Fortuna Silver Mines Q4 2023 Earnings Call Transcript

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March 7, 2024

There are 7 speakers on the call.

Operator

Good morning, everyone, and welcome to the Fortuna Silver Mines Q4 and Full Year 2023 Financial and Operational Results Call. At this time, all participants have been placed in a listen only mode and we will open the floor for questions following the Please note this conference is being recorded. I will now turn the conference over to your host, Garolos Baca, Investor Relations. Garolos, over to you.

Speaker 1

Thank you, Jenny. Good morning, ladies and gentlemen. I would like to welcome you to Fortuna Silver Mines 4th quarter Full Year 2023 Financial and Operational Results Conference Call. Hosting the call today on behalf of Fortuna will be Jorge Alberto Anosa, President, Chief Executive Officer and Co Founder Luizarillo Anosa, Chief Financial Officer Cesar Velasco, Chief Operating Officer, Latin America and David Whittle, Chief Operating Officer, West Africa. Today's earnings call presentation will be available on our website atfortunasilver.com.

Speaker 1

As a reminder, statements made during this call are subject to the reader advisories included in yesterday's news release and in the earnings call presentation. Financial figures contained in the presentation and discussed in today's call are presented in U. S. Dollars unless otherwise stated. Before I turn over the call to Jorge, I would like to indicate that this earnings call contains forward looking information that is based on the company's current expectations, estimates and beliefs and is subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from a conclusion, forecast or projection made in the forward looking information.

Speaker 1

A description of these risks, uncertainties and other factors is set out in the company's annual information form for the financial year ended December 31, 2022. The annual MD and A for the year ended December 31, 2022 and the interim MD and A for the Q3 2023, which are all publicly available on the SEDAR website. Certain material factors or assumptions were applied by the company in drawing a conclusion or making a forecast or projection a form for the financial year ended December 31, 2023. The annual MD and A for the financial year ended December 31, 2023 and the interim MD and A for the Q3 of 2023. Company assumes no obligation to update such forward looking information in the future except as required by law.

Speaker 1

I would now like to turn the call over to Jorge Alberto Anosa, President, Chief Executive Officer and Co Founder of Fortuna.

Speaker 2

Thank you, Carlos. Fortuna had a strong close to 2023. In the Q4, we recorded $66,000,000 free cash flow from ongoing operations, which is consistent with the $70,000,000 recorded in the Q3. We achieved a record 136,000 gold equivalent ounces in the period as well and realized an average gold price of $19.90 per ounce. P and L record sales of 2 $65,000,000 or consolidated ASIC for the period was $1509 per gold equivalent ounce.

Speaker 2

We're using the strong proceeds of the business to advance payments on our corporate grades facility, paying $40,000,000 in the 3rd quarter, dollars 41,000,000 in the 4th quarter and subsequent to year end, we paid an additional 25 $1,000,000 between the end of February early March. We have a favorable debt to EBITDA ratio of 100.3 and a total net debt of approximately $83,000,000 Providing enhanced flexibility to our balance sheet through debt reduction is one of our capital allocation priorities in 2024 and we expect to achieve 0 net debt during this year. Another capital allocation priority is funding high value organic growth opportunities in the portfolio and attractive acquisitions in the regions where we are already established. Our $38,000,000 exploration program this year includes 200,000 meters of drilling with a focus on the Ambasud in Senegal and Seguela in Cote D'ivo. For reserve replacement, our priorities continue to focus on the San Jose and Yanomoco mines.

Speaker 2

In the short to medium term, both the Via Basu project in Senegal and the Segueta mine in Cote d'Ivoire are our strongest drivers for growth and value. As David Whittle, our Chief Operating Officer for West Africa will explain later, At Seguela at the end of December, we are processing ore at a rate which is 26% higher than nameplate capacity and encountering positive grade reconciliation at their starter antenna pit. In the 4th quarter, we obtained 24% more gold ounces than predicted by the reserve model. And the priority continues and the property continues to offer tremendous discovery opportunities, which we are diligently pursuing with our exploration. At Bienbasut, we currently hold an 850,000 ounce gold resource, which we catalog as historical and has not been incorporated to our consolidated resource.

