Amerigo Resources Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 5 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the AMERCO Resources Q2 2023 Earnings Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, August 3, 2023. I would now like to turn the conference over to Graham Farrell, Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator. Good afternoon, and welcome, everyone, to Amerigo's quarterly conference call to discuss the company's financial results for Q2 of 2023. We are delighted to have you join us today. This call will cover Amerigo's financial and operating results for the Q2 ended June 30, 2023. Following our prepared remarks, we will open the conference call to a question and answer session.

Speaker 1

The call today will be led by Amerigo's Chief Executive Officer, Aurora Davidson along with the company's Chief Financial Officer, Carmen Amezquita. Before we begin with our formal remarks, I would like to remind everyone that some of the statements on this conference call may be forward looking statements. Forward looking statements may include, but are not necessarily limited to financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested by any forward looking statements due to a variety of factors, which are discussed in detail in our SEDAR filings.

Speaker 1

I will now hand the call over to Aurora Davidson. Please go ahead, Aurora.

Speaker 2

Thank you, Graham. Welcome to Americas earnings call for the Q2 of 2023. I have spoken frequently about how important It is for MBC to have achieved operational consistency over the last 3 years. A consistent operation leads to predictable cash flows and market trust. Through most through almost the end of June, MVC had maintained that consistency.

Speaker 2

So it was very significant for us when a climatic event cut off MVC's connection to Chile's Central Power Grid on June 23. Today, I'm happy to report that after resuming normal operations on July 22, our production results have continued to be on track. I am confident our revised guidance should be met or surpassed this year. While preparing my remarks for today's call, I reflected on the fact that this was an initial call, almost a stunning contrast. In the Q2, we saw production weakness versus the continued strength and robust nature of Americas' capital return strategy.

Speaker 2

And we saw the stark comparison of our routine annual maintenance shutdown with a brilliantly planned and executed emergency repair effort. If you haven't seen the 2 videos where we provided market updates on the flooding event and the project to reconnect us to the central power grid, I invite you to watch them. They are available on our website and the images will give you a much better idea of the challenge we faced and how it was resolved. Amerigo's 3 new releases on this subject cannot convey the message like the videos. Despite our comprehensive prior disclosures, I would like to discuss 4 critical points about this operational disruption.

Speaker 2

The first point is that it will only impact our second and third quarter results. MVC has operated at full capacity with no further problems since July 22. However, we did reduce our annual copper production guidance by 3% to £60,500,000 of copper due to the lost production from the flooding. We also incurred higher than normal costs from a secondary power source that enabled us to process fresh tailings while the repairs were being made, and there was additional and some CapEx from the reconnection project. The second point is that the disruption had no lasting effect on Americas long term business and did not affect the company's capital return strategy.

Speaker 2

This week, the Board of Directors declared our regular quarterly dividend of CAD0.03 per share. This is our 8th consecutive dividend. The third point is that we came out of this crisis stronger. We took the opportunity to change our infrastructure to have more protection in the future. This extra protection was part of the increased unplanned CapEx that was money well spent.

Speaker 2

My 4th and final comment is that this crisis provided shareholders with a front row view of how strong a team we have at NDC. This team did extraordinarily from sourcing the materials to managing the project. They also work night and day to reconnect to the power grid as quickly as possible, minimizing lost production. This is significant because the strength of the MVC plant and operations are the cornerstone of Americas' capital return strategy. Now let me provide you with some specifics of our 2nd quarter results.

Speaker 2

Carmen Amezquita, our CFO, will provide more detail in her financial update. We knew ahead of time that the Q2 would be the lowest production Quarter of the year due to the 8 day annual plant maintenance shutdown at MVC. The floss added 8 days of additional loss production in the quarter. Those additional days account for the 9% decline in copper production compared to the Q2 of 20 The copper price was weaker than in the previous quarter, which also affected financial results. The copper price was $3.80 per pound, down from $4.02 per pound in Q1, resulting in $2,700,000 in final settlement adjustments recognized in the quarter as the final prices for Q1 became known.

