Q3 2024 Gatos Silver Inc Earnings Call
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Janine: Thank you for standing by. My name is Janine and I will be your conference operator. Presenting today will be Dale Andres, CEO of Gatos Silver and Andre Van Niekerk, Chief Financial Officer.
Janine: We will conclude today's session with a question and answer period where other members of the GATOS Silver Management Team will be available. For those who have registered in advance, ask questions.
Janine: And would like to ask questions during this time, simply press star followed by the number one on your telephone keypad.
Janine: If you would like to withdraw your question, please press the pound key.
Janine: At this time, all participant lines have been placed on mute for the duration of the presentation to prevent any background noise.
Speaker Change: I would now like to turn the conference over to Dale Andres. Please go ahead.
Thank you, Operator, and good morning, everyone.
Speaker Change: I just want to remind everyone at Gatow's, we will be making
Speaker Change: forward-looking statements and those are subject to various risks and uncertainties that may cause actual results to vary and Capital Silver does not assume the obligation to update any forward-looking statements.
Just to start.
Speaker Change: As you can see on slide three, there was a lot going on in the third quarter. On September 5th, the company entered into a merger agreement with First Majestic.
Speaker Change: The proposed merger consolidates three world-class producing silver districts in Mexico and that creating a leading primary silver producer.
Speaker Change: We expect this transformative transaction to close in the first quarter next year, and that's of course subject to certain conditions, and I'll describe those a little bit more later in the presentation.
Speaker Change: The Los Gatos joint venture had record cash flow from operations and record free cash flow.
Speaker Change: This was primarily due to the strong operating performance and higher metal prices in the quarter.
Speaker Change: We revised guidance upward in early October and the third quarter results put us in a strong position to achieve our revised annual guidance.
Speaker Change: I would also like to highlight the Los Gatos Joint Ventures free cash flow, and that was $42.6 million in the third quarter, which provided sufficient cash flow to allow for $54.2 million of distributions to the Joint Venture partners during the quarter.
Speaker Change: As a result of these cash distributions, Gato Silver had a cash balance of $114.8 million at the end of October, and last week the joint venture did make another $40 million distribution with our share being $28 million.
Speaker Change: So, so far this year, the joint venture has made close to $150 million in distributions to its partners.
Speaker Change: On September 25th we announced new mineral reserves and resources and an updated life of mine.
Speaker Change: The new plan extends the life of mine to the end of 2032, and that's at a milling throughput rate of 3,500 tonnes per day.
Speaker Change: Importantly, this added 36% to the total expected silver equivalent production over the life of mine, and that's compared to last year's plan.
Speaker Change: During the third quarter, we continued our focus on exploration drilling on both near mine and other targets.
in the large Los Gatos District.
Speaker Change: We are seeing some interesting initial results at central deeps, and I will talk more about that in the exploration slide.
Speaker Change: Turning to slide four, mill throughput for the third quarter was 3,246 tonnes per day, and that's the seventh consecutive quarterly record.
Speaker Change: We do remain mine limited, so we're currently shutting the mill down for three to four days per month for extended maintenance.
Speaker Change: which we do with our own crews and whether we need to do that time for maintenance or not, we shut it down for that amount of time. And that does ensure that the mill stays in very good shape, but on an operating day basis, we're processing ore at a rate somewhere between 3,600 and just over 3,900 tons per day.
Speaker Change: Higher mill throughput compared to the third quarter of 2023 resulted in silver production being 9% higher at 2.42 million ounces, and silver equivalent production, which includes zinc, lead, and gold, was 11% higher at 3.84 million ounces for the quarter.
Speaker Change: Site operating unit costs were approximately $97 per ton this quarter, and that's 8% lower than the third quarter last year.
Speaker Change: Cash costs for the quarter were 4% lower than in the third quarter of last year as well, and that's despite the higher throughput rates.
Speaker Change: Our continuous improvement initiatives continue to help drive costs lower and productivity higher.
Speaker Change: We do have a number of initiatives underway to further increase ore production from the mine, including our underground equipment rebuild program and various operational improvement projects, which are focused on planning, maintenance and operational execution.
Speaker Change: All in sustaining costs per payable ounce of silver after byproducts were $9.61.
Speaker Change: and that's per ounce, or 35% lower than the third quarter of last year, and that's helped by strong byproduct production and sales, and well within our revised guidance range for 2024.
Speaker Change: All in sustaining costs per payable ounce of silver equivalent on a co-product basis for just over $16.00.
And that's 9% lower than the third quarter of 2023.
Speaker Change: This was slightly above our guidance range and that really is a result of the higher realized silver price for the quarter. For all in sustaining cost performance, we do use actual realized prices.
Moving to slide 5.
