Fortuna Silver Mines Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 10, 2023

There are 9 speakers on the call.

Operator

Greetings, and welcome to the Fortuna Silver Second Quarter 2023 Financial and Operational Results Call. At this time, all participants are in a listen only mode and a question and answer session will follow the formal presentation. 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.

Operator

Sir, the floor is yours.

Speaker 1

Thank you, Avi. Good morning, ladies and gentlemen. I would like to welcome you to Fortuna Silver Mines' 2nd quarter 2023 financial and operational results conference call. Hosting the call today on behalf of Fortuna will be Jorge Alberto Granossa, President Chief Executive Officer, Luizarillo Reynosa, Chief Financial Officer Cesar Velasco, Chief Operating Officer, Latin America David Whittle, Chief Operating Officer, West Africa and Julien Baudron, Senior Vice President of Sustainability. Today's earnings call The financial figures contained in the presentation And discussed in today's call are presented in U.

Speaker 1

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 made in 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 31, 2022. The annual MD and A for the financial year ended December 31, 2022, and the interim MD and A for the Q2 In drawing a conclusion or making a forecast or projection as reflected in the forward looking information made in this call.

Speaker 1

These material factors or assumptions are also described in the company's annual information form for the financial year ended December 31, 20 The annual MD and A for the financial year ended December 31, 2022 and the interim MD and A for the Q2 of 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 Granosa, President, Chief Executive Officer and Co Founder of Fortuna.

Speaker 2

Thank you, Carlos. The highlights of the quarter is our 1st gold pour at the New Brazil Seguela mine for sure. This took place on May 24 as we pre released. Seguela was delivered on budget and slightly ahead of Schedule. Segue is a flagship asset for the company, adding high margin gold ounces for over a decade of mining to our portfolio.

Speaker 2

David Widdle, 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 start up hiccup here and there, things are advancing according to plan. And after a little over 2 years since the Roxgold acquisition and subsequent capital deployment towards the delivery of Seguela, We're ready to start harvesting the cash flows and benefits of the transaction. Our strategic expansion of the business into West Africa It's going to start paying off. We now have 2 operating mines in the region and starting in Q3, West Africa becomes our largest contributor to Free cash flow and our recent agreement to acquire Chesa Resources and the advanced exploration stage, the Ambasut project in Senegal, which is set to close in September, adds to our exciting regional exploration and growth pipeline.

Speaker 2

During the quarter, We had to contend with a couple of events that waited on the operational and financial results of the company for the period, which were pre released and discussed in our Q1 MD and A 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. Across Mexico, there have been generalized worker union demands for higher profit sharing, which have affected several mines. The more notable one probably being Newmont's Penasquito, which unfortunately has been on standby for 2 months now trying to resolve the issue. At our Yaramoko mine in Burkina Faso, we had to repair the Armtec tunnel At the entrance portal of the mine, closing access to the mine entrance for 27 days.

Speaker 2

Although this event at Yaramoko did not impact production, Which is tracking on the upper end of guidance for the year, it did generate standby charges of approximately 1,500,000 And at the Lindero mine in Argentina, our pit operations reached a peak in the movement of waste material during the quarter, reaching a stripping ratio of 2.7:one, which we expect to revert back to 1.1:one for Q3 and 0.7:one for Q4. Also bear in mind that over the next 18 months, we will be carrying out the first and final planned expansion of the leach pad at the Lindero mine. This is a $34,000,000 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 in when we report Q3 results.

Speaker 2

Taking into account the issues described before, our business managed to generate $9,500,000 of free cash flow from operations, $44,000,000 in net cash flow from operating activities, dollars 44,000,000 in adjusted EBITDA And a net operating income of $3,500,000 or $0.01 per share. Our consolidated all in sustaining cost is expected to have peaked in Q2 at $17.99 and to come down during Q3 and Q4 As the operational issues at San Jose and Yaramoko were successfully resolved in the Q2, 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 3rd quarter. Luis, our CFO, will expand on this. There is a general theme of margin compression over the last The years ago the mining industry and we, of course, have not been immune to this. And again, That is why assets like Seguela are pivotal to our portfolio.

Speaker 2

We expect Seguela to operate at an all in sustaining cost in the vicinity of So coming from Seguela in field 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 Yaramoko mine continues expanding mineralization and the producing Zone 55 All right, Bobby, to a point where we're planning for an interim reserves update before the end of the year, David Whittle will also be expanding on this In June, we had a fatal accident at the Cayllono mine involving 1 of our Conducting activities related to work at heights. This tragic accident comes as a blow At a time when the Caylloma 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 and learnings across the organization. So something like this does not ever repeat again.

