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spk01: Good morning, ladies and gentlemen, and welcome to the Silvercrest Report's second quarter 2023 conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, November 9, 2023. I would now like to turn the conference over to Eric Feer. Please go ahead.
spk09: Thank you, operator. Good morning and thanks everyone for joining. Today we'll be providing commentary on our Q3 2023 results, after which we'll be happy to take questions. The slide deck we'll be referring to is available on our website at silvercrestmetals.com under the investor tab. Before we get started, I'd like to direct you to the forward-looking statement on slide two. All figures discussed this morning are in U.S. dollars unless otherwise stated. All of the ounce and per ounce references discussed will be based on silver equivalent ounces sold unless otherwise specified. Our silver equivalent reference are based on a gold to silver ratio of 79.51 to one. On the call with me today is Chris Ritchie, President and Pierre Boudoin, Chief Operating Officer, starting on slide three. Q3 marked another successful quarter for Las Chispas, and we remain on target to meet our 2023 sales and cost guidance. Our strong operating margins continued to substantial free cash flow in the quarter. Las Chispas continues to perform well with gold sales of 14,500 ounces of gold and silver sales of 1.53 million ounces. Silver equivalent sales totaled 2.68 million ounces, bringing year-to-date sales to 7.69 million ounces, positioning us well to meet our annual guidance of 9.8 to 10.2 million ounces. All in sustaining costs from the quarter were better than expected and compares favorability to the annual guidance. Pierre will discuss the factors that led to this in his portion of this presentation. We remained debt free and our total treasury assets increased by nearly 40% from Q2 to $81.7 million. Our financial strength and resilience are unique attributes that deserve attention in the market, where accessing capital is both difficult and expensive. Our robust free cash flow and healthy balance sheet provide us with significant capital allocation flexibility, which we used in the quarter to optimistically explore buyback shares and increase our bullion holdings. On the ESG front, we signed a collaboration agreement to work on agricultural infrastructure, sewage system, and water concessions for agricultural use for our nearby communities. This is another positive step in the company's five-year water stewardship plan. This agreement advances our continued efforts to help our communities secure state and federal funding for water related infrastructure to protect their livelihoods and create long term economic resilience. The benefits of these efforts are already being felt in the community. The improved access to water allows for a second planting season, creating an opportunity for increased household income for our local partners. I will now pass on to Chris to discuss the financial results for the quarter.
spk08: Thanks, Eric. Moving to slide four. The operational performance of Las Chispas was highlighted by our strong free cash flow and continued growth of our treasury assets. In the quarter, we generated revenue of $63.8 million. Our cost of sales was $26.4 million, reflecting a notable . Net income in the quarter was $29.9 million, or 20 cents per share. Net free cash flow was $33.4 million or 23 cents per share. As in previous quarters in 2023, our net income and net free cash flow in the quarter benefited from financial items like the return of value added taxes and the application of net operating losses, which are commonly known as tax loss carry forwards. Our net operating losses were fully utilized in Q3 and beginning in Q4 2023, we anticipate accruing income taxes at Mexico's corporate tax rate of 30%. Our 2023 income taxes, as well as the extraordinary and special mining duties, will be due and paid in Q1 2024, which will impact our income and cash flow in 2024. We will begin making quarterly income tax installments and annual payments for the extraordinary and special mining duties in 2024. Now on slide five. Prudent capital allocation has always and continues to be an important area of focus for our team. As a single asset company, our first allocation priority is to maintain a defensive balance sheet that allows us to proactively manage risk, weather the uncertainties of our industry, while also being positioned to take advantage of the opportunities that arise in cyclical businesses. After the $7.1 million spent on the share buyback, we were still able to grow our treasury assets in the quarter by nearly 40% to $81.7 million. Our total treasury included $70 million of cash and $11.7 million of gold and silver bullion. We remain debt-free with access to an undrawn $70 million revolving credit facility. We have also resumed our focus on growth. In Q3, we announced a $10 million exploration budget for Las Chispas that will run through the end of Q1 2024. This program is focused on both conversion of ounces and the discovery of new ounces. In the quarter, $2.8 million was spent on exploration. Opportunistically returning capital to our shareholders was a focus in the quarter. In the middle of the quarter, we announced and launched a share buyback that allows for the repurchase of up to 5% of our shares outstanding. In the seven and a half weeks that the buyback was active, we repurchased $7.1 million, or 20% of the allowable limit. We are also focused on increasing exposure to gold and silver for our investors by adding bullion to our balance sheet as another currency to be managed. In the quarter, we increased our bullion position by $6.1 million. We are actively managing this position through the utilization of an option strategy which helps to manage both the upside and downside risks. Our objective is to earn a superior yield over our other balance sheet instruments while increasing exposure to our preferred store of value in a risk-adjusted manner. Subsequent to the quarter, we have continued to add to our bullion holdings. With that, I will now pass it on to Pierre to discuss operations at Las Chispas.