Speaker Change: Silver production is now expected to be between 9.2 and 9.7 million ounces compared with the original guidance of 8.4 to 9.2 million ounces and this represents an increase of 10% at the low end of the range and 5% at the high end.
Speaker Change: On a silver equivalent production basis, we're now expecting between 14.7 and 15.5 million ounces, and that compares to the original guidance of 13.5 to 15.0 million silver equivalent ounces.
Speaker Change: And this represents an increase of 9% at the low end of the range and 3% at the high end.
Speaker Change: Based on current mine plan sequencing at Cerro Los Gatos, the company expects full year zinc, lead and gold production to be near the high end of the original guidance range.
Speaker Change: On the cost side, we now expect full year by-products all in sustaining costs to be between $8.50 and $10 per ounce of payable silver, and that compares to the original guidance range of $9.50 to $11.50 per ounce.
Speaker Change: And this represents a decrease of 11% at the low end and 13% at the high end.
Speaker Change: And on a co-product basis, for the all-in sustaining cost full year, it's expected to remain within our original guidance range, and that's between $14 and $16 per ounce of payable silver equivalent.
Speaker Change: We remain on track to meet the Sustaining Capital Expenditure Guidance at Cerro Los Gatos of $45 million.
Speaker Change: and remain on track for total exploration and resource development drilling expenditures of $18 million in 2024.
Speaker Change: I'll now turn the call over to Andre to present our financial results. Andre?
Thank you, Dale. Good morning, everyone.
Andre: The 70%-owned Los Gatos joint venture's strong operating performance and strong realized metal prices resulted in another quarter of robust gasoline generation.
Andre: Cashflow provided by Operations was $58.2 million, a new quarterly record.
Andre: The LGJV generated free cash flow of $42.6 million this quarter, 199% higher than the $14.3 million in Q3 2023. And also a new record for the LGJV.
Andre: The increase from the comparable quarter last year was primarily due to significantly higher revenues as a result of higher metal prices and higher sales volumes.
Andre: Cash flow used in investing activities was $15.6 million in Q3 2024, $400,000 higher than in Q3 2023. Of that amount, $12.9 million was spent on sustaining capital expenditures and $2.1 million on resource development drilling.
Andre: The LTJV made cash contributions of $54.2 million during the third quarter to the LTJV partners.
Andre: And as a result of the continuous strong free cash flow generated in the third quarter, the joint venture made an additional $40 million in capital distributions on November 7th, subsequent to the end of the quarter.
Andre: In total, the joint venture has made $149.2 million of distributions to the two partners this year.
Andre: Now turning to slide 7 to look at the financial results of the Los Catos Joint Venture for the quarter.
Andre: Revenues increased by 40% to $93.8 million in the third quarter of 2024.
Cost of sales decreased slightly despite the higher sales volumes.
Andre: Depreciation, depletion and amortization expense increased by approximately 7% primarily due to the larger capital base partially offset by the impact of the increase in the mineral reserves and the extension of the life of mine.
Andre: An income tax expense of $13.9 million was recorded compared to an income tax benefit of $900,000 in Q3 2023.
Income tax expense increased primarily due to higher taxable income.
Andre: Finally, the LGJV recorded net income of approximately $25.7 million, a significant increase from the $15.1 million net income recorded in Q3 2023.
Andre: Turning to slide 8 to review the financial results for Gato Sova.
Andre: Net income for the third quarter of 2024 was $9.9 million, approximately 200% higher than in Q3 2023. Basic and alluded earnings were $0.14 per share this quarter compared to $0.05 per share in Q3 2023.
Andre: Adjusted net income was $15.2 million for Q3 2024, compared to $3.3 million for the prior year period.
Andre: Net income was adjusted for the cost associated with a proposed merger with First Majestic.
Andre: On a per share basis, adjusted at income was $0.22 per share basic.
Andre: Equity income in affiliates increased to $18.2 million primarily due to the increase in net income of the LTJB.
Andre: The company incurred general and administrative expenses of $10.4 million compared to $7.5 million in Q3 2023.
Andre: The $2.9 million increase is primarily due to the $5.3 million of costs in the quarter associated with the proposed merger with First Majestic.
Andre: And lastly, other income includes $1.5 million of the quarterly management fees received from the LGJV for the quarter.
Andre: Turning to slide nine, as was mentioned earlier, the joint venture paid cash distributions of $54.2 million to the JV partners Gattlesilver and Doha during the third quarter, of which we received $37.9 million.
Andre: As a result, Guido Silva ended the third quarter with a cash balance of $116.7 million.
Andre: on October 31st, 2024. And on November 7th, the LGJV made another capital distribution of $40 million, of which the company received an additional $28 million.
Both GSI and the LGJV continue to remain debt free.