Speaker 2

This resulted in a financial net loss of CAD 3,800,000 or CAD 0.02 per share for the quarter, CAD 0.03 net loss per share. During the quarter, our cash decreased by $12,300,000 The three main reasons were CapEx payment of $4,800,000 dividend payments of BRL 3,700,000 and our semiannual debt repayment of BRL 3,500,000. Our net cash position, that is cash minus bank debt, is $16,200,000 As I have said previously, we will not return capital to shareholders at the expense of the required CapEx we need to have at MVC. This month, we will complete a significant CapEx project, a new sample processing historical tailings in Galquenes. This sample will operate for 3 to 3.5 years.

Speaker 2

The purchase of a standby power transformer, a significant risk mitigation CapEx project is also progressing. We expect this transformer to be installed during MVC's 2024 annual maintenance shutdown. Here is a brief update of the continuing success of Amerigo's capital return strategy. As you know, the cornerstone of our strategies are regular quarterly dividend. Consistent dividends provide a big incentive for investors to buy and hold our stock.

Speaker 2

The regularity and safety of the dividend with the current yield of 7.4% are paramount to Amerigo. Since October 2021, when Amerigo's capital return strategy was launched, Amerigo has paid a cumulative dividend of CAD0.20 per share. The quarterly dividend has also been raised once by 50% from CAD0.02 to CAD0.03 per share. During the same period, Amerigo repurchased 20,100,000 shares, more than 11% of the issued and outstanding shares when the strategy was initiated. Under the strategy, the company has paid $25,900,000 in dividends and used CAD 23,700,000 to repurchase shares, a total of CAD 49,600,000 with a capital allocation ratio of 52% dividends and 48% buybacks.

Speaker 2

I will conclude my comments with the outlook for copper. Currently, global copper inventories remain remarkably low. The most recent LME warehouse stock is 75,000 tonnes compared to 89,000 at start of the year and 130,000 tonnes a year ago today. Despite the negative to catastrophic tone of economic headline news, copper prices this year found a shortlist floor of $3.60 per pound, which was much better than in 2022. The $3.64 has been followed by rights up to over $3.95 per pound, filing subsequent floors at $3.70 and then $3.80 per pound.

Speaker 2

While we continue to see a wide range of short term copper price forecasts, What we know for sure is that copper producers continue to struggle to sustain supply and are selling all the copper they produce. The demand for copper is real and more substantial than headline economic data would let us believe, but short term economic noise persists and spot copper prices react. However, the positive consensus on the medium and long term price outlook continues because projected demand will grow faster and sooner than new supply can be developed. This points to higher copper prices. My outlook for Amerigo continues to be very optimistic.

Speaker 2

My already positive assessment of our operation and team was further strengthened by the response to the flooding crisis. We continue to have a robust copper demand and supply outlook, and we have a unique long term operation ideally positioned to benefit from these favorable conditions. I believe Amerigo continues to represent its amended value proposition for new and existing shareholders. I will ask Carmen to discuss the company's 2nd quarter financial results now. Carmen, please go ahead.

Speaker 2

Thank you, Aurora. Now I will present the Q2 2023 quarterly financial report from Amerigo and its MVC operation in Chile. In the Q2 of 2023, Amerigo had a net loss of 3,800,000 Loss per share of CAD 0.02 or CAD 0.03 EBITDA of CAD 1,700,000 and operating cash before changes in noncash working capital of negative $2,300,000 We expected Amerigo's financial results this down on June 23, 2023, resulting in £1,300,000 of lost copper production. They bought production 9% lower than in Q2 2022, representing $3,200,000 in lost copper tolling revenue in the quarter. Earnings were also affected by a lower average copper price of $3.80 per pound compared to $4.10 per pound in the comparative quarter and from lower realized copper prices for Q1 sales in Q2, which resulted in $2,700,000 in final price settlement adjustments given our M plus 3 price convention for copper sales.

