Amerigo Resources Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 31, 2024

There are 6 speakers on the call.

Operator

Thank you. Mr. Graham Farrell, Investor Relations, you may begin.

Speaker 1

Thank you, Sylvie. Good afternoon, and welcome, everyone, to AMERCO's quarterly earnings call for the Q3 of 2024. We appreciate you joining us today. This call will cover Amerigo's financial and operating results for the quarter ended September 30, 2024. Aurora Davidson, Amerigo's President and Chief Executive Officer and Carmen Amezquita, the Company's Chief Financial Officer will lead the call today.

Speaker 1

Following Aurora and Carmen's prepared remarks, we will open the conference call to a question and answer session. Please note that all dollar figures reported in this call are U. S. Dollars, except where we specifically refer to Canadian dollars. Before we begin our formal remarks, I would like to remind everyone that some of the statements on this earnings call may be forward looking statements.

Speaker 1

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 various factors discussed in detail in our SEDAR filings. I will now hand the call over to Aurora Davidson. Please go ahead, Aurora.

Speaker 2

Thank you, Graham. Welcome to Amerigo's earnings call for the Q3 of 2024. I am pleased to report strong operational and financial results for the Q3. Amerigo reported quarterly net income of $2,800,000 EBITDA of $13,300,000 and free cash flow to equity of $5,900,000 Quite significantly, during the quarter, Amerigo paid CAD 0.07 per share to shareholders, representing CAD 8,500,000 in dividend payments. The company's cash position at quarter end was CAD 25,100,000 The Board of Directors has declared Amerigo's 13th consecutive quarterly dividend.

Speaker 2

The dividend of CAD0.03 will be paid on December 20 to shareholders of record as of November 29. As mentioned in our press release, our 3 key performance drivers, which are production, copper prices and cost management were robust in the Q3. Copper production was £16,300,000 MVC's plant availability was 97% and a record 70% of our copper production came from fresh tailings. We have recovered the production lost in the Q2 due to heavy rain. So our guidance for 2024 remains firmly in place.

Speaker 2

MVC also continues to manage costs well. Our quarterly cash cost was $1.93 per pound, which was also our normalized year to date cash cost, below our annual cash cost guidance of $2.08 The average copper price per pound received by MVC in the 3rd quarter was $4.22 That is without any question a high copper price. However, it was lower than the $4.39 price we had in the 2nd quarter. And given our N plus 3 copper pricing, this resulted in $3,300,000 in negative price settlement adjustments to Q2 production. Finally, but no less significant, there were no environmental incidents at MVC or lost time accidents involving our employees during last quarter.

Speaker 2

To close my comments on financial performance, let me quickly recap our year to date results. The average MVC copper price in the 9 months of reported financial results was $4.18 which enabled us to generate net income of $16,800,000 EBITDA of $49,200,000 and free cash flow to equity of $19,900,000 Year to date, we are beating production and cost guidance. A significant milestone for the company occurred in the 3rd quarter. This was the payment of Amerigo's first performance dividend on August 6. Again, this payment, which is in addition to our regular quarterly dividend, proved how our capital return strategy can quickly share the benefits of high copper prices with shareholders.

Speaker 2

This first performance dividend was well received by the market. Our Q3 share price significantly outperformed midsize copper producers and ETFs such as the Global X Copper Miners, S&P's Metals and Mining and Sprott's Junior Copper Miners. As you know, we have designed our capital return strategy to be flexible in how we return capital to shareholders. This strategy includes 3 tools, the regular quarterly dividends, spontaneous performance dividends and share buybacks. And as you may remember, Amerigo has a target cash position of CAD 25,000,000 which already includes the regular payment of CAD 0.12 per year to shareholders.

Speaker 2

In other words, when cash is over CAD 25,000,000 additional cash can be distributed to shareholders through performance dividends, share buybacks or a combination of both. As a company, we believe that not diluting Amerigo's shareholders year on year is an important goal. So, in October, we restarted share buybacks through Amerigo's normal course issuer bid. We will continue to buy back shares for cancellation in the remaining months of 2024 and intend to end the year with fewer shares outstanding than on January 1. The current normal course issuer bid expires on December 2, but we will renew it for another year.

Speaker 2

Being active on a normal course issuer bid does not mean that performance dividends can't happen too. Both can occur if copper prices are strong. Just last quarter, you saw how Amerigo's performance dividend worked quickly to return extra cash to shareholders. This payment came after only a relatively short period of strengthening copper prices. As a reminder, Amerigo's performance dividend is a flexible tool regarding timing, frequency and the amount of capital to be returned to shareholders.

