Sierra Metals Inc.

Q3 2021 Earnings Conference Call

11/9/2021

spk00: Hello and welcome to the Sierra Metals third quarter 2021 financial results call. My name is Emma and I'll be your operator today. If you'd like to ask a question at the end of the presentation, please press star followed by the number one on your telephone keypad. If you'd like to retract your question for any reason, please press star followed by the number two. It's now my pleasure to hand the call over to Mike McAllister, Vice President of Investor Relations to begin. Please go ahead.
spk06: Good morning, everyone. Welcome to Sierra Metals' third quarter 2021 results conference call. On today's call, we are joined by Luis Marcansi, our CEO, and Ed Diamaris, 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 that, 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. In the interest of time, we are allowing all participants to ask two questions, and we are asking that participants respect this request. Further questions can be addressed through email or follow-up calls after the conference call. 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 their conclusions, forecasts, 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 40F or on the company's website. Please note that all dollar amounts mentioned on today's call are in U.S. dollar unless otherwise noted. I would now like to turn the call over to Luis Marchese, our CEO, who will provide us with the third quarter highlights, as well as an outlook for the remainder of the year. Afterwards, Ed Guimaraes, our CFO, will take us through the quarter's financial highlights. With that, I will now turn the call over to Luis Marchese.
spk04: Thanks, Mike. Good morning, everyone. Turning now to the third quarter highlights on slide four. After reading yesterday's press release, you are now aware that Q3 was an exceptionally difficult quarter for the company. We have been dealing with the residual effects of COVID-19, which includes delays on mine development, infield drilling, maintenance, high personnel turnover, infrastructure backlog, and others, which have affected throughput, grade, and metallurgical performance. While Yabrikocha and Puzi are now back on track, the Bolivar mines have experienced limitations on mine development, infotainment and equipment availability during the past year, which is heavily impacting throughput, upgrades and recoveries. While these issues are believed to be temporary in nature, we are very focused in improving the current situation are currently conducting a comprehensive review of all the operational processes at the Bolivar mine, from geology to the mine, as well as at the mill. We intend to incorporate the findings of these reviews into the Bolivar mine operations to allow for a return to a normal, steady, and profitable state of operations at the mine. The early findings and contingencies coming from this review are being incorporated into the 2022 Bolivar Mine Budget, currently being prepared, to provide stakeholders with an updated projection of the Bolivar Mine's capabilities and operations potential going forward. Despite the significant challenges in the quarter, including lower throughput and metal production, stronger metal prices have supported revenue. Additionally, foreign exchange rates have worked in our favor, starting to offset the large associated cost of COVID-19 at Jauricocha, which benefited the company. After reviewing the nature of these limitations moving forward and taking into consideration previously revised production guidance, we felt it was prudent to lower the EBITDA and CAPEX guidance and increase cost guidance for Bolivar to better reflect the expected outcome for 2021. Turning now to slide five. Production guidance remains unchanged with copper equivalent production expected to range between 110 to 115 million pounds. However, due to the previously mentioned and rapidly changing issues at our Mexican operations, primarily at the Bolivar mine, We have lowered our EBITDA guidance range from $130 to $140 million to now range between $105 to $110 million. We have also lowered our expected capital expenditure guidance, previously set at $100 million, to now range between $75 to $80 million. This, in part, is due to the deferral of our magnetized R&R project at the Bolivar mine in 2022. as the iron ore and freight markets normalize and where we complete the required detail engineering and land access process. Finally, given the issues at the Bolivar mine, we have adjusted expected costs higher to reflect what is now expected to be the range for 2021. Cash costs for 2021 are now expected to range between $167 to $175 up from the previously provided guidance of 152 to 140 per copper equivalent pound. All in sustaining cash costs are now expected to range between 330 to 347, up from the previously provided guidance of 260 to 274 per copper equivalent pound. I would like to mention that despite these challenges, we have a strong focus on improving operations, but we are continuing to push for production and stabilization and growth at all three mines. Scaling up production and reducing unit costs remain a priority. Additionally, we are emerging from the harsh restriction imposed by COVID-19. We continue to see improvements in availability of our workforce as vaccination rates continue to improve which should help us to return to more normalized operations. Metals prices have and are expected to remain relatively strong during this period of transition. Turning to slide six. I'm looking ahead to the remainder of 2021-2022. Despite the unexpected challenges we are facing, we continue to see encouraging growth opportunities for the company. Opportunities still include the production of iron ore concentrate and accelerated stage scaling up of production at Bolivar. Continuous improvement initiatives at Jaricocha and Cusi, while we are completing preliminary feasibility studies. We also continue with our brownfield exploration plans, especially at near-mountain opportunities, including between Casca and Tipumachay areas near Jaricocha Mine, where we recently received new permits, as well as La Cidra at La Montura near the Bolivar Mine. We also plan to reactivate our green food programs at our extensive land position in Peru and Mexico. 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 prudent and sustainable operation and growth, and more importantly, to improving the pressure value benefiting all shareholders. With that, I will now turn the call over to Ed for the third quarter financial results.
