Q3 2023 Gatos Silver Inc Earnings Call
Hello, Ladies and gentlemen, thank you for standing by welcome together Silver's third quarter 2023 results conference call.
Presenting today will be Dale Andres CEO of Gatto, silver and Andre Van Niekerk, Chief Financial Officer, We will conclude today's session with a question and answer period with other members of the Gatos Silver management team will be available. If you would like to ask a question. During this time simply press star followed by the number one on your telephone.
Pat if you would like to withdraw your question simply press Star one again.
At this time all participant lines have been placed on mute for the duration.
Excuse me I have the presentation to prevent any background noise.
Turning your attention to slide two please note today's call contains forward looking statements various risks and uncertainties may cause actual results to vary caito silver it does not assume the obligation to update any forward looking statements I would now like to turn the call over to Mr. Dale Andres. Please go ahead.
Thank you operator, and good morning, everyone.
Turning to slide three.
There are three clear highlights this quarter.
We continued to further strengthen the balance sheet, increasing the cash balance and reducing debt with continued free cash flow generation.
Both GSI, so still very at 70%.
<unk> got those joint venture are debt free with a strong cash position.
Number two operations continued to perform very well with the Cerro Los Gatos mine matching record throughput rates.
As a result of continued good operational performance in the first month of the fourth quarter in October along with recent optimization of the mine plan.
We are increasing our 2023 full year silver and silver equivalent production guidance by 16% and 8% respectively based on the midpoint of each guidance guidance range.
And number three again.
I believe most importantly in early September we announced an updated life of mine plan and reserve and resource where we extended the mine life to 2030.
<unk> increased the expected silver production over the life of mine by 46%.
We are actively in the field drilling the new and prospective southeast deep zone.
And we will be shifting our focus to additional near mine and district drilling through the fourth quarter and into 2024.
Turning to slide four this shows the continued strong operating performance at the Cerro Los Gatos mine.
Throughput in the quarter was just over 2900 tonnes per day, while silver grades improved compared to the prior quarter, which resulted in an 11% increase in silver production of $2 2 million ounces.
Silver equivalent production, which include zinc lead and gold was $3 5 million ounces for the quarter.
Okay.
Cost of sales increased by 10% compared to the same period a year ago.
<unk> as a result of the strong Mexican peso exchange rate.
Applying pressure on our costs, which are reported in U S dollars as well as inflationary pressures.
Our all in sustaining costs were similar to the prior quarter.
I think it's very important to note with regard to operating costs, we are continuing to identify and implement various productivity and cost optimization initiatives and this is having a tangible impact to offset these pressures.
As a result of recent strong operational performance as well as optimization of the mine plan.
We now expect to exceed our original 2023 production guidance and have made upward revisions to our silver and silver equivalent production guidance ranges.
I'll now turn the call over to Andre to present, our financial results.
Thank you Dale good morning, everyone.
It's got a joint venture at another good quarter with continued cash flow generation.
Lower production in revenues were offset by lower capital expenditures, resulting in similar free cash flows today in Q3 2022.
The algae JV generated $29 $4 million in cash flow from operations in the third quarter of 2023 compared to $38 5 million in the same period.
Two.
The joint venture generated free cash flow of $14 $3 million this quarter compared to $14 $7 million in Q3 2022.
Free cash flow for the first nine months of this year.
$62 $6 million was 8% higher than in the same period last year.
Okay.
Cash flow used in investing activities dropped from $23 8 million in Q3, 2020 to $15 $2 million in this quarter due to the lower expected sustaining capital expenditure requirements going forward.
Year to date, we have incurred.
$9 $9 million.
Resource development drilling totaled $3 $5 million for the quarter, but most of the spending focused on the infill drilling of the southeast needs.
Greenfields exploration work is ramping up with approximately $1 million incurred on exploration during this quarter.
The joint venture made additional capital distributions of $35 million subsequent to the end.
After quarter on October 30th.
Bringing the total capital distributions to the partners for 2000 $23 million to $85 million. This is $30 million more than the $55 million of dividends paid in 2022.
Now turning to slide six to look at the financial results of the 70% Los Gatos joint venture for the quarter.
Revenue decreased by 9% in Q3 2023 compared to the same period last year.
The decrease in revenue is primarily due to decreases in sales volume.
Zinc and lead.
Each of those base and a decrease in the average realized price of 29%.
Partly offset by an increase in average realized price of silver and lead.
Cause ourselves for the quarter increased by 10% primarily as a result of the increased processing costs as a result of higher mill throughput.
<unk> of the Mexican peso against the U S dollar and inflationary cost pressures in the period, partly offset by cost reduction initiatives.
As part of our continuous improvement program.
Depreciation depletion and amortization expense decreased by approximately 16% primarily due to the increase in mineral reserves at the extension of the life of mine.
An income tax recovery of $900000 was recorded in Q3 2020 compared to income tax expense of $6 7 million in Q3 2022.