Speaker 2

It can occur at any time during the right copper price conditions. The opportunity cost of missing a performance dividend is high, which provides an extra incentive to hold Amerigo long and ignore market volatility. Speaking of opportunity cost, I hope you have seen our latest videos on YouTube and Amerigo's website. In them, we redefine what growth means for Amerigo's shareholders and why Amerigo's growth should be preferred versus the traditional definition of growth, which is production growth. The videos show how our capital return strategy launched 3 years ago has grown your personal return on invested capital.

Speaker 2

They also clearly show how your investment is expected to grow consistently based on the stable and reliable MVC operations. I'll tell you a secret. We will release another video and spreadsheet soon. This new analysis paints a very different picture from what investors have been told about the merits of traditional production growth. I think it will be eye opening for many copper investors.

Speaker 2

In the new video, you will see an even more persuasive discussion about how Amerigo is the best way to generate growth in your personal return on invested capital. The video will show how our growth outperforms the traditional production growth scenario, especially on a risk adjusted basis. The opportunity cost of missing a potential performance dividend in a rapidly rising copper price environment is high enough by itself. However, the potential opportunity cost of investing in a production growth stock without truly understanding the risks can be much higher. The new video will make this concept very clear.

Speaker 2

Ultimately, however, Amerigo's commitment to shareholders is best communicated through facts and dollars. In the last 3 years, we have paid $72,700,000 to shareholders, dollars 49,000,000 through quarterly and performance dividends and dollars 23,700,000 through share buybacks, reducing the number of shares outstanding by more than 11% since inception of the strategy. As you can see, Amerigo's return to shareholders is happening right now, not somewhere in the distant future, which is the riskiest place of all. We are currently developing Amerigo's 2025 operational and capital expenditure budgets. There is good news for the New Year, including a significant drop in spot treatment and refinery charges, which will most likely lead to the most competitive TCRC annual benchmark in years.

Speaker 2

The level of TCRC charges is important for two reasons. Of course, a lower charge reduces our cash cost and increases profitability, but lower TCRCs also signal the state of the copper industry. When smelter and refineries lower their TCRCs, it's because they lack enough copper concentrate to process. Smelters do not want to halt their daily operations because the cost of shutting down and restarting are very high. They prefer to remain producing, operating at breakeven costs if necessary until things improve.

Speaker 2

Therefore, smelters aggressively bid for copper concentrates, resulting in lower charges for copper producers. Low TCRCs mean the market is tight, which will eventually result in higher copper prices. Higher prices eventually will bring in more supply into the market to solve the imbalance, but as we have spoken of in detail, particularly in the Q2 earnings call, that cannot happen fast. The consensus on copper prices in 2025 is positive, with an average price forecast of $4.42 per pound. However, as we saw earlier this year, copper prices can quickly rise to unprecedented levels.

Speaker 2

Again, Amerigo is prepared to quickly share the increased cash flows from those price spike events with shareholders. Our view on copper continues to be bullish. We have spoken repeatedly that this view is based predominantly on tight market fundamentals pointing to structural supply deficits. As 3rd quarter results have recently been reported, further examples of supply side problems have emerged, reporting production shortfalls and cuts to guidance from some of the world's largest copper producers. In addition, demand side market drivers such as interest rate cuts and government stimulus, particularly in China, are currently favorable.

Speaker 2

As you likely know, China launched a significant stimulus package in September. This was estimated to be the equivalent of 3% of China's GDP, the most significant liquid injection in China since COVID-nineteen. This positive macro drivers and a round of global interest rate cuts have supported copper prices well. This is despite significant geopolitical noise, including of course the U. S.

Speaker 2

Presidential election campaign. I think a simple argument about the U. S. Election is valid. The argument is that copper could benefit from either election outcome or simply from the election being over.

Speaker 2

Electoral uncertainty could well be a factor temporarily holding back the price of copper. A recent analysis done by Citi indicates that a Trump presidency could have the most serious potential impact on copper and commodity markets because of proposed tariffs. However, recent history tells us that China responded to U. S. Tariffs with strong economic stimulus during the last Trump presidency.

