Sierra Metals Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 15, 2023

There are 8 speakers on the call.

Operator

Welcome to the Sierra Metals Inc. 1st Quarter 2023 Consolidated Financial Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask I would now like to turn the conference over to John Bintzic, Investor Relations for Sierra Metals. Please go ahead.

Speaker 1

Good morning and thank you. I'd like to note that this earnings call contains forward looking information that is based on the company's current expectations, estimates and beliefs. Please review this slide and other forward looking information contained in the company's annual information form, which is publicly available on SEDAR and on the company's website. Please note that all dollar amounts mentioned on today's call are in U. S.

Speaker 1

Dollars unless otherwise noted. The accompanying presentation for today's Call is available for download through the webcast or from the company's webcast at sierrametals.com. This morning's press release, the financial statements And the management discussion and analysis are also posted on our website and on SEDAR. We would like to remind investors and analysts taking part in today's call And the Q and A that our focus is on the Q1 2023 results, historical performance and the outlook for the business. And while we will provide a brief update on the strategic review process, we will not be addressing the activist shareholder situation on today's call.

Speaker 1

Our speakers on today's call are Oscar Cabrera, Chair of the Board of Directors Ernesto Valeraiso Valdez, our Interim Chief Executive Officer and Jose Fernandez Baca, our Interim Chief Financial Officer. Following management's prepared remarks, a question and answer period will follow. And now, I would like to turn the call over to Oscar Cabrera. Oscar?

Speaker 2

Thank you, John, and good morning, everyone. My comments today will be brief as I will leave it to Ernesto and Jose to review the company's strong Q1 results and outlook. As Board Chair and a member of the Special Committee of Independent Directors that is undertaking The comprehensive strategic review, I would like to provide the following comments. We understand that people have been eager to receive information on the final recommendation of the committee. The mandate was broad and the strategic review has been comprehensive.

Speaker 2

The review of strategic transaction is approaching completion. With respect to the proposed Copa transaction, most recently, the special committee made material inquiries of Copa regarding its operations and mine plans, but did not receive substantive information in response thereto. As a result, those discussions are not continuing. A further update will be provided when material developments arise from the special committee process and recommendations. The special committee has been closely monitoring the progress being made at the company, including the Q1 2023 results reported this morning.

Speaker 2

We are very encouraged by the operational and financial improvements and the rapid recovery from the challenges experienced last year. The special committee is very pleased with the operating progress reported to date, including improving safety procedures and the strong future projections. We continue to be on track to meet full year guidance. In addition, we have seen tangible progress on the 11/20 permitting at Yauricocha, which is fundamental to the long term success of the company. As a result, the special committee reaffirmed its full confidence in the management team and the plan they are implementing.

Speaker 2

We believe this management team has demonstrated both the vision and execution abilities to warrant the opportunity to continue leading the company. This is still a critical time for Sierra Metals as we deliver on our plan to return the company to its full potential. We believe it is disruptive and not in the interest of shareholders to engage in public disputes over control of the company. The Board will continue to work diligently with our stakeholders with a view to represent the best interest of all, not just a certain group. The Board fully support and has directed management to continue their plans to focus on safely achieving strong operational and financial performance that will benefit all stakeholders.

Speaker 2

On today's call, other than my preceding remarks, we will not be commenting further or taking questions on the Special Committee's work. And as mentioned, we will not be taking questions about the activist shareholder situation. I would now like to turn the call over to Ernesto. Ernesto?

Speaker 3

Thank you, Oscar, and good morning, everyone. Let me begin my remarks today by discussing our number one priority, safety. Our strong operating performance this quarter is due in large part to our improved approach to safety. I said on the last call, A safe mine is an operating mine and our focus is to ensure we provide a workplace environment where all our employees and contractors are safe And can be productive. As shown on this slide, we can see how everyone at Sierra Metals has embraced our renewed focus on safety.

Speaker 3

On a consolidated basis, in Q1 2023, we have improved our safety performance over 20 2120 And I'm also happy to say it is better than industry average in both Peru and Mexico. Everyone at Sierra Metals should be proud of these accomplishments. I know we will continue to strive to maintain these high standards. Now on to an overview of our results. I will assume everyone has read our Q1 2023 production results, which we released on April 25 and our financial results earlier today.

