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.
spk00: Ladies and gentlemen, thank you for standing by and welcome to the Goros Silver Q3 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star 1 on your telephone keypad. If you require any further assistance at any time, please press star 0. I would now like to hand the conference over to your speaker today, Stephen Orr, CEO. Please go ahead.
spk01: Good morning. I would like to welcome everyone to GatoSilver's inaugural earnings call as a public company. And today we're going to be covering the earnings for the third quarter of 2020. However, before I proceed with the discussion on the company's performance, I'd like to call your attention to this cautionary note on slide two. I will be making forward-looking statements which are not guarantees of future performance and involve certain risks, uncertainties, and assumptions concerning future events. So who is Gato Silver? Well, Gato Silver was founded in 2010 by the Electrum Group. It was a very successful institutional investor in the resource industry. And we've been held as a private company until late in October in 2020 when we conducted an initial public offering with a dual listing on the New York Stock Exchange and the TSX. The company controls over 103,000 contiguous hectares of mineral rights spanning a distance of 60 kilometers along a mineral trend in southern Chihuahua State. And that's shown here on slide number three. Over the last decade, we have discovered an entire new silver and zinc-rich mineral district, which we named the Los Gatos District. And so far, we have discovered 14 known zones of mineralization. In 2013, we formed a joint venture on the Los Gatos District with Japan-based Doha Metals Mining, whereby they provided financing to develop our initial discovery zone, Cerro Los Gatos, which now contains over 200 million silver equivalent ounces of resource. And we've been able to build that into an operating mine that began its commissioning in July of 2019. Gatos Silver currently owns 51.5% of the Los Gatos Joint Venture, and it has an option to purchase another 18.5% to bring our ownership to 70% of the district. And as you'll see in slide number four, this is one of the primary uses of proceeds from the IPO. And turning to slide four, on October 27th, we priced our IPO at $7 per share and raised gross proceeds of $172.5 million through the issuance of just over 24.6 million shares. And the next day, we began trading on the New York Stock Exchange and TSX under the ticker symbol GATO. The IPO was led by BMO Capital Markets, Goldman Sachs, and RBC Capital Markets, with Canaccord Genuity and CIBC acting as co-managers. We're very proud of the fact that to date, This is the largest precious metals IPO since 2010. It's the only NYSE and TSX dual listed precious metals IPO since 2010. And it's the largest North American precious metals equity financing in 2020. Our proceeds will substantially be used to increase Gatos Silver's ownership in the Los Gatos joint venture to 70%. and to retire our project working capital facility and to fund Los Gatos district exploration programs to continue expanding resources and reserves. And on slide five, we've provided you with a site overview. It's really a pleasure to introduce you to North America's newest silver exploration development and production company. commonly precious metals companies IPO during their expiration stage. However, Gato Silver was fortunate to have financial support from its private shareholders and Doha Metals and Mining to remain private for the last 10 years. And we've been able to methodically build value by accumulating one of the largest mineral rights packages in Mexico, then making 14 separate mineral discoveries to define a new silver and zinc-rich district, and completing a feasibility study on our initial discovery zone, Cerro Los Gatos, then securing project financing and constructing a 2,500-ton-per-day mine and processing plant that began commissioning in July of 2019. And this slide provides an aerial view of the Cerro Los Gatos project with the mine portal shown in the left quadrant of the slide. All the ore that's mined from this underground deposit is truck hauled from the mine to a run of mine or storage pad where the process plant then blends it to provide consistent quality ore to the process plant. And we create a lead concentrate that contains most of the silver and is currently being sold to Trafigura and a zinc concentrate that is sold to Doha. And on slide six, here are the expected life of mine performance metrics. The key takeaways are at 2,500 tons per day, there are 11 remaining years in the life of this mine. And it's expected to produce 12.2 million silver equivalent ounces annually, which consists of 6.5 million ounces of silver, 62 million pounds of zinc, 40 million pounds of lead, and just over 4,000 ounces of gold annually. And we expect to do this at an all-in sustaining cost of $11.77 per ounce on a silver equivalent basis. And we expect to generate $92 million of annual free cash flow over the next four years based on a silver price of just under $19 per ounce. Now, turning to our third quarter 2020 highlights, I mentioned that we began commissioning Cerro Los Gatos in July 2019. However, that was interrupted. by