spk06: Thanks, Luis. Turning now to slide seven, the company had a difficult third quarter due to operational challenges primarily at the whole of our mine and the residual effects of COVID-19. We reported a 6% decrease in our consolidated throughput and generated adjusted EBITDA of $17.4 million in comparison to Q3 2020. We also reported an adjusted net loss of $3.1 million, and we finished the quarter with approximately $58 million in cash. These results are primarily due to the operational issues previously mentioned by Louise at our belly of our minds. However, the company continues to expect that 2021 EBITDA of 105 to 110 million will still reflect an increase of 8 to 13% improvement over 2020, a benefit of stronger metal prices. Our revenue mix by metal continues to be led by copper, followed by zinc and silver. Copper is expected to remain a leading role in the company's metal mix of production and revenue. In Q3 2021, we saw an improvement in copper, zinc, and lead realized prices with a minor reduction in silver and gold realized prices. Copper continued to improve in the first half of 2021 and remains currently strong. Zinc has seen growth in Q3 and has remained relatively strong. Turning now to slide eight, compared to the same period in 2020, cash cuts were higher at all mines. reasons have been previously disclosed in this call but again this is mainly due to operational issues that are both of our mind and lower metal production across all mines we have also seen increased treatment charges due to price participation escalators from off-takers unit costs were also affected mainly due to indirect fixed costs which still must be incurred despite lower metal metals production Looking to 2022, we expect to see higher labor costs from our Mexican operations of approximately 2 million per year because of recent legislation changes. Also, we expect to see higher CapEx costs as we catch up on a backlog of infrastructure projects, which have been delayed during the past year due to the implications of COVID-19. Turning now to slide nine. We finished the quarter with $58 million in cash and have total debt, net debt of $28.6 million. The company has commenced the repayment installments of its debt facility in June of this year with initial installment of $6.25 million. We will continue to make quarterly installments with the last installment occurring in March 2025. The company continues to have a relatively 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 has supported for base dividend policy of $0.03 per share, which was recently declared in a press release dated November 5th, 2021. With that, I will now turn the call back over to Mike. Hey, Ted. That concludes the presentation portion of the call. We will now open the call up to the Q&A portion of the call. Again, in the interest of time, to allow questions from all stakeholders, we ask that you please limit your questions to two at this time. Additional questions can be addressed after the conference call. With that, operator, please open the lines.
spk00: Thank you. If you'd like to ask a question today, please press star followed by the number one on your telephone keypad. Our first question today comes from Heiko Aal from HC Wainwright. Please go ahead. Your line is now open.
spk06: Hello, everyone. Thanks for taking my questions. Hope you're safe. Can you hear me? Hello? Thanks, Heiko. Yes, we can hear you. Okay, let's talk about the guidance revision for Bolivar for a second. You talk about those close delays in line development, infill drilling, and high personnel turnover. Therefore, your all-in sustaining at the midpoint are up 26.8% if you're just taking on midpoint old, midpoint new, with really another 50-ish days left in the year. So obviously, that math ignores the impact of higher costs in Q3. In other words, the change is actually less. But nonetheless, my question still stands. What could swing you to either end of this figure? And are there any effects that maybe you wouldn't have known about at the end of Q3, which is now 40 days ago? Thanks for your question. underlying um rationale or the the reason for the higher cost it's it's all tied to grade uh mostly grade issues at at the bull of our mind and that as louise mentioned was something that started um more than a year ago in terms of the the lack of due to covet the lack of personnel um the high turnover we were having a lack of development uh and that was forcing us to go into higher tonnage areas, but with much lower grades. We're still working through this sequencing issue. It's been a lot longer than we had expected. And as Louise mentioned, we're doing a full comprehensive review from geology, mine, to mill. We should know more about this over the coming weeks, months, but we want to get to the bottom of this. Fair enough. And then just one more quick clarification, and it's also building on the last question a bit. You're taking down your CapEx guidance by 20 to 25 million, again, only 60 days left in the quarter, or 50. How much of that is actually due to the magnetite iron ore plant at the Bolivar mine? And will this do anything to longer-term costs for the project, given the crazy cost inflation we're seeing for everything from printers to used cars to workers? Thanks, Tycho. Yes, you're correct that primarily the revision in CAPEX guidance was due to the magnetite project. We were fast tracking the magnetite projects when we had iron ore prices above $200 per ton. As those prices came down and with the almost tripling of bulk freight costs, it allowed us to or prudently to consider revising this fast track and more taking our time. We're doing a comprehensive detail engineering right now on the project, and we should have the results of that in the coming weeks, early December, and it didn't really make sense to start embarking on a CapEx program until we had that detailed engineering. Again, we were comfortable doing it when iron ore prices were north of $200 per ton, but it's much different now where you've got iron ore at slightly around $100, and you've got both freight costs anywhere from $50 to $75. So the economics have changed, but we believe that the freight costs should normalize. I think this is a short-term work in the system, and freight costs I would expect to get more in line with historical norms over the next 6 to 12 months. Perfect. Thank you. Thank you. I'll get back to you.