Speaker 2

Copper tolling revenue in Q2 2023 was $32,000,000 compared to $33,600,000 in the comparative quarter. Moly revenue was stronger this quarter at $2,900,000 compared to $2,200,000 due to higher molybdenum production and stronger prices. Our total production costs, including depreciation, were $35,300,000 compared to $32,000,000 in Q2 2022. We newly prepared the 2023 budget and provided cost guidance that power costs would be higher in 2023 due to contractual inflationary adjustments to the base power tariffs and higher pass through charges from the Chilean power grid. Actual pass through charges, however, have been higher than expected.

Speaker 2

Another factor impacting our costs has been the stronger Chilean peso. However, the increase in costs coming from a stronger peso is within the sensitivities we shared in our initial guidance for 2023. Under other expenses in Q2 2023, general and administrative expenses were consistent with Q2 2022 at $1,000,000 with $500,000 in salaries, management and professional fees, dollars 300,000 in share based payment compensation and $300,000 in office and general expenses. We also reported other gains of $800,000 in Q2 2023 compared to other losses of $2,900,000 in the comparative quarter, which relate almost entirely to foreign exchange. Amerigo's foreign exchange gains and losses are mainly unrealized and come from mark to market foreign exchange rate adjustments for amounts held in MVC denominated in Chilean pesos.

Speaker 2

The derivative to related parties was a $300,000 recovery compared to a $800,000 recovery in Q2 2022. This comes from changes in the discount rates used to calculate the derivatives The company's finance expense in Q2 2023 was $400,000 compared to $300,000 in Q2 2022. In Q2 2023, the company recognized an income tax expense of $200,000 compared to $3,300,000 in the comparative quarter. Moving on to a brief review of cash costs. Americas cash cost in Q2 was $2.37 per pound.

Speaker 2

This was higher than expected due to the lower production in the quarter from the effects of the Up to the end of May, our cash cost was $2.09 per pound, below our original guidance of $2.14 per pound. We have updated our cash cost guidance in our latest MD and A. Based on the lower production and higher power costs From using a secondary power source in July, we expect the 2023 cash cost to be $2.27 per pound. Moving on to the balance sheet. On June 30, 2023, the company had cash of $31,700,000 restricted cash of $4,200,000 and a working capital deficiency of $4,900,000 There was a net decrease in cash of $12,300,000 in the quarter as the net cash generated from operating activities was lower than the cash used in financing and investing activities.

Speaker 2

The most significant use of cash in the quarter was for financing activities for the following items in order of magnitude: $3,700,000 to pay the quarterly dividend, dollars 3,500,000 on MVC's semi annual debt payment, $1,700,000 for the final lease payments at MVC and $800,000 on the share repurchases. Of this, the only item that is recurring every quarter is the dividend payment. On CapEx, we used $4,800,000 in the quarter. As we have stated before, 2023 is a CapEx intensive year at MVC due to the constructing a new sump in Cauquenes and Purchasing a Standby Power Transformer at MVC. As a final comment, we reported a provisional price of $3.80 per pound for our Q2 sales.

Speaker 2

The final settlement prices will be the average LME prices for July, August September 2023. A 10% increase or decrease from the $3.80 per pound provisional price would result in a $5,200,000 change in revenue in Q3 2023 regarding Q2 2023 production. We know now the July price, which was $3.83 per pound. We will report the Q3 2023 financial results Early in November 2023, I want to thank you for your continued interest in the company. We will now take questions from call participants.

Operator

Questions will be taken in the order received. Your first question is from Steve Theravani from Sidoti. Please ask your question.

Speaker 3

Thanks. Good afternoon, Aurora, Carmen. Given the damage from the flooding and then The efforts to restart, did that have to did that result in any raised 2023 CapEx? Were there any long term investments needed for that process?

Speaker 2

Yes, it did. We included that in our MD and A. It's estimated that the CapEx for the reconnection is going to be $1,100,000

Speaker 3

And then expected would you expect higher than normal costs In 3Q, any idea what that might be?

Speaker 2

We are expecting higher cost in Q3, particularly in July. We had to face Higher power costs associated with the secondary power source. We have increased our guidance, as Carmen was saying from $2.14 per pound to $2.27 per pound annually as a result of the Various effects, Steve, lower production and higher power costs in the month of July.

