.
Process plant improvements.
Allowing for a blend of approximately 40% transitional and oxide ore.
In April the price has seen a additional quantities of some of the higher grade oxide ore mined earlier in the year.
Long term upside transitional feet will be in the order of 10% 15%.
So guy was strong performance resulted in cash cost.
<unk> and AUC being below guidance range of $3 95 to $798 of Nash.
Following the operation strong performance in the quarter become can see continue to see improvements in throughput and a continuation of good grade positive reconciliation is probably 16 plant.
As a result, we expect gold production to achieve.
The items.
Thank you Rmi.
Some production performance.
Forecast 36 ounces of gold.
Mine production.
It was 127000 tons and an average 30 day rate.
One two grams a tonne.
<unk> operations, which increased from the 55 zone underground mine.
Development continues as the key the ore body.
<unk> mine with the fed.
Citing operations commencing towards the end.
Towards the end of the quarter.
So the processing plant.
<unk> 7291 tons were treated on an average decline of 772 grams a tonne.
We've covered 98.
And in April by the increase the Greg.
The increase in production resulted in year to date IC to monetize the light of the lower end of annual guidance at $1421 per ounce.
In the third quarter rock salt in cooperation with other mining groups and stakeholders engaged with governments of Makena SaaS side, because the government's proposed variation to metal royalties.
These collaborative approach has seen a small increase in royalties of 1.5% at current gold prices.
With a maximum increase of 2% once coal prices in $2000 an ounce.
Finding and development operations continued to encounter high grade areas.
Which generally lighter than previously experienced.
Stoping activities is starting to progress some of these higher grade areas and as a result, we expect 2023 production to be within the revised guidance range of a 100.
120000 ounces.
The company anticipates, having a similar production rates in 2020.
Diamond drilling during the third quarter was 5% lower eastern side of the 55.
Total results.
Our results have seen an extension on slide two our expected mining boundaries as well as the inclusion into the mine plan of an additional eastern oil drives us are always part of the 50 Cogs ore body.
Showing in the fourth quarter and throughout 2020 full focus became on testing for the western strike extensions 50, Cogs side as well as testing potential deeper extensions.
But the OLED.
Yeah.
Thank you David.
Okay.
Thank you Jorge and.
Good morning to everyone.
On a consolidated basis, Ziggy, our Latin American operations delivered solid gold and silver production.
Good safety performance in the quarter.
We also continued to advance several key sustaining capital project at both <unk> and <unk> mines.
Regarding costs, we are starting to see some reduction tendencies are main supplies and consumables like diesel cement sulfuric acid cyanide and other reagents.
In Mexico, we are experiencing some pressure from the strengthening of the Mexican peso versus the U S dollar of roughly 20% when compared to 2022 levels.
Now I will discuss our operational performance during the third quarter.
In Argentina lean data mined one 9 million tons support with a stripping ratio of one one to one and.
And looking forward to the stripping ratio is expected to continue its positive trend through to the end of the year to approximately 0.7 to one.
A total of one 5 million tons support were placed on the Leach pad at an average gold grade of zero point 62 grams per ton containing an estimated 29068 ounces of gold.
<unk> gold production in the quarter was 20933 ounces in line with the mining sequence and the mineral reserves.
In accordance with our mine plan.
Higher stripping ratios seen in the first nine months of the year position us for improved access to higher grade material to be mined during the upcoming fourth quarter.
As a result.
The NATO anticipates, placing about one 6 million tons before on the Leach pad at a higher average grade of <unk> 67 grams per tonne.
One of the most relevant capital projects, putting data in 2023, and 2024 is the leach pad expansion, which will serve for the next several years of production.
As of September 30, yet these project is 13% complete.
While ization of the contractors' personnel and equipment has already commenced the first shipments of Geo membrane and Geo synthetic clay liners have arrived at site and the project remains on schedule for completion during the second half of 2024.
Estimated time.
Time of completion.
Is aligned with the stacking plan and production requirements requirements for next year.
<unk> for the quarter was 1600 <unk>.
And 11.
<unk> per ounce, mainly due to higher cash cost per ounce, resulting from a combination of lower production and higher indirect cost, but partially compensated by higher capitalized stripping costs.
