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spk06: I will now turn the call over to Mike Allister, VP of Investor Relations for Sierra Metals. Please go ahead.
spk04: Thank you, operator, and good morning, everyone. Welcome to Sierra Metals' second quarter 2021 results conference call. On today's call, we are joined by Luis Marchesi, our CEO, as well as Ed DeMaris, our CFO. We are assuming that all published materials have been read, and as such, today's presentation highlights the key issues of the quarter. However, I would like to highlight, as always, we are open for questions at the end of the presentation, which can expand upon other issues that might be of interest to those listening. The accompanying presentation for today's call is available for download through the webcast or from the company's website at sierrametals.com. Yesterday's press release, the financial statements, and the management discussion and analysis are also posted on the company's website. Before I turn the call over to management, 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. This forward-looking information is subject to a number of risks, uncertainties, and other factors. Actual results could differ materially from our conclusions, forecasts, or projections as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast, or projections in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information is contained in the company's annual information form, which is publicly available on CDAR or EDGAR via Form 40.0. or on the company's website. Please note that all dollar amounts mentioned on today's call are in U.S. dollars unless otherwise noted. I would now like to turn the call over to Luis Marchesi, our CEO, who will provide us with the second quarter highlights as well as an outlook for the remainder of the year. Afterwards, Edgar Maris, our CFO, will take us to the company's financial highlights for the quarter. At the end of the call, Luis Marchese will provide a brief statement on the update of the strategic review process. With that, I will now turn the call over to Luis Marchese.
spk03: Thanks, Mike. Good morning, everyone. Turning now to the second quarter highlights on slide four. One of the biggest issues still affecting our daily operations at all three mines is the COVID-19 pandemic. As always, the safety of our workforce and the communities in which we operate remains paramount to the company. The pandemic has imposed various direct and indirect challenges to the company and management, which have hindered our ability to operate. You are muted.
spk07: You can mute or unmute yourself by pressing star six.
spk03: As expected this year,
spk07: The host would like you to unmute your microphone. You can press star six to unmute.
spk03: Some of the COVID-19 issues are still ongoing or are a residual effect from previous quarters from current operations. Direct impact issues have included lower workforce availability and additional costs related to management and prevention of COVID-19. residual effects from delays on mine development has forced production to come from lower grade, higher tonnage areas in order to reach throughput targets. Lower grades have directly affected metal production at all three of our mines. Although the company was able to secure the production expansion permit to 3,600 tons per day of the agriculture, it came with a delay from our initial expectations. On the other hand, the company also encountered problems related to significant underground water and high temperatures at its Coosey mine, which made it less amenable to the plant production rates. The issues at Coosey are being rectified with the completion of a race board, which will provide relief to the high temperatures and streamlining the pumping capacity at the mine.
spk04: We seem to be having some technical difficulties. Good morning, everyone. I'll just pick up where Louise left off. If we turn to slide four, one of the biggest issues still affecting daily operations at all three mines is the COVID-19 pandemic. As always, the safety of our workforce and the communities in which we operate remains paramount to the company. I believe, Louise, are you able to join now? The pandemic has imposed various direct and indirect challenges to the company and management, which have hindered our ability to operate as effectively as expected this year. Some of the COVID-19 issues are still ongoing or are a residual effect from previous quarters on current operations. Direct impact issues have included lower workforce availability and additional costs related to management and prevention of COVID-19. I believe Luis is trying to connect. Yes.
spk03: Thank you.
spk04: Okay. Apologies, everyone. We're having some technical difficulties. Luis turning in from Lima. effect from delays on mine development has forced production to come from lower grade, higher tonnage areas in order to reach throughput targets. Lower grades have directly affected metal production at all three of our mines. Although the company was able to secure the production expansion permit to 3,600 tons per day at Yaudi-Kocha, it came with a delay from our initial expectations. On the other hand, the company also encountered problems related to significant underground water and high temperatures at a Coosy mine, which made it less amenable to the planned production rates. The issues at Coosy are being rectified with the completion of a raised bore, which will provide relief to the high temperatures and streamlining the pumping capacity at the mine. I will now turn it over to Luis Matias.
