Sierra Metals Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 13, 2024

There are 7 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to the Sierra Metals, Inc. First Quarter 2024 Financial and Operating Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded.

Operator

After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Jean Pierre Fortellvio, Manager of Business Development and Investor Relations for Sierra Metals. Please go ahead.

Speaker 1

Good morning, everyone. 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 Plus and the company's website. The accompanying presentation for today's call is available for download from the company's website at sierrametals.com. Today's press release, the financial statements and the MD and A are posted on our website and on SEDAR Plus.

Speaker 1

Please note that all dollar amounts mentioned on today's call are in U. S. Dollars unless otherwise noted. And lastly, I'll remind everyone that starting in 2024, the company modified its definition of cash cost to include treatment and refining charges, selling costs and on-site G and A. We think that this is a more accurate and more transparent way of reporting to the market.

Speaker 1

Now we can clearly identify that sustaining capital portion of our total costs. Following management's prepared remarks, a Q and A period will follow. Speakers on today's call are Ernesto Valadezo, our CEO and Jose Hernandez Vaca, our CFO. And now, I'd like to turn the call over to Ernesto.

Speaker 2

Thank you, Jean Pierre, and good morning, everyone. Let me begin as we always do by discussing our company's number one priority, safety. As seen on slide 3, our focus is to continuously ensure we provide a workplace environment where all our employees and contractors are safe. This includes a continuous improvement approach to safety where we continue we conduct regularly safety programs, safety inspections and safety audits for all employees and contractors. This has been very well received by everyone throughout the company as we all recognize that being safe leads to a productive work environment.

Speaker 2

We released our Q1 2024 production results on April 18 and our financial results earlier today. I will assume everyone has had a chance to review them, so I will not be going into detail, but we will instead provide highlights as seen on slide 4. On a consolidated basis, in the Q1 of 2024, our 2 operating mines, Yauricocha and Bolivar produced almost 20,000,000 copper equivalent pounds, which is a 21% increase from Q1 2023. This was from processing almost 600 and 40,000 tons of ore in the Q1, which was 23% higher than in the same quarter a year ago. Breaking this down by metals, copper, silver, gold and lead were respectively 36%, 10%, 2019% and 10% higher in Q1 when compared to the same quarter in 2023.

Speaker 2

At Bolivar, the mine achieved record metal production, while at Yauricocha, the mine continues to maximize production above the 11/21 level. As a reminder, we obtained our permit to mine the Massey Forebody below the 11.20 level on February 21 this year. Development is on track to achieve full production by Q4 2024, which will allow Yauricocha to achieve full processing capacity of 3,600 tons per day, approximately 40% increase from current run rates. As a result of our strong Q1 production, we are reaffirming our 2024 guidance and we continue to generate strong cash flows from our operations, further improving our financial position. More of these later from Pepe when he discusses our financial results.

Speaker 2

All in all, it was another strong quarter. Moving on to Slide 5. As previously mentioned, it was a record quarter of metal production at Bolivar as the mine continued its trend of quarter over quarter production increases. During Q1 2024, Bolivar produced 11,400,000 copper equivalent pounds from nearly 8,000,000 pounds of copper, more than 200 ounces of silver and over 4,000 ounces of gold. All metals produced in Q1 were significantly higher than in Q1 2023.

Speaker 2

The improved production from Q1 2023 to Q1 2024 was mainly driven by higher metal grades mined from the advancements in the mine's development, which allowed for access to higher grade mineralized zones including the Dulce zone. To date, exploration results in the high grade Dulce zone have been very, very encouraging. Cash costs and all in sustaining costs for Q1 2024 were $2.44 $3.12 respectively per copper equivalent payable tax. The increase in all sustaining costs in Q1 when compared to Q1 2023 is mainly driven by the increased development at the mine to access higher grade zones. Some of the initiatives undertaken in the last quarter that helped boost productivity included starting a new tailings dam project with dam number 2 under construction and engineering for dam number 3 currently underway.

