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spk03: and welcome to the Fortuna Silver second quarter 2023 financial and operational results call. At this time, all participants are on a listen-only mode, and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host Mr. Carlos Baca, Vice President of Investor Relations. Sir, the floor is yours.
spk08: Thank you, Wally. Good morning, ladies and gentlemen. I would like to welcome you to Fortuna Silvermine's second quarter 2023 financial and operational results conference call. Hosting the call today on behalf of Fortuna will be Jorge Alberto Ganosa, President and Chief Executive Officer, Luis Darío Ganosa, Chief Financial Officer, Cesar Velasco, Chief Operating Officer, Latin America. David Whittle, Chief Operating Officer, West Africa. And Julian Bodron, Senior Vice President of Sustainability. Today's earnings call presentation will be available on our website, 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, and is subject to a number of risks, uncertainties, and other factors that could cause actual results to differ materially from a conclusion, forecast, or projection, meaning the forward-looking information. A description of these risks, uncertainties, and other factors is set out in the company's annual information form for the financial year ended December 31st, 2022. The annual MD&A for the financial year ended December 31st, 2022, and the interim MD&A for the second quarter 2023, which are all publicly available on CEDARplus website. Certain material factors or assumptions were applied by the company in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information made in this call. These material factors or assumptions are also described in the company's annual information form for the financial year ended December 31, 2022, the annual MD&A for the financial year ended December 31, 2022, and the interim MD&A for the second quarter, 2023. 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, president, chief executive officer, and co-founder of Fortuna.
spk06: Thank you, Carlos. The highlights of the quarter is our first go-to at the newly built Seguela Mine for sure. This took place on May 24th, as we pre-released. Seguela was delivered on budget and slightly ahead of schedule. Seguela is a flagship asset for the company, adding high margin gold ounces for over a decade of mining to our portfolio. David Whittle, our chief operating officer for West Africa, is here with us, and he will share with you our progress on the ramp-up activities later in this call. But I can advance that beyond the normal startup hiccup here and there, things are advancing according to plan. And after a little over two years since the Rocksville acquisition and subsequent capital deployment towards the delivery of Segela, we're ready to start harvesting the cash flows and benefits of the transaction. Our strategic expansion of the business into West Africa is going to start paying off. We now have two operating mines in the region and starting in Q3, West Africa becomes our largest contributor to free cash flow. And or recent agreement to acquire Chester resources and the advanced exploration stage the embassy project in Senegal, which is set to close in September. Adds to our exciting regional exploration and growth pipeline during the quarter, we had to contend with a couple of events that waited on the operational and financial resource of the company for the period. which were pre-released and discussed in our Q1 NDNA as subsequent events. At the San Jose mine in Mexico, demands by the workers' union for higher profit sharing beyond what is mandated by law and or standing collective agreements with the union led to a 15-day legal blockade generating corresponding loss of production, expenses, and standby charges. Carlos Ortiz- Across Mexico, there have been generalized worker union demands for higher profit sharing, which have affected several mind. Carlos Ortiz- The more notable one, probably being human Spanish keto which, unfortunately, has been on standby for two months now trying to resolve the issue. Carlos Ortiz- At or get a mobile mind in Burkina Faso, we had to repair the arm tech tunnel at the entrance portal of the mind. closing access to the mine entrance for 27 days. Although this event at Yaramoco did not impact production, which is tracking on the upper end of guidance for the year, it did generate standby charges of approximately $1.5 million. And at the Lindero mine in Argentina, our PEEP operations reached a peak in the movement of waste material during the quarter, David Rivera- Reaching a stripping ratio 2.7 to one, which we expect to revert back to 1.1 to one for Q3 and 0.7 to one for Q4 David Rivera- Also bear in mind that over the next 18 months we will be carrying out the first and final a planned expansion of the leach, but at the little mind. This is a $34 million project and the single largest in our