Gatos Silver, Inc.

Q4 2020 Earnings Conference Call

3/29/2021

spk00: Ladies and gentlemen, thank you for standing by and welcome to Colorado Silver Q4 and year-end 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, simply press star and the number one on your telephone keypad. If you require any further assistance at all, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Stephen Orr, CEO. Please go ahead.
spk01: Thank you. I'd like to welcome everyone to Gato Silver's year-end and Q4 2020 earnings call. Before I get started, I just want to remind participants on this call that I will be making forward-looking statements with regard to future events. And by their very nature, they're subject to some degree of variability. So turning to slide number three, Our initial public offering in October of 2020 raised $173 million of proceeds to continue adding value to Gato Silver's Cerro Los Gatos mine and the Los Gatos district. In March, we completed the purchase of 18.5% additional interest in the Los Gatos district, and we now are 70% owner of the entire district. And we're now turning our attention to district scale resource growth potential. Gotcha Silver has the second largest mineral rights package of our in-production peers at 103,000 contiguous hectares. The package spans a distance of about 60 kilometers along the mineralized trend. And we've reactivated drilling at Cerro Los Gatos and are 100% owned Santa Valeria project and soon at Esther, which is the zone that's closest to Cerro Los Gatos. And I'll speak more on that later in this presentation. But we're not just an exploration company. We've demonstrated that we know how to build and operate mines. And Cerro Los Gatos was built on time and below budget. And we capitalized it properly, knowing that we're not just building a mine, but we're developing an entire district. And we think this has already paid dividends. The processing plant is operating at its 2,500 ton per day design rate. And as of January, the underground mine achieved its 2,500 ton per day design rate. So we believe the commissioning has gone quite well given the challenges Dr. Silver has had to prevent the COVID-19 outbreak at the Cerro Los Gatos mine. Turning to slide number four, we devote a significant amount of attention to environmental, social, and governance factors at Los Gatos and have recognized its importance for the last 10 years. All of our achievements would not have been possible without the support of the regional government, regulatory agencies, and surrounding communities. And we recognize that it's 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 not only from employment opportunities, but also through educational assistance, medical care support, and provision of sustainable clean water. And we're very proud of our safety record at the mine. Through Q1 of 2021, our lost time injury frequency was zero. Over 99% of our employees reside in Mexico and 60% of them reside in Chihuahua State. This devotion to improving the lives of those impacted by our project has been recognized by the Mexican government and local communities, and we have never had any opposition to the project. Turning to slide five, this is a summary of our performance during 2020. Given the challenges of COVID-19 management, we were relatively pleased with Sara Lozcada's performance last year. And I'll speak more about this performance in detail later in the presentation. Turning to slide six. Despite interruption by Mexico's government mandated suspension for COVID-19 during April and a portion of May last year, we did achieve record production of 652,739 war tons. We also achieved record silver, zinc, and lead recoveries through the processing plant, and the third and fourth quarters of 2020 were profitable. Key to this achievement was effective COVID-19 management at the Cerro Los Gatos project. All of this positioned the company to take advantage of increasing investor interest in silver and silver equities and allowed us to successfully complete an initial public offering in late October of 2020. Turning to slide seven, this covers the 2020 mine operations. This is a fully mechanized mine that uses long-haul scoping and mechanized cut and fill mining methods. Following the COVID-19 mine suspension in April and May, We increased the mine production rate at a more moderate rate to ensure that we could maintain COVID-19 prevention protocols. Irrespective, we achieved our 2,500 ton per day design target in