Speaker 2

We expect to enhance our knowledge of the mineral deposit and expand it with our ongoing 45,000 meter drill program and being in a position by year end to deliver a preliminary economic assessment. At both the San Jose and Yaramoko mines, we continue pursuing reserve replacement with well funded drill problems. At San Jose, we are targeting the Yesiven, a high grade silver gold discovery made in 2023. And at the Aramoku, we have achieved a lot of success expanding reserves on the fringes of the Zone 55D orebody. We will be reporting on results from our exploration programs in West Africa and Latin America later in March.

Speaker 2

And another capital allocation consideration is our share buyback program, which was under a temporary restriction placed by the credit facility bank syndicate. This restriction was lifted by us in early January and with the financial results blackout behind us, we may now participate again in the market. And considering available liquidity, capital allocation opportunities and the state of the company valuation in the market, we may be participating again in the market as I said. So with that, I would now let our Chief Operating Officers provide some further detail on our operations to the region, so we can start with West Africa. David, do you want to go ahead?

Speaker 3

Thanks, Jorge. Saigailer and Yaramoko had a successful 4th quarter from MOCA safety and production perspective. Both mines recorded 0 LTIs, and Yaramoko reached an exceptional milestone of 3 years LTI 3 in 2023 and attained ISO 14,001 and ISO 45,001 certifications. In the Q4, Segayla produced 43,096 ounces of gold, a 37% improvement compared the previous quarter and delivered 78,617 ounces of gold for 2023, outperforming annual production guidance by 5%. Yaramoko's strong production performance delivered 28,200 and 35,000 ounces of gold sorry, 28,235 ounces of gold, leading to 117,711 ounces of gold for the year, achieving the higher end of the revised annual production guidance.

Speaker 3

In the Q4 of 2020, Siguira mined 409,293 tons of ore with an average gold grade of 3.34 grams per ton and 2,240,681 tons of waste per strip ratio of 5.4. Oil processed was 300 and 87,267 tons at 3.62 grams per ton of gold. Mining operations focused mainly on the Antenna pit to provide oil feed to the processing plant. At the Antian pit, Hall Road and other development was completed, and topsoil and waste stripping commenced with 104,472 tons of waste stripping being achieved. Preparations for the mining of the cooler pit commenced during the quarter, with grade control drilling and haul road construction being undertaken.

Speaker 3

Processing plant operations continue to ramp up beyond the nameplate capacity of 154 tons an hour during the quarter, achieving an average throughput of 186 tons per hour. In December, an average throughput of 194 tons per hour was attained, 26% higher than design. A partial mill reline was undertaken in February, and we are now successfully further testing throughput constraints. Goal recovery for the quarter was 94.9%, slightly ahead of the 94.5% design recovery, benefiting from the higher head grade. The second lift of the tailing storage facility is currently under construction and is expected to be completed by the end of this quarter.

Speaker 3

This will assure adequate tailing storage for another 2 years of production at the increased throughput rates. Seguiler's strong performance resulted in both a cash cost of $3.41 and an ASIC of $7.37 per ounce of gold, both below guidance. At Yaramoko, mine production in the Q4 of 2023 was 112,906 tons at an average grade of 7.33 grams per tonne gold. Mining operations were primarily sourced from the 55 Zone Underground Mine. Development and stoping operations of the Bagassi South Mine contributed 10,162 tons at 6.05 grams per tonne gold to the above outputs, with batch treatment of Bagassi ore showing a very close correlation to the mine core.

Speaker 3

At the processing plant, 110,445 tons were treated at an average grade of 7.16 grams per tonne gold with the recovery at 98.3%. The decreased processing tons are attributed to a planned shutdown for 11 days in December 23. The enhanced production resulted in the cash cost and AISC at Yaramoko being below the lower end of annual guidance for the year at $8.17 $14.99 per ounce of gold, respectively. Development operations and diamond drilling success enable further strike extensions of the 55 Zone ore body to the East of the expected mining boundaries as well as ex strike extensions and mineable displays of the QB prime ore body at the Bagassi South mine. Back to you, Jorge.