Speaker 2

Subsequent to the quarter end, we published or 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. To this end, 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. Julien Baudran, Orchino Vice President of Exploration is here with us and can expand on the highlights of the report. Julien, you want to touch on the report, please?

Speaker 3

Yes. Thank you, Jorge. So for this report, This 5th report, sustainability report for the company, it includes an updated format To ease the access to ESG data, such as SaaS D, TCFD and GRI being our main ESG reporting framework. We also present this year standalone mini sustainability reports for each of Our operation. So you will be able to find our key performance per site.

Speaker 3

The report presents also a strong ESG governance system with a dedicated sustainability report, Sustainability Committee and also short term incentive based on ESG performance. The report gives also the detail of our 2022 performance On all the material ESG factors, so such as safety environment, biodiversity, What are human rights Waste Management and Human Capital? We will you will find also Commitment of the company to implement industry standard to manage sustainability related risk and opportunities, Mainly climate change our climate change position statement based on TCFD with the objective to disclose 2,030 GAG reduction target in the coming 6 months. We will have also some news from Cesar On this climate change matter. Other big commitment this year or last year was GISTM Telix Management, where we target a full compliance by 2027.

Speaker 3

This standard will warranty to minimize risk from tailings management and ensure the long term value of the company. Finally, the report presents the contribution to our house 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 our long term growth strategy and also how mining can And building a better world. Thank you.

Speaker 3

Back to you, Jorge.

Speaker 2

Thank you, Julian. Now we'll have our Chief Operating Officers take us through a review of the highlights for the region. So we can start with West Africa. David, you want to go ahead?

Speaker 4

Thanks, Jorge. Operations in West Africa continued their solid During the Q2 of 2023, the highlight being the completion of construction and the pouring of first gold at on May 24 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 Initial processing plant fee for commissioning was predominantly oxide ore from the upper 10 meters of mining of the Antenna pit. This section of the Antenna pit appeared to have been heavily depleted due to artisanal mining activities. They're not therefore not providing the initially expected grade.

Speaker 4

The nature of this oxide also 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 Seguela will be at the lower end of the guidance Current mill throughputs are exceeding nameplate capacity and our long term view of Seguela'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 completed and see in pit with Stage 2 and tenor pit grade control drilling underway.

Speaker 4

In the 2nd quarter, Seguela 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. Ore processed was 109,605 tons at 1.56 grams per ton with 4,023 ounces being poured. On July 18, The transformer feeding the SAG mill variable speed drive sales and a repair With overview of the original equipment, manufacturer was successfully undertaken. Unfortunately, 8 days of Production from the processing plant were lost with normal operations recommencing on July 26. In other activities, infill drilling at the Sunbird pit was completed in the beginning of the second quarter, which will allow for the conversion of insert material to reserve status and allow the Sunbird pit to be brought into the life of mine plans.

Speaker 4

As operations progress, the focus will turn to debottlenecking the current process plant, 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 were 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 arm Continue with the processing of surface stockpiles. As such, 144,202 tons of ore were processed That's an average grade of 6.51 grams per ton.

Speaker 4

Mining development continued Diamond Drilling is currently focusing on the lower eastern side of the 55 zone ore body, but we'll switch back to the western side in for Q3. A second diamond drill to further explore the western boundaries of the 55 zone is expected to be mobilized also in the Q3. Due to the increased grades encountered and the increase in mineable tons, It's now expected that Yaramoko will exceed the upper end of current guidance. Gold production for the first Half year was 55,439 ounces. ASIC for the 2nd quarter was $6.26 an ounce $15.64 an ounce for the first half of twenty twenty three, both at the lower end of guidance range.

Speaker 4

Safety and health of our employees is a key focus at our operations. Unfortunately, at Seguil, we 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 2nd quarter. Thank you. And back to you, Jorge.

Speaker 2

Thank you, David. We can move on to LATAM Cesar.

Speaker 5

Thank you, Jorge, and good morning to everyone. In the Q2 of 2023, consolidated silver and gold production at our Latin American operations was 1,260,000 ounces and 31,323 ounces, respectively, representing a decrease of 23.6% 16.7% when compared to the comparable period in 2022. The 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 Q2 was 800,000 tonnes of mineralized material With a stripping ratio of 2.69:one, which is aligned with the operations planned for the year of 1.17:one. Gold production in the quarter was 25,456 ounces.

Speaker 5

This is 12% lower when compared to the Q2 of 2022. But as mentioned, these decreases explained by lower head grades of mineralized Material plays on the leach pad are baked fully aligned with the mineral reserves and mining sequence for the period. Gold production for the 1st 6 months of 2023 totaled 50,714 ounces, Well in line to meet annual guidance. AISC 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 on key consumables and services and the lag on the depreciation of the Argentine peso. 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.