a Mexican government mandated suspension for COVID-19 during April and a portion of May this year. I'm pleased to report that once the suspension was lifted, we were able to rapidly resume commissioning activities during the third quarter. Accordingly, Gatosilver achieved record production from the mine, record silver, zinc, and lead recoveries through their processing plant, and it resulted in record cash flow generation. Key to this achievement was the effective COVID-19 management at the Cerro Los Gatos project. All of this position the company to take advantage of increasing investor interest in silver and silver equities to successfully complete our initial public offering. And on slide eight, this slide shows an isometric view of the mine development on the left and the daily average production rate by month on the right. So you can see that Cerro Los Gatos achieved its 2,500 tons per day target back in February of 2020 prior to the Mexican government's mandated health suspension. When the project recommissioned in June, it has been progressively increasing its production and is on target to again achieve 2,500 tons per day by January of 2021. The development is well ahead of schedule, and this has provided sufficient ore phases to sustain 2,500 tons per day. Turning to slide 9, this shows a chart of the average daily processing plant production rate by month. This processing plant is highly automated and was able to ramp up very quickly after the COVID-19 suspension. It was only constrained by the mine production and has been operating between 21 to 28 days per month. While the mine continues, its progressive production rate increased. The metal recoveries have been excellent. Silver is almost exactly the expected recovery from the feasibility study. Zinc is slightly above the feasibility study expectation, and lead is actually 2% higher. The gold content in the deposit is really quite small. At this time, I'd like to turn the discussion over to our Chief Financial Officer, Roger Johnson. Roger Johnson Thank you, Steve. I'm now on slide 10. For the quarter ending September 30, 2020, Gatto Silver Inc. had a modest $1.2 million loss. The $3.7 million of operating expenses were nearly entirely offset by a $3.4 million equity income from the Los Gatos Story Venture, its first profitable quarter since operation began in Q3 of 2010. From this slide, the pre-development costs relate to the Sunshine Complex. After October 30th, 2020, they are not part of Kato Silver Inc. operations, and they will be reclassified as continued operations beginning next quarter. In addition, the arrangement fees with DOA, which are provided by the financing, will also decrease as we move forward with repaying the working capital facility. Moving on to slide 11, the Los Gatos Joint Venture revenue in the quarter was over 50% of the revenue for the nine-month period ending September 30, 2020. Even though we operated at lower than designed throughput, higher metal prices and a focus on ore control contributed to the first profitable quarter in our relatively short life to date. Lead concentrate sales containing 90% of the recovered silver were strong. The silver in the lead concentrate is paid at a much higher percentage than silver in the zinc concentrate. Considering the COVID-19 pandemic and the lower than expected throughput, excuse me, lower than designed throughput, we're happy with the cost we had for the quarter. Back to you, Steve. Thank you, Roger. Now, turning your attention to slide 12. We devote significant attention to environmental, social, and governance factors at Cerro Los Gatos, and we view this as our social license to operate. All of our achievements at Los Gatos would not have been possible without the support of the regional government, regulatory agencies, and communities that are impacted by this project. And we recognize that it is essential to conduct our operations in a manner that protects our employees' safety, does not harm the environment, and ensures that the local communities benefit through not only employment opportunities, but also education assistance, medical care support, and provision of sustainable, clean water. Recognizing this responsibility, the Cerro Los Gatos mine was built to a world-class environmental standard. We ensure the operation is not causing air pollution through enclosure of ore storage areas that may emit dust during wind events. We constructed the tailing storage facility with a double liner to prevent water contamination. And in terms of community support, we built the first full-time medical clinic in the Ejido of San Jose del Sitio, and it is staffed by doctors from Mexico's social services. We annually fund the purchase of educational materials for local schools and provide annual scholarships for students to attend the University of Chihuahua. We funded the redevelopment of the community water system to ensure access to a sustainable source of clean water. and we constantly work to create a strong safety culture at the project. The consistent reduction in safety frequency shown on this slide tells us that it's working. Our devotion to improving the lives of those impacted by our project has been recognized by the government of Mexico, local communities, and we have never had any opposition to