Speaker 3

As such, I will not be going into detail on each operation, but we'll instead provide this high level overview. Sands of our process of $577,000 in Q1 2023 was 17% higher than in Q4 2022. When comparing Q1 2023 to Q4 2022 silver, copper, zinc, lead and gold production have increased 9, 34%, 66%, 48% and 15% respectively. Production in Corporate equivalent pounds in Q1 2023 was £18,000,000 versus £14,000,000 in Q4 2022 for a 28% increase. Bolivar's path toward improved operating performance continues with an 11% increase in ore throughput over Q4 2022.

Speaker 3

Copper equivalent production in this quarter increased 18% compared to Q4 2022. Following the implementation of new technology and safety measures to safeguard against similar occurrences to last year's Much like incident, the Yauricocha operations have recovered and production is back on track. In Q1, Yauricocha delivered a 44 increase in throughput and a 65% increase in corporate driven production over the previous quarter. All in all, there have been quarter over quarter improvements across many of the key operating metrics. This is a testament to the hard work of our entire team.

Speaker 3

It is also proof that we have achieved our goal of stabilizing our operations and we are now poised to deliver As noted last quarter, we have made a strategic decision with input from our Board of Directors to classify the Cusi mine as a non core asset. To that end, we will continue Now let me provide details on how our plan is delivering on these operating improvements. As many of you know, I came on board in late November. I knew Then we had I knew then we had to stabilize our business ahead of anything else. To do so means every aspect Our business was reviewed from top to bottom.

Speaker 3

We knew we could not afford to continue to operate the business with a Short term quarter by quarter view that sacrifice our long term viability, which management teams in the past had done. It was just not suitable. The Board has been very supportive of the plan to build a viable business for the long term. The first part of the plan is to reorganize and right size our business ensuring we have the right people with the right skills in the right locations. We've implemented a flatter organizational structure with a more hands on approach, holding our local teams accountable.

Speaker 3

We have to ensure strategic alignment from all levels with priorities set to ensure we operated the business as a team. The second part of our plan is to lower our cost structure. At the corporate level, we have put initiatives in place to lower annual overhead costs in Canada by $2,000,000 and by $4,000,000 in Peru. To achieve these goals, we have Operations were also tasked with reducing costs. Peru and Mexico has targets to reduce mining costs by 5% and 7% respectively.

Speaker 3

As we have with safety, we have now implemented a company wide culture of reducing costs where we can. The 3rd part of the plan is to increase efficiency and thereby productivity. Some productivity improvements initiatives including increasing asset utilization, focused underground development of mine sequencing and improvements to ventilation and pumping systems at Bolivar. Well, at the agriculture we have initiated activities designed to identify additional mineral resources until we have the permit in place to mine below the 11.20 level. Let me take a moment to discuss the permit for 11.20.

Speaker 3

This permit should have been obtained before 2020 when it was first recognized that we needed to mine below the 11.20 metal. Unfortunately, this was ignored by certain former Board members and previous management teams for the sake of short term gains. Mining below the 11.20 level will be a game changer for the agriculture. That ore body is immense. This would allow us to implement bulk mining techniques utilizing sublevelcaving mining methods which are lower in costs.

Speaker 3

Given the importance of this initiative, we have a dedicated team in place working to obtain the needed permits. They are making great progress and are currently on track to get this permit before year end. Another example to illustrate our plan, our plan is working since I've taken over as CEO. The chart on this slide shows that tons milled Over the past 5 months, a 15% increase at the agriculture and 39% increase at Bolivar. But more importantly, a positive strength of profitability over this period.

Speaker 3

This is another clear data point that shows our work to optimize operations is delivering results. It also shows we have momentum in our business that are confident and we are confident this will continue for the remainder of 2023. Now let me hand the call over to Jose, our CFO.

Speaker 4

Thank you, Ernesto. In light of the operational gain just discussed, let me provide the following quarter or the quarter financial highlights. Consolidated revenue from metals payable of $58,500,000 in Q1 2023 increased by 27% from Q4 2022. In Q1 2023, Yavikocha's cash cost per corporate equivalent payable pound was 2.05 and all in sustainable cost per corporate equivalent payable pound of 3.12. These were effectively 35% 38% lower than in Q4 2022.

