Fortuna Mining Corp

Good day, ladies and gentlemen, and welcome to the Fortuna Silvermine second quarter 2021 financial and operational results. At this time, all participants are in a listen-only mode, and we'll open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Luis Canoza, Director of Investor Relations. Sir, the floor is yours.

Hi, Matthew. Thank you. By the way, Luis Canoza is our CFO. It's Carlos Baca, Director of Investor Relations right now, speaking. Good morning, ladies and gentlemen. I would like to welcome you to Fortuna Silver Mines and to our financial and operations results call for the second quarter of 2021. Hosting the call today on behalf of Fortuna will be Jorge Alberto Ganosa, President and Chief Executive Officer, and Luis Darío Ganosa, Chief Financial Officer. Today's earnings call presentation is available on the featured presentation box on our homepage at fortunasilver.com. As a reminder, statements made during this call are subject to the reader advisories included in yesterday's news release and in the earnings call presentation. Financial figures contained in the presentation and discussed in today's call are presented in U.S.

dollars unless otherwise stated. Before I turn over

The call to Jorge, I would like to indicate that this earnings call contains forward-looking information that is based on the company's current expectations, estimates, and beliefs. This forward-looking information is subject to a number of risks, uncertainties, and other factors. Actual results could differ materially from a conclusion, forecast, or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection 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 projection 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 and MD&A, which are publicly available on CEDAR. The company assumes no obligation to update such forward-looking information in the future, except as required by law. I would now like to turn the call over to Jorge Alberto Ganosa, co-founder of Fortuna.

Thank you, Carlos, and good morning to all. I will start the presentation on slide six, which shares our second quarter highlights. In spite of COVID-19-related challenges at Lindero, which have led us to revise the items for the year, our second quarter results continue to reflect the strength of our business, with record sales of $120 million. EBITDA of $55 million, and an EBITDA margin over sales of 46%. Adjusted earnings of 12 cents per share came in largely in line with analysts' consensus. We maintain a liquidity position of $122 million with a debt-to-EBITDA ratio of 0.2%. Our healthy balance sheet plus the incremental plan contributions to free cash flow from Lindero and Yaramoku in the second half add to our ability to fund Seguela construction under various price, metals, and areas. Lindero produced 19,500 ounces of gold in the period. A dramatic surge of COVID cases in Argentina during the quarter impacted Lindero leading to a 16-day stoppage spread over the three months. In addition, continued restrictions in the country impaired our ability to support or ramp up, which relies on foreign vendor technicians. These entry issues into the country have been partially resolved over the last couple of months. Today, we have specialized technicians on site for all stages of crushing, including the HPER, and we're working to get superior technicians for the stacking system in the country in this third quarter. On July 2nd, we closed the Roxgold acquisition. We're working on a 100-day integration plan, which is advancing well, and in many instances, exceeding our expectations. With this acquisition, Fortuna is cementing a diversified low-cost production platform, sourcing precious metals from four operating mines, and with a robust permitted development project in Zeguela, where we expect a construction decision this third quarter, as we close the mining convention negotiations with the Cote d'Ivoire government. We provided revised production guidance on July 19th, which incorporates the Yaramoco Gold Mine contribution for the second half of the year, and our downward revision of gold production at Lindero. Lindero Gold production is 50,000 ounces lower to 100,000 ounces now. The 50,000 ounces are not lost but postponed for next year. We do not believe this year we will be able to make up for the days of stoppages and the slow ramp-up due to the reasons described in the second quarter. Our revised consolidated guidance for silver does not change from the original and stays at 6.8 to 7.6 million ounces. And for gold, it's revised to 194 to 223,000 ounces for 2021. The gold equivalent production guidance is 283 to 323,000 ounces. still representing a year over year increase of 90 to 116% in terms of gold equivalent production.

Slide seven.

In slide seven, we share a 12 month rolling average performance on safety KPIs. or trend of improvement on safety performance has seen a flattening. And in some cases, we observe a reversal across operations. The start of operations at Lindero at the onset of the COVID pandemic last year has weighted heavily on heavily performance at this particular mine. We have had 10 lost time injury accidents in the second quarter. You know, we have in place a cultural change initiative we're committed to, and we have, you know, we're displaying and implementing initiatives to continue with this success we enjoyed, lowering and improving performance on safety KPIs.

