Fortuna Silver Mines Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Fortuna Silver Mines Q3 2023 Financial and Operational Please note this conference is being recorded. I will now turn the conference over to your host, Jorge Roberto Ganoza, CEO of Fortuna Silver Mines. Jorge, over to you.

Speaker 1

Thank you, Jenny, and good morning to all and welcome again. In addition to myself, we have on the line Luizarillo Gagnosa, Chief Financial Officer Cesar Velasco, Chief Operating Officer of Latin America, I'm David Widdle, our Chief Operating Officer for West Africa. For your reference, during the conference call, we have provided Results presentation available on the landing page of our website under future presentations. As we will be making forward looking statements during the call, please refer to our cautionary statements included in the presentation, Chapman, our Senior Vice President, Technical Services and qualified person. Financial figures contained in the presentation and discussed in the calls in today's call are presented in U.

Speaker 1

S. Dollars unless otherwise stated. Yesterday before market opened, we reported record production and financial results. Our noteworthy results are the successful outcome of 2 years of hard work and focused execution on our strategic plan. We have placed ourselves in a strong position to deliver shareholder value today and into the future.

Speaker 1

Since the Roxgold acquisition in mid-twenty 21, We have successfully expanded and consolidated our presence in 2 of the most exciting mining regions in the world, West Africa and Latin America. We have a balanced mine 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 of our 5th and flagship mine, Seguela. So I'll be comparing performance versus the previous Q2, which I believe helps better see the impact and the change in the business.

Speaker 1

Production and financial results are highlighted by record figures across all relevant metrics of the business. Gold equivalent production of 128,671 ounces, an increase of 38% compared to the Q2 of this year. Sales of $243,000,000 an increase of 53% compared to the 2nd quarter. Net earnings of $27,500,000 or $0.09 per share, adjusted net earnings of $0.10 per share, results. Analyst consensus and a notably large free cash flow from operations amounting to $70,000,000 compared to $9,500,000 in the 2nd quarter.

Speaker 1

Our consolidated cash cost was well below $900 And AISC was $13.12 per gold equivalent ounce. We continue tracking well to meet the upper end of guidance range for the year, powered by the Yaramoko, Seguela and Caylloma mine contribution. The record financial performance was mainly driven by Seguela, our flagship mine, contributing full quarter production for the first time. In addition, we also benefited from higher gold production at Yaramoko related to higher grades in new extensions of Zone 55, as well as an overall steady performance across the mines portfolio, where we observed abating inflation in consumables and recorded gains from continued optimization initiatives. In terms of Ezeguerra mine, We were still ramping up production during the Q3.

Speaker 1

By the end of September, the process plant was exceeded Exceeding nameplate capacity of 154 tons per hour by 13%. Looking forward in the Q4, we expect to benefit from steadier production at higher throughput rate. The mine recorded gold production of 31,498 ounces at a cash cost of of $3.95 per ounce and AISC of $7.88 per ounce results. Over the coming months, we expect cash cost and ASIC to gradually gravitate towards our guidance projections in the range of $500 for cash cost and $1,000 for AC. This is explained by higher projected stripping in our plants and longer haulage distances as pit operations advance.

Speaker 1

David will provide further insights into our operations at Seguil and Yaramoko later on. As we transition out of 2 years of intensive investment and enter a cash harvest phase, capital allocation becomes a topical issue for us. Our priorities are to continue strengthening the balance sheet through debt reduction. Our debt 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.

Speaker 1

Another priority is ensuring exploration programs remain well funded with a focus on high value opportunities in the portfolio and reserve replacement at our mines. Currently, we have 11 drill rigs turning across our properties And we remain open to other avenues to continue enhancing shareholder value. For example, with our bank lenders, we're in discussions to lift certain covenants to become active again on our share repurchase program. In September, we completed the acquisition of Cheso Resources and the Diambasut Go project in Senegal. The Ambasut is an exciting advanced stage exploration opportunity and a very strategic fit for us.

Speaker 1

It complements our advanced project pipeline and Senegal is a near neighbor country to our existing operations. We're making best use of time here and are already drilling with 3 rigs exploring for additional ounces. Also during September October, we had good news at our San Jose mine in Mexico. We announced receipt of a positive Mexican court ruling reinstating our 12 year environmental impact authorization. The court did not give any credit to the surprising January resolution issued by the Mexican environmental agency, Semarnat.