The income tax recovery is due to the reduction in the valuation allowance on the deferred tax assets related to PPE and land development as a result of the increase in the mineral reserves and resources, allowing for additional future income tax deductions to be realized.
Finally, the LTE JV had net income of $15 1 million for the quarter, 16% greater than the $13 $13 million recorded in Q3 2022.
Now, let's move to slide seven to look at the financial results for the solar.
For the quarter ended September 32023 capital Solar recorded net income of $3 3 million or <unk> per share in.
In line with a <unk> <unk> per share recorded in Q3 2022.
Corporate G&A was approximately $1 $6 million higher in.
In Q3, 2022, mainly due to a $1 8 million dollar noncash stock based compensation charge.
As a result of an equity grant as an extended blackout period, which was partially offset by lower consulting fees.
Slide eight.
Early in the third quarter, that's a silhouette paid off the remaining $9 million.
On its revolving credit facility.
And both GSI and Dale HIV are debt free.
<unk> solar has the full $50 million available for draw under its revolving credit facility.
The algae JV ended the quarter with a cash balance of approximately $47 million in spite of capital distribution of $35 million <unk> partners.
All right.
Yes.
We received $24 5 million.
So the capital distribution that joint venture remain well funded with approximately $21 million in cash.
Yeah.
<unk> ended the quarter with a cash balance of $33 5 million, which increased to $57 7 million at the end of October after receipt of each portion of the capital distributions by the algae JV.
The company and the Los Gatos joint venture are well positioned to continue to execute on growth opportunities.
I will now hand, it back to Dale.
Thanks, Andre and turning to slide nine as mentioned previously.
<unk> increased our full year silver and silver equivalent production guidance.
Silver production is now expected to be between eight eight and $9 3 million ounces compared with the original guidance of $7 four to $8 2 million ounces.
This represents an increase of 19% at the low end of the range and 13% at the Hyatt.
Silver equivalent production is now expected to be between 13, eight and $14 6 million ounces compared with the original guidance of 12, 4% to $13 8 million ounces on a silver equivalent basis.
This represents an increase of 11% at the low end at 6% at the high end of the range.
Based on the revised mine plan sequencing, we expect full year zinc and gold production to be near the low end of the original guidance ranges.
Full year lead production is expected to be within the upper half of the original guidance range of 36 to 40 million pounds.
We expect full year co product and by product all in sustaining costs to remain in the lower half of the original guidance ranges and <unk>.
We continue to expect sustaining capital expenditures at the Cerro Los Gatos mine of approximately $45 million in 2023 was about $30 million spent in the first nine months of 2023.
On slide 10, our updated life of mine at mineral reserves that we announced on September <unk> of this year.
Extended our current mine life to the end of 2030, and we believe we have substantial additional upside that we are focused on realizing.
There are currently seven surface drill rigs and three underground rigs actively drilling at the mines.
With five surface drills focused on instilling infill drilling of the southeast deep area at Cerro Los Gatos.
Targeting to add three to four years to the mine life by the third quarter of 2024, and Thats through conversion of the higher grade portions of the FERC resource that we also announced just recently in September.
In addition to the southeast Steeps drilling we have several other high priority targets located within a couple of kilometers of the mine as well as more than 50 targets across our one.
103000 hectare concession package.
Both near mine and district targets will be an increasing focus for the team for the remainder of 2023 and as we move into 2024.
Turning to slide 11. This final map shows a few of the key targets, we will be following up over the next 12 or so months that are within a couple of kilometers of the existing mine workings.
We are currently drilling at both <unk> and Cascabel CT.
<unk> is located roughly one kilometer along strike from the southeast deep zone.
Cascabel, which is located about one kilometers southwest of the mine is a.
<unk> altered large fault structure parallel to the main fault structures at Cerro Los Gatos.
We already have a few intercepts in the northwest offset offset zone from the previous drilling in 2021, and 2022 and we are planning to follow up on those hits with our underground drills from existing developments now that we're deep enough to hit it from a good angle.
Our expectation is that it will be 2024 before we get to some of the other district targets.
And so we have no shortage of exciting targets to keep us busy next year.
In closing we are looking forward to some of the exciting catalysts for the remainder of the year.
We will continue to drive productivity improvements and cost optimization, which is a core part of our business and operating strategy.
As mentioned earlier, we are debt free and GSI has a cash flow silver has a cash balance of 50 close to $58 million.
We expect to continue to receive regular cash distributions from the Los Gatos joint venture with strong operating margins and cash flow.
We remain focused on extending the mine life by the third quarter of next year through infill drilling and conversion of the southeast deep zone with more than half of that infill drilling already complete.
And we're very excited as we start to increase our near mine and district drilling in the large and highly perspective district through the end of this year and into next.
I will now hand.
I hand, it back to the operator for questions. Thank you.
Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Cosmos <unk> with CIBC. Your line is open.
Thanks, Dale Thanks, Andre for the presentation.
Realize that if I combine the two names together it becomes your name Dale, but I would think to Andre.
Just just occurred to me.
