Gatos Silver Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 3 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Gatto Silver Second Quarter 2023 Results Conference Call. Presenting today will be Dale Andre, CEO of Gato Silver and Andre Van Niekerk, Chief Financial Officer. We will conclude today's session with a question and answer period, where other members of the Gato Silver management team will be available. For the duration of the presentation to prevent any background noise.

Operator

Turning your attention to Slide 2, please note Today's call contains forward looking statements. Various risks and uncertainties may cause actual results to vary. Gatto Silver does not assume the obligation to update any forward looking statements. I would now like to turn the call over to Dale Andres. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Turning to Slide 3, We continue to build on the foundation set last year. With strong liquidity throughout 2023, A $50,000,000 capital distribution was paid by the Los Gatos joint venture to its partners on July 20, of which Gatto Silver received $35,000,000 We received $9,000,000 or we used $9,000,000 of that to retire the outstanding balance of the revolving credit facility and GSI is now debt free with the full $50,000,000 available under the revolving From an operating perspective, the Los Gatos joint venture continued to perform well with a record mill throughput rate of over 2,900 tonnes per day. Our cost optimization initiatives contributed to offset the impact of the This quarter and continue to do both resource expansion drilling and greenfield exploration on our over 100,000 hectare land package in the Los Gatos District. We currently have 9 drill rigs and that's Len will talk about this a bit later, soon to be 10 working to extend mine life and unlock the district potential.

Speaker 1

Turning to Slide 4, this shows our continued strong operating performance at the Cerro Los Gatos mine. As expected in the mine plan, we mined lower silver grades during the Q2. We expect Silver feed grades will gradually decrease towards reserve grade over coming quarters and years as we move deeper in our deposit. Cerro Lindt Gatos had another record quarter of mill throughput in the second quarter and we are continuing our debottlenecking efforts in the mine with a focus on productivity and equipment efficiencies. We are also continuing to push down on operating costs At the same time, with a robust pipeline of continuous improvement and cost reduction initiatives.

Speaker 1

For our all in sustaining costs, we continue to expect to finish this year within guidance and for

Speaker 2

Andrew? Thank you, Daryl. Good morning, everyone. Slide 5 shows why we remain confident in this asset As it continues to generate consistent strong cash flow period over period. The LG JV generated $74,400,000 in cash flow from operations in the first half of twenty twenty three compared to $80,500,000 in the first half of twenty twenty two.

Speaker 2

With free cash flow of $48,400,000 for the first half of the year, an increase of 14% compared to the first half of twenty twenty two. Our rate of sustaining capital spending is now decreasing as the operation has settled into an optimization stage. With cash flow from investing activities dropping from $19,000,000 in Q2 2022 to $14,600,000 in Q2 of 2023. We expect sustaining capital expenditures of $45,000,000 for the full year, of which $21,000,000 was spent to date. In addition, exploration and capitalized resource development drilling is expected to be $3,000,000 $13,000,000 respectively, of which $1,100,000 $7,000,000 has been incurred today.

Speaker 2

Lower cash flow from operations during Q2 2023 was Our capital expenditures resulting in similar free cash flow of $19,700,000 versus $19,500,000 in Q2, 2020 The joint venture ended the quarter with approximately $83,000,000 of cash and cash equivalents and made a capital distribution of $50,000,000 to the JV Partners on July 20, of which Gatos received $35,000,000 Turning to the financial performance for the quarter, we will start with the results of the 70% earned LG JV. Revenues increased by 2% to $58,300,000 The increase in revenue is primarily due to a lower provisional revenue adjustment and a 19% increase in the realized solar price. The increase was partly offset by a 13%, 10% and 19% decrease in volume of silver, zinc and late salt. In addition, the realized zinc price dropped by 50%. Cost of sales decreased by 7% primarily as a result of the decrease in volume of concentrate sold in the period and continued cost reduction initiatives, which offset the impact of the strengthening peso against the U.

Speaker 2

S. Dollar and other cost inflationary pressures. Depreciation, depletion and amortization expense was higher than in Q2 2022, primarily due to higher tonnes mined and the additional depreciation charge of capital projects completed in late 2022 early 2023. Income tax expense increased by $2,900,000 primarily due to an increase in non cash deferred tax expense, partially offset by a decrease in current income tax expense. Overall, the LTJV I had net income of approximately $750,000 in Q2 2023 compared to $3,400,000 in Q2 2022.