Slide eight. We pre-released production for the second quarter.

Our gold equivalent production in the quarter was 56,000 ounces of gold. When measured against the previous quarter, silver production is up 49%. This difference is explained mainly by the 54 days of government-mandated COVID stoppages at the San Jose mine in Mexico last year of production. Our gold production is up 337%, explained by the same loss of days at the San Jose mine and the fresh new contribution of ounces coming from Lindero. Our byproducts, zinc and lead, also exceeded growth with respect to last year. This is also explained largely by the loss of operation days at Cayoma last year.

Slide nine.

Precious metals made 85% of our record sales of 120 million. Silver contributed 40% to revenue. In the period, we realized the silver price of $26.85 per ounce and a gold price of $1,812 per ounce.

Next slide, please.

For the comparison of year-over-year quarterly financial performance, the takeaway here is a significant rebound driven by improved COVID conditions in Peru and Mexico, plus the new contribution of Lindero to the business. Sales of 120 million up from 44 million Adjusted EBITDA of $55 million, up from $9.4 million. And adjusted net income of $21.5 million, up from a loss of $5.1 million.

Slide 11.

Our all-in sustaining costs at all operations were aligned with guidance. San Jose came in at $13 per ounce, Cayoma at $18, and Lindero at $1,214 per ounce. Even though we produced lower gold than Lindero than our guidance plan called for, the timing on the execution of capital projects over the year at Lindero helped offset all unsustaining costs.

Slide 12.

For the first half of the year, we have executed capital projects totaling $32 million out of an annual budget of 80 million for Latin American operations. Exploration investment amounted to 6.9 million. Our Greenfields and Brownfields budget for 2021 for LATAM is $21 million. Total approved capital for West Africa for the second half of the year amounts to 42.5 million. Yaramoco's sustaining capital and brownfields initiatives amounts to $22 million. Seguela and Bosura exploration, total $9.5 million. And the Fortuna Board approved in July an early works budget for Seguela of $11.5 million, which includes long lead equipment packages and focused in engineering work.

All these in anticipation of a construction decision later in the quarter. Slide 13, please. Focusing again on Lindero.

Here, the reconciliations of tons, grade, and gold ounces mined for the second quarter continue to indicate a good correlation with the reserve model with differences of less than 5% for all parameters. So the conciliation of the reserve model to production continues to be extremely good. Gold leaching response as well as radiant consumption was within the expected parameters for the granulometric compositions and metallurgical type pores that we have placed on the leach. As of July 21st, Ramp up of operations continues. Pit operations are performing and delivering according to design. Primary and secondary crushing systems performed at 80% of design over the period with sustained days exceeding design parameters. HPR agglomeration and stacking system, the three work in tandem. operated at 72% of design capacity. Today, with foreign vendor support currently on site for HPER and crushing circuits, we expect to beat the final mile of this challenging ramp up at Lindero. And in slide 14, we share with you the asset portfolio in the portfolio pyramid, a post-Roxgold acquisition, where you can see our four operating mines, our development project, and the baskets of exploration opportunities that we have, ranging from advanced explorations at Greenfields Explorations, at Bosura, Santa Fe, Bosura in Burkina Faso, Santa Fe in Mexico, Ivo Blanco in Mexico, a large land package covering 250, sorry, 160,000 hectares in Cote d'Ivoire and Cerro Lindo project in Argentina, Baborigami in Mexico, Solitario in Argentina as well. certainly a robust exploration portfolio and opportunities at the base of the pyramid. So with that, I will let Luis now take you through the financial results.

Yes, thank you, Jorge. So on slide 16, Just a moment to confirm your slide 16.