Speaker 5

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 operation's Carbon footprint by approximately 4,252 tonnes 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 Q4 of 2022, so everything is on track.

Speaker 5

Moving to Mexico. The San Jose mine produced 0,960,000 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 tonne, reflecting a 31% 30% decrease in production, respectively, when compared to the Q2 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 tonnes. This also had an impact on the mines preparation plan, Delaying access to higher grade stopes scheduled for a period as well as high absenteeism during the quarter. The operation has adjusted the mining plan and higher grade stops are expected to be mined in the upcoming months.

Speaker 5

Management has implemented a revised mining and processing plant 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 blockage 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 on 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 the standby charges derived from it. Moving down to Peru.

Speaker 5

In the quarter of 2023, the Caylloma mine produced 305,296 ounces of silver At an average head rate of 84 grams per tonne, a 14% increase in the comparable period in 2022. Production has benefited from higher head rate stopes at the lower levels of the Animas vein. Silver production for the first 6 months totaled 59,000 ounces, on track to achieve the upper end of annual guidance range. Zinc and lead production was £14,000,000 £10,200,000 at an average head rate of 5.18% And 3.72%, respectively. That's a 29% and 34% increase when compared to the Q2 of 2022.

Speaker 5

As mentioned before, the increase in production is the result of higher hit grade source from the lower levels at the Animas Bay. Zinc and lead production for the 1st 6 months totaled £27,100,000 19,700,000 respectively. AISC is tracking well to meet annual guidance range as the operation continues to deliver strong production at a lower cost. Back to you, Jorge.

Speaker 2

Thank you, Svekar. Luis, please go ahead.

Speaker 6

Yes. Thank you.

Speaker 7

So sales were $158,400,000

Speaker 6

in the quarter. That's a decrease of $9,500,000 compared to the prior year. The decrease was driven mainly by the lower metal 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, we're 31% 30% below the prior year. As a result, both of the 15 day stoppage And as Cesaro explained, the lower average production rates over effective days of production. Silver and gold prices were up 7% 6% compared to Q2 of 2022, but this positive effect was offset by a sharp drop in zinc prices of 31%.

Speaker 6

Our operating income was down $5,400,000 primarily as a So to lower sales and the $7,100,000 of non recurring expenses That we've mentioned, consisting of $3,500,000 of standby charges, dollars 2,800,000 related to new agreement with the workers union at San Jose and $1,000,000 fine at Yaramoko. Consolidated cash cost of sales per gold equivalent ounce was approximately $9.70 This is $80 above the prior year. The increase was the result of higher cost per ounce sold at San Jose related to Lower productivity rates and lower head grades 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 Our lower income tax in the quarter compared to Q2 of 20 22 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.

Speaker 6

After the aforementioned impacts and one time We recorded net income of $3,400,000 or $0.01 per share. With respect to our all in sustaining costs, we have disclosed $17.99 per gold equivalent ounce SOL, which represents an increase of $3.66 year over year. The increase is explained by the effect of the stoppage San Jose, as described before, and higher AISC at Lindero, driven primarily by higher sustained CapEx associated to Phase 2 of the leach pad Expansion and a peak in the planned stripping ratio for the 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 $44,200,000 compared to $47,400,000 in Q2 of 2022. Changes in working capital as per the cash flow statement were positive $2,700,000 It is worth noting this includes $4,400,000 of negative changes in working capital from Seguela consisting of inventory and payables, which we have excluded from our reported $9,500,000 of free cash flow from operations.

Speaker 6

This free cash flow from operations figure is after sustaining CapEx, brownfield exploration and corporate expenses. Cash used in investing activities as per the cash flow statement is $73,200,000 This consists of $35,600,000 of sustaining CapEx including brownfields, dollars 19,500,000 in construction and preproduction activities at Seguela, A $10,000,000 payment associated to First Gold at Feigela, dollars 3,400,000 of capitalized interest And $4,500,000 in costs related to the Chesa Resources transaction. At the end of the quarter, we still had approximately $9,400,000 of construction payables outstanding. Moving on to the balance sheet. We closed the quarter with a liquidity position of $98,000,000 Our revolving credit facility of $250,000,000 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 Sigueta construction, we maintain a strong liquidity position going into the second half of the year.

Speaker 6

Finally, our total net debt including the outstanding convertible debenture is $198,000,000 resulting

Speaker 2

Thank you, Carlos, for Q and A.

Speaker 1

Thank you, Jorge. We would now like to open the call to any questions that you may have.