Speaker 1

Our mine has operated normally throughout this time with Semarna 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 Giese. The discovery hole intersected 9.9 meters at 1.2 kilogram silver equivalent per ton within a broader halo of mineralization. Ghesi is located east of the main Trinidad Victoria system where production takes place currently and some 200 meters from existing underground infrastructure. Yes.

Speaker 1

It is a blind discovery, meaning it does not have any recognizable surface expression. And we're currently drilling with 2 core rigs working to gain better geologic understanding of this new zone. On health and safety across the business, We recorded one LTI. As of the end of the quarter, our year to date LTI frequency rate stands at 0.38 and the total recordable frequency rate at 0.86. This compares to 0.22 and 2.37 a year ago respectively.

Speaker 1

Worth noting is the achievement of our Yaramoko 2019, which in the quarter recorded 3 years free of lost time injuries. Year to date, we have no reportable events on the environment. I would now let David and Cesar provide a high level overview of our business and performance in West Africa and Latin America. We can start with you, David.

Speaker 2

Yes. Thanks, Olga. Operations in West Africa Strongly during the Q3 of 2023, AllSeis demonstrated excellent safety performance with no significant instance and 0 LTIs. At Seguela, the mine's 1st full quarter of production resulted in 31,498 ounces of gold, Which followed the successful completion of the processing plant performance test in August, the operation is now exceeding nameplate capacity. At Yaramoko, guidance was increased by approximately 14% to 110,000 to 120,000 ounces, And the mine also achieved a milestone of operating 3 years without an LTI.

Speaker 2

In the 3rd quarter, Sigayla mined 502,326 tonnes of ore at an average grade of 3.48 grams per tonne Mining operations focused on the Antenna pit in order to access the higher grade areas and to source sufficient fresh rock for the completion of the processing plant's performance test. At the Anseum pit, the 1st program of grade control drilling took place, topsoil stripping and storage commenced and the haul rate construction continues as Process plant operations ramped up beyond the nameplate capacity of 154 tons per hour during the quarter, achieving an average rate of 3.62 tonnes per hour. In September, An average of 174 tonnes per hour was reached. Process plant improvements are currently allowing results. Additional quantities of some of the higher grade oxide ore mined earlier in the year.

Speaker 2

Long term oxide transitional fee will be in the order of 10 of 15%. Segueil's strong performance resulted in both cash cost per ounce and AISC results. Following the operation's strong performance in the quarter, we continue to see improvements in throughput and a continuation of good grades and positive reconciliation into the processing plan. As a result, we expect gold production to achieve the upper end of guidance. At Yaramoko, strong production Performance delivered 34,036 ounces of gold.

Speaker 2

Mine production at Yaramota was 127,060 tonnes at an average grade of 8.12 grams per tonne. Mining operations were chiefly from the 55 Zone underground mine. Development continued at the QV ore body at the Bagassi mine with the first stoping operations commencing towards the end of Q3. At the processing plant, 137,281 tonnes were treated at an average grade of 7.72 grams per tonne, recovery at 98.5%, enabled by the increased feed grade. The increase in production resulted in year to date AISC at Karamoto being below the lower end of annual guidance at $14.29 per ounce.

Speaker 2

In the Q3, Roxgold, In cooperation with other mining groups and stakeholders, engaged with the government of Burkina Faso with regards to the government's proposed variation to metal royalties. This collaborative approach has seen a small increase in royalties of 1.5% at Current gold prices with a maximum increase of 2% once gold prices exceed $2,000 an ounce. Mining development operations continue to encounter high grade areas with ore body widths generally greater than previously experienced. Typing activities are starting to progress in some of these higher grade areas. And as a result, we expect 2023 production to be within the revised diamonds range of 110,000 to 120,000 ounces.

Speaker 2

The company anticipates having a similar gold production results. Diamond drilling during the Q3 was focused on the lower eastern side of the 55 zone ore body. Results. Drill results have seen an extension on strike to expected mining boundaries as well as the inclusion into the mine plan of an additional eastern ore drive at the lowest part of the 55 Zone ore body. Drilling in the Q4 and throughout 20 24 will focus again on testing further Western Strike extensions of 55 Zone as well as testing for potential deeper extensions.

Speaker 3

Thank you, Jorge, and good morning to everyone. On a consolidated basis, the Latin American operations delivered results. Project at both the Lindero and Caylloma mines. Regarding costs, we are starting to see some reduction tendencies on main supplies and consumables like diesel, cement, sulfuric acid, cyanide and other reagents. In Mexico, we're experiencing some pressure from the strengthening of the Mexican peso versus the U.