the project. On slide 13, Before I finish, I would like to introduce you to our management team. I have just over 40 years of experience in the resource industry with multinational resource companies for the first half of my career, and later managing junior mining companies such as Oceana Gold, Ventana Gold Corp, and now Gato Silver. Our chief financial officer, Roger Johnson, spent his early career with a big four accounting firm and then entered the resource industry by joining Rio Tinto and subsequently worked for Pesmenco Zinc and Newmont before joining Gato Silver as the chief financial officer. Our chief administrative officer, Adam Dubas, spent his early career as a financial analyst prior to joining KPMG and working in their energy industry practice. Phil Pyle, our vice president of exploration, is the co-discoverer of the Los Gatos district. And our chief operating officer, John Kenyon, has devoted most of his career to developing and managing mining operations. Our vice president of Mexico, Luis Felipe Huerta, has extensive project development experience in Latin America. So I'd like to thank you for your time today. Our full earnings report is available on our website at gatosilver.com. And at this time, Roger and I would be happy to answer any of your questions.
spk00: Thank you. At this time, if anybody has a question, please press star 1 on your telephone keypad. Again, that would be star 1 on your telephone keypad. We'll wait just a moment to compile a Q&A, Roger. And if anybody has a question, please press star 1 on your telephone keypad. First question comes from Ryan Thompson from BMO. Your line is open.
spk01: Hey, Steve and Roger. Thanks for the presentation. Just a couple of questions for me. Firstly, you mentioned that you've got the option, obviously, to increase the ownership percentage to 70%. And I think that you have until sort of mid-21 to exercise that option. Can you just comment on if it's actually been executed and just any additional color there? Absolutely, Ryan. Yes, we have until June 30th of 2021 to exercise that option. But we're in very detailed discussions with DOA on executing the option. They are extremely pleased. that we will be doing that. And we anticipate that we will have that completed by the end of January of 2021. Okay, that's great to hear. Just the next one for me. Obviously, the other sort of important use of proceeds from the IPO was funding the exploration program. Can you just touch a little bit on, I guess, A, when you think you're going to get sort of the drills turning and B, what the high priority targets are and when we can expect to see some exploration results out of Sierra Las Gadas? So the highest priority target is actually restarting exploration at Cerro Los Gatos itself. And I'm very pleased to report that that program began on December 5th. So we are currently drilling. We are focusing initially on the southeast portion of the deposit. um that'll be both extensional drilling and infill drilling as we begin to convert our 3.7 million tons of inferred resource in the measure indicated we believe between the southeast portion and then the subsequent drilling that we do in the northwest we'll be able to convert all of that plus add some additional inferred resource i think that we should have first results to report just prior to year end on Cerro Los Gatos. Right after the beginning of the year, we have received our consents to begin district exploration. And the first place that we'll be going is to the Esther deposit, which is about four kilometers away from Cerro Los Gatos. Esther has an initial NI43-101 compliant resource on it, but it hasn't had any drilling since 2012. So we're very excited to get started drilling in on a district scale again. The program with Esther will be more expensive. I should have said the program at the district will be more expensive than just Esther. We will also be testing a few other targets that are within that proximity as well. Then concurrent with the ester drilling that will start at the beginning of the year, we will also start a program that is an exploration project outside of the joint venture. It is called Santa Valeria, and it's 100% controlled by Gato Silver. That program, I think, is very prospective. It looks to us like it's an analog to Cerro Los Gatos. It does have some previous drilling. It was conducted by another junior mining company. They did get economic intercepts. So we're very excited to get that program started as well. That's great. Can you just give us a sense of how many drills you plan to get on each target? And have you established what the budget is going to be for 2021 yet on the exploration side? Yeah, the budget. So we'll start out initially with two drills. Both of them will be on Cerro Los Gatos. Then after the beginning of the year, we'll bring a third drill in on Forrester. The budget, our portion of the budget, and by that time or soon after, we will have the Los Gatos to adventure at 70% our ownership, 30% DOA's. We are anticipating just under $6 million of our expenditure. our portion of that expenditure for the exploration. And that for gotcha silver also includes the Santa Valeria project as well. All right, great. Thanks. Looking forward to the results as they start coming in here. Thanks, Ryan.