But maybe first off on your guidance.
Congrats on increasing our guidance for the year.
If I recall when we talked in Q1, you had talked about expecting stronger first half.
Our strong second half.
You touched on it but I'm just trying to confirm what has changed is it is it higher grades are you seeing.
So better grade reconciliation or is it really just mine sequencing.
Continuing long ago with a higher grade stopes or is it is it throughput as well I'm just trying to get a better sense in terms of.
What happens.
Yeah. Thanks. Thanks for the question Cosmos, Yes, we're really really pleased to be able to increase our guidance.
I think it's a combination of all of those things we.
We are seeing higher throughput we are.
We're seeing improved recoveries.
We're in a particular area of the mine and bolts in the northwest and Central Zone, which is the highest grade portion.
Those are difficult to predict.
In the sense that.
<unk> over quarter variations can can.
It can be fairly significant when you are into the highest grade portion so it's a bit of that.
And then it's just optimizing the mine plan.
As we progress through the year compared to the original mine plan and expectations at the start of the year. So it's a combination of all of those things.
Originally we had expected higher silver in the first half and a little bit higher base metal grades in the second half.
Seeing the higher silver continue throughout the throughout the year. So it's more consistent with.
With these green zones that we're in and the base metals is a little bit lower than we expected, particularly in the second half here.
Okay, great and how does it usually brookdale when the silver grade goes up due to the base metal grades usually also go up as well can you just remind us.
It really depends on the area that we're in typically with our deposit we tend to be more silver rich hit the top of the deposit and more base metals rich towards the bottom, but where we are in the highest grade portions of the central and northwest zone.
Seeing bodes pretty good silver grades as well as base metal grades.
Great.
And maybe it's too early to ask but I'm sure you're going through the budgeting process right now for 2024.
The increase in guidance for 2023, and what you've seen in terms of good operations.
At the asset in 2023, any kind of read through that we can carry on chin.
For 2024 at a high level.
Yes, I would just flag.
For the last eight or nine quarters, which delivered very stable and consistent production both on a throughput recovery and obviously, there's variation due to grades.
We expect that stable.
Operations throughput recoveries to continue into 2024, where as you mentioned, we still are going through the budgeting process.
We will continue to optimize the mine plan as we do that.
So I'm hesitant to give any further color on 2024, while we go through that process, but.
You Shouldnt you Shouldnt expect any any surprises compared to the life of mine plan that we put out.
Maybe switching gears a little bit.
On Mexico.
It's good to hear Dale that youre able to contain costs, while costs have increased by <unk>.
Offset it with operational efficiencies number one I want to.
Confirm that you've been able to offset the cost increases.
Operational efficiency or at least most of it.
And number two it's regarding sort of the country itself.
Seen some.
Sure.
Mining companies in Mexico.
Security issues I, just wanted to confirm that.
There's no issues in terms of where are you at and no issues in terms of.
The asset itself.
Yes.
Thanks, again Cosmos just on.
I'll answer the cost question.
First we're.
Yes, we're doing a good job containing costs, obviously and there were no different than any of the other.
Mining companies in Mexico, we're exposed to.
The Mexican the strong much stronger Mexican peso over over the last 12 or so months.
<unk>.
Obviously, applying some pressure and inspire signal stellar inflationary.
Pressures.
Our continuous improvement program I'm really proud of our team.
The work that we've done.
We've got some great initiatives this year, we're really focusing on.
Back half of this year.
<unk> improvement, including equipment, availabilities, and Utilizations continuing to see some great impacts from that work.
That work will continue that and other projects as we head into 2024, so I'm confident of that.
We can offset.
These pressures.
I would just flag.
On a quarter by quarter basis, it's important not to read too much into our.
Site costs, there can be slight variations, depending on an inventory adjustments or timing of expenditures.
In general if you look at our cost of sales profile for the last 12 months.
Yes.
It is quite well and we don't expect any big.
Big swings with the continued cost.
Savings and reduction initiatives that we have under underway.
Just to answer the question on Mexico.
And the security in particular, we're comfortable operating where we are.
I think this is quite.
Regional based with no other companies have had some concerns were always.
Cautious but.
We're in an area that is.
Relatively safe on a comparable basis compared to other areas in Mexico, we have a great relationship with our local community.
San Jose Dos CTO and as I said, we have no.
I don't know security concerns at the at the mine site itself.
Great.
Great to hear and those are all my questions. Thanks once again.
Thanks Cosmos.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
There are no further questions at this time.
Mr. Andres I turn the call back over to you.
Thanks, operator.
Thanks to everyone, who participated in the call we look forward to continuing to update update.
Update you as we progress with our with our operating performance and most importantly, as we head into 2024.
Updating you on our exploration results and continued progress on our life extension.
Work. So thank you. Thank you all.
This concludes today's conference call. Thank you for joining you may now disconnect your lines.
Please wait the conference will begin shortly.
Yes.
Sure.
[music].
Okay.
Yes.
[music].
Okay.
Yes.
Okay.