Speaker 2

Definition drilling, which was enhanced operational predictability and resume construction of the integration tunnel, which will reduce haulage costs. We remain on track to meet guidance for 2024 at Bolivar. Turning to Yauricocha on slide 6. Q1 operating results were better than Q1 2023, which is a direct reflection of the team's effort over the last 12 months to maximize output above the 11.20 level. Now having obtained a permit to mine below the 11.20 level in February, the mine has started a development process to access this large ore body.

Speaker 2

I'm pleased to report that we are on budget and on track to achieve capacity of 3,600 ton per day by the Q4 of this year, a 40% increase from current run rates. For Q1 2024, copper and lead rates remain aligned with Q1 2023 as gold, silver and zinc grades were lower. As anticipated, mining was primarily in the lower grade ore bodies. However, copper equivalent production remained in line with Q1 2023. We're expecting throughput rates and metal production volumes to improve as development below the 11.20 level progresses.

Speaker 2

The Q1 of 2024, Yobicocha had a cash cost per copper equivalent payable pound of $3.27 and an all in sustaining cost of $3.69 The higher all in sustaining costs in Q1 when compared to Q1 2023 is primarily a result of costs associated with development below the 11.21. I won't take you through all the significant productivity and cost reduction initiatives that we undertook at the Alicocha during the quarter in order to highlight the following. Development below the 11.20 level has started with a new mining contractor focused exclusively on the underground development. New mining equipment is on-site and improved main ventilation and pumping infrastructure has been installed. All in all, the team at Yolicocha did a great job maximizing production and reducing costs where possible.

Speaker 2

We remain on track to meet guidance for 2024. As many of you have seen, on May 7, we announced an updated NI 40three-1 101 compliant mineral reserve and resource estimate for both Bolivar and Yauricocha. This estimate is the first one in over 3 years and as shown on Slide 7 highlights the significant amount of mineral reserves and resources we have at both our mines. The key here is the 5 plus years of proven and probable reserves life of mine at Yalicocha and the 3 plus years at Bolivar. Also, I'd like to highlight the 8 10 years, respectively, life of mine of measure and indicated resources.

Speaker 2

These are very compelling for the future of our mines as we continue to deliver long term value for our stakeholders. Now over to Pepe to discuss our financial results.

Speaker 3

Thank you, Ernesto. I will now provide some financial highlights of the Q1 2024. Consolidated revenue from vessels payable of $63,000,000 in Q1 was an increase of 18% from the 3rd quarter of 2023. This is mainly a result of higher production at Per River. Cash flow generated from operations before movements in working capital was over $16,000,000 for Q1 2024, resulting in another positive quarter of cash flows from our margins.

Speaker 3

Adjusted EBITDA of Q1 was 13% higher on the same quarter a year ago. The company's cash position as at March 31st was over $11,200,000 Overall, our robust operating performance has improved our financial position. As noted on this slide, our net debt to adjusted EBITDA ratio has steadily improved with our strong operations. On a trailing 12 month basis, we have quickly improved our net debt to adjusted EBITDA coverage to 1.3x in Q1 2024, which is very manageable for us. A quick update on the ongoing and very productive talks with our lenders on our refinancing package.

Speaker 3

We expect the refinancing package will offer the company relief on its repayment schedule and financial covenants and help fund future growth initiatives. Our lender has been very strong partners and shown a tremendous amount of support for our achievements to date and for our growth plans. With this with 2 important milestones in hand, which are the updated mineral reserves and result estimate and the permit obtained to mine below the 11.20 level, we expect to announce a refinancing agreement in the coming weeks. Back to you now, Ernesto.

Speaker 2

Thanks, Pepe. Shifting now to another very integral part of our business, which is to partner with our local communities on important initiatives that benefit everyone. Shown on this slide are some images of the events and important initiatives undertaken this quarter in Mexico and Peru. We remain committed to ensuring safety, wellness and environment, which are our top priorities. In closing, we see 2024 as a year to consolidate the optimization efforts that started in 2023 and establish a platform for growth and long term value creation.