spk00: And your next question will come from Mark Mihaljevic from RBC. Your line is open. Thanks, and good morning, guys.
spk01: I guess Ryan covered actually a lot of what I was thinking about, but to start, I guess you want to just give a little more commentary on progress on the ramp up that you guys have seen subsequent to quarter end and how that's tracking relative to your internal expectations? Yeah, the ramp-up mark at the mine is tracking very well. We're quite confident that we'll be at 2,500 tons per day by the beginning of 2021 or in January of 2021. The process plant has ramped up very quickly. It basically has, we have kind of metered its performance or production performance so that it tracks with the ramp-up of the mine, but it's easily able to achieve 2,500 tons per day. So we've been very pleased with its performance. We've been pleased with the quality of the concentrate. And most importantly, we've been very pleased with the ore grades that we're getting out of the underground mine now. That's great to hear. And how is the cost contracting relative to your expectations? And when do you think you'll actually be at steady state costs? So I'll turn that question over to Roger Johnson, our CFO. All right. Thanks, Dave. Mark, as I mentioned before, we're happy with our costs now, even though they're slightly higher than the feasibility study would indicate what we would like to be because of the pandemic and the lower than design capacity. I would say that we would be in the first quarter of next year before we would be able to say we got declared success on where we think the costs will be at their lowest point. We just need to get through this ramp up, and hopefully the COVID protocols will be a little less, but that one's a big question mark. With the vaccine just coming out, And now, you know, likely we're going to continue with those protocols for at least another six months and perhaps another year. So the cost will be a little bit higher than we thought from the feasibility study, but we're getting very close. Do you want to just touch on the local COVID situation and, you know, your ability to control the risk of any interactions from COVID? Certainly. We've been really quite pleased at our ability to keep the site COVID-free, if you will. The site is a residential site, and we can exercise a great deal of control with the employees. The employees work there for 20 days, and then they go home, go back to their families for 10 days. While they're at site, we maintain quite rigid COVID-19 prevention protocols, such as social distancing, people required to wear face masks in common areas. But because it is a residential site, we provide all the room and board for our employees, so we We use an international food services company. They have nutritionists and we make sure our employees get proper nutrition. We provide the cleaning for all the residences so we can maintain proper cleaning and sterilization protocols. We have an onsite clinic. It is a full clinic and it is staffed by doctors. um and so we conduct almost continuous testing at site as well and we use a molecular test there when our employees return from their breaks all of them go to chihuahua and they stay in a hotel for one night they are tested When we receive the results, those that test positive, and we do have employees and contractors that test positive every rotation, are returned home. The others are then taken to site. So far, this has been very effective. And most recently, we have now been able to establish a molecular test at site. And that has allowed us to test employees from local communities that work at the site as well. But we also recognized early on that we needed to proactively work with all the local communities on prevention protocols for COVID-19. And we have been doing that since March of this year, and that's helped us to reduce what could have been a much higher infection rate in the local communities. So far, we've been able to keep COVID-19 out of several Scotts. That's perfect. That's it for me. Thanks. Thanks. And looking forward to tracking the ramp up in Ferguson, Florida. Thanks, Mark.
spk00: Again, if anybody else would like to ask a question, please press star 1 on your telephone keypad. Again, that would be star 1 on your telephone keypad. At this time, I have no further questions in queue. I turn the call back over to the presenters for closing remarks.
spk01: Well, if there are no further questions, thank you very much. We're looking forward to 2021 and speaking with you again regarding our year-end results. Thank you. Thank you. Thank you. Bye.
spk00: Thank you, everyone. This will conclude today's conference call. You may now disconnect.
Disclaimer