Speaker 4

In Q1 2023 at Delivered, cash cost per corporate equivalent payable pound was 1.85 And all in sustainable cost per company, key parent payable found was 3.10%. These were effectively 5% Higher and 16% lower than in Q4 2022. Adjusted EBITDA in Q1 of $15,200,000 was significantly higher than the negative adjusted EBITDA of $500,000 in Q4 2022. In the Q1 of 2023, we have earned more in adjusted EBITDA than in all of 2022. For Q1 2023 was $2,100,000 or $0.01 per share on a basic and diluted basis.

Speaker 4

Cash flow generated from operations before movements in working capital of $12,900,000 for Q1 2023, nearly 5 times increase over Q4 2022. And as of March 31, 2023, Cash and cash equivalents was $3,900,000 and working capital was negative $83,000,000 primarily due to the reclassification of Our banking syndicate has almost completed its review, so we will Soon be able to formalize our debt refinancing package prior to the June 8, 2023, Due date of the 2nd quarterly principal installment. We continue to have advanced discussion with our current secured lenders on refinancing of short term obligations and our review initiatives to improve short term liquidity through ancillary financing arrangements. I can say all our lenders have been very supportive in our plans as we improve our operations and balance sheet. And one final comment.

Speaker 4

We are reviewing several other initiatives to improve our balance sheet, including opportunities to surface hidden value of

Speaker 3

In summary, we are delivering on our plan. And while there is still work to be done and we strive for Having now stabilized our business, the team's next priority will be to grow our very strong operations. This means sustainable, predictable and reliable growth over the long term. Fundamental to achieving this goal is expanding the mineral resources at our core mines. Our key growth initiatives are centered around revising the life of mine plans at Yawicocha and Bolivar And this work is close to completion.

Speaker 3

Once this work is complete, we will revisit our growth capital needs. I said last call and I'll say it again. We firmly believe Bolivar and Yauricocha are cornerstones assets capable Underpinning Sierra Metals for the benefit of all our shareholders and stakeholders for the long term. The 1st 6 months of my tenure as CEO has shown that we have the plan and team in place to continue to deliver. One of the core principles of our new leadership team is managing our assets for the long term.

Speaker 3

This is fundamental to the success and future prosperity of Sierra Mendoza. It is clear to me that in the past Our assets have been managed for short term gain. Success over the long term in mining requires a focus on things such as safety, Proper mine planning, sequential and logical mine development and operational excellence. These are the pillars of a successful mining company. To achieve these things, you also need a focused and motivated team.

Speaker 3

That is the last piece of the puzzle and another area where we are making great strides. The strategic plan we have put in place addresses all of these key issues and our team is highly motivated and aligned to deliver value for all stakeholders. In a very short period of time, our team has been able to surface value at our key assets. Our asset base is strong and if managed properly, we can unlock significantly more value for all stakeholders. We have the potential to position Sierra Metals as a long life low cost mining company and we are confident we With that, I'll hand the call back to the operator to start the Q and A session.

Speaker 3

Just Please remember that we are in different locations, so it might take a few seconds to answer any of the questions. Thank you so much. Operator?

Operator

Thank you. We will now begin the question and answer session. The first question is from Jim Young with New West Investments. Please go ahead.

Speaker 5

Yes, hi. Could you talk about The expectations for your cost structure

Speaker 2

and all

Speaker 5

in sustaining costs at both Bolivar and Yauricocha Over the next, say, 2 to 3 quarters?

Speaker 3

Hi, Jim. Your question is on Costs for Q2 and Q3, if I understood correctly, I'm sorry?

Speaker 5

Yes. Well, basically, you've made excellent strides so far, but clearly, I would assume that you have there's opportunities To reduce costs going forward. My question really is, if you think about where your business is today and where you want to take it over the Sequium quarters and where do you think the cost structure should go to?

Speaker 3

Okay. Thanks for the question, Jim. As I said before, we have targets to reduce costs Both in Yauricocha and Bolivar, 5% 7%, respectively. In Bolivar, Throughput is going to help us a lot. We are planning on ending the year at a 5,000 ton Daily rate in Bolivar, so that's going to help.

Speaker 3

In Yavicocha, we are being Very, very selective on everything, including headcounts, contractors who are planning On revisiting the idea of mining with an in house team instead of contractors, So we do have many initiatives, pumping and ventilation systems are going to be also in Yauricocha. We're working on that as well. That's going to improve productivity. As you know, in the agriculture, we cannot go further For our throughput at this point, but we and that's costs. And you know mining is all about costs.