Speaker 2

Amongst the many initiatives identified by the team to create value, let me highlight 6 of them. As already discussed, we have already achieved one key initiative for 2024 with the publication of an updated national instrument 40three-1 101 compliant mineral reserve and resource estimate for both our Yolycocha and Bolivar mines. Overall, our operations have a very significant amount of mineral reserves and resources that will provide the foundation for our ambitious growth plans at each mine. We already announced the receipt of the permit to mine below the 11.20 level at Yauricocha on February 21, 2024. Our focus is to mine efficiently all we can above the 11.20 level and safely develop access below the 11.20 level.

Speaker 2

We anticipate our production will increase to full capacity by Q4, thereby increasing our production rates by 40% from today's rates. At Bolivar, we will continue our project to phase in the expansion of our tailings facilities with a goal of having them up and running within 3 years. That expansion should increase production by 50% to 7,500 tons per day throughput from current rates. Corporately, our 2 2024 priorities include refinancing our debt to be better aligned with our growth plans and to seek partners to help us uncover value from our large and prospective greenfield land packages in Mexico and Peru. So we expect 2024 will be another safe, busy and productive year while creating value for all our stakeholders.

Speaker 2

With that, I hand the call back to the operator to start the Q and A session. Operator?

Operator

Thank first question comes from Bryce Adams with CIBC. Please go ahead.

Speaker 4

Thank you, operator, and thanks, Sierra, for the presentation. We got the new cost metric reporting underway. So this morning was my first chance to reconcile the new cost structure against our model and we did okay. But I was wondering if you could please discuss unit costs at Bolivar and Yauricocha for Q1 that would be appreciated. I'm thinking of the mining, milling, G and A costs, dollars per tonnes, not dollars per pound.

Speaker 4

So if you had some of those metrics available, it would be very useful.

Speaker 2

Hello, Bryce. If I understood correctly, you want a little explanation on costs on Bolivar and Yauricocha Q1 costs?

Speaker 4

Yes, mining costs per tonne, same for processing costs per tonne, that would be very useful.

Speaker 2

Okay. The cost, I'm going to talk about all in sustaining costs. In the agriculture, you can see that we didn't do great, but we did okay considering that we were on top of the eleven-twenty level where we have very little mineral and it's expensive to access it. On top of that in the agriculture, we are developing below the 11.20 level, which is considered sustaining CapEx. So it's also included in the all in sustaining cost.

Speaker 2

Breaking it down to mining and you got me there. Pepe, you have the breakout of mining and new costs?

Speaker 3

Not a detail. Now, I hope that we can share with the client after the call.

Speaker 2

Right. So we'll send you something right after the call to see that breakup. In Bolivar, on the other hand, we did very good. You can see on the slide that it was a quarter of record production. So our costs, we continue to bring them down and we see Bolivar, I mean, with great expectations.

Speaker 4

Yes, okay.

Speaker 3

We will send

Speaker 2

you a detail on mining and new costs as well. I don't have the numbers with me right now.

Speaker 4

That's all right. Yes. Do you have those numbers for the reserve update? Because I was hoping to get the actual results from Q1 and then compare it to the inputs that were used in the reserve update. But I actually didn't see the cost assumptions that were used for the mineral reserves to calculate cutoff grades, etcetera.

Speaker 4

Are they correct me if I'm wrong, I didn't see them in the press release, but would those inputs be available in the full filing that's going to come within the next 5 or 6 weeks?

Speaker 2

Absolutely, they will. We just published a summary of the results of the NI 40three-1 101. The full reports, which are probably 100 to 100 pages long each, will bring all of that data and we will put them they will be available for all of you

Speaker 4

Okay. And it will include the CapEx and taxes and full economic analysis?

Speaker 2

Yes, yes. And the cutoff rates and yes.

Speaker 4

All right. So we're looking forward to that one. Maybe changing gears to the below 11.20 levels, you've highlighted development is on track. Can we dig into that a little bit more? If you're developing drives down there, are you developing in ore right now or you're still trying to access the ore zones?

Speaker 4

How's the ventilation down there? Is there event work that needs to be done? What about ore loading? Is it all set up to load ore once you get into production? And like when would you be looking to take the 1st blast in the cave to be at full run rate for Q4?