January of this year. As we increase the units in terms of more tons and metal ounces and pounds, the unit costs are getting closer to those expected in the feasibility study. Slide eight, the standout performance came from our processing plant. This plant is fully instrumented with an on-stream analyzer that is monitoring silver, lead, and zinc recovery in real time during the concentrate production. And it will automatically adjust reagent addition to adjust to the changing conditions to maximize recovery. I call your attention to the table in the right-hand side of this chart. This shows the improvement of our metal recoveries over the four quarters of 2020. The silver recovery now exceeds the expected recovery from the feasibility study. Zinc recovery has achieved our expectations and lead recovery also now has exceeded expectations. I would now like to introduce Roger Johnson, our Chief Financial Officer, to present our 2020 financial results. Thank you, Steve. I am on slide nine. For 2020, our loss from continuing operations was $35 million, or 80 cents per share. You can see from this information that half of the loss was from the equity loss in the Los Gatos Joint Venture. Adam will discuss the Los Gatos Joint Venture results in a moment. As Steve mentioned, the Los Gatos Joint Venture was profitable in the third and fourth quarters of 2020, so I expect income in the LGJB for 2021. As for our operating expenses, as we discussed in our recent Investor Day presentation, exploration of the Los Gatos district is increasing. In addition, we spent a modest $800,000 in 2020 for the non-Los Gatos Joint Venture activities at East Santa Valeria and for maintaining an exploration staff. Our general administrative expenses were almost $8 million in 2020, as we have higher costs associated with becoming a public company. These include legal consulting costs, additional personnel we've added, higher directors' fees and stock compensation, and higher insurance costs. The arrangement fees you see here are similar to interest costs, and they relate to DOA-provided loans in the Los Gatos Joint Venture. A substantial portion of such fees will no longer be incurred with the repayment of the working capital facility that we announced earlier this month. The interest expense you see here was for a convertible note provided by our majority shareholder, Electron. This note was converted to equity as part of our IPO, and therefore the cost is non-returning. With that, I'll turn it over to Adam.
spk02: Thank you, Roger. I'll direct everyone's attention to slide 10 of the presentation, and I'll be covering the Los Gatos Joint Venture financial results. Here we have the table for the financial results for the year into 2020, and it's important to note that this is on a 100% basis. Throughout 2020, Gato's silver share of these operating results was 51.5%. During the fourth quarter of 2020, this was our second consecutive profitable year with $2.9 million of income at the Los Gatos Touring Venture. We had $121.5 million of sales for the year into 2020. This was comprised of approximately 21,000 tons of lead concentrate at average grades of nearly 5,300 grams per tonne silver and nearly 59% lead. This also included near 28,000 tons of zinc concentrate at average grades of 619 grams per tonne silver and 55.6% zinc. The average metal prices realized during the year were nearly $20 per ounce silver and about $1.03 zinc, which are the two primary payable metals of this operation. Turning to operating expenses of $126 million for the year end of 2020. This is primarily consisted of $65 million in cost of sales, $45 million in depreciation, depletion, and amortization, nearly $10 million of G&A expenses, $3.4 million of non-recurring costs related to the COVID-19 shutdown in April and May of 2020, $2.1 million of royalty expenses, and a small component of just under $1 million for exploration expenses during the year. Exploration expenses were reinitiated in earnest in December when we commenced the CLG definitional drilling program as previously announced in prior press releases. Other expenses in the year consisted of about $12.5 million of interest expense, nearly $9 million of non-cash arrangement fee expenses, and about a $1 million foreign exchange loss. Altogether, this resulted in a net loss for the period of about $27.7 million for the Los Gatos Joint Venture, again, on a 100% basis. With that, I will turn it over to Steve Orr for our next slide.