spk03: Thank you, Ed. Sorry for the technical difficulties. We have also seen increased treatment charges due to price participation escalated from our paychecks. Unique costs were also affected, mainly due to indirect fixed costs, which still must be incurred despite lower metals production. We continue to take proactive measures to mitigate potential impact that COVID-19 and we continue to test and quarantine employees before they can join the active workforce and continue to monitor all employees daily. I would also mention that while the Peruvian and Mexican governments' vaccination efforts are bringing vaccines to the population in our areas of influence, starting with the most at risk in the communities, the situation, however, is not yet under control. and COVID-19 remains a significant risk for our personnel, communities, and our business. The company has engaged proactively with the local authorities to support their efforts and to facilitate vaccination efforts nearby our operations. Turning now to slide five. In reflecting the previously mentioned challenges and their impact on operations in the first half of 2021, we saw the need to revise our production cost and give it the guidance to align with the outlook for the year. We continue to work through the challenges and issues with the second half of the year expected to be stronger than the first half. With that, copper equivalent production is now expected to fall between 110 and 115 million pounds this year. Cash costs are trending higher due to the previously mentioned reasons, and we will see increased overall costs in 2021. Based on the new production and cost guidance ranges, management have also revised the data guidance, which is now expected to range between $130 million to $140 million for the year. new iron ore processing plant at Bolivar. We are now revising capital expenditures for the year to $100 million. The company balance sheet remains strong, and after the increase in capital expenditures and the repayment of loans for approximately $19 million, which will lower the overall debt position to approximately $80 million at the year's end. Despite the challenges we face in relation to the pandemic in the second quarter, the company continues to see improvements in consolidated throughput, revenue, EBITDA, and net income over the same period in 2020 and over the previous quarter in 2021. Looking ahead to 2021, turning to slide six, and looking ahead in 2021, despite the unexpected challenges we're facing, we continue to see strong growth opportunities for the companies, even more so as we emerge from the pandemic with increased vaccination rates amongst our employees. Short-term opportunities include the production of pyromore concentrate, accelerated stage production increases at Bolívar, continuous improving initiative for Chabricos and Cusi, while we are completing preliminary feasibility studies to evaluate a 53% throughput expansion at the Yabri Cocha mine and the potential doubling of production at the Bolivar and Cusi mines. We also continue with our brownfield exploration programs while reactivating our greenfield programs at our extensive land position in Peru and Mexico. We continue to expect further cash flow and liquidity improvements in the future, a benefit of expected production and great improvements, and strong metal prices. The company is making the necessary capital investments and infrastructure improvements to continue growing production and improving costs. We remain committed to the company's proud and sustainable growth, and more importantly, to improving the fair share value of benefiting all shareholders. With that, I will now turn the call over to Ed,
spk07: The host would like you to unmute your microphone. You can press star 6 to unmute.
spk04: The company had a relatively good second quarter despite COVID-19 and other operational challenges. We reported a 54% increase to our consolidated throughput as well as adjusted EBITDA of $38 million. We also reported positive free cash flow and net income and we finished the quarter with approximately $76 million in cash. These results are the product of evolving optimized operations and expansions ramp up despite the negative effects of COVID-19. Overall, the company continues to have solid financial and operational performances, which we expect to continue into the second half of 2021. Our revenue mix by metal continues copper followed by silver and zinc. It is expected that copper will continue to take a leading role in the company's metal mix of production and revenue going forward. In Q2 2021, we saw an improvement in all realized metal prices. Copper continued to improve in the first half of 2021 and remains strong currently. Precious metals and zinc have also remained relatively strong. Turning now to slide eight, compared to the same period in 2020, cash costs were higher at all mines. The reasons have been previously disclosed on this call, but again, this is mainly due to lower metal production, which is attributable to lower head grades from reduced tonnage contributions from higher grade zones and operational issues at CUSI. We finished the quarter, and if we turn to slide nine, we finished the quarter with $76 million in cash and have total net debt of $17.2 million. The company has commenced the repayment of its debt facility in June this year with an initial installment of $6.25 million, and we will continue to make quarterly $6.25 million installments for the last installment occurring in March 2025. The company continues to have a strong balance sheet, working capital and cash position to support capital expenditures, debt repayment and growth initiatives. Based on our current budgeting process and current strong metals price environment, this scenario could provide support for an attractive dividend policy in the future. Management remains committed to the company's prudent and sustainable growth plan, and more importantly, improving the per share value benefiting all shareholders. And with that, I will now turn the call back over to Luis, who will provide a brief update on the strategic review process announced in January of this year. Luis?