<unk> is expected to be at the high end of annual guidance as Capex execution picks up in the fourth quarter.
In dental continuous capturing significant savings, particularly on key consumables and the focus remains on cost control and good capex execution.
Moving up to Mexico, San Jose production reflects up 43%, 42% increase in silver and gold production when compared to the previous quarter.
The mine produced one 4 million ounces of silver at an average head grade of 189 grams per tonne.
<unk> 8205 ounces of gold at an average head grade of 114 grams per tonne.
Management continues executing on an improved mining and processing plant through at year end to recover part of part of the lost production from the second quarter.
Silver and gold production for the third quarter of 2023, when compared to the third quarter of 2022 is explained by the lower grade profile of the mineral reserves in the mine plan.
San Jose is estimated to be approximately 15% above the upper end of cost guidance for the year.
As a result of catching up during the fourth quarter pause in postponed development meters from the previous quarters.
<unk> for the year incorporates an intensive infill drilling campaign at the recently discovered ESG vein.
Additional drilling is underway from both surface and underground.
Regarding Peru.
<unk> produced 308000 to 121 ounces of silver.
This is a 6% increase from the same period in 2022.
At an average head grade up 83 grams per ton silver the mine is well positioned to achieve the upper end of <unk>.
Annual guidance.
Zinc and lead production was 14 and $10 3 million pounds, respectively, which represents an 18 and 14% increase in production from the same period in 2022.
Increased production is the result of positive grade reconciliation to the research model in level 16, and 18 of the Animas vein.
Zinc and lead average head grades were five points, <unk>, 7% and 366%, a 16 and 10% higher for zinc and lead respectively.
When compared to the same period in 2022.
Increased recoveries for zinc and lead were driven by those higher grades I think that covers Latin America operations back to you all again.
Thank you.
With a review of our financials.
Sure. Thank you.
I'll be focusing my commentary on the <unk>.
Comparable quarter of 2022 sales of.
$243 1 million in the third quarter of this year were $77 million.
Above Q through Q3 of 2022. This is a 46% increase explained primarily by the contribution of 35500 ounces.
Gold from <unk> in the quarter as well as higher metal prices year over year realized gold and silver prices were up 12% and 23% respectively.
Our cash cost of sales per gold equivalent ounce was $814. This is 8% or $67 per ounce below the prior year.
Cash cost of sales and so again that was $397 per ounce and slightly below $500 per ounce, when including capital leases related to the mining contractor, which are reported as part of basic but excluded from cash costs per ounce.
And you had a multiple we have also reported a significant reduction in cash cost per ounce of approximately $180 related to the effect of higher rates a trend that has remained constant throughout the year as David pointed out.
These positive impacts were partially offset by a higher cash cost per gold equivalent ounce at the middle and San Jose.
In the case of the narrow this is mostly aligned with the expected reduction in the head grades consistent with the mine plan.
In the case of San Jose This is mainly due to higher mining cost to make up for the shortfall of production in the second quarter of this year related to the illegal blockade.
The higher maintenance and indirect costs.
As a result of the higher volumes sold lowered cost per ounce and higher metal prices.
Mine operating income increased 106% to 6% year over year year.
While our general and administrative administration expenses remained for the most part constant.
This strong operating leverage effect has resulted in an increase in operating income of almost 700%.
From $5 7 million in Q2 of last year to $45 5 million in Q3 of 2023.
We have disclosed we expect higher depletion, that's again in future quarters related to the purchase price allocation from the <unk> acquisition.
We anticipate depletion will increase over the next two to three quarters towards run rate levels on a per ounce basis.
We estimate that for the level of ounces sold in the quarter. This would add an additional non cash charge of around $10 million to cost of sales or approximately $300 per ounce.
Continuing with the income statement, we have recorded $8 $2 million of net interest and finance costs compared to $2 4 million in Q3 2022.
This $8 $2 million in 2023 is comprised of $5 1 million of net interest charges.
And $3 1 million of accounting accretion for various concepts, including mine closure right of use assets and the outstanding outstanding convertible debt.
In the comparable quarter $1 $3 million of interest charges were capitalized, whereas no interest capitalization took place in Q3 of the current year.
Our effective tax rate in the quarter was 18% as we have disclosed is well no income tax was recorded.