Speaker 2

Thank you, David. Cesar, you want to provide your report, please?

Speaker 4

Yes. Thank you, Jorge, and good afternoon to everyone. In 2023, our Latin American operations successfully delivered 130,310 ounces of gold, 5,900,000 ounces of silver, £40,900,000 of lead and £55,100,000 of zinc. Consolidated gold production achieved guidance enabled mainly by Lindero producing 101,238 ounces. The consolidated silver production was 7% below guidance due to San Jose's lower tonnage extracted from the mine as it has to deal with 15 days stoppage at the beginning of the year, operational difficulties thereafter and reduced grade profile as we are operating at the tail end of reserves.

Speaker 4

Base metals with exceptional lead and zinc production was 28% 15% above guidance respectively. Starting in Argentina, Lindero's gold production for the 4th quarter was 29,591 ounces, a significant increase of 41% when compared to the previous quarter. This increase was enabled by higher gold production and the extraction of 4,600 ounces contained in fine carbon and copper precipitate. Gold production for the year totaled 101,238 ounces, achieving midpoint of annual production guidance. In the Q4, a total of 2,100,000 tons of ore were mined at a stripping ratio of 0.6:one, leading to a stripping ratio of 1.14:one for the year, aligned with the mining plan.

Speaker 4

During the same period, a total of 1,600,000 tons of ore were placed on the leach pad at an average gold grade of 0.63 grams per ton containing an estimated 31,000 665 ounces of gold. Lindero's annual cash cost of 920 dollars and AISC of $15.65 per ounce of gold were both within guidance. To note, cash cost and AISC have been affected by adverse in country macroeconomic conditions during 2023, compounded by an increase in sustaining capital expenditures mainly related to the heap leach expansion project. These costs were partially offset by improved copper byproduct sales totaling $7,700,000 As of the end of February 2024, the $41,000,000 leach pad expansion project is approximately 28% progressed with completion planned by the end of 2024. Those $41,000,000 equates roughly to $4.10 on the ASIC for 2024.

Speaker 4

While this investment weighs heavily on the company's ASIC for this year, it would greatly benefit Lindero by allowing the placing of reserves over the next decade. In Mexico, San Jose produced 1,000,000 ounces of silver and 6,341 ounces of gold in the Q4 of 2023, with average head grades of 145 grams per ton and 0.91 grams per ton, respectively. Total production for 2023 was 4,700,000 ounces of silver and 28,559 ounces of gold, 12% 16% below annual guidance respectively. The decrease in production, as I mentioned before, is attributed primarily to the 15 day illegal union blockade in the 2nd quarter, the associated disruption to operations thereafter, a silver and gold head grade reconciliation to reserves at the lower end of guidance range and the mine that offers less operational flexibility as it is working on the tail end of reserves. We continue to experience significant inflationary pressures in Mexico beyond what we see in other countries where Fortuna operates.

Speaker 4

The 2023 cash cost of 14.40 dollars and AISC of $19.40 per silver equivalent ounce were above guidance. Higher costs are mainly explained by a significant appreciation of the Mexican peso, which affects approximately 50% of our total cost in addition to higher labor, contractor material and consumable costs, lower ounces produced and lower head grades, all of which are also carried into 2024 estimates. Based on exploration outcomes and the remaining life of reserves, the company is preparing strict compliance with government regulations and adhering to high international standards. In Peru, the Caylloma mine produced 330,478 ounces of silver at an average head grade of 88 grams per ton in the Q4. Silver production for 2023 totaled 1,227,000 and 60 ounces, surpassing the upper end of guidance by 10%.

Speaker 4

Lead and zinc production for the quarter was £10,800,000 £14,000,000 with head grades averaging 3.84% and 5% respectively. Caylloma delivered strong base metal production in 2023, totaling £40,900,000 of lead and £55,100,000 of zinc, surpassing guidance by 28% 15% respectively. Enhanced production was the result of positive grade reconciliation to the reserve model in level 16 and 18 of the animal's vein. Back to you, Jorge.