spk01: So turning to slide number 11. 2021 will be a year of optimization at the Los Gatos project. We'll be doing a number of sustaining capital projects to improve Cerro Los Gatos efficiency and ability to sustain its production targets. We'll be building a paste backfill plant to replace the cemented rock fill backfill that's currently used. The Pace fill plant will directly inject tailings into open voids in the mine, providing a stronger fill product, reducing the amount of tailings placed in the surface tailings impoundment by about 50% and increasing the truck haulage capacity for more ore. We'll also be adding another lift to the tailings impoundment. The construction of the Pace backfill plant will meaningfully reduce the frequency of additional lifts on this facility in the future. The mine has a high geothermal gradient, which is not uncommon in underground mines. Last summer, we commissioned the first surface refrigeration plant for the northwest zone of the Sierra Loja Scottish deposit. The intake air during the warmer seasons is chilled to maintain a comfortable ambient air temperature in the mine environment. It has proved its efficacy in the northwest zone, and we will now build a second plant for the central zone. And by the way, these are the first surface refrigeration plants installed at an underground mine in Mexico. As previously released, we expect to produce between 7.5 and 7.9 million ounces of silver in 2021, and between 4.5 and 5,000 ounces of gold, between 40 and 42 million pounds of lead, and 49 and to 52 million pounds in zinc, and an all-in sustaining cost of between $17 to $70.50 per silver ounce. This guidance is conservative, and it assumes we will be maintaining all our COVID-19 prevention protocols throughout 2021, which does not hinder the productivity in the mine and increase our costs. All employees continue to be tested when they return from their break for their 20-day work rotation. And we still consistently have employees test positive. Those that test positive return home before coming to site, and we somehow have to cover for their absence. While these stringent prevention protocols hinder productivity and increase costs, they've allowed us to continue operations And we have never had a COVID-19 outbreak at Cerro Los Gatos. Turning to slide number 12. In terms of exploration, and you see on this map, the outline of the intersecting rectangles shows our 103,000 contiguous hectares mineral rights. And of course, The dark purple oval with the red star is the Cerro Los Gatos deposit. Well, we currently have three active drills. Two are on the southeast extension of the deposit and one on the northwest extension. The objective of this program is to convert the current 3.7 million tons of inferred resource to measured and indicated. And we believe we'll do that, and we believe we'll add more inferred because the deposit is still open along Stripe. A fourth drill is active at Gato Silver's 100%-owned Santa Valeria project, which is depicted in a lighter color just outside of the Los Gatos mineral rights package. And last week, we received permit approval to begin drilling at Esther, and we'll be mobilizing a fifth drill to Los Gatos dedicated to a definition-style program to expand the Esther resource quantity and quality. The objective is to define a large enough measured and indicated resource to complete an NI 43-101 compliant feasibility study. In retrospect, had we not proactively acquired every available mineral right when we first started exploration, we would not have had the good fortune to discover not just a deposit like Cerro Los Gatos, but an entire district that so far contains 14 separate discoveries. Gatosilver is a story about growth, and more importantly, organic growth. It is very rare for a resource company to control an entire district and even rarer to have discovered the district, built a mine, and just to be in the early stages of defining the vast riches in this district. We've only explored 15% of this massive land package. Turning to slide 13. We consider ourselves extremely fortunate to have accomplished an IPO that raised 172.5 million in proceeds and resulted in the largest precious metals financing on the New York Stock Exchange and the Toronto Stock Exchange in 2020. We also have some of the most respected institutional funds in the finance sector as our shareholders. The market understands what a unique asset the Los Gatos District is, and we understand our obligation to continue delivering value. We've been able to discover and develop this district in the span of 10 years, and in resource development terms, that's a relatively short period. Every decision this management team, our board of directors, and our joint venture partner, DOA, make is done through the lens of ensuring that we build an enduring silver and zinc district for the future. There's complete strategic alignment between DOA and Gata Silver to ensure this district continues to increase its mineral resources and metal production for decades. And that completes my presentation at this time. We're available to take any 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 just wait a moment to compile a Q&A roster. I do have a question from Doug Groh from Sprout Asset Management. Your line is open.
spk03: Thank you, Operator, and thank you, folks, for the presentation today. I have a question with regard to how you look at your operating costs relative to your various metals that you produce. You're indicating an all-in sustaining cost of $17 to $17.50 for gold, and I believe that's on a byproduct basis. Would you have that on a – I'm sorry, for silver, $17.50 for silver – Would you have that on a silver equivalent basis as well?
spk01: Thanks, Doug. I'm going to turn that over to Roger Johnson to answer. Yeah, Doug, we do have that available. I can get that to you. I don't have that right off the top of my head, but I can send that to you, Doug.
spk03: Okay, that's fine. I'm going back to a presentation you had earlier in the month of March. I think it was at the BMO conference. I believe it's on page 20. You profiled production, production costs, as well as free cash flow profile for the Los Gatos technical report on a 100% basis. And I believe you indicated that you're expecting to produce about 7.2 million ounces of silver in 2021. And I believe it's about 5.5 million ounces of silver equivalent from your lead and zinc. Is that correct?