sustainability CapEx portfolio. At Seguela, we produced 4,023 gold ounces in the quarter, but those ounces were sold in July. So our Q3 sales will benefit from that bump when we report Q3 results. Taking into account the issues described before, our business managed to generate $9.5 million of free cash flow from operations, $44 million in net cash flow from operating activities, $44 million in adjusted EBITDA, and a net operating income of $3.5 million, or one cent per share. Our consolidated all-in sustaining cost is expected to have peaked in Q2 at $1,799, and to come down during Q3 and Q4 as the operational issues at San Jose and Yaramoco were successfully resolved in the second quarter. Waste stripping at Lindero comes down in the second half of the year, as I previously mentioned. And more importantly, we start benefiting from the Seguela mine sales in the third quarter. Lease or CFO will expand on this. There is a general theme of margin compression over the last years across the mining industry, and we, of course, have not been immune to this. And again, that is why assets like Segela are pivotal to our portfolio. We expect Segela to operate at an all-in sustaining cost in the vicinity of $1,000 per ounce moving forward. On the exploration side of the business, We continue to report positive results coming from Seguela infill drilling at Sandberg and new prospects like Barana, where we reported earlier this week a drill hole intersect of 90 grams of gold over a true width of 1.8 meters. Also, on a positive note, our exploration at the Yaramoco Mine continues extending mineralization and reproducing Zone 55 ore bodies to a point where we're planning for an interim research update before the end of the year. David Whittle will also be expanding on this as well. In June, we had a fatal accident at the Cayuma mine involving one of our mine contractors conducting activities related to work at heights. This tragic accident comes as a blow at a time when the Cayoma mine has been operating without any lost time injuries for 23 consecutive months and has robust management systems and practices in place. All identified improvement measures coming from the investigation and analysis of the accident have been implemented at the mine site, and a corporate action plan is in place to expand learnings across the organization. So something like this does not ever repeat again. Subsequent to the quarter end, we published our 2022 sustainability report. Communicating adequately on the topical issues of environmental and social governance with our stakeholders and meeting expectations sensibly is something we take very seriously. We carry out a thorough materiality assessment to identify which of the many expectations placed on the sector are reasonable to us and our moment. Julian Bodran, our Senior Vice President of Exploration, is here with us and can expand on the highlights of the report. Julian, do you want to touch on the report, please? Yes, thank you, Jorge.
spk04: So for this report, this fifth report, sustainability report for the company, it includes an updated format to ease the access to ESG data, such as SASD, TCFD, and GRI, being our main ESG reporting framework. We also present this year standalone mini sustainability reports for each of our operations. so you will be able to find worky performance per site. The report presents also a strong ESG governance system with a dedicated sustainability report, sustainability committee, and also short-term incentives based on ESG performance. The report gives also the detail of our 2022 performance on all the material ESG factors, such as safety, environment, biodiversity, water, human rights, waste management, and human capital. You will find also commitments of the company to implement industry standards to manage sustainability-related risk and opportunities. mainly climate change, our climate change position statement based on TCFD with the objective to disclose 2030 GHG reduction targets in the coming six months. We will have also some news from CESA on this climate change matter. Other big commitment this year or last year was GIST and TELIX management where we target a full compliance by 2027. This standard will guarantee to minimize risk from tailings management and ensure the long-term value of the company. Finally, the report presents the contribution to our host countries and local communities. financial contribution, but also you will see other information about how we impact positively the life of our people. So we encourage you to explore these other key aspects of the business. The sustainability report is definitely a good way to assess long-term growth strategy and also how mining can help building a better world. Thank you. Back to you, Jorge.
spk06: Thank you, Julian. Now we'll have Chief Operating Officers take us through a review of the highlights for the regions. So we can start with West Africa. David, you want to go ahead?