spk03: Thank you, Ed. Turning now to slide 10. I would like to give a brief update on the strategic review process that we originally announced in January this year. Let me first state that we strongly believe the company has strong foundations for a solid value for the market in return for its shareholders. Despite current challenges, the company benefits from a strong EBITDA performance at current metal prices, and a solid financial position to build additional value into the future. It has a current number of exciting, actionable organic growth opportunities, particularly at Bolivar and Yabri Cochin, and a large land package for growth in the future, both near mine and further. The process is still ongoing and considering all options, we expect to be able to provide a more detailed report on the process in the coming weeks. Let me finish my presentation by highlighting the strengthening of our company's focus on environmental, social, and governance structure and initiatives, provided an increasingly complex and challenging environment in which to operate. In that sense, It's important to mention that we're also considering the ongoing fluid changes in the political landscape in both jurisdictions, Peru and Mexico, for our current strategic plan. That ends the presentation portion of this call. We would now like to open the call to questions from participants. Operator, please open the line.
spk06: As a reminder, if you would like to ask a question, that is star followed by the number one on your telephone keypad. Once again, that is star one.
spk04: Radio, your line's on mute. We won't be able to hear you.
spk06: Your telephone keypad. Once again, that is star one . If you would like to ask a question, that is star one. Once again, that is star one. Once again, that is star one to ask a question.
spk03: Very good.
spk04: Operator, can you open the lines?
spk06: The line is open.
spk04: Well, you've been announced the first caller. It's Mark Reitman from Noble Capital. Open the line.
spk06: Your first question comes from Mark Reichman.
spk05: Good morning and thank you. I just had two questions. The first was on the iron ore processing plant. If there was any, if you could just kind of elaborate on, you know, the timing there when you might expect it to go into production in 2022, you know, the ramp up or perhaps when you might provide a little more guidance around that asset.
spk03: Thanks, Mark. This is Luis. We are proceeding with this project on a fast track basis, Mark. So, as we speak, we are looking at the different parts of the project at the same time. We will be issuing a PDA for Bolivar, including the magnetite project in the coming weeks. We are finalizing it. And that will give you some more detail on the actual economics, the actual very exciting economics of this project. In terms of timing, we are expecting it to be on full production in the second quarter of next year.
spk05: Okay. And the second question was just on the production guidance. You know, the full year 2021 production guides look pretty straightforward. only one that i called caught my attention was on the zinc uh you know given the first half production numbers relative to the full year guidance and i was just wondering if there were any uh if you want to maybe comment on kind of the differences between say the first half and what your expectation is in the second half relative to the zinc production thank you mark the thing the thing production is uh
spk03: very much influenced by the sequencing at the mine in Yabucocha. So the plan just reflects what the sequencing is allowing us to bring to the market as soon as possible. As we've mentioned before, we have some residual effects from the COVID pandemic, and that has influenced our development plan at the mine. So we are trying to reach as soon as possible to a higher grade area. But what is on the guidance is what we feel that we can achieve between now and the end.
spk05: Great. Thank you very much. Thank you.
spk06: The next question will come from Haiku Ayo with HC Wainwright. Please go ahead.