Speaker 3

Okay. Makes sense. When I think about the CapEx projects outside of maintenance you conducted over the last few years, so much of it has been Derisking production, whether it had been water supply, the back standby transformer or protecting critical Structure which proved critical after this incident. How is this making you think about further investments in de risking production because Obviously, you can't protect against all catastrophes. But is there a lot more you want to do coming out of this?

Speaker 3

Or do you feel very good at where you are?

Speaker 2

I think we have made critical progress in the last 3 years. You follow us well, so you know that we basically improved our water at least in the short and medium term for us anyways. 2 other projects that are significant, One of them proved its value was essentially the flotation Protection that we installed in the water ancillary lines in Cauquenes. Right now, with the water that we have in Coligues, All of our lines are floating. If we haven't had that protection in place, we probably wouldn't be able to better sustain a similar flooding event in the future should it occur.

Speaker 2

And another project that Cameron mentioned is our standby power transformer. We have 2 power transformers in MVC, And we wanted to make sure that should one of those occur from damage, operational damage and needed to be repaired, We wouldn't have any hindrances to production. So we basically will have the new transformer arrive in Chile this month at the month of end of July, and it's going to be installed next year. And then we'll have a fantastic backup system where if one of our transformers goes down, we will be turned on in a matter of a few hours. So that's significant.

Speaker 2

I don't have a long list of additional derisking projects, but we maintain a critical view of what could go wrong and new risks continue to pop up. I mean, climatic risk is an example. So we're vigilant about that. And as I mentioned, should we identify another A project that needs to be financed to reduce operational risk in the future, we will do so.

Speaker 3

Great. That's helpful. I mean, you noted a variety of reasons to point to why share repurchases have been a little slower lately. Obviously, you had You lost some production. You had some additional costs, but how are you the balance sheet is still in great shape.

Speaker 3

How are you thinking with copper prices now back north $380,000,000 seemed to be at least temporarily at a more stable range. You got 4 months left on this buyback. How are you thinking about to put share repurchase at this point?

Speaker 2

Yes, that's a good question. Buying back shares is one of the tools of our capital return strategy, and we have used it a lot in the last If you look at our share buyback activity in 2023, which Just in case some people may not know that, we provide the monthly update on what we have done on the share buyback program on our website. So it's always up there for You can see that outside of the restrictions to buy shares during blackout periods, we were active in the 1st 4 months of the year. Copper prices during those 4 months were over $4 per pound. Then in May, the copper price receded to $3.73 and we were still buying back shares.

Speaker 2

We bought about 700,000 shares in May. And we went into the 2nd quarter blackout. We faced this operational disruption in MVC. And This disruption, as we have said, will affect the cash generated from operations. It had an effect in Q2.

Speaker 2

It will have an effect in Q3. So at current copper prices, we will take a pause and we will continue to monitor conditions to see when we go back to the NCIB. I know that it is tempting for shareholders to think that if the share price is lower than it has been, just buy as many shares as you can as fast as you can. But this is a balancing act, and we need to adjust our pace from time to time, and this is one of those times. This is a marathon, not a sprint.

Speaker 2

And so we're monitoring conditions, but we're not actively buying back shares just at this point in time.

Speaker 3

Great. Thanks, Aurora.

Operator

Thank you. Your next question is from Terry Fisher from CIBC. Please ask Hello,

Speaker 4

Aurora. Can you hear me?

Speaker 2

We can hear you.

Speaker 4

Super. Okay. Two questions. I'll table both of them. First is you talk about Transformers, but transformers don't generate electricity.

Speaker 4

So is this something I mean, if the link to the grid is down, it doesn't matter Whether you have a transformer or not, are we really talking about generators because you did have some on-site generators. So that's one question. My other question Is that I'm trying to follow the dates here, but the 8 day downtime for maintenance, I don't believe that that overlapped with the power problem, which I think was another 8 days. If that's correct, you were impacted for half of the oh, that's half of the month, not half of the quarter. I haven't done the numbers.