spk09: Thanks, Jorge. Operations in West Africa continued their solid performance during the core second quarter of 2023. the highlight being the completion of construction and the pouring of first gold at the Sagala mine on May the 24th, with 4,023 ounces of gold being produced in the quarter, which was shipped in July. As we commenced processing operations, we encountered some initial commissioning issues and altered mining plans to provide a more competent feed material to the processing plant. Excuse me. Initial processing plant feed for commissioning was predominantly oxide ore from the upper 10 meters of mining at the antenna pit. This section of the antenna pit appeared to have been heavily depleted due to artisanal mining activities, therefore not providing the initially expected grade. The nature of this oxide also caused issues within the first stages of the processing circuit, leading to reduced throughputs. These issues have been addressed. Mill feed is now a combination of fresh, transitional, and oxide ore, and nameplate capacity of 154 tons per hour is currently being met or exceeded. Whilst the above early issues mean that we now expect production from Sagala will be at the lower end of the guidance range, current mill throughputs are exceeding nameplate capacity, and our long-term view of Sagala's potential remains unchanged. The initial grade control drilling at Antenna showed a 15% increase in contained ounces compared to the geological model, driven by a 2% increase in tons and 13% increase in grade when discounting the upper 10 meters of oxide ore. Initial grade control drilling is now complete at Ancien Pit with Stage 2 Antenna Pit grade control drilling underway. In the second quarter, Sagala mined 383,100 tons of ore at an average grade of 2.35 grams per ton and 877,143 tons of waste for a strip ratio of 2.3. All processed was 109,605 tons at 1.56 grams per ton with 4,023 ounces being poured. On July the 18th, the transformer feeding the sag mill variable speed drive failed, and a repair with overview of the original equipment manufacturer was successfully undertaken. Unfortunately, eight days of production from the processing plant were lost, with normal operations recommencing on July 26th. In other activities, In-fill drilling at the Sunbird Pit was completed in the beginning of the second quarter, which will allow for the conversion of inferred material to reserve status and allow the Sunbird Pit to be brought into the life of mine plans. As operations progress, the focus will turn to de-bottlenecking the current process plan, increasing throughput, and examining expansion options as the mine plan develops. At the Yaramoko mine, strong production performance enabled the operation to pour 29,002 ounces of gold. Mine tons at Yaramoko was 64,779 tons at 6.35 grams per ton. The reduced mine output was due to the 27-day stoppage caused by the loss of access to the main 55-zone mine due to the on-tape tunnel failure. of the portal. Normal operations were resumed in early May, and the mine has been operating as planned with no further interruptions. During the mine's stoppage, processing operations were able to continue with the processing of surface stockpiles. As such, 144,202 tonnes of ore were processed at an average grade of 6.51 grams per tonne. Mining development continued to encounter higher grades than planned, as well as extend the mining boundaries to the western side of the ore body. Diamond drilling is currently focusing on the lower eastern side of the 55 zone ore body, but will switch back to the western side in the third quarter. A second diamond drill to further explore the western boundaries of the 55 zone is expected to be mobilized also in the third quarter. Due to the increased grades encountered and the increase in mineable tons, it's now expected that Yaramoka will exceed the upper end of current guidance. Gold production for the first half year was 55,439 ounces. Basic for the second quarter was $1,626 an ounce and $1,564 an ounce for the first half of 2023, both at the lower end of guidance range. Safety and health of our employees is a key focus at our operations. Unfortunately, at Sagala, we incurred an LTI in April due to a processing plant employee incurring chemical burns. At Yaramoko, safety performance remained strong, with no injuries occurring at the mine in the second quarter. Thank you, and back to you, Jorge.
spk06: Thank you, David. We can move on to Latin, Cesar.