spk01: Go ahead, Roger. Yeah, this is Roger again. Doug, the numbers that you are referring to, yes, those were the numbers that were in the technical report. As you can tell from the numbers that we are now providing as guidance now, these numbers are lower based upon where we are with the mine plan and the dewatering matters that we've been addressing.
spk03: Okay. And then I believe in this presentation you indicated a – silver operating cost on an equivalent basis of about $14 an ounce. I think that's from the technical report. So I guess where my question is going is, how are the costs tracking with regard to the technical report? Are they higher? Are they lower? What are you finding?
spk01: So, Doug, I'll answer that question. Great. Yeah. So the costs are higher. And the ramp up has been slower than we anticipated in large part due to COVID-19 management efforts. What we've seen on the ground in terms of COVID-19 impact in Mexico has been dramatically different than what has been reported. By the end of 2020, we were having between 40 and 50 employees test positive every rotation. And when those kind of numbers are testing positive, it has an adverse impact on the productivity of the site. And interestingly enough, I see there's a media release today that Mexico has admitted to underreporting by over 60%. the number of deaths in Mexico, and that the deaths are actually closer to 312,000 and the second highest in the world, just behind the United States, but even higher than Brazil. And that's a country that has a population of 127 million people. So it is a very serious issue down there. And when we put together our guidance for 2021, We did so with the assumption that we are going to have to maintain the stringent protocols and we're going to have to deal with this all through 2021. We clearly hope that is not the case. But we have no basis to assume it will be anything different than that. So accordingly, you see a much more moderated guidance just because this is what we think we're going to be dealing with.
spk03: So do you have, Steve, do you have an estimate in terms of the COVID cost for 2021 approximately based on, you know, last year?
spk01: Yes. Steve, can I take that one? Yeah, absolutely. Sure. So going back to the per ounce, it's about $0.50 per silver equivalent ounce, if you want to look at it in that fashion. Yeah.
spk03: OK.
spk01: So just on testing alone, we do molecular testing. We have our own clinic at site. And of course, our employees are tested prior to them stepping on site. The testing cost us last year about $5 million. Okay.
spk03: I did a quick calculation on your 50 cents per ounce, and, Roger, I guess that's about $5 million, right?
spk01: Yeah. Between $5 and $6 million.
spk03: Okay. And then, sorry to take all this time here, but Do you expect to have free cash flow this year in about how much?
spk01: Yeah. This is Roger. Let me take that to Steve, and then you can jump in if you need to. So we're not projecting cash flow as being part of our guidance. As you can see, we haven't published it, but I can give you a little help on that. We do expect to generate enough cash flow to make all of our debt payments. There are some pretty significant debt payments with our term loan that's out there. We also need to make some reductions in our vendor accounts. And we'll then be able to establish amounts that need to go into the reserve matters for these term loans as well. And you've got our capital estimates and our production cost numbers, which you've been talking about. So you can probably calculate pretty closely what the cash flow is going to be. And we've also talked to you about the pandemic costs that we've got built into that. But if you wanted to put into the cash flow, say, maybe a $10 million number for paying down our vendors as well, that's probably the only number you can't calculate from what we've got. That'll give you an idea. And that you should be able to come up with that, yeah, will be cash flow positive even after we make debt payments.
spk03: Okay, great.
spk01: So, Doug, just further to that, we are cash flow positive. The problem is that with the conditions of the debt facility and the cash sweep component of that, there won't be any dividend that comes out of the joint venture for a few years.
spk03: Okay, thank you.
spk00: Again, if anybody has a question, please press star 1 on your telephone keypad. Press star 1 on your telephone keypad. I have no further questions at this time.
spk01: OK, operator. Well, thank you very much. I'd like to thank everybody on the call for your time today. And this completes our presentation.
spk00: Thank you, everyone, for joining us today. This will conclude today's conference call. You may now disconnect.
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