spk02: Hey, can you guys hear me okay? Yes. Hey, can you hear me okay? Yes, we can hear you, Michael. Thank you. Perfect. Thanks for taking my question. For Bolivar, you state in your release that Mina de Fierro is a larger ore body with greater tonnages so far, so good. But you also mentioned that the head grades and recoveries are lower than at Bolivar West. Going to the recoveries, is the change in the recoveries attributable to just being different rock? Is it tougher to chase grade? Just to show me what is the difference, how meaningful is it, and how long-lasting is it?
spk03: Yeah, well, Mina de Fierro is a lower grade mine compared to Bolivar. And the reason for the lower recovery is because it's Mina de Fierro. It has iron ore into it. So on one hand, it hits the metallurgy as compared with Bolivar West. But on the other hand, it's giving us the opportunity to bring the magnetite as an important byproduct. So on one hand, we can have slightly lower grades and slightly lower recoveries because of the sort of ore that you have. But on the other hand, it's going to give us some additional revenue coming from the magnetite in the near future.
spk02: That makes sense. You also mentioned some delayed capital expenditure in the release, and also specialized technical oversight as it relates to your impact from COVID. Just thinking out loud, I mean, how much of this is actually long-lasting, long and lasting, or even possibly permanent, And can you crack down a little bit on what exactly it is and costs in current place?
spk03: I'm sorry, can you understand your question very well?
spk02: Yeah. You mentioned delayed capital expenditures in the release related to COVID. And you mentioned specialized technical oversight also related to COVID. I assume that some consultants and some safety people But I mean, just thinking out loud, how much of those expenditures are longer-lasting, possibly permanent? And can you just maybe granulate down a little bit of what exactly they are?
spk03: Okay. Well, yeah, due to COVID, because of the late capital expenditure, high COVID, we had to – in Peru, we had – I would think one of the toughest lockdowns in the world. And that pretty much put people from going to site. And also, as you are aware, as you might be aware, Peru has had the highest number of deaths in the world. So that has made us prioritize within this strategy, this tragedy, our expenditure at the moment. So, for example, the jelly culture chart, which was going ahead, we had to stop it for some time, and now we are retaking it. Some expenditure in terms of development, we also have to delay. So we are retaking this sort of expenditure as we speak, and that is going to go between now and potentially even next year. The other, the specialized technical consultant, yes. For example, on our greenfield exploration, we wanted to bring some fairly specialized persons that know about the sort of ore bodies that we are willing to explore. But many of them have been stuck in their own countries due due to these lockdowns all over the place. So these lockdowns changing from one country to another, plus the restrictions that we've had on site have stopped us from bringing these specialized persons into our operation. And that has pretty much delayed our ability to move forward with these initiatives.
spk02: Very fair. Thank you guys so much. I'll be back in the queue. Thank you.
spk06: Your next question comes from Lee Cooperman from Omega Family.
spk01: Hi. There's a lot of things I want to cover, but I have to say that I'm very confused about what you're saying about the strategic review process. You just said a moment ago that it wasn't over. It was initiated in January of this year. You've had eight months to figure out what's going on. And I think the shareholders are deserving of a more fulsome explanation. Have we gotten bids that were inadequate? Have we gotten no bids? What is the story? What is going to change in the next two or three weeks that we didn't have any decision in the last eight months? You held out the comment. You said you have more to say in two or three weeks. Why don't you just share that with your investors? in an open mic. That's question number one. Very disappointed in how you've addressed it. We've waited eight months for an explanation of what's going on, and then you give a very superficial, inadequate explanation. Okay? So why don't you just come clean and tell us what's going on? We realize we're not a distressed situation, so we don't have to take any bid. Is it that we got inadequate bids? We got no bids? What is going to happen in the next two or three weeks that didn't happen in the last eight months? Help me out. Okay? That's question number one.
spk03: Do you want to bring on the questions and then I reply?