As Jorge has mentioned, we had record sales in the quarter and overall a strong financial performance across our main financial metrics. As a reminder, and also as mentioned by Jorge, results in the comparative period in 2020 were depressed due to the impact of the pandemic and related government-mandated stoppages. So the emphasis will be mostly about the absolute figures in the quarter as opposed to the variance year over year. Earnings per share were $0.09 in the quarter. And adjusted earnings per share was $0.12. After adjusting for $3.5 million of expensed amounts related to the Roxwell transaction and other non-cash, non-recurring items. Adjusted EBITDA of $54 billion. 0.9 million was at an all-time high, except only for the 60.8 million recorded in Q1 2021, the first quarter of this year. And free cash flow from ongoing operations was 18.5 million, reflecting the capacity of our business to translate EBITDA results into free cash flow, in spite of COVID-related challenges at Lindero. Also, in relation to free cash flow, we had negative changes in non-cash working capital items of $8.3 million in the quarter and $24.7 million year-to-date. The amounts year-to-date are related mostly to accounts receivable at San Jose and the natural buildup of accounts receivable and leachpad inventory at Lindero. We expect these absolute amounts to maintain or slightly come down in Q3. and a stronger recovery of receivables towards year end.

And next slide, slide 17.

Yeah, so sales increased by $76 million over due to 2020 out of the total impact attributable to higher volume of metal sold of 51.8 million as shown. The bridge chart, around two-thirds is explained by Lindero, 30% San Jose, and the balance of around 4% would be Cayoma. Similar to the prior quarter, the largest single impact on our sales, excluding Lindero, was the price of silver, with an impact of $17.8 million as shown in the slide as well.

Slide 18.

Yes, on the left-hand side, we provide a breakdown of EBITDA by mine. As mentioned before, financial performance for Cayoma and San Jose continues at historical highs, underpinned by higher metal prices, as well as delivery of production and cost performance within our guidance range. The higher oil in sustaining cost for San Jose shown on the right-hand side of 26% compared to the prior year is to a large extent explained by changes in the gold-silver ratio and the impact this has on silver equivalent production. This effect is close to around $2 per ounce. At Lindero, lower gold production of over 30% in the second quarter compared to our internal plan had a significant impact on EBITDA and cash cost per ounce. However, all in sustaining costs for the quarter and for the first half of the year remains within the guided range in our news release of January 19th due to a slower pace of plan cap execution. Also worth highlighting, variable unit costs per ton at Lindero, as well as key operational mine KPIs, are tracking well and within expectations. With respect to a revised annual guidance for Lindero, given the lower revised wall production of approximately one-third, as mentioned by Jorge, we are now expecting higher cash cost per ounce of about 50%, and higher oil and sustaining cost of just below 40%. Please refer to our news release of July 19 for more information.

On slide 19, Yes, here we show the evolution of our liquidity and cash position.

As a reminder, in Q4 of 2020, our credit facility was scaled down from 150 million to 120 million. This is reflected in the drop in liquidity in Q4. Since the end of the Lindero construction towards year-end 2020, we continue to show growth in our cash and liquidity position. For Q2, 2021, we show the impact of the Roxhole transaction in the dotted segment at the top of the bar. Without these transaction related payments, total liquidity would have been in the range of 160 million. We are currently working in putting in place a new expanded credit facility, which we expect will be concluded in Q3. This will be a $200 million facility with a very similar structure to the existing one. And importantly, it will bear a lower cost of interest. Based on... As an additional comment, based on our revised guidance and excluding any Seguela construction budgets, in the current price environment, we expect to generate between $80 and $85 million of free cash flow for the second half of the year. So, based on this and our expanded credit facility, our total liquidity towards year-end should be in the range of $250 million, giving us plenty of comfort to launch construction activities at Seguela. Finally, a brief comment on the information disclosed in the subsequent events note of our financial statement regarding payments done in relation to the closing of the Roxwell transaction. We have disclosed $29.3 million in change of control payouts and settlements of long-term incentive units to non-continuing executives and directors. Out of this amount, $5.6 million is actual change of control payments, and the balance is the cash settlement of RSUs, PSUs, and DSUs. With that, I'll pass it back onto you, Carlos. Thank you.

Thank you, Luis.

We would now like to turn the call over to any questions that you may have.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Please hold while we poll for questions. Your first question is coming from Don DeMarco. Your line is live.