spk05: Thank you, Jorge, and good morning to everyone. In the second quarter of 2023, consolidated silver and gold production at our Latin American operations was 1.26 million ounces. and 31,323 ounces respectively, representing a decrease of 23.6% and 16.7% when compared to the comparable period in 2022. This decrease in production was mainly driven by the 15-day illegal blockade at the San Jose mine, as referenced to by Jorge, which concluded on May 11, and also lower head grades at the Lindero mine. So in Argentina, at the Lindero mine, mine production for the second quarter was 0.8 million tons of mineralized material with a stripping ratio of 2.69 to 1, which is aligned with the operations plan for the year of 1.17 to 1. Gold production in the quarter was 25,456 ounces, This is 12% lower when compared to the second quarter of 2022. But as mentioned, this decrease is explained by lower head grades of mineralized material placed on the leach pad as they fully align with the mineral reserves and mining sequence for the period. Gold production for the first six months of 2023 totaled 50,714 ounces, well in line to meet annual guidance. ASIC is expected to be at the high end of annual guidance range, mainly due to higher sustaining capex driven by the leach pad expansion, high capitalized stripping cost, higher inflationary pressures from key consumables and services, and the lack on the depreciation of the Argentine vessel. The mine continues capturing savings and focus remains on cost control and value generation by concentrating on constantly pursuing efficiencies and delivering strategic capital projects on time and on budget. I am also pleased to report that the contract for the construction and operation of the solar plant at Lindero has been awarded. The solar plant will supply about 40% of the total annual energy requirement of 15 megawatts peak, generating fuel savings and contributing to the reduction of the operations carbon footprint by approximately 4,252 tons per year of CO2. So that's good news. This was an important step and engineering and permitting works have commenced. The solar plant is expected to begin generating power by the fourth quarter of 2022. So everything is on track. Moving to Mexico, the San Jose mine produced 0.96 million ounces of silver at an average head grade of 168 grams per ton and 5,778 ounces of gold at an average head grade of 1.02 grams per ton. reflecting a 31 and 30% decrease in production, respectively, when compared to the second quarter of 2022. The decrease in production is explained by the 15-day full shutdown of operations due to the legal blockade by the Workers' Union, which impacted plant production for the quarter by 47,200 tons. This also had an impact on the mines preparation plan, delaying access to higher-grade stoves scheduled for a period, as well as high absenteeism during the quarter. The operation has adjusted. The mining plant and higher grade stops are expected to be mined in the upcoming months. Management has implemented a revised mining and processing plan to recover the lost production in the quarter. At this stage, though, it is anticipated that silver production will achieve the lower end of annual guidance range while gold production will come below. The effect on costs derived from the agreements reached with the union, as well as the blockade's impact on production, has been significant and are being partially offset by reducing non-essential expenditures and capturing further efficiency initiatives for the remaining of the year. Additionally, costs have also been affected by a stronger Mexican peso, which has appreciated approximately 20% year-to-date, coupled with higher inflation of supplies and services. It is anticipated that ASIC for the year will be slightly above guidance, mainly due to the impact of the blockade and standby charges derived from it. Moving down to Peru, in the second quarter of 2023, the Cayoma mine produced 305,296 ounces of silver at an average head rate of 84 grams per ton, a 14% increase in the comparable period in 2022. Production has benefited from higher head rate scopes at the lower levels of the animal's vein. Silver production for the first six months totaled 0.59 million ounces, on track to achieve the upper end of annual guidance range. Zinc and lead production was 14 and 10.2 million pounds at an average head rate of 5.18%, and 3.72% respectively. That's a 29 and 34% increase when compared to the second quarter of 2022. As mentioned before, the increase in production is the result of higher heat grade source from the lower levels at the animal's vein. Sink and lead production for the first six months totaled 27.1 million pounds and 19.7 million pounds respectively. is tracking well to meet annual guidance range, as the operation continues to deliver strong production at a lower cost. Back to you, Jorge.
spk06: Thank you, Cesar. Luis, please go ahead.