Operator

Thank you. At this time, we will be conducting a question and answer

Speaker 6

Thank

Operator

you. Our first question is coming from Eric Windle with Bank of Nova Scotia. Your line is live.

Speaker 7

Great. Thanks for taking my question. To the Fortuna Obviously, great to see Seguela 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 grades tracking in terms of reconciliation and tons and when you think you might get to steady state there, I mean, Notwithstanding the transformer issue, that'd be great. Thanks.

Speaker 2

David, do you want to expand on that one?

Speaker 4

Yes, no problem. Yes, initially, as we touched on in the Discussion earlier, our grade 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 still got to do the reconciliation of the grade control drilling at Tansian, which is now being completed. That will probably still be a couple of weeks away.

Speaker 4

And the grade control drilling at the Stage 2 of Antenna that is currently underway.

Speaker 2

And to add a bit of color to that, we see The infill drilling at Antenna, which is the anchor for production this year and into the next one, the infill grid It's at a 10 meter drill spacing pretty much, so giving higher confidence for ore control. And we expect to report or Conciliation of production to reserves At the end of the Q3, no, with the results for this Q3. For the Q2, it was just a few initial weeks of production and getting the new balance, A process that went on in the 1st month of The Q3 in July, and as you can expect, the team is dealing with balancing weightometers, Beltwayers and stuff like that, which is normal with any commissioning process. 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 loan expectations, right?

Speaker 4

Yes. After those initial issues with the predominantly oxide ore, yes.

Speaker 7

Okay, great. Noah, super helpful. Thank you very much. I'll hop back in the queue.

Operator

Thank you. Our next question is coming from Don DeMarco with National Bank Financial. Your line is live.

Speaker 8

Thank you, operator. Good morning, Jorge and team. Guys, just following along The line of questioning in 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 Over the next 2 or 3 quarters?

Speaker 2

Yes. We will be reporting all in sustaining costs for the quarter. I mean, I think it will be reasonable to expect Those all in sustaining figures for the initial months of production I'm 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 have had to expose more Fresh ore than the original plan contemplated. We had to move faster into 2 shifts in the pit rather than just 1.

Speaker 2

So those things will have some bearing on the oil in Sustaining in the short term, for sure. But long term On the long term, I'm talking about at this stage, the next two quarters, I would expect we are tracking Within our guidance expectations. Yes. Luis, perhaps you want to expand anything on that?

Speaker 6

Just to provide a bit more visibility, I mean, that involves a cash cost per ounce In the range of $600 to $6.50 on average over the next couple of quarters, Depending, as Jorge just described, on some of the variability we might see as the mine continues So the mine plans continue to adapt. And ASIC, yes, it's we stick to our guidance of Around $1,000, dollars 10.50 per ounce for the second half of the year on average.

Speaker 8

Okay. Thank you for that. Just second question looking at the Chester acquisition. Clearly, this Provides an opportunity in your pipeline. We're looking ahead to the close of the transaction in September.

Speaker 8

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 Potential first pour or something. But what is the runway of, catalysts and milestones that you envision for this?

Speaker 2

Yes. For us, the Ambat Sud remains an exploration project. Cheshire had advanced With a PEA and was trying to move beyond the PEA building on Engineering towards a pre fees study. We are analyzing, reviewing all of that work. There might be some engineering work We want to continue pursuing, but largely for us, Chesa remains an exploration project.

Speaker 2

The Yanvasu is today a sub-1000000 ounce deposit. And as it sits today, doesn't meet our Criteria for developing MI. But we having said that, we have we are of a strong view That there is full year opportunities to take that 5,000,000 ounce deposit as it sits today Well beyond the 1,000,000 ounces. Bienbasut sits at the core 1 of the most productive gold belts in the West African region, just kilometers away From a and Lulo and B2Gold's Fekola mine. So we are quite excited about the exploration opportunity this presents, but it is an exploration project for us.

Speaker 2

We still have to show success with the drill bit and move the Ambasu beyond the 1,000,000 ounces before we contemplate 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 Ambasut before the end of the year. But first things first, we need to close the transaction that will take place in September.

Speaker 2

That's our best estimate right now. And but our exploration team, Paul Whelan, Pat Manoush, are working already on Exploration budget for the second half of twenty twenty three.

Speaker 8

Okay. Thank you for that. That's helpful. And that's all for me. So good luck with the continued ramp up at Seguela.

Speaker 5

Thank you.

Speaker 2

At this time.

Operator

Okay. We appear to have no questions on the line at this time. So I will hand it back for any closing comments.

Speaker 1

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.

Operator

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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