spk01: Yeah, fine. That's number one. Number two, how, you know, you kept on, you know, reiterating up until today, 170, 180, whatever it was, guidance. It just seems it's not a good thing for you and investor relations and shareholders to to basically be so far off your prior guidance and not make any revisions well before the earnings report. So I would chastise you for, frankly, embarrassing your investors and the analysts that cover you, if they care, as to why you did not give a profit warning well before you reported. That would be a second question. That's not a question. It's a statement, okay? Third, you have any kind of view... About 2022, in other words, in a broad scale of things, you know, do you anticipate a material improvement in EBITDA? Do you think we'll remain at this low level of EBITDA compared to previous expectations? What is your thinking about 2022 with all the exculpations and all the, you know, hedges that you have? What can you tell us about 2022? Then getting back to 2021, what is your expected year-end cash position likely to be? Do you expect to be a net cash position? And then your CapEx for the year and your free cash flow for the year and year-end cash position. And a similar for 2022. That would be interesting. And then you made an allusion to a dividend policy. You obviously weren't ready to pay a dividend now. What's going to have to happen for you to pay a dividend in the future? These would be some of my questions.
spk03: Thank you, Dean.
spk01: I'll give you one other question. Who's in charge? The chairman of the board is a critical call. The chairman of the board isn't even on the call. Who's in charge of making decisions for the company? Generally, the chairman of the board represents the shareholders. He's not on the call, which disappoints me. So, you know, in terms of corporate governance, who's in charge?
spk03: Well, because of the strategic review process has been a major issue, it seems to me that the chairman of the board should be involved on the call.
spk01: That's my personal opinion. which you could disregard, but that's my personal opinion.
spk03: No, no, we don't disregard your opinions.
spk01: Well, you have. I've alerted you people in the past to what I thought you should be covering, and we don't cover it, so you've done a good job of ignoring what was well-intentioned, sophisticated input. But go ahead. We don't want to change the nature of the call. The most important thing is, what were you trying to say about the strategic review process that's going to change in the next few weeks that has not happened in the last eight months? And then, secondly, year-end cash position this year anticipated and what you think 2022 could look like. I see big increases in production planned, and I've got to imagine efficiency will improve. So I would think that 2022 could be a very good year for us. But you made no comment about it. And here we are, and this year is almost over. But go ahead. The floor is yours.
spk03: Thank you, Dean. let me start with that question uh with the view of 2022 and and that's a very important question and thanks for that we are currently stabilizing our operations that's what our aim is and we are working in the backlog of capital expenditure that we have to make sure that we went to the foot our issue in this first half of the year is one of sequencing it's not that the or has it's not there they're always still there but we are sequencing it differently so we have uh going to higher tonnage lower rate areas because they were closer and we had to prioritize uh tonnage to make sure that we were producing to the fullest of our with our infrastructure so that has been the case as we are coming out of the kobe 19 situation which has been a real tragedy around us we are bringing eventually the higher grade areas to the plant. So that's what's happening on 2022. And we also expecting to have higher production because we have the permit in the agriculture to bring it to 3,600 tons per day, which is good news. So all in all, we're expecting 2022 to be much better in terms of production. And we reflect that on our guidance once we release it to the market. In terms of the process, we certainly understand that this has taken longer than usual, but we are living unusual times. I mean, we work in two different jurisdictions. and uh the the visit to the mines and the diligence are complex processes that in this sort of uh situation environment usually will take longer so that's as far as i can comment in terms of the process we said the process is ongoing and uh and we'll come back to the market once we have a result And certainly we are working very hard on that.
spk01: Well, my question is, what are you going to learn in the next three weeks that you didn't learn in the last eight months? If you said something like the virus has made it very difficult for interested parties to get access to the mine, I could understand that. But you're giving no explanation as to why the process has taken so long. And this is where I think you hurt yourself.
spk03: That's the reason, pretty much, yes.
spk01: Yeah, but why do you say that? Why do you have to be asked that question? Why don't you just say that and volunteer it, basically, that the process is taking longer because the virus is complicated? You know, whatever. That's where I welcome your call.
spk03: But anyway, I will leave the cash position and dividend policy for Ed to reply. Thank you.