spk03: Many thanks, Chris. I'm now on slide six. Underground mining rate increased during the quarter, averaging slightly over 900 tons per day. This increase in mining rate is linked to a higher proportion of long-haul stoves than planned, and to a lesser extent, higher localized dilution in Bobby Main vein. In Q4, it's expected that mining rates will be in the range of 800 to 900 tons per day, in line with the ramp-up rates outlined in the technical report. During Q3, lateral development averaged 34 meters per day in line with the plan. During the quarter, the Los Chispas portal was further advanced ahead of the mining in the area in 2024. We continue contract negotiation with mining contractors, including our current contractors. We're still targeting to complete these discussions in Q4 2023 for implementation in the first half of 2024. In the updated technical report, we made assumptions as to the outcome of these negotiations, but the final details may differ. The last year's plant averaged 1,245 tons per day, slightly above what we were expecting for the quarter. It was originally anticipated that the plant would have lower availability in the quarter due to seasonal conditions impacting the power supply. However, this did not metabolize, allowing for higher average milk throughput than planned. As expected, average process gold and silver declined slightly from Q2 of 2023. The plant recovered 2.74 million silver equivalent ounces, and metallurgical recovery remained solid at approximately 98% for both metals. The company continues to benefit from strategic stockpile use to supplement plant feed as the mine is gradually developed and tonnage ramped up. It's expected that this benefit will remain a significant contributor to plant feed through 2025. Our corporate level ASIC in the quarter was $12.23 per ounce compared favorably to our annual guidance. ASIC was lower than expected due to higher sales volume, decreased cash costs, and lower capital spending than planned. Capital spending was below plan due to delays in procuring key underground material, as well as some slight change to the scope both on the ground and on surface. These delays are not material, and we're expecting to progress with capital spending in Q4. I will now pass it back to Eric to conclude the presentation.
spk09: Thanks, Pierre. Moving to slide seven. As noted earlier, we remain well positioned to execute our 2023 sales and cost guidance, as you can see on slide seven. Please note that our guidance is based on 20 to one Mexico peso to US dollar exchange rate. We have seen a notable move in this rate to the levels of approximately 17 to one in Q3, we estimate about 40 to 50% of our costs are peso denominated. So what is next? My favorite subject, exploration. Our exploration efforts will continue with $10 million of drilling budget through Q1 2024. The program is currently targeting 10 million higher grade inferred ounces proximal to current and planned operations for potential reserve replacement. We also look forward to exploring early stage opportunities with over 23 kilometers of underexplored veins at Las Chispas. We are in the process of year-end planning now, and as part of this, our exploration budget is being put together, and our priorities for 2024 are being defined. This wraps up our formal commentary for today. Operator, please open the line for questions.
spk01: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press star, followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Eric Wimmel with Scotiabank. Please go ahead.
spk04: Hi, morning. Thanks for taking my question. Nice to see the stock outperforming this morning. Just I wanted to ask a quick question and the disclosure you talked about, you know, spending on CapEx below plan from delays in procuring underground materials as well as some changes to scope. Any additional elaboration on that, please?
spk03: Yeah. So it's Pierre speaking. We had some delays in procuring some of the electrical material we need for the expansion of the mine and also some fans. That was for underground. And we decided to change the scope of our second furnace for the process plant. But none of this is material as I noted on the call.
spk04: Great. Thanks, Pierre. Very helpful. Just another question on the share buyback. So obviously a company has been active on the buyback. Should we assume then you'll continue through the rest of the year? Any sort of thresholds you look at or sort of rules you should think of on the buyback?
spk08: Thanks, Eric. We look at the NCIB as one of the tools in the toolkit. When we look at capital allocation, Exploration is a key focus. Buying back shares is a key focus. Adding bullion to the balance sheet. And the flexibility that our balance sheet and the asset provide us allow us to make those choices at the right moment. That said, we do want to continue to return capital to shareholders. We don't share the specific budget or price thresholds that the board has set for that, but it is still a key focus for us going into the end of the year.
spk01: Your next question comes from David McCausland.
spk05: Good morning. I have a couple quick questions. Nowhere can I find what the special mining duty rate is. Can you tell me? Your tax rate is 30%, but is it 10%, 15% on top? It says 7.5%. Okay. Is there any cartel obstruction you're experiencing there? Any kind of, you know, we want to close you down and let's, you know, we get a piece of the pie here?