Speaker 2

Thank you. We'll now proceed with a review of our financial results. Luis, please? [SPEAKER MARTIN PEREZ DE SOLAY:]

Speaker 5

Yes. Thank you. So for Q4, we 2023, we have recorded a net loss attributable to Fortuna shareholders of $92,300,000 explained by an impairment charge of $90,600,000 related to the scheduled to exhaust mineral reserves by the end of this year compared to mid-twenty 25 as previously planned. Adjusted net income in the period was $20,600,000 or $0.07 per share compared to $6,400,000 or $0.02 per share in the prior year. In the quarter, we have adjusted for several non recurring items, all of them except 1 are non cash charges.

Speaker 5

I will briefly describe them on a pretax basis. The main one is impairment at San Jose as I just mentioned. Under cost of sales, we have adjusted $15,400,000 of write downs comprised of $9,500,000 of materials inventory at various sites and $5,900,000 of low grade stockpiles at Lindero. The materials inventory write downs are related to a reassessment of consumption plans at San Jose in the face of the shortened life of mine for $4,400,000 with a balance corresponding to Yaramoko and Lindero. The write down of low grade stockpiles at the Lindero mine was triggered by anticipated higher costs to completion over the life of mine.

Speaker 5

It is worth pointing out that this write down doesn't necessarily bring into question the economic viability of the stockpiles as a decision to stockpile low grade ore follows an incremental cost logic while the accounting allocates costs based on an average cost method. Under the line item labeled write off of mineral properties, we have adjusted for the full $5,300,000 amount, which is related to greenfields exploration project in Mexico and Argentina. Under other expenses, we have adjusted for a $6,400,000 severance provision at San Jose related to the scheduled mine closure and $1,200,000 of customs penalties at Seguela related to the construction phase. So back to adjusted net income, the main drivers of the increase over Q4 2022 were the contribution of the Seguela mine, which explains the 71% higher volume of gold sold and higher gold price of 15% which resulted in an average of $19.90 per ounce for the quarter. Our cash cost of sales per gold equivalent ounce sold was $8.40 compared to $8.73 in the prior year.

Speaker 5

As David mentioned, cash cost at Sikela was $3.23 per ounce. That would be $3.76 per ounce if we included capital leases related to the mining contractor, which are reported as part of AISC, but excluded from cash cost per ounce. The contribution of low cost ounces from Seguela was partially offset by higher cash cost per gold equivalent ounce at Yaramoko, Lindero and San Jose in the quarter. For Yaramoko, this was primarily due to higher operating costs in Q4, partially offset by higher head rates. In the case of Lindero, the higher cost per ounce was mostly aligned with the expected reductions in head rates consistent with the mine plan.

Speaker 5

And for San Jose, this was mainly due to a shortfall of production in the quarter compared to the mine plan and lower head rates and the effect of the peso appreciation as noted by Cesar. Depreciation and depletion for the quarter was $71,600,000 compared to 44 $500,000 in the prior year. The increase of $27,000,000 is explained by the higher gold equivalent ounces sold and higher depletion per consolidated gold equivalent ounce of $67 This higher depletion on a per ounce basis is related primarily to Seguela where total depletion and depreciation was 26 $1,000,000 including $17,000,000 corresponding to the purchase price allocation from the Roxwell acquisition. On income taxes, we have recorded $27,000,000 of current income tax compared to $7,800,000 in Q4, 2022. The increase is mostly explained by Seguela.

Speaker 5

We note that tax paid in the quarter was $6,300,000 as we will be paying taxes for the first time at Seguela in 2024. Moving on to free cash flow and liquidity, we reported $66,000,000 of free cash flow from ongoing operations. This is after sustaining CapEx and corporate expenses. Our total liquidity at the end of the quarter was $213,000,000 up fifty $1,000,000 from the end of September 2023, reflecting the strong free cash flow generation in the quarter. We paid down $40,500,000 of debt in Q4 2023 and have made, as Jorge pointed out, subsequent payments of $25,000,000 up to the beginning of March.