Speaker 4

All I can say is that it seems strange to me you're able to do as well as you did Compared to last year, the $32,000,000 revenue versus $33,600,000 when you had a lower copper price, okay, And lower production, and I would have thought that production would have been impacted even more than it was, 13.6 versus 14.9. So I'm just wondering how you're able to do that, whether you had stockpiled material or able to process or I don't know. I mean, I'm grateful, but just would like to understand it there.

Speaker 2

Yes. There's a very simple answer for that. There were higher settlement adjustments, Negative settlement adjustments in Q2 2022 than this year.

Speaker 4

Okay.

Speaker 2

So that is the difference in revenue. Also, if you're looking at total revenue, not just copper revenue, we had higher moly revenue. In the financials and the MD and A, there's a full breakdown Let's call it the gross copper revenue, the negative settlement adjustments and then the items that we deduct from our revenue, which are the royalties, TCRCs and transportation. So if you look, for example, at Q222, the total amount of settlement receivables that were negative were almost $8,000,000 So that's the difference in That basically didn't take the revenue last in the comparative quarter compared to this quarter.

Speaker 4

And what about the production? Why wouldn't it have been down more given how much downtime you had?

Speaker 2

We also had a maintenance shutdown last year in Q2. So essentially, we had our maintenance shutdown in both 2nd quarters. And in addition to that, we lost 8 years sorry, 8 days this quarter that we didn't lose in Q2 2022.

Speaker 4

Okay. That's fine. That explains that. Can you go back to the transformers then versus generators?

Speaker 2

The generators the generating units were impaired last year at the end of December. We're not using them. They're essentially not efficient units that operate in an unsustainable way. So it's very hard for us to produce power in a cost effective way to sell it back to the grid to use them. So those have been basically impaired, and we're not relying on them.

Speaker 2

They're going to be decommissioned as soon as of the period in which the authorities is giving us to basically bring them down. What we're installing is a power transformer. It has nothing to do with power supply. It's basically a transformer within the plan to operate our equipment. So we have 2 and we're going to have a third one.

Speaker 2

It's not a different platform.

Speaker 4

But if the tower was to fall down again and you were no longer connected to the grid, Having this additional transformer wouldn't really help.

Speaker 2

No, it wouldn't. No, it's not a generating unit. It is a transformer to transform the power that comes into Thank you, Terry.

Operator

Thank you. Your next question is from John Potani from Needham of America Capital Management. Please ask your question.

Speaker 4

Thank you. My question was already answered. Thank you for the prior calls. But let me just take the opportunity to Commend management for their superior handling of what is a major exogenous event.

Operator

There are no further questions at this time. Please proceed.

Speaker 2

Well, thank you for joining us at this call today. The recording of the call and a script will be available In the next few days, on the Amerigo website, we will address you again in November to discuss the Q3 financial results. And as usual, if you have any further questions about the company, please reach out to either Carmen, Graham or myself. We're always available to shareholders.

Operator

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.

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Key Takeaways

  • A climatic event on June 23 cut MVC’s connection to Chile’s grid, halting operations until July 22 and prompting a 3% reduction in full-year copper production guidance to 60,500 tonnes.
  • The Board declared a regular quarterly dividend of CAD 0.03 per share—Amerigo’s 8th consecutive payout—underscoring its commitment to a balanced capital return strategy.
  • Q2 results showed a net loss of CAD 3.8 million (CAD 0.02 per share), driven by a 9% drop in production, a weaker average copper price of USD 3.80/lb, and elevated power and repair costs.
  • Management raised its 2023 cash cost guidance to USD 2.27/lb (from USD 2.14/lb) due to lost production days and higher power expenses from a temporary secondary power source.
  • Amerigo remains optimistic on medium- and long-term copper fundamentals—marked by low LME stocks and strong demand—and has invested in de-risking projects like floating pipelines and a standby transformer for future resilience.
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Earnings Conference Call
Amerigo Resources Q2 2023
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