spk02: Yeah, we don't have these issues in Sonora.
spk03: We all go in town and we can enjoy the walk at night without any problems. Very nice.
spk05: Yeah, don't... Don't hold it against me for asking because it could be a big issue. I don't know that it is. So if you just, that's the answer I'd like to hear. Let's put it that way. I think pretty much all shareholders would. Do you have a man camp there? And how many employees do you have? And are they living in the local town? Are they hard to get if you need to staff up? What's the labor situation there?
spk03: First of all, First question, we have a 500-man camp, but we allow our employees to live in the community or at the camp based on what they prefer. And this camp has been a good tool for us to keep our turnover rate at low level. Last year, we experienced an 8% turnover rate, which is amongst the best in the industry. And with regards to the difficulty to get people, the best way is to keep them, obviously. But also, we have a contract with a mining contractor that gets its manpower in the lower part of Mexico. So far, it's been very good on our side.
spk05: Well, that's a good thing, too, for sure. Labor problems... and companies today are big problems, I think, way too often. Hey, I really think you've done a great job since for the six years I've owned your stock and your drilling and your exploration. And Mr. Boudoin, the video of the plant that you built was amazing, okay? So I can't give you guys a good enough credit for building such a high percentage recovery plant. with huge tons, tonnage, or maybe not huge, but, I mean, significant. And stockpiling with, you know, I don't know, the grades dropped a little bit this quarter. Do you think that's a trend that we're going to continue to see? Because maybe, you know, you knew where the strongest minimalization was in your stockpile in your first couple quarters.
spk03: Well, I'll tell you that the stockpile is something that we monitor very closely. We consider that as our best hopes at its own surface. And so this is something that we monitor against the value that we have in our model. And at this point, I can say that we're very happy with the level of our stockpile. And with regards to the start of your question, With regards to the question on grade in the plant, I'm just going to say that this is per design. We expected the grade to be lower in this quarter, and we should not read any more into this. We still have to plan to produce between 9.8 and 10.2 million ounces for the year, and we're well on our way to complete that.
spk05: Okay, well, thanks for taking my questions and thanks for doing such a good job. Appreciate it.
spk01: Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Alain Charquin.
spk04: Yes, hello. I'm pleased with the success of the company. I wanted to know if the company right now is looking actively at other projects or mines in the area. or in the world?
spk09: Thank you. Yeah, this is Eric. Our growth plan is in three paths. One is exploration. It's priority one. Continued exploration at Las Chispas. We have a lot of value, I believe, is still to come and still to see at Las Chispas. So we'll be spending dollars there. We also have a regional program that we're working on that's within haulage distance of the mill at Las Chispas. That is continuing. It will continue for years to come as we look at projects that are earlier stage that still need to be drilled and mapped and sampled. So that feeds some of the exploration appetite for discoveries. And our third path is M&A, and we continue to look at M&A projects. We're being a bit selective to be in the Americas. That's our target. North America is a great place to play right now. So yeah, there's lots of things to do. We don't have a big team to be running out, so we have to watch our resources as far as what we select and where we go with it. Thank you.
spk01: Your next question comes from Garrett Gojin with Stansberry Research.
spk06: Hey, guys. Can you hear me okay?
spk05: Yep.
spk06: Good. Great quarter. It's been a while since I've seen a free cash flow generation like that in the silver industry. Capital allocation, you guys are doing a great job. I'd love to see the share buyback. Are you thinking about paying a dividend? Because if you just that 20 million bucks, that'd be close to 3% yield highest in the industry.
spk08: Thanks, Garrett. It's Chris here. When we evaluate the difference between a share buyback and a dividend, the first thing we did was look at other companies, single asset companies, and there was only two or three in the world that were actually paying a dividend. The flexibility or lack of flexibility that a dividend creates is something we were definitely cognizant of given that we do want to allocate capital for future growth. So we thought that the share buyback was a better option because it allows us to be more aggressive at the right times in the cycle. And that flexibility is something that's quite unique for us. So we thought the share buyback was just a chance to be more aggressive and flexible. In the future, down the road, that's something we'd like to be able to consider.
spk06: Okay. The share buyback is the best way to do it. Lower shares out, increases earnings per share, drives the share price higher. So your capital allocation is looking at drilling and internal growth. That's where you see your like-mind being expanded primarily at this point, right?
spk09: Or expanded. There you go. So, I mean, we got, as I said on the talk there, and it's in the news release, Garrett, $10 million. We spent just under $3 million of that so far to get to Q1. We're really focused on inferred resources that didn't get converted to indicated and considered for reserve conversion for the updated tech report. So it's to get through that. get some new reserves back into the pipeline that's near infrastructure. And as we're doing that, we'll be spending money at Las Chispas to look at the 23 kilometers of weather vane that's underexplored. So we're seeing some interesting things right now. I'll cross my fingers, hope we can get some news out on exploration for the end of the year. We'll see. Okay.