Speaker 2

Okay. Good question. I thank you for that question because this is going to clarify a lot of uncertainty. We already started the development below the eleven-twenty level. We started that February 22 of this year, one day after we got the permit.

Speaker 2

We have brought a new contractor not to mess with the operation side of the mine, but to develop the below the 11.20 level. So, it's like a new mine for us. We, for sure, are going to be mining at full capacity at 3,600 by Q4. In Q3, we'll probably start getting funds out of there. And we are going to invest around $2,000,000 this year to get up and running our Yauricocha shaft, which is a world class shaft that was built 2 years ago.

Speaker 2

And all it needs is a couple of $1,000,000 to get it up and running. All the mineral that we're going to take out of the below the 11:30 level is coming out through this shaft that is going to be available in Q3, up and running, I mean. I don't know if that answers your question.

Speaker 4

Yes, I mean, it sounds quite advanced on all fronts. Ventilation is strong those lower levels?

Speaker 2

Ventilation is good. We have the raised borrowers in place. We're getting better every day at ventilation and pumping as well. Infrastructure, it's being developed also, I mean, electrical works below the 11.20 level. So we have a very detailed plan and we are saying it out loud.

Speaker 2

By Q4, we will be at full production, 3,600 tons. Coming most of it, 80% of those 3,600 are going to be from below the 11 20 level.

Speaker 4

Yes. And I mean, if we go back a little while ago, maybe it wasn't on your clock Ernesto, but some of the previous management had talked about throughput at 5,000 or 5,500 tons a day. Is there still some thinking around achieving that or is that sort of just being car parked for now?

Speaker 2

Yes, I wouldn't go into that. I have never said that. I know it was the previous management. Look, this is a new mine. Let us during 2025, let us understand, operate safely this new mine below the 11.20 level and probably I can tell you something in a year or so.

Speaker 2

But right now, 3,600 is going to be our throughput for the next year, year and a half for sure. I'm not planning on using that.

Speaker 4

Understood. Maybe I've got one last one for Pepe. So you've got the permit now and reserves have been stated for the first time in a couple of years, 3 or 4 years. Is that are those the 2 big enablers for the balance sheet refinancing? And is that what's the timeline on a potential market update on that topic?

Speaker 3

Yes. As we mentioned, banks have been very supportive in all these past months and they were expecting us to announce the 43111, which is something that we already did. And also, they were very expecting to have the permit of the year in 'twenty that we also got. Now we are finishing the discussions and we are pleased to say that quite soon, I would say in the following weeks, we will be announcing the refinancing.

Speaker 4

Okay. That's great to hear. Congratulations. And yes, thanks for taking my questions.

Speaker 2

Sure. Sure. Thank you, Bryce.

Operator

The next question comes from Jonathan Lee with Ares Resource Capital. Please go ahead.

Speaker 5

Hey, gentlemen. Thanks for taking my call. Good morning, everyone. Just quick question. If I look at year over year between the private placement, the issuance of ROCs and DSOs, looks like it's roughly 29% to 30% increase in share count on a fully diluted basis year over year.

Speaker 5

Can you clarify how much of that, call it, 30 percent issuance on a fully diluted basis has been issued, whether it be from to management insiders?

Speaker 2

Okay. We did issue that private placement. 10% of that private placement came from management. I don't know if that's what you mean by insiders.

Speaker 5

So Yes, just on an just on an aggregate basis between the prior placement, the RFCs, the DSUs, etcetera, of the 30% of the issuance of shares in RSUs and DSUs, how much of it was total, how much of it was issued to management for

Speaker 2

it. Okay. Jantiero, can you help me with this? You have the numbers for Raj?

Speaker 1

Yes, Ernesto. Not on the top of my mind at this point.

Speaker 2

Okay. Can we get back to you please with those numbers?

Speaker 1

Okay. Yes, we can everything is publicly available in SEDAR, but definitely we can help

Speaker 2

with some information.