Speaker 2

The city analysis believes this may happen again, with particular emphasis on China's energy grid upgrade, which would benefit copper demand. As a side note, City's current estimate for copper prices in 2025 is roughly $4.65 which is higher than consensus. To finish, this was a strong quarter for Amerigo and we are optimistic that in 2025, we will continue to benefit from our unique company's strengths. We have a long term business at MVC that produces additional copper for Chile. MVC has excellent operating performance and generates operational cash flow predictably.

Speaker 2

Excess cash is quickly, flexibly and efficiently returned to shareholders. As an Amerigo shareholder, you can rely on the business outcome of a solid copper producing operation that consistently provides actual and substantial capital returns. I will now ask Carmen Amezquita, Amerigo's CFO, to discuss the company's financial results. Carmen, please go ahead.

Speaker 3

Thanks, Aurora. We're pleased to present the Q3 2024 quarterly financial report from Amerigo and its MVC operation in Chile. The company continued to report strong financial results in the Q3 of 2024. We posted net income of $2,800,000 earnings per share of $0.02 EBITDA of 13,300,000 and operating cash flow before changes in non cash working capital of 8,900,000. Copper production in Q3 2024 was 46% higher than Q3 2023 at £16,300,000 up from £11,100,000 in Q3 2023.

Speaker 3

This increase was due to the impact of last year's flooding throughout Chile. Higher production along with a higher average copper price of $4.22 per pound compared to $3.76 per pound in Q3 2023 resulted in a gross copper revenue of $68,800,000 in Q3 2024 compared to $41,600,000 in the comparative quarter. The notional items deducted from top line copper revenue include DET royalties of $19,200,000 smelting and refining of $6,400,000 and transportation of $400,000 In Q3 2024, we had negative fair value adjustments of 2,700,000. After these revenue deductions, copper tolling revenue in Q3 2024 was 40,200,000 compared to 25,700,000 quarter on quarter. It is important to note that Amerigo's financial performance is highly sensitive to copper prices.

Speaker 3

Amerigo

Operator

has

Speaker 3

an M plus 3 price convention for its copper sales where the final copper price for any given month will be the average LME price for the 3rd month following the delivery of our copper to Codelco. From the time of sale until 3 months later when the final price becomes known, we use monthly provisional prices which we take from the price curve between the published LME monthly average M and M plus 3 prices. This is a mark to market mechanism. Given that the final prices for our Q2 sales were lower than the provisional prices, this resulted in $3,300,000 in negative price settlement adjustments associated with Q2 sales that were deducted from revenue during Q3 2024. Our molybdenum revenue was higher this quarter at $5,200,000 compared to $4,600,000 in the comparative period quarter, primarily due to the increase in production from £200,000 to £300,000 Amerigo's final revenue in Q3 2024 was 45,400,000 an increase from 30,300,000 recognized in Q3 2023.

Speaker 3

This increase was driven predominantly by higher copper deliveries and copper prices. Tolling and production costs increased 18% quarter on quarter to $38,100,000 compared to 32,400,000 in Q3 2023, driven by a 50% increase in copper deliveries quarter on quarter. As I mentioned earlier, Q3 2023 was an anomalous production quarter due to the effects of severe weather events in Chile. Despite a 33% increase in power consumption, power costs were consistent with those in Q3 2023 at $7,900,000 This is because in the Q2 of 2023 MVC used a temporary high cost power source to produce fresh tailings while the plant was disconnected from the central power grid. Both head office, general and administrative expenses and the derivative to related parties expense remained consistent with the prior period quarter at $900,000 $100,000 respectively.

Speaker 3

Other gains included a gain of $600,000 compared to losses of $3,300,000 in Q3 2023, most of which was due to a $700,000 foreign exchange gain that was recorded during the quarter compared to a $2,200,000 foreign exchange loss recorded in Q3 2023. In Q3 2023, there was also $1,100,000 in environmental compliance costs. The company's finance expense in Q3 2024 was $900,000 compared to $1,000,000 in Q3 2023. During the period, the company recognized an income tax expense of $3,300,000 with a current tax expense of $4,400,000 offset by a deferred income tax recovery of 1,100,000 dollars All of the above items resulted in a quarterly net income of $2,800,000 compared to a loss of $5,800,000 quarter on quarter. Year to date, the company recorded a net income of $16,800,000 dollars or $0.10 earnings per share compared to a net loss of $500,000 or a nil loss per share in the 9 months ended September 30, 2023.