Speaker 2

The change in net income was primarily due to increases in DD and A and income tax expense, partially offset by decreases in royalties, Exploration expense, again on foreign exchange and an increase in interest income. Turning to the financial results for Gato Silver on Slide 7. For the quarter ended June 30, 2022, Gato Silver recorded A net loss of $3,600,000 or $0.05 per share compared to net income of $5,200,000 or $0.08 per share for the quarter ended June 30, 2022, mainly due to the decrease in equity income in affiliates. Equity income and affiliates decreased primarily as a result of the lower net income recorded at the joint venture. In addition, corporate G and A was approximately $1,900,000 higher in Q2 2023 compared to Q2 2022, primarily due to non recurring audit and consulting fees related to the restatement of financial statements as well as higher legal defense costs.

Speaker 2

Looking at our balance sheets and liquidity on Slide 8, The LG JV continued to generate strong cash flow during the first half of the year, generating approximately $74,000,000 in cash flow from operations and $48,400,000 in free cash flow during the first half of the year. The LG JV ended the quarter with a cash balance of approximately $83,000,000 As previously mentioned, on July 20, the LG JV paid a $50,000,000 capital distribution to its partners, Gatos Silver and Doha, of which we received $35,000,000 After the capital distribution, the LGJV remained well capitalized with approximately $30,000,000 of cash. Coto Silver ended the quarter with a cash balance of $9,100,000 $9,000,000 outstanding on its revolving credit facility. After the end of the quarter, the company used $9,000,000 of the $0.35 capital distribution, received to pay off the full outstanding balance of Credit Facility on July 21, 2023. Kato Silver is debt free with approximately $36,000,000 in cash at July 31, 2023.

Speaker 2

The company and the LGJV are well positioned to continue to execute on growth opportunities. As shown on Slide 9, we're on track to meet previously announced production and cost guidance.

Speaker 1

As per

Speaker 2

the mine plan, we expect the silver to be higher in the first half of the year and lower in the second half of the year as a result of lower grade scheduled to be mined in the second half of the We still expect full year Coca product all in sustaining cost per ounce to be within the 15 $1.50 $17.50 per silver equivalent ounce range and between $11 $13 per silver ounce on a by product basis. We are also on track to meet our sustaining capital guidance of $45,000,000 for 2023. In addition to the $13,000,000 which we anticipate spending on resource development drilling on the Southeast Deep Sand this year. I will now hand it back to Dale to tell you more about the life of mine and exploration upside of the CLG.

Speaker 1

Thanks, Andre. And turning to Slide 10, I want to talk about some of our exciting growth potential. And this slide shows a long section through our deposit. We currently have 5 surface drill rigs and 3 underground rigs actively drilling at the mine and that's targeting up to add up to 6 years to the mine life by mid-twenty 24. Our first stage of this life extension is a new life of mine And reserve incorporating recent resource conversion drilling that we're on track to complete before the end of this current quarter in Q3.

Speaker 1

We also plan to report an initial resource for the Southeast Deeps area as part of this update. The 5 surface rigs that we have on the Southeast Deeps are infilling to about 50 meter spacing with the objective of converting this to the reserve to a reserve status for our 2024 minutee plan update. Our plan is to have the drilling Q1 of next year and that subsequent update out in the second half of next year, targeting the Q3 again. Well, we are really pleased with the progress in and around the Cerro Los Gatos Mine, the biggest potential upside is our district. The joint venture holds a concession package that is roughly 50 kilometers by 40 kilometers and extends, We currently have more than 50 individual prospects identified with 1 drill active at the current time on the near mine Santa Ana target.

Speaker 1

And as I said previously, we plan to mobilize a 7th surface drill rig next year and we're continuing our detailed mapping of the district, which will help to generate further targets as we progress. Turning to Slide 11. Looking forward to the catalysts for the remainder of the year, we will continue to drive productivity improvements and cost optimization. And as mentioned earlier by Andre and myself, we are debt free. I just want to repeat that.

Speaker 1

We are debt free and GSI has a strong cash balance of $36,000,000 with $50,000,000 available under our revolving credit facility. We expect to continue to receive regular cash distributions from the Los We remain focused on extending the mine life and we are on target to issue our updated mineral resource reserve and resource estimate before the end of this current quarter. And that will hopefully provide further clarity on the enormous potential of this asset. And we are very excited to accelerate our drilling in the large and highly prospective Los Gatos district later this year and into next year And that's going to have a near mine focus to start. I'll now hand it back over to the operator for questions.

Operator

Sir Andres, I turn the call back over to you.

Speaker 1

Thank you, and we look And further to that, on our Q3 and Q4 performance as we progress throughout the year. Thank you. Thank you very much.

Operator

This concludes today's conference call. You may

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