Oh, thank you, Operator, and good afternoon, gentlemen. Just a couple questions from me. First of all, On the call, it was mentioned that some of the production at Lindero has been deferred to 2022. This year, Lindero, we're looking at maybe 100,000 ounces. Can you give us any indication of how much higher the production at Lindero might be in 2022?

We are currently budgeting the year done. We are in the process of – we have started the budgeting process. But the message here is we have a capacity to produce in the range of 150,000 ounces. And if we're not achieving that based on the grade that we have at the mine, it's basically because the rate of production is down. So I would expect that or production for the second 2022 would be able to capture at higher rate, you know, annual production closer to what our target was this year, right? In the range of between 120 and 150,000 ounces, right? Okay. The message basically is this is not an absolute loss of ounces, but rather a deferral. I mean, the models are conciliating well. The metallurgy is conciliating well. And it's just a very painful ramp up in Argentina right now for the team.

Okay. Thank you for that. My next question has to do with the ROX gold transaction. And I see on the cash flow statement, I see an item, the promissory note, $35 million promissory note. Can you give us an indication of the total transaction cost for the acquisition? Is it just the $35 million in that promissory note, or is it more than that? And any other details in terms of what the major items were would be appreciated.

Yes. So, yes. The promissory note really is a balance based on total costs to be paid out directly by Roxul at the time of the closing and their availability of cash. But in terms of total expenses or total transaction costs, The figure I mentioned of $29 million of cash payouts for change of control items and settlement of long-term incentives is the largest amount. The rest really would be related to legal expenses, advisory fees, and these amounts will be fully disclosed in our Q3, right? but certainly the largest component of that is the amount we have disclosed in our subsequent events. The largest component of the 35.

Yes. Okay. Okay, that's helpful. Okay, well, that's all for me. Good luck, gentlemen, getting Yaramoko added into your portfolio of Q3, and we look forward to Lendero rebounding as well. Thank you. Thank you. Thank you.

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone at this time. Your next question is coming from Michael Anthony. Your line is live.

Yes, sir. The mine that you just said, the acquisition, can you tell me exactly what precious metals they have?

If I understand your question, you're asking about the recent acquisition and the assets that we're bringing. If that is right, they are all gold assets. The Aramoco mine is a gold-only mine, and the Seguela project is a gold-only project.

Yes, sir. Well, I got one more. Will y'all be paying a dividend any time this quarter or maybe in the future?

Not in this quarter. The question of a dividend for us is not a question of if, but when, really. And the purpose of bringing, one of the purposes of bringing the Roxville transaction is to build a portfolio of assets that can provide sustainability over the long term to provide investors with a return that is sustainable over time, right? Quality assets, high margin assets that can be sustainable over time will make a dividend or a means to return to shareholders sustainable over time. So for us, it's a question of when. We have a capital project. an important capital project in Seguela that's in the midst of a construction decision this quarter. So, you know, I think that in this price environment, once we launch that project, the discussion of a dividend is one that the board will be engaging on with, right?

Well, this was a great quarter. It was a very strong quarter, and I appreciate everything y'all are doing for shareholders.

Thank you, sir. Thank you. That's all the questions.

Thank you. Your next question is coming from Ryan Thompson. Your line is live.

Yeah. Hi, Jorge and team. Thanks for the update. Just a question for me on Lindaro. I see you stacked about one and a half million tons to the pad in the second quarter. If I just look at sort of the ratio of ounces produced to ounces stacked, I'm getting about 43% on my math. Could you just talk a little bit or maybe give a breakdown of how much of that 1.5 million tons was coarse ore versus sort of HPGR crushed and agglomerated ore? And are you seeing, you know, differences in the metallurgical performance between those sorts of two types of ore types?

Yes. In our Q2 disclosure, we provide a breakdown of the stacked ore.

Give me a second here.

We provide a very detailed explanation here where we trucked ore amounted for roughly 800,000 tons. So Q2 was not particularly a good quarter in terms of the composition of the stacking mix. The tractor from the run of mine and core source stock was placed on the leach, but total 800,000 tons. And it was 32% higher than originally planned. At this stage, we have a completely stocked truck stacking. All the stacking is taking place with the conveyor stacking system. So everything that's going to the leach pad is running through the HPER, agglomeration and conveyor stacking. So that's an important development and that speaks about the continued improvements and reliability and mechanical efficiency we're achieving with that part of the system.