Speaker 3

S. Dollar of roughly 20% when compared to 2022 levels. Now I will discuss our operational performance during the Q3. In Argentina, Lindero mined 1,900,000 tons of ore with a stripping ratio of 1.1 to 1. And looking forward, the stripping ratio is expected to continue its positive trend through to the end of the year to approximately 0.7 to 1.

Speaker 3

A total of 1,500,000 tons of ore were placed on the leach pad at an average gold rate of 0.62 grams per ton containing an estimated results. 29,068 ounces of gold. Lindero's gold production in the quarter was 20,933 ounces, in line with the mining sequence and the mineral reserves. In accordance with our mine plan, The higher stripping ratios seen in the 1st 9 months of the year positioned us for improved access to higher grade material to be mined during the upcoming Q4. As a result, Lindero anticipates placing about 1,600,000 tons of ore on the leach pad at a higher average grade of results.

Speaker 3

One of the most relevant capital projects for Lindero in 2023 2024 results. The Leach pad expansion, which will serve for the next several years of production. As of September 30, This project is 13% complete. Mobilization of the contractors, personnel and equipment has already commenced. The first shipments of geomembrane and geosynthetic clay liner have arrived at site and the project remains on schedule for conclusion during the second half of 2024.

Speaker 3

The estimated time of completion is aligned with the stacking plan and production requirements for next year. ASIC for the quarter was ARS 16 results. $11 per ounce, mainly due to higher cash cost per ounce, resulting from a combination of lower production is expected to be at the high end of annual guidance as CapEx execution picks up in the 4th quarter. Lindero continues capturing significant savings, particularly on key consumables and the focus remains on cost control and good CapEx execution. Moving up to Mexico, San Jose's production reflects a 43% 42% results.

Speaker 3

Increase in silver and gold production when compared to the previous quarter. The mine produced 1,400,000 ounces of silver at an average head grade of 189 grams per ton and 8,205 ounces of gold at an average head grade of 1.14 grams per ton. Management continues executing on an improved mining and processing plan through year end to recover part of the lost production from the 2nd quarter. Silver and gold production for the Q3 of 2023, when compared to the Q3 of 2022 results 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 its cost guidance for the year results.

Speaker 3

As a result of catching up during the Q4 and postponed development meters from the previous quarters. ASIC for the year incorporates an intensive infield drilling campaign at the recently discovered Iasi vein, where additional drilling is underway from both surface and underground. Regarding Peru, Caylloma produced 308,221 ounces of silver. This is a 6% increase from the same period in 2022 at an average head grade of 83 grams per tonne silver. The mine is well positioned to achieve the upper end of annual guidance.

Speaker 3

Zinc and lead production was results. £14,000,000 £10,300,000 respectively, which represents an 18% 14% increase in production from the same period in 2022. Increased production is the result Increased recoveries for zinc and led were driven by those higher grades. I think that covers Latin America operations. Back to you, Jorge.

Speaker 1

Thank you, Cesar. Luis, review for financials?

Speaker 4

Sure. Thank you. So I'll be focusing my commentary on the Comparable quarter of 2022, sales of $243,100,000 in the Q3 of this year were $77,000,000 above Q3 of 2022. This is a 46% increase explained primarily by the contribution of 35,500 ounces of gold from Seguela in the quarter as well as higher metal prices. Year over year realized gold and silver prices were up 12% 23% respectively.

Speaker 4

Our cash cost of sales per gold equivalent ounce was $8.14 This is 8% or CAD67 per ounce below the prior year. Cash cost of sales at Siguela was CAD3.97 per ounce and slightly below $500 per ounce when including capital leases related to the mining contractor, which are reported as part of ASIC, but excluded from cash cost per ounce. At Yaramoko, we have also reported a significant reduction in cash cost per ounce of $180 related to the effect of higher grades, a trend that has remained constant throughout the year as David pointed out. These positive impacts were partially offset by higher cash cost per gold equivalent ounce At Lindero and San Jose, in the case of Lindero, this is mostly aligned with the expected reduction in head grades consistent with the mine plan. In the case of San Jose, this is mainly due to higher mining costs to make up for the shortfall of production in the Q2 of this year related to the illegal blockade and higher maintenance and indirect costs.