Speaker 3

Before moving on to the statement of financial position, I will mention some non IFRS measures used by the company, cash cost, total cost and all in sustaining cost. AmeriGold's cash cost in Q3 2024 was $1.93 per pound decreasing from $2.44 per pound quarter on quarter. The $0.51 per pound reduction in cash cost was caused predominantly by the 46% increase in copper produced. Total cost decreased to $3.54 per pound from $3.94 per pound following a $0.51 per pound decrease in cash cost and an $0.11 per pound decrease in depreciation offset by a $0.22 per pound increase in DET royalties from higher copper prices. All in sustaining costs for Q3 2024 were $3.72 per pound compared to $4.46 per pound in Q3 2023.

Speaker 3

This was primarily due to the $0.40 per pound decrease in total cost plus a reduction of $0.30 per pound in sustaining CapEx from the prior period quarter as 2023 was a CapEx intensive year. Year to date, the cash cost for the 9 months ended September 30, 2024 was $1.95 per pound compared to $2.21 per pound for the 9 months ended September 30, 2023. Moving on to the statement of financial position, on September 30, 2024, the company had cash and cash equivalents of $25,100,000 dollars restricted cash of $6,700,000 and a working capital deficiency of $4,900,000 a significant reduction from the working capital deficiency of $12,300,000 on December 31, 2023. Regarding cash flows during the quarter, Amerigo generated cash flow from operations of $8,900,000 and the net cash flow generated in the quarter including the changes in working capital was $10,500,000 dollars In terms of cash uses, dollars 3,000,000 was used in investing activities for CapEx and $11,000,000 was used in financing activities, which included $8,500,000 in dividends paid to shareholders through the payment of Amerigo's quarterly dividend of CAD 0.03 per share and a performance dividend of CAD 0.04 per share. As a final comment, our Q3, 2024 copper sales were booked at a provisional copper price of $4.24 per pound.

Speaker 3

The final prices for July, August September 2024 sales will be the average LME prices for October, November December 2024 respectively. A 10% increase or decrease from the $4.24 per pound provisional price used on September 30, 2024 would result in a $7,000,000 change in revenue in Q4, 2024, regarding Q3, 2024 production. The average LME price for October was $4.33 per pound higher than the provisional price and today's spot price is $4.28 per pound. We will report Amerigo's 2024 annual financial results in February 2025 and thank you for your continued interest in the company. We will now take questions from call participants.

Speaker 3

Thank

Operator

And your first question will be from Steve Farazynski at Sidoti. Please go ahead.

Speaker 4

Good morning afternoon, sorry, Aurora and Carmen. Thanks for the detail on the call. Aurora, I wanted to ask about the strong production this quarter. It looks like it was your highest level since 4Q of 'twenty three and you caught back up to you're on track to hit guidance again this year. In a normal quarter, outside of weather impact, and obviously, you have the 1 week shutdown annually, what causes what can cause production to flex up or down in a quarter?

Speaker 4

What are the major factors?

Speaker 2

The major factors would be the throughput that we get from El Teniente and the grades that we get from El Teniente because those are significant drivers that are outside of our control. Cauquenes, which is the processing of all tailings, we have full control over that and we layer that on top of whatever we are getting from El Teniente. Codelco has been or I should say, Teniente, not Codelco, although it also applies to Codelco in general, but the El Teniente operations have done very well in Q3 in terms of production, and they are expected to continue to do well. This was sort of the guidance that Codelco set out and they're reaching that desired recovery in their production levels.

Speaker 4

So when you provide guidance at the beginning of the year, is that based off of what Codelco's production plans are and how much room do you leave yourself a cushion knowing that for instance in 2Q you had some weather impact?

Speaker 2

We work with El Teniente's mining plan to do our own mining plan for the fresh tailings. We add some additional layer of risk protection regarding the days that we may lose for weather events, particularly in Cauquenes, because for safety reasons when we have heavy rain, we suspend operations in Cauquenes. That's our normal standard operational procedure. So basically, we do not work with made up information. We have a very detailed production plan based on the information that El Teniente provides and we layer our Cauquenes plan on top of that to reach our maximum production capacity.

Speaker 4

Got it. That's very helpful. I'm just sure it's not nearly as simple as you made it sound.

Speaker 2

It is not. It is not. You're getting the simplified version. Okay. Fair

Speaker 4

enough. You paid a performance dividend this quarter. Now you just announced you're resuming the share repurchase. We talked about this a little bit on the last call, but can you run through a little bit about how the Board weigh the performance dividend versus the share buyback?