spk07: Yes, thank you. So sales were $158.4 million in the quarter. That's a decrease of $9.5 million compared to the prior year. The decrease was driven mainly by the lower metals sold at San Jose, as explained due to the illegal blockade reported in the month of April. Silver and gold metals sold at San Jose were 31% and 30% below the prior year. It's a result both of a 15-day stoppage and as Sarah explained, the lower average production rates over effective days of production. Silver and gold prices were up 7% and 6% compared to Q2 of 2022, but this positive effect was offset by a sharp drop in sink prices of 31%. Our operating income was down $5.4 million, primarily as a result of lower sales and the $7.1 million of non-recurring expenses that we've mentioned, consisting of $3.5 million of standby charges, $2.8 million related to a new agreement with a workers' union at San Jose, and a $1 million fine at the Aramoco. Consolidated cash cost of sales per gold equivalent ounce was approximately $970. This is $80 above the prior year. The increase was a result of higher cost per ounce sold at San Jose related to lower productivity rates and lower hedge rates as a result of a ramp up process after the stoppage and higher cost per ounce at Lindero related to lower volume produced and higher input costs. This was partially offset by lower costs per ounce sold at Yaramoco. Our lower income tax in the quarter compared to Q2 of 2022 reflects lower income before income taxes and a tax credit in the quarter at our Mexican operations. In addition, the prior year effective tax rate was impacted by timing of withholding taxes. After the aforementioned impacts and one-time charges, we recorded net income of $3.4 million, or one cent per share. With respect to our holding sustaining costs, We have disclosed $1,799 per gold equivalent ounce sold, which represents an increase of $366 year-over-year. The increase is explained by the effect of the stoppage at San Jose, as described before, and higher ASIC at Lindero, driven primarily by higher sustaining capex associated to Phase II of the Leachpad expansion. and a peak in the planned stripping ratio for a year, as well as higher cost per ounce, as mentioned before. In terms of free cash flow, net cash from operating activities in the quarter was $44.2 million, compared to $47.4 million in Q2 of 2022. changes in working capital as per the cash flow statement were positive $2.7 million. It's worth noting this includes $4.4 million of negative changes in working capital from Ceguera consisting of inventory and payables, which we have excluded from our reported $9.5 million of free cash flow from operations. This free cash flow from operations figure is after sustaining CAPEX, brownfields exploration, and corporate expenses. Cash used in investing activities as per the cash flow statement is $73.2 million. This consists of $35.6 million of sustaining CAPEX, including brownfields, $19.5 million in construction and pre-production activities at Seguela, a $10 million payment associated to First Gold at Seguela, $3.4 million of capitalized interest, and $4.5 million in costs related to the Chesser Resources transaction. At the end of the quarter, we still had approximately $9.4 million of construction payables outstanding. Moving on to the balance sheet, we closed the quarter with a liquidity position of $98 million. A revolving trade facility of $250 million was almost fully drawn at the end of the quarter, and we expect to start reverting this in the second half of the year as we start paying down debt after the end of the Sigela construction. We maintain a strong liquidity position going into the second half of the year. Finally, our total net debt, including the outstanding convertible to venture, is $198 million, resulting in a leverage ratio of total net debt to adjusted EBITDA of 0.9. Thank you. Back to you, Jorge.
spk06: Thank you, Carlos, for Q&A.
spk08: Thank you, Jorge. We would now like to open the call to any questions that you may have.
spk03: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. Confirmation tone will indicate your line is in the question queue. And you may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is coming from Eric Windmill with Bank of Nova Scotia. Your line is live.
spk02: Great. Thanks for taking my question to the Fortuna team. Obviously, great to see Sagala ramping up well. I know it's still early days, but just wondering if you had any additional detail in terms of what you're seeing in terms of where the grade's tracking in terms of reconciliation and tons and You know, when you think you might get to steady state there, I mean, notwithstanding, you know, the transformer issue. That'd be great. Thanks.
spk06: David, do you want to expand on that one?
spk09: Yeah, no problem. Yeah, initially, as we touched on in the discussion earlier, our great control drilling at the antenna pit, indicated an increase in overall ounces, predominantly grade driven as well. In our recent reconciliations through the plant, that would now imply that we are seeing those grades as expected from our mining plans actually in the mill as well. We've still got to do the reconciliation of the grade control drilling at Antien, which is now being completed. That will probably still be a couple of weeks away. And the grade control drilling at the stage two of Antenna that is currently underway.
spk06: And to add a bit of color to that, with the infield drilling at Antenna, which is the anchor for production this year and into the next one, the infield grid is at a 10-meter drill spacing pretty much. So, you know, giving... higher confidence or control. And we expect to report or, you know, conciliation of production to reserves at the end of the third quarter, you know, with the results for the third quarter. For the second quarter, you know, it was just a few initial weeks of production and getting the new balance, a process that went on in the first month of the third quarter in July. And as you can expect, you know, the team is dealing with balancing weightometers, belt layers, and stuff like that, which is normal with any commissioning processes. So we expect that by the end of Q3, we can probably provide our first reconciliation. But so far, everything suggests, David, that we're tracking our own expectations.