Speaker 4

As a result of the higher volume sold, Lower cost per ounce and higher metal prices, mine operating income increased 166% year over year. While our general and administration expenses remain for the most part constant, This strong operating leverage effect has resulted in an increase in operating income of almost 700% from $5,700,000 in Q2 of last year to $45,500,000 in Q3 of 2023. We have disclosed we expect higher depletion at Seguela in future quarters related to the purchase price allocation from the Roxgold acquisition. We anticipate depletion will increase over the next 2 to 3 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 $10,000,000 to cost of sales or approximately $300 per ounce.

Speaker 4

Continuing with our income statement, we have recorded $8,200,000 of net interest and finance costs compared to $2,400,000 in Q3 2022. This $8,200,000 in 2023 for various concepts including mine closure, right of use assets and the outstanding convertible debt. In the comparable quarter, dollars 1,300,000 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 as well no income tax was recorded at Seguela in the quarter due to income tax offsets from the construction phase.

Speaker 4

Under a full income tax scenario, we would expect effective tax rates on a consolidated basis between 35% 40%. Moving on to free cash flow and liquidity, we reported $70,000,000 of free cash flow on the back of Strong cash from operations of $106,500,000 compared to the prior year free cash flow and cash from operations increased by $36,000,000 $42,000,000 respectively. Our total liquidity at the end of the quarter was 162 Strong free cash flow generation in the quarter. As Jorge mentioned, we paid down $40,000,000 of debt and expect to continue paying down debt in the coming quarters. As a reference, the $40,000,000 of debt reduction represents Quarterly interest expense savings of approximately $800,000 at current interest rates.

Speaker 4

Finally, at the end of Q3, our total 2023, our total net debt was $134,000,000 down from $198,000,000 in June 2023 for a total net debt to EBITDA ratio of 0.5%. Back to you, Jorge.

Speaker 1

Thank you. That concludes management's Discussion of results. Jenny, back to you.

Operator

Thank you very much, Jorge. At this time, we will be conducting our question and answer Your first question is coming from Derek Windmill of Scotiabank.

Speaker 5

Nice to see the free cash flow in Q3 and the stock responding well. Just a few quick questions for me, if you don't mind. At Lindero on the Phase 2 Leach pad expansion, can you just remind me what the critical path items are? And I guess how much additional tonnages will get you?

Speaker 1

Sure. Critical path and Cesar, do you want to expand?

Speaker 3

Sure, Jorge. Well, critical paths were, in fact, the geomainbrane and geosynthetic Clay liners, those were properly purchased in time and are on their way To cite, first shipments have already arrived, almost 30% to 40% of those, the remaining ones during the Q1 of 2024. And now the civil contractor mobilization, which is one of the main packages and activities, Who is mobilizing as we speak. So that should cover those critical paths

Speaker 1

And being in line with Raj, with respect to the second part of the question, this expansion of the leach pad It was contemplated in the regional design and it serves basically the Supports the loan. It does not provide for an expansion of throughput. No, it was a scheduled expansion in the original design to support the 19,000, 20000 tons per day

Speaker 5

Okay, fantastic. I appreciate that. Thank you. And in terms of exploration at Lindero, any comments there? As you recall, Was it ARRI 0 or one of the targets there?

Speaker 1

At Lindero, We have focused our exploration funding in 2023 With priorities in Seguela as high value opportunities. And then on life of mine replacement, the funding has been prioritized for the Yaramoko mine and the San Jose mine, Right. So Lindero and Caylloma have not received any significant funding In 2023, we would expect to see some funding allocated towards ARRISARO in 20 24, right. Remember, 2023 still has been a capital intensive year for us on the Seguela build. So we rationalize Or EBIT or exploration funding, right?

Speaker 5

Okay. Thank you. Appreciate that. Maybe just one more for me, if you don't mind. San Jose, obviously, some pretty great exploration results recently.

Speaker 5

I know it's still early days, but Any comments on what you think that could mean for the mine plan?

Speaker 1

Yes. It is an exciting discovery, very 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 we need time, right?

Speaker 1

What I can say is that it's high grade. It's structurally, it's making sense to us. But how meaningful it is or it becomes to 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 this as we advance. Thank you.

Operator

Thank you very much. Okay. We don't appear to have any further questions. I will now hand back over to the management team for any closing comments.

Speaker 1

That's all on our part. Thank you very much.

Speaker 2

Have a good day.

Operator

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.

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