spk00: Thank you. Our next question today comes from Mark Reitman from Noble Capital Markets. Please go ahead, Mike. Your line is now open. Mark.
spk03: Thank you. Good morning. So my question is really just kind of piggyback on the last ones. So despite the raised cost guidance that Bolivar It seems like just given the first three quarters, you still would be expecting some modest improvement in the fourth quarter. So I wanted just to delve into it in terms of your expectations. I know you're doing the study, but beyond just developing the higher grade ore bodies, how long do you think it will take? Do you think it will be a quarter or two before you kind of get back to normal? And what would you kind of consider normal?
spk04: Thank you, Mark. This is Luis. We are expecting that it's going to take us a couple of quarters to go back to normal. What normal means is that we should have a steady operation and we can reach the areas that we're planning to reach by then. And we have more certainty on the ore that we're going to mine. And let me go through what the different delays have meant. We've had less mine development that we would have wanted to have. So we are now only able to reach some areas of the mine, which lower grade, and we have limited flexibility in terms of the production where we can mine. In terms of the infield drilling, again, we have done this than we would have wanted to do. So the quality of the estimate of the resources that we're mining is also lower. So sometimes we have surprises on what sort of ore we find. So that is what has been driving the last quarter or so. Now, what we're doing now is we're bringing some more drilling machines to get up to speed with the infield drilling. And we are also bringing some more contractors and equipment to go back to the usual mine development. But as we've highlighted, this has prompted us to go into a very comprehensive review of all processes at the mine. We have our technical team right now there, and we're going to engage with some other outside experts to do a more detailed review. So hopefully in a couple of quarters, we should be back to normal.
spk03: That's very helpful. Thank you very much.
spk04: Thank you.
spk00: Just as a reminder, if you'd like to ask a question, please press star followed by 1 on your telephone keypad. Our next question comes from Leon Cooperman from Omega Advisors. Please go ahead, Leon. Your line is now open.
spk01: Thank you. Just two questions. You know, one is, do you have any ability or willingness to indicate any expectations for EBITDA in 2022? In other words, you mentioned you thought a couple of quarters we'd be back to normal. You know, what should we look at, number one, in terms of 2022 EBITDA expectations? And secondly, I'm just curious, is this an example of weak controls or a philosophy of communication? The last two quarters you had major misses and made no attempt to educate the market before the report. So I don't know if this is a philosophy of communication or you just didn't know what's going on in the business and whatever. But, you know, it's a philosophical question.
spk06: Hi, Lee. Thanks for your questions. Yeah, at this point, Our forecasting EBITDA for next year until we have this comprehensive review completed on the bullet of our mind, that's really going to drive EBITDA for next year. Usually we put out EBITDA in January of every year and hopefully we'll have the answers by then. But if we don't, I'd certainly be willing to push out the EBITDA guidance until we have a better indication. i don't like missing guidances we've revised two in the past year it's uh it's been extremely difficult um and and that was something that was was occurring and that's to your second point you know these major misses um we we forecast every every two months we we have updated our forecasts for for the year and uh I guess you could say that the mines, in particular Bolivar, might have been a little optimistic in terms of how quickly they could have turned things around. And we never saw that play out. When we did our guidance halfway through the year, the view was that we could make that up in the second half. But when we got to the end of September, we clearly saw that this trend was continuing and that it was, you know, we had to adjust guidance. We had no choice. But it is something that I take your point. It is something we need to reexamine and make sure that our ability to forecast can improve in that area.