spk04: Thanks, Lee. In terms of just on our EBITDA, we did revise EBITDA 130 to 140, and we have not yet provided guidance for 22, but we can expect for next year that given the extra revenue stream from iron ore production as well as increased production, And if we assume that no prices will remain, indications appear to be that way. And despite COVID, we should see higher EBITDA. There's no question higher EBITDA for 2022. In terms of- What about the range of that? It's too early. The magnetite, until we release the economics on the magnetite, which is coming in weeks, that's going to play an important factor, and I prefer to wait until we have that PDA announced, and then we can speak to the economics. In terms of year-end and the cash balance, if you look at the revised guidance, we expect end of year with between 40 and 45 million cash after the CapEx requirements that we're factoring in of 100 million. And in addition, we have to pay 18.75 million of debt. But I expect next year, CapEx will likely remain strong. We are in a significant plant expansion across our mines. So we still have heavy capex, but all in all, it should be a much better year compared to 2021.
spk01: Well, the $93.8 million of debt you're saying at the end of the year will be that minus 18.75, right? Is that what you're saying? about 80 million dollars yeah yeah 70 that's 75.05 million and you have cash of course you have net debt about what we have now uh but you have spent a lot of money on capex that you were funded right and would you expect to generate cash next year that all depends on the capex um
spk04: It's too early, but I can't see why we couldn't. Given a strong production profile increase, the 20% increase that we're having in Kocha, the increased metal stream from iron ore, that should all drive positive cash flow.
spk01: Let me, if I could make an observation with your permission. Generally speaking, when you're going through a strategic review process and you let people into your data room, you give them numbers. So you must be giving prospective buyers of the company your best guess about 2022 with all the exculpations and all the possible scenarios. What are you telling the buyers? It seems to me with increased production with the magnetite plant in, you could do well over $200 million next year. I hesitate to make any forecast because we've been so off from what we've said in the past. But it would seem to me, with the kind of cap-extra spending and present prices and improvement in efficiency, that this company should generate EBITDA well over $200 million next year. Is that something that is not realistic in your mind or in that range of possibilities?
spk04: I can't comment on that. It's still too early to comment on it.
spk01: We need a comment on December 31st of 2022?
spk04: In the coming weeks.
spk01: Coming weeks. You know, you've had eight months to prepare for this call, and everything is in the coming weeks. It doesn't make any sense to me, but what do I know? All right, very good. All right, so what are the questions that I asked that we didn't get to? Why would you wait so long to revise guidance? Why do you want to embarrass your analytical community and produce results $40 million less than you were telling people? and did not give a revised guidance. Is your accounting system such that you didn't know about this a month or two ago?
spk04: We issued our production results in August, early August. That was about two weeks ago. And with that, we were considering revising guides. Given the sequencing issues that Louise referred to, this isn't a desktop exercise where you just basically, well, let's just change the no price assumptions. Let's put in a lower production, and let's just put out a revised . You're essentially updating all of your life of mines, and it's a very complicated process.
spk01: Let me ask you this. In the past, you used to produce a slide with the NAV of the company. If taking what you guys know now, do you have an opinion on your net asset value?
spk04: There's quite a lot of research on that in terms of published data on that. And I know what you're referring to, Lee, that PEA from Three years ago, I believe, back in 2018, we pulled that, yes. The PEAs are much larger than what was published then. And if you look at the recent bank independent research, that should give you an indication as well of NAV. And that's above where we're currently trading, that's for sure.
spk01: But I would assume the NAV would be approaching $6 per share, U.S. Do you disagree with that number?
spk04: I don't disagree with that number.
spk01: Okay, thank you. No more questions. Good luck, guys.
spk06: There are no further questions in queue. I would now like to turn the call back over to Mike McAllister for closing comments.
spk04: Operator, that concludes today's call. On behalf of the management team, I would like to thank all participants for joining us today. And I'd like to offer our sincere apologies for today's technical difficulties with our conference call service operator. This will be rectified so it does not happen again in the future. A replay of the webcast and all the materials can be found on our website at sierrametals.com. If there are any further questions or concerns, you may reach out to us after today's call. Our contact information can be found in today's presentation as well as on the company's website. Thank you, operator. Please conclude the call.
spk06: This does conclude today's conference call. Thank you for your participation. You may now disconnect.
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