Speaker 5

Finally, at the end of 2023, our total net debt was $83,000,000 down from $134,000,000 in September of 2023. Back to you, Jorge.

Speaker 2

Thank you. Operator, we can open up the room for Q and A.

Operator

Perfect. Thank you very much. We are now opening the floor for questions. Our first question is coming from Don DeMarco of National Bank Financial. Don, your line is live.

Speaker 6

Thank you, operator, and good morning, Jorge and team. First question, a couple of questions on Seguela. First off, looking at your guidance, I mean, what drove Seguela ASIC guidance higher in 2024? Because we see that Q4, you're still running at $7.37 an ounce, but then the midpoint next year is $11.70

Speaker 2

dollars Yes. As you can see, Don, in the second half of the year, our average strip ratio has been around 5.4, and that is set to increase in accordance to our plan to around 8% to 9%. The life of mine strip ratio of Seguela is around 13. We have initiatives to optimize that with underground trade off studies that are ongoing right now, but that's what's currently in the plan. So in the first half in the second half of the year, in the first two quarters of production, we have benefited from low strip ratios and shorter haulage distance.

Speaker 2

Moving onward into 2024, our strip ratios will increase in accordance to plan and our haulage distances will increase as well. So yes, that's basically where the explanation is.

Speaker 6

Okay. Thank you. Also, Seagal, we've seen 3 quarters in a row now where recoveries have increased. Q4 was 95%. Should we flat line 95% from here on or do you expect it to increase further?

Speaker 2

David, do you want to tackle that question?

Speaker 3

Yes, I can respond to that. Obviously, the 1st couple of quarters, we were mining predominantly the Antenna Stage 1 ore, which was probably higher grade than the life of mine grade. So we're expecting still to retain around that 94.5% to 95%

Speaker 2

in

Speaker 3

terms of the life of mine recovery.

Speaker 6

Okay, good to know. Shifting over to San Jose, you're spending $5,000,000 on drilling this year at San Jose at Yesi. What do you need to find here to be able to keep the mine open?

Speaker 2

Or is

Speaker 6

that even an option?

Speaker 2

No, it's certainly an opportunity that we value. So we currently have 3 drill rigs advancing on the FE. I have to say that it took us a while to understand the geology of the and the geometry of this structure. It has an orientation, a strike orientation that is different to what we're used to seeing and that is made it difficult at the beginning, but we find it as an exciting feature of this new vein. But now we have a well defined plane that we are hitting hard with drilling.

Speaker 2

Before it was a bit drill to understand and now is we're drilling for volume. So I would expect that by midyear, we have a better grasp on how meaningful this discovery is. As I always say, here we had at Yesi an exciting discovery. Now we need to see it through into an exciting resource, right? We are currently working for that second component of this.

Speaker 2

And as I said, we're hitting it hard. All of our drilling, the $5,000,000 is funding drilling that are concentrated in this area. And we don't know the limits of it yet. And the expectation is that we can define volumes and resources, tonnages, start getting a grasp on that by mid year. So that will dictate that outcome will dictate our view on how to treat the mine plan moving forward.

Speaker 2

As it sits today, we're exhausting reserves by the year end. We have other resources in the mine and the team is currently working on optimization opportunities and on the Victoria resource, for example, to see if we can extract some more and waiting at the same time for outcomes of the Jesi vein exploration. Also, I think we'll have a better idea of how the winding down of potential winding down of mining will look closer to midyear. But parallel to all of this, we are advancing, updating our plans and keeping flexible.

Speaker 6

Okay. Sounds great. We'll look forward to an update on Yassie around mid year's end. Thank you, Jorge. That's all for me.

Operator

Okay. We don't appear to have any further questions in the queue at the moment. I will now hand back over to Jorge for any closing comments.

Speaker 2

No, I just want to stress that our business continues to show strength from the perspective of free cash flow generation. It has been a good end of the year and we look to an exciting 2024. So with that, Carlos, you want to?

Speaker 1

Thank you very much, Jorge. I would like to thank everyone for listening to today's earnings call. Have a great day.

Operator

Thank you very much. That does conclude the conference call for today. 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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