Speaker 3

In the Lima office, we have reduced dramatically our headcount and are looking to Even move out of this office. In Toronto, We already did that. We went from downtown Toronto to a place a little bit farther away. We have reduced significantly our costs there and so on. So I hope I answered your question.

Operator

Mr. Young, did you have a follow-up question?

Speaker 5

Well, yes, I mean, okay, I can ask another way then. In the recent quarter, you show that the all the same costs for copper Your question is, see by the end of this year, where do you think that cost should go to? Likewise, at Bolivar, you say that the reported that the all those same costs on a copper equivalent basis is 310. We think that should go by the end of this year.

Speaker 3

Okay. Okay. So you are asking me for the target All in sustaining cost of each mine? Yes. We plan on We plan on reducing them by the end of the year into 5% and 7%, respectively.

Speaker 3

I don't have the exact number with me, but We said 5% 7% down in costs in Yauricocha and Bolivar.

Speaker 5

Okay. Thank you.

Operator

The next question is from Hector Ariely with Rainbow Fund. Please go ahead.

Speaker 6

Hi, good morning. Thank you for taking my questions. I have two quick questions. One is a follow-up to the original question. I don't know how much information you can provide us, but assuming that the 11/20 permit is successful, Do you guys have any ballpark estimate that you could provide to us in terms of what that all in sustainable cost Number would look like once Peru does have the 11/20 permit, would it be significantly different from the guidance that you guys have given for 2023?

Speaker 3

It would. It would be a lot lower. I don't know for how much. We don't project that far away numbers. There's a lot to consider, inflation and so on.

Speaker 3

We are planning on obtaining the 11/20 permit by the end of this year. We are working towards that And it will probably take us around 9 months to get and start mining that below 11.20. So it's a little bit far away for me to give estimates on all in sustaining costs at that time. But But you're saying it for sure. Okay.

Speaker 6

Great. Thank you. And then just one additional question. So you referenced in your release that you guys have $86,000,000 in net debt. That's in addition to the ballpark $50,000,000 that is owed to Sierra to Minera Corona in terms of an inter party related transaction.

Speaker 6

So can you help me try to Dan, how you guys will prioritize that? It looks like you guys have been able to revert the operational deficiencies that the company had. But In terms of prioritizing the repayment of these loans, once you guys reach the agreements that are need to be reached in the next Can you help me understand how you will prioritize between eventually paying back these loans and or Paying back the related party transactions to Monera Corona. Thank you.

Speaker 3

Yes, very good question. And the answer is yes, it's in addition. In addition of the bank debt, Sierra Metals owes Corona that amount of money. The priority right now is to refinance our bank debt. That's priority number 1.

Speaker 3

And we are Close to finishing this first round of negotiations and be able to forward To postpone 75% of our bank repayment 2023 bank repayment to 2025. So that's our first priority. As soon as we continue our improvement, 11.20 Permit and We start seeing some cash. Our goal is to start paying that amount to I mean, to Sierra to start for Sierra to start paying the 2 to corona. So those are our priorities.

Speaker 3

Bank debt first, get operational efficiency, build cash on corona, Probably dividends and so on and the wheel starts going round and round, right?

Speaker 7

Okay, perfect. Thank you for your feedback.

Operator

We have a follow-up question from Jim Young with New West Investments. Please go ahead.

Speaker 5

Yes, hi. Thank you. My question is regarding the 11/20 permit in Yauricocha, is the How long will it take for once your permit is granted until you can actually start to mine and Reduce the rack from that area below the 11.20 because the question really is, Is the infrastructure in place, created to build up the infrastructure and then you have to mine?

Speaker 3

Yes. Thank you for the question again, Jim. It will take us around 9 months. From the date we get the permit to start for leases, it will probably take us from 7 to 9 To say anything lower than that would be too positive on my side, I think. We need to build the infrastructure down there.

Speaker 5

How much in cost did that require?

Speaker 3

I don't have the exact amount, Jim, right now in my head, but We have considered that in our mine plans. It's development material, it's not new CapEx, It's development the mine. We develop the mine In ore as well. So the money will come out of the mining, The mining that we do, we don't require additional CapEx to do this. It will pay by itself Because we have a lot of material there.