In the quarter due to income tax offsets from the construction phase.
Under a full income tax scenario, we would expect an effective tax rate on a consolidated basis between 35 and 40%.
Moving on to free cash flow and liquidity, we reported $7 million of free cash flow on the back of strong cash from operations of $106 5 million.
Compared to the prior year free cash flow and cash from operations increased by 36% and $42 million.
<unk>.
Our total liquidity at the end of the quarter was $162 $3 million.
Up $64 $4 million from the end of June 2023, reflecting the strong free cash flow generation in the quarter.
As Jorge mentioned, we paid down $40 million of debt and expect to continue paying down debt in the coming quarters.
I referenced a $40 million of debt reduction represents quarterly interest expense savings of approximately zero point $8 million at current interest rates.
Finally at the end of Q3, our total 2023, our total net debt was $134 million.
Down from $198 million in June 2023.
For our total net debt to EBITDA ratio of 0.5.
Back to you heard him.
Thank you that concludes management's discussion of results Jamie.
Back to you.
Thank you very much Jorge at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your phone keypad now a confirmation tone will indicate your line is in the question you May Press Star two if you would like to remove your question from Nicky how anyone using speaker equipment.
It might be necessary to pick up your handset before.
Keith Please hold a moment, whilst we poll for questions.
Thank you. Your first question is coming from Derek Glynn of Scotia Bank. Your line is live.
Great. Thanks, so much.
Team nice to see the free cash flow in Q3, and the stock responding well.
A few quick questions for me if you don't mind Atlan Darryl on phase two leach pad expansion can you just remind me what the critical path items are and I.
I guess, how much additional tonnage as well got you.
Sure.
Critical path and setup.
Q1 expense sure Jorge.
Well critical paths where in fact.
Geo membrane on Geo synthetic clay liners those were properly ported curious in time.
Or on their way to you.
To cite first shipments have already arrived almost 30% to 40% of those the remaining ones.
First quarter of 2024, and now the civil contractor mobilization, which is one of the main.
Packages and activities.
Mobilizing as we speak.
So that should cover those critical paths.
<unk>.
<unk> MBA in languages, Roger with respect to the second part of the question.
This expansion of the Leach pad.
Was contemplated in the original design.
It serves basically.
The <unk> supports the long it does not.
Provide for an expansion of throughput.
It was a scheduled expansion injury side.
To support the 19 20000 tonnes per day.
Or that we.
Okay.
Okay Fantastic I appreciate it thank you.
In terms of exploration Linda or any comments there are some recall was in Arizona or one of the targets there.
As Lynn Liddle.
We have a focused or or exploration funding.
In 2023.
With priorities in cicada.
As a high value opportunity.
And then on.
Life of mine replacement.
The funding has been prioritized for the year are multiple mine in the San Jose mine right.
So lean data.
<unk>.
And <unk>.
We have not received any significant funding in 2023, and we would expect to see.
Some funding allocated towards <unk> in 2024, right remember at 2023 steel has been a capital intensive year for us on the <unk>. So we rationalized.
Or a beat or exploration funding rate okay.
Okay. Thank you I appreciate that maybe just one more for me if you don't mind San Jose.
Pretty good exploration results recently I know, it's still early days, but any comments on what you think.
Could mean for the mine plan.
You know it.
Yes, he is an exciting discovery.
Exciting.
High grade close to existing infrastructure.
But as is the case now we have to migrate from an exciting discovery.
To see how does this contribute to our production right.
And that's the phase we are currently in.
And.
Uh huh.
And we need time right what I can say is that it's high grade.
Structurally, it's making sense to us.
But how meaningful it is or it becomes too the production.
It's something that we still need to answer and that's why we are.
Conducting exploration work here.
With a high sense of priority.
And we'll look forward to reporting on these as we advance them.
Okay.
Okay. Thanks, so much I appreciate you taking my questions and congrats on a good quarter.
Cheers.
Thank you.
Thank you very much just as a reminder is that any remaining questions. Please press star one on your keypad.
Okay appear to have any further questions I will now hand back over to the management team for any closing comments.
Okay.
So on our part thank you very much.
Have a good day.
Thank you very much everybody. This does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful rest of the day. Thank you for your participation.
Alright.