spk06: What area looks most prospective to you guys?
spk02: Areas as far as in Las Pistas?
spk00: Yes.
spk09: Yeah, okay. Yeah, so there's, we're working, as you're familiar with the map, we call it the treasure map. We're working on Bobby Sewell, which is in the south. and some extension of that. We're looking to depth now for the Bobby Canora main vein going to depth. We're also quite encouraged is what we're seeing in the Las Chispas area. If you recall, we haven't been back to Las Chispas since the 2020, so it's been pretty much on the shelf working on on the technical report and doing the infield drilling, mostly around Bobby Canora. There's some new opportunities that we're seeing at Las Chispas. We'll see how they come to fruition.
spk06: Okay, and then last question. How many phases do you have working now, and where is the ore primarily coming from?
spk03: We maintain between 12 and 16 faces. Our limit at this point is certainly not the faces but more of our drilling capacity which we're working actively with contractors to expand.
spk06: Where is the ore primarily coming from?
spk03: Bobby Canora, Bobby Norte, and Bobby Vista.
spk06: Okay, good. Thank you, guys.
spk01: Your next question comes from Matthew Rofer with Malate.
spk07: Hey, Chris, Eric, and Pierre. Congrats on the quarter. Well done. As a long-term shareholder since 2018, it's This is why I wanted to be involved with the project. So it seems like it's finally coming to fruition with the asset throwing off a significant amount of cash. So I'm pleased with that. Wanted to follow up with some of the previous questions on exploration. So we had a 13% reduction of roughly 10 million ounces from the TR, if I'm not mistaken. Um, obviously myself and my investors, uh, are excited that you're getting back to growth mode and Eric, I liked that. You said, um, your favorite thing is exploration that, that warms my heart. Um, I wanted to ask about these 23 kilometers of veins. Um, I'm just, I'm just trying to, again, understand there's, there's back in 2019 or 2020. there was a new section of the property, newly defined section of the property, I believe it was called 118. Is that part of the Las Chispas section that you have not really spent too much time on over the last few years in terms of exploration? Or is that 118 a different part of the property?
spk09: 118 zone is part of the Las Chispas main vein. Okay. So it's not, it's below the underground workings. We're just starting back in that area right now to do further exploration. We're just returning after four years of being over in the Bobby Canora area.
spk07: And how many, how many rigs or drills are, are being utilized at the moment on the property?
spk09: At the end of the quarter, Q3, I'll speak to that. We had between seven to eight. I got one rig floating there because it likes to do the operational work too. So it jumped from extra operations. So at the end of Q3, we had seven to eight.
spk07: That's great. And in terms of communicating that, the results from that from the market, I know there was like lab backlogs and things like that due to COVID delays and such. Are you seeing, you know, the processing time from what you guys are finding on site to having like a lab analyze the results of your drill findings? Is that lag time decreased? So, like you said, you're hoping to have communication to the market by the end of this year. Are you seeing a decline in that lag? Obviously, my investors are big growth investors, and we're happy, again, that we're getting back to that level now that the mill is operating as we expected and the financial health of the company is very strong. So I'm just curious on what you're seeing from that side of things.
spk09: Yes. We use two labs, ALS Chemex. and SGS. I'll speak of ALS Chemex and the exploration samples that are going there for assays, and then I'll turn it over to Pierre and he can talk about SGS, okay? So our lab turnover is decent right now. It's three to four weeks. It was during COVID because everybody's scurried home, you know, double that, but it's a decent rate now as as we use ALX, and they're at a Hermosillo in North Vancouver. So Pierre, if you can talk about SGS.
spk03: Yeah, so if you look in our technical report, we actually build our own lab in Arispe. That was part of our ESG efforts to return some work in the municipality. And this lab, we contracted it out to SGS. And SGS is in the process of getting this lab certified. They've been working on it now for more than a year. And we expect that this lab is going to be certified before the end of the year. And when this happens, actually all the samples from the company are going to go to this lab. And the turnover is going to go from essentially four weeks down to probably days because it's going to be our own certified facility.
spk07: That's great. Thanks for answering the questions. The last comment I want to make is on a question. Just, Chris, keep buying back that stock. I appreciate it.
spk02: Thanks, Matt.
spk01: There are no further questions at this time. Please proceed.
spk02: Thank you, everyone, for attending the Silvercrest Q3 2023 results call.
spk06: Have a great day.
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