Speaker 3

If I want to repeat that, the infrastructure we need will pay by And remember, the most expensive CapEx needed for that to mine below 11.20 It's the shaft and the shaft has been built. We are on the final touches Of the shaft, we'll probably have that in a year or so. So everything is in line to start mining and development

Operator

Mr. Young, did you have any further questions?

Speaker 5

I'm all set right now. Thank you.

Operator

The next question is from Alberto Aries with Ares Resource Capital. Please go ahead.

Speaker 7

Hi, Ernesto. Hi, Oscar. Thank you for taking the call. I agree with you in terms of the potential of the assets and the long term view On a mining company, certainly I've had my investment in Sierra for 14 years. So somebody knows about patience and long term It's certainly as shareholders, but we certainly are very interested Improving things for all shareholders.

Speaker 7

And that's why my question is directed to you in terms of the short term. We were very concerned in October of last year when there was that press release that you put out saying that The company was running into financial difficulties and that's why we quickly tried to come up with a solution. So the question is, What are you doing in the short term? You're talking about the refinancing with the banks, but Is it going to provide enough cushion for the short term? And things happen in the mining industry, Sometimes there is disruptions.

Speaker 7

Is the company prepared for withstand any potential problem In the short term, what is your plans? How are you financing this short term shortfall that the company has?

Speaker 3

Okay. Oscar, you want to get in?

Speaker 2

No, no. Ernesto, please go ahead. I can complement your answer.

Speaker 3

Okay. Well, thank you for the question. As you can see, our Q1 results, Alberto, are not bad. We have produced an EBITDA of around $15,000,000 A lot higher than the whole EBITDA of last year, all in all. So we the short term our short term view, I think we have it covered in operating the mines as we are operating them right now, Efficient and efficiently, safely, always safely.

Speaker 3

As you may know, the banks are with us on this. The banks are Finalizing a due diligence process in the next week or so and are very eager to work with us towards better times. So that's our view. I mean, continue to run the assets as we are, produce money for the short term And keep working on the long term in the finance side that is working with banks and while I Pass it on you to Oscar about other stuff.

Speaker 2

No, thank you Ernesto and thank you Alberto for your question. As I mentioned in my prepared remarks, we're not going to be commenting on the potential strategic options under consideration until the special committee has completed its review. Our process has been comprehensive and it's taking time. So I appreciate Investors and stakeholders, patients, we've been supporting management on operations and improving our balance sheet. We have options, and we will be sure to announce any material results As soon as our process is complete and we'll be able to outline our objectives then.

Speaker 7

When should we expect that? Because we've been hearing about this for Quite some time and I think people are losing patience in terms of where the company's valuation is. Certainly, there is an improvement in the operating performance, which I recognize, but I think that The markets are clearly saying that there is something that is not right. There is a crisis that we are all facing. And we, at least in the art front, we want to come up with that solution for everyone.

Speaker 7

So I think there's nobody more motivated than us to fix the problems of Sierra Metals and that involves all the shareholders.

Speaker 2

Right. Well, Ernesto, if I may. We have had engagement with shareholders We wish to provide their views and you're aware of that. We have had positive discussion with shareholders that are supportive of current management and Board. But we cannot discuss these details of these conversations in this forum.

Speaker 2

But I can assure you that this management and Board are working towards getting to the potential of the asset that Sierra Metals has. And we'll disclose any material developments as soon as possible.

Speaker 7

Yes. I think it is very, very important to do it as soon as possible because I think investors, all the shareholders Should decide who should be running, which board members should be running this company. So my recommendation as the largest shareholder is Put the best things that you can put in front of shareholders so that you get the credit that you should get. But if you don't show it, You should be penalized for that.

Speaker 2

Thank you for your comments, Alberto. As you know, we take every shareholder's comments into consideration and we'll do the best for all stakeholders.

Speaker 3

Thank you.

Operator

This concludes the question and answer session. I'd like to turn the conference back over to Ernesto Valariezo for closing remarks.

Speaker 3

Thank you for taking the time to join us today. We appreciate your continued support. I'm proud of what the team has accomplished today. I believe we are heading in the right direction, growing our business in a safe and responsible manner. You can expect more from us and we look forward to showing you our progress and earning your continued trust.

Speaker 3

As always, please feel free to reach out as we are committed to an open and constructive dialogue with all of our shareholders. Have a good day everyone.

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