spk01: Well, you think you have the ability, you just have not communicated it. I mean, the market has been working with stale information for quite some time, and I think it's incumbent upon Mike or whoever is going to do it to make sure people are on the right track. That's it. Enough said.
spk06: Thanks, Lee. And just on that point, we put out revised guidance when we have all the information available and we present it to the board in a timely manner. And again, this has been extremely difficult and it was a lot of discussions at the board level and presentations and we're continuing to get to the bottom of the issues at Bolivar.
spk00: Thank you. Our next question today comes from Jim Young from Midwest Investments. Please go ahead, Jim. Your line is now open.
spk05: Yeah. Hi. A couple of questions here. Number one would be, can you help us understand, add the comments you made about these price participation escalators? Are they the same as the TCs, RCs? And so can you just help us understand what these are? Number one. Number two, though, what direction can we expect them to take? How will they unfold in 2022? Will they be at the same level, higher or lower? Thank you. Sure, Jim.
spk06: Yeah, TCs and RCs and the price participations, these are something that the smelters and the offtakers build in. So they want to ensure should metal prices start to increase, they want to participate in the upside. And when we, looking at Bolivar, we locked in our contracts for the 2021 year back in June of 2020, and metal prices were hovering around, copper, I should say, was hovering around $2.75 a pound. So if we think about it, and the formula, not to get too detailed or into the granular, but essentially, that the formulas work that for every $100 per ton rise in copper price, there's a $10 per pound rise in the TCRC. So you can see that our copper price went from, if we talk in tonnage, we went from around 6,000 tons, $6,000 a ton to $10,000 a ton. We were actually hovering $10,500 a ton. So based on that formula, it adds another $400 approximately to the TCs, RCs. So that's extremely significant. And to answer your second part of the question, will these continue? Because of the Bolivar operational issues, we do have, they're likely that we will complete our 2021 commitments. in the first quarter of 2022, just because of the great issues that the concentrates were not at the level that we anticipated. So we will likely see these TCs, RCs continuing into, I'd say, April of 2022 before they reset again and go back to much more normal prices or costs, I should say.
spk05: So, Ed, if you set the 2021 prices back in June of 2020, what is the June – I would assume that the 2022 prices have been set already. So can you help us understand relative to 2020 when you set those for 2021, what will the relative cost be going forward on a normalized basis?
spk06: They're going to be much lower than the $450 a tonne or whatever you're saying. It will be in the range of $60 to $100 a tonne. So you should see a significant decrease in the TCSRC.
spk05: Okay, thank you very much.
spk00: Thank you. Our next question today comes from Alonzo Checker from Ares Resource Company. Please go ahead. Your line is now open.
spk02: Thank you. Good morning, Luis and Annette. So I had a couple of questions. First, you noted the COVID-related issues that affected HeadGrade and many other events. Can you help us understand why it seems that the impact that COVID is causing looks much worse on Bolivia related to and also for miners operating in Mexico. And the second one is regarding the status or timing of the integration tunnel in Bolivar, the tunnel. We understand that, you know, that's going to help reduce operating costs at the mine. So we just wanted to understand what's the status and timing of that.
spk04: Okay. Hi, Alonso. Regarding COVID, yes, in Bolivia it has been harder because Bolivia already had a backlog of infant reeling and development in place by the time COVID started. So COVID, in a sense, has compounded the issues that Bolivia had in place. So that's where we are now. I said, but that's why we're fixing it. Jabalicocha was in a much better position. So it's pretty much operating normally now. And Cusi had this ventilation issue, which should have been solved in 2020, but due to COVID, could not be solved. And now it's already been solved. But due to the backlog, in Bolivar at the beginning. Now these things just got worse over time. So now we are putting enough capital and resources to go back to where it should be. Regarding the tunnel, yes, that's good news. After the integration tunnel, it's a three-kilometer tunnel. We have driven two kilometers already. We are short one kilometer. So in less than one year, we should be finalizing that tunnel. We're also driving the connecting tunnels from Bolivar West and Mina de Fierro. So eventually by 2023, we should have this operating in terms of connection. In terms of including some additional infrastructure inside, like a crusher or something else, that should take a bit longer.
spk02: Okay. Thank you very much. Thank you.
spk00: Thank you. This concludes today's Q&A session. So I'll now hand the call back to Mike McAllister for any closing remarks.
spk06: Operator, that concludes today's call. On behalf of management team, I would like to thank all participants for joining us. A replay of the webcast and all 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 information can be found in today's presentation as well as on the company's website. Thank you, operator. Please conclude the call.
spk00: Thank you all for joining today's call. You may now disconnect your lines.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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