Now,

or metallurgical performance based on the types of ore that we are stacking in certain cells, be it coarse ore and conveyor stacked ore, again, or metallurgical performance and cyanide consumption and lime consumption. All of that is tracking according to our planned extraction and recovery rates. So the key change that we'll see in the third quarter is a significantly higher contribution of conveyor stacked ore as we have again stopped already core source stacking, right? That was always a temporary measure that we decided to implement knowing last year, around March of last year or June of last year, that it is a complex system running the HPR agglomeration and stacking, and we were doing it alone. We didn't have the benefit of foreign vendor technicians for any of the three components of the system, those being the HPER, the Westpro, agglomerators, and the superior stacking system. So now we're working with technical support on site, at least for the HPER, and over time, our operators have gained more experience. It's taking longer than anticipated, again, because we're doing it alone. But that's a significant change, Ryan, right? This is the last quarter, has been the last quarter you'll see in any way significant amounts of tract ore placed on the leach bed.

Okay, no, that's good to hear. Those stacking systems sound like they're starting to perform a bit better here. Maybe just switching gears a a little bit going over to West Africa. You mentioned negotiations on the mining convention for Sigwila. Could you maybe just dig into that a little bit more and just provide us some more color on those negotiations and what we should expect there?

Yes. We are in, I'll say, the first round of negotiations with the Cote d'Ivoire government. and we are getting back to them on this first draft of the convention. It is not far from where the team expected we would land, but it is a negotiation, it's a process, and we're doing it with a lot of... care and respect for the country and the authorities. And we expect we can have an agreement between the parts in a way that would allow us to launch the construction of the project towards the end of this quarter. But we are currently engaged with the government in the negotiations.

Perfect. Thanks for that. And maybe I'll just ask one more. Are you able to provide any commentary on how Yaramoka performed in Q2? I know that obviously the deal didn't close until Q3, but if you can make any comments on how it performed in Q2 or even just, you know, in the month of July, anything would be helpful there. Yes.

In Q2, Yaramoka had a small shortfall in ounces. So due to the sequencing of some grade in the plan, they were in some extremely high grade areas. And those high grade areas do carry high variability as well. And in this case, that variability played against the plan. But we understand it as a local event, and the mine is out of those high-grade zones right now. So in July, we are already seeing performance tracking in line with the short-term and long-term plan. And, you know, we all know Yaramoku is quite a reliable asset, and we don't see this small shortfall in Q2 as anything of concern or a change in trend, but rather a feature of, you know, a particular area, extremely high-grade area in the market.

Got it. Okay. Thanks for the update, Jorge. That's all I had today. Thank you.

Thank you. Your next question is coming from Adrian Day. Your line is live.

Yeah, good afternoon. I had a couple of questions, if I may. Can you remind me, please, what the anticipated capex for Seguela is? Also, if you have any other major capex items over, let's say, the next 12 months? And then given that, do you have any plans for financing?

Good morning, Adrian. The estimated capital for Seguela is approximately $150 million as per the feasibility study. A big chunk of the capex, around $60 million, five, $70 million are encapsulated within the EPC agreement that we are aiming to execute with Lycopodium for the execution of the project.

So, you know,

And this is usually the case with these projects. The bigger capital expense, you start seeing flow through towards, you know, half to two-thirds of the construction, right? And this is probably a year and a half construction.

Okay. In terms of financing, we... during our prepared commentary, we believe we have plenty of comfort to launch into construction activities based on the corporate facility we are putting in place and our existing cash availability plus just ongoing free cash generation.

Okay. Okay. Okay. I know you've got enough, but you've always run a very conservative balance sheet, which I like. But you think you've got enough without any additional financing? Yes, that is an absolute yes. Okay, great. Thank you.

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone at this time.

Please hold while we poll for questions. There are no further questions in the queue at this time.

If there are no further questions, I would like to thank everyone for listening to today's earnings call, and we look forward to you joining us next quarter.

Have a great day.