Speaker Change: Thanks, Andre. On slide 10, this highlights how our business improvement initiatives are helping to drive our cost performance at the mine site, together with increased mill throughput.
Speaker Change: Site operating costs per ton milled have decreased by 9% over the past three years and that's despite inflationary pressures and the substantial strengthening of the Mexican peso and that's on average in 2024 compared to 2021.
Speaker Change: We are continuing to focus on the efficiency of our underground workforce and equipment, including continuing our rebuild program, as I mentioned earlier, and advancing other productivity initiatives.
Speaker Change: to sustainably mine above 3,200 ton per day rate that we've been achieving so far in 2024 and with plans to further extend to 3,500 tons per day by mid 2025.
Speaker Change: Turning to slide 11, we announced our new Mineral Reserve and Life Submine on September 25th.
Speaker Change: The large infill drilling program in 2023 and 2024 in the Southeast Deeps has resulted in successful conversion of 3 million tonnes in that zone to reserve status.
Speaker Change: This has enabled the mine life to be extended by another two years, to the end of 2032, and that's even at the higher throughput rates of 3,500 tonnes per day, where the previous life of mine averaged only 2,950 tonnes per day, so that's a significant increase.
Speaker Change: The Life of Mine continues to have a low all-in sustaining cost, providing for significant cash flow generation over the Life of Mine.
Speaker Change: The average annual after-tax free cash flow is expected to be approximately $80 million per annum based on reserve silver price assumption of $23 per ounce and that's well below the current spot price.
Speaker Change: And the operation does have significant leverage to higher metal prices.
Speaker Change: At a silver price of $30 per ounce, the average annual after-tax free cash flow is expected to be approximately $111 million per annum.
Speaker Change: And total silver production expected to increase by 22%. And again, that's compared to the previous life of mine.
Speaker Change: is expected during the 2025 to 2027 period, so for the next three years.
Speaker Change: And that is without further optimization potential, which we're driving towards. We are continuing to optimize the design of the copper separation circuit.
Speaker Change: with a decision anticipated in early 2025. And we are also evaluating various recovery improvement options in the mill to help drive margins higher.
Speaker Change: Turning to slide 12, the third quarter marked a clear pivot in our execution towards unlocking value in the Los Gatos District on exploration.
Speaker Change: With the completion of the Southeast Deep's infill program for the 2024 Mineral Reserve and Resource Update earlier in the year, efforts were redirected towards resource expansion, and that's both near mine,
and on growth-related drilling more broadly in the district.
Speaker Change: While still early days, we had some very positive results in the central deeps area and were particularly encouraged by these results in central deeps.
Speaker Change: as it opens up a large area for potential mineralization close to our existing infrastructure. And we currently have three surface rigs drilling in this zone.
Speaker Change: Further to the south, we are continuing to follow the high-grade plunge in the southeast deep zone, so we're continuing to drill there. And we continue to follow up on our previously announced results that hit mineralization at San Luis.
Speaker Change: At the same time, we continue to advance our knowledge of key targets across all levels of the exploration pipeline.
Speaker Change: from early stage mapping across our 103,000 hectare property through to continued resource additions at Cerro Los Gatos.
Speaker Change: On slide 13, and in summary, the transformative combination with First Majestic that we announced in early September is expected to close in the first quarter of 2025.
Speaker Change: We are progressing both the Mexican antitrust approval process and securities regulatory approvals.
Speaker Change: In the meantime, we continue to safely drive further mill throughput increases, and that's building on the last seven consecutive quarters of records, together with mine productivity improvements and cost optimization.
Speaker Change: We remain focused on driving margin improvement across all aspects of the business, with several value-enhancing initiatives being evaluated right now, including the higher recovery rates in the copper circuit and the mill.
Speaker Change: And we are continuing our exploration drilling program for 2024, with a focus on near-mine targets as I said, including the St. Louis and Linz targets more broadly in the district.
Speaker Change: So, we'll continue to update results, both on operating performance and our exploration as we progress through to the end of the year.
Speaker Change: We do continue to generate strong operating margins and cash flow with regular distributions from the joint venture expected to continue.
Speaker Change: And with a growing cash balance at the corporate level, with close to $115 million in the bank at the end of October. And that's before the recent receipt of the $28 million from our share of the most recent distribution last week.
Speaker Change: I'll now hand the call back over to the operator for questions.
Thank you.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by 1 on your touchtone phone.
Again, should you have a question...
Speaker Change: There are no questions. I will now turn the conference back over to Dale for closing remarks.
Dale Andres: Thank you, Operator. We look forward to providing updates as we progress the first Majestic transaction and providing updates on our operational performance and exploration drilling as we progress in the meantime. Thanks for your time, everyone.
Speaker Change: That concludes our conference call for today. You may now disconnect.
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