Speaker 5

All right. Thank you very

Operator

much. There are no more questions

Speaker 1

sorry, yes, we received a couple of questions. The first one was focused on the refinancing term. I believe Pepe already answered that one. And then we received another one, which is as follows. Given that Ernesto, given that you now have a new mineral reserve and resource estimate, will you be publishing guidance beyond 2024?

Speaker 2

Yeah. Thanks for the question. We won't be publishing guidance beyond 2024 at this point. We are happy with what we have accomplished right now. We want to understand below the 11.20 level much better.

Speaker 2

We just finished up with our NI 40three-1 101. So I'm not too eager to go and publish guidance beyond 2024. What I can tell you is that our guidance for 2024 looks solid. Any more questions, Guilherme? No, not on our end.

Operator

There is one more question from the phone line. The next question comes from Hector Elias with Rainbow Fund LP. Please go ahead.

Speaker 6

Yes. Hi, good morning. Thank you so much for taking my call. First off, congratulations on all of the positive developments over the last couple of quarters. So with regards to our question specifically, I kind of wanted to get an idea in terms of how you're going to prioritize these new cash flows that you'll be generating, right?

Speaker 6

You'll be getting the additional upflow from Yauricocha. You, in the past, had talked about potentially looking for a 3rd mine. And then on top of that, you have the loan from the subsidiary, the approximately $85,000,000 from Minera Coronado up to Terra Metals. So if you can help me better understand how you're going to prioritize either potentially doing some M and A activity, paying back the loan. Can you help me understand how management is thinking about that?

Speaker 6

Thank you.

Speaker 3

Sure.

Speaker 2

Excuse me. I didn't get your name, it's Alberto? Hector Aurelius. Hector Aurelius. Okay.

Speaker 2

Thanks for the question, Hector.

Speaker 3

Absolutely. Look,

Speaker 2

the best dollar spent in mining and the most profitable dollar spent in mining is in your own operations.

Speaker 3

So this

Speaker 2

company needs to work on its CapEx because it was on a sale process the last year, some CapEx was reduced that is necessary. So what we are going to do is focus on our 2 main mines, Yavlicocha and Bolivar, and we are going to try to catch up and this is going to take us a few years, 2, 3 years with the CapEx that we need to invest in our operations. Regarding the M and A, there is 2 ways of growing and you know in this business size matters. 1 is organically and the other one is inorganically. Organically, we already I think we've been very clear that we are going to prioritize our 2 main operations, Yolricocha and Bolivar.

Speaker 2

On the inorganic side of the growth, it's very hard to get something, to buy something that is value accretive for us. So we're looking. We're looking. We always receive calls that I think we have been proven over the last quarters that we are good turnarounders. We are very good operators.

Speaker 2

So we are looking for opportunities and hopefully we'll find something in the next year, 2 years, 3 years that is value accretive for us and we want to be ready. In order to find something, we have to look, look and look a lot. You know how this business is. It has to be value accretive for us. So that's what I would I've been saying in the M and A front.

Speaker 2

And there is the 3rd leg of growth comes from our greenfield projects. And we need partners. We need big brothers. We have a porphyry in our hands in Yauricocha. A lot of money is needed to develop a porphyry.

Speaker 2

So, we are in the process of finding a big brother. Hopefully, in the next month, we can say we can tell the market good news about it. And also in Mexico, we have more than 80,000 hectares of land of 7 Greenfield projects that we also need big brothers to develop them. We're not going to use our funds to develop those. We need partners, JVs.

Speaker 2

On the portion of the debt, with this refinancing that is coming, some of this debt will be repaid to the Minera Corona, the agriculture company. So, in the press release, when we announced that the refinance has been done, we'll explain how much of that debt will be reduced. And we are comfortable that we are going to give good results and good news to the market. I cannot go ahead and tell you anything more at this point, but it's coming in the next couple of weeks.

Speaker 6

Yes, fantastic. Thank you so much for all the clarification. Really appreciate it.

Speaker 2

Thanks. Thanks to you, Hector.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Ernesto Balarego for any closing remarks. Please go ahead.

Speaker 2

Thank you for taking the time to join us today and have a good day everyone and wait for more good news from Sierra Madal. Thank you all.

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Sierra Metals Q1 2024
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