spk09: Yep. After those initial issues with the predominantly oxide ore. Yes. Yes.
spk02: It would be great to know. It's super helpful. Thank you very much. I'll hop back in the queue.
spk03: Thank you. Our next question is coming from Don DeMarco with National Bank Financial. Your line is live.
spk01: Thank you, Operator. Good morning, Jorge and team. Guys, just following along the line of questioning the previous call on Seguela, Jorge, you mentioned... You're expecting AISC on the order of about $1,000 an ounce going forward. But just wondering if you're going to be reporting AISC for Q3, and how should we model costs during this ramp-up sale for the next two or three quarters?
spk06: Yes. We will be reporting all in sustaining costs for the quarter. I mean, I think it will be reasonable to expect that those all in sustaining figures for the initial months of production are going to be a bit distorted. But we plan to report. We're making some adjustments or some adjustments have made have been made also to the original mine plan as David described. We had to expose more fresh ore than the original plan contemplated. We had to move faster into two shifts in the pit rather than just one. So those things will have some bearing on the all-in sustaining in the short term for sure. But, you know, long term, and long term I'm talking about, you know, at this stage, the next two quarters, I would expect we are tracking within our guidance expectations. Luis, perhaps you want to expand anything on that?
spk07: Just to provide a bit more visibility, that involves a cash cost per ounce in the range of $600 to $650 on average over the next couple of quarters, depending, as Jorge just described, on some of the variability we might see as the mine plans continue to adapt. And ASIC, yes, we stick to our guidance of around $1,000, $1,050 per ounce for the second half of the year on average.
spk01: Okay, thank you for that. Just a second question looking at the Chesser acquisition. Clearly, this provides an opportunity in your pipeline. We're looking ahead to the close of the transaction in September, but beyond that, could you give us a sense of the timing on some milestones you might expect, a resource update, PEA? I don't know, maybe it's too early to talk about, you know, potential first pour or something, but what is the runway of catalysts and milestones that you envision for this?
spk06: Yes, for us, the ambassador remains an exploration project. Chesser had advanced with a PEA and was trying to move beyond the PEA, building on engineering towards a pre-feast. We are analyzing, reviewing all of that work. There might be some engineering work we want to continue pursuing. But largely for us, CHESAR remains an exploration project. The AMBA soup is today a sub-million ounce deposit. And as it sits today, it doesn't meet our criteria for developing a mine. But we, having said that, we are of a strong view that there are opportunities to take that sub-million ounce deposit as it sits today well beyond the million ounces. Diambasud sits at the core of one of the most productive gold belts in the West African region. just kilometers away from, you know, Cuncoto and Lulo and B2 Gold's Hekola mine. So we are quite excited about the exploration opportunity this presents, but it is an exploration project for us. We still have to show success with the drill bit and move the ambasude beyond the million ounces before we contemplate a development stage project. So it's an advanced exploration project for us, one we're very excited about. We are currently developing an exploration budget. We want to be drilling the Ambasud before the end of the year. But first things first, we need to close the transaction that will take place in September. That's our best estimate right now. But our exploration team, Paul Whedon, Pat Manouche, are working already on an exploration budget for the second half of 2023.
spk01: Okay. Thank you for that. That's helpful. And that's all for me. So good luck with the continued ramp-up at Seguela. Thank you.
spk03: Thank you. Once again, ladies and gentlemen, if you have any questions, please press star 1 on your telephone keypad at this time. Okay, we appear to have no questions on the line at this time, so I will hand it back for any closing comments.
spk08: Thank you, Ali. If there are no further questions, I would like to thank everyone for listening to today's earnings call. Have a great day.
spk03: Thank you. This concludes today's conference, and you may disconnect your lines at this time. And we thank you for your participation.
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