Speaker 2

Yes. Well, we have just we just mentioned that we were back buying back shares as of the beginning of October. It was a small window of opportunity before we went into our blackout. We're coming out of the blackout tomorrow, so we will resume that. Generally speaking, right now, we are not looking at being extremely active with the buybacks as it was the case 2 years ago.

Speaker 2

I think that our 2 immediate action steps regarding buybacks are to ensure that we have a lower share count year on year, which essentially means buying back in route numbers about 1,200,000 shares in 2024 and to have in place a normal course issuer bid going forward, just to maintain the full range of tools that we have under the capital return strategy. Whether performance dividends or share buybacks are used from time to time depends on various factors. We have spoken before about the spot copper price, the copper outlook, the share price, general macro drivers. So these factors change from time to time. And also new factors always come into the analysis.

Speaker 2

For example, this year in Canada, there is a new federal tax of 2% associated with buybacks. Is it a deal breaker? It's not, but it has to be considered. And we have also spoken about that some of the challenges regarding share buybacks is that our cash generation cycle is inversed to the best timing for buybacks, right? At high copper prices, we generate good amounts of cash to buy back shares.

Speaker 2

But we will also be dealing with a stronger Amerigo share price because of how Amerigo shares respond to copper price hikes. So, in general, the decisions regarding buybacks or performance dividends are decisions that are made in real time by the Board of Directors based on the information that we have in front of us from time to time. When we had our prior board meeting last quarter, the conditions were very indicative of paying a performance dividend. This time around, we are moving first with share buybacks. And as I said in the call, it all depends on copper prices what can occur.

Speaker 2

It's not that we cannot do both, but the timing of when to do them will be 100% dependent on how strong copper prices are. Okay.

Speaker 4

That makes a lot of sense. Just you mentioned early stages of starting the budgeting process. Can you talk a little bit about CapEx plants? Is there anything larger on the horizon right now that

Speaker 2

We usually have our capital intensive years on 3 year cycles. We had a capital intensive year last year when we built a Cauquenes sump. We don't have anything out of the ordinary right now on the drawing board. So I would expect our CapEx to be consistent with what we have seen so far for 2024. One of the things that I mentioned though, which I think is quite interesting is what has been happening with TCRCs, because they do have a significant impact on the profitability of every copper producer.

Speaker 2

And the indication right now is that we will be looking at perhaps the lowest benchmark for treatment and refinery charges since 2,008, which is good news.

Speaker 4

2,008, did you say?

Speaker 2

Yes.

Speaker 4

Wow, that is good news. Excellent. I think that's a good way for me to wrap it up then. Thanks so much,

Operator

And your next question will be from Terry Fisher at CIBC World Markets. Please go ahead.

Speaker 5

Yes. Good day and thanks again for pretty thorough reporting. First thing I would say is that I think the press releases are very well done. The notes at the end, I find very helpful in summing everything up and giving us the right way to look at things. I have not had a chance to go through the MD and A yet.

Speaker 5

So I had my first question was about the big reduction in costs on Page 4, other expenses. But I think from Carmen's comments that that's really accounted for by the lower power costs and the lower environmental costs from the previous

Speaker 2

year. In other expenses, it would be the absence of the environmental costs that we faced last year and swings in foreign exchange. Some of those are realized, some of those are unrealized. Power is included within tolling and production costs, not under other expenses.

Speaker 5

All right. Okay. So the only other thing that I wanted to comment on and ask is, it seems to me, Aurora, that you're kind of pioneering here in terms of how investors should look at an investment, not just in these shares, but generically in a lot of other kinds of businesses, and I'm quite complementary about that, things like the free cash flow to equity and then the notes describing that. And then you've gone on to mention in this call about the videos and the focus on how to understand shareholder returns perhaps from a different perspective. So my question is, are you really pioneering this?

Speaker 5

Where does this come from?

Speaker 2

No, it's all school. It's all time school. This is how the world used to be before.

Speaker 5

Okay. So, I was going to ask, is there any other company you know of that does it like this?

Speaker 2

No, no. I haven't seen it. We're just trying to be contrarian in response to the usual pushback that we get that we're not a growth company. We are a growth company in a different way.

Speaker 5

Yes, I agree completely. And I've all looked at things the same way for a long time, but I thought it was kind of in the wilderness and had no company, but now I do. So I appreciate that. Thanks a lot. That was great.

Speaker 5

Another good quarter.

Speaker 2

Thanks, Harry.

Operator

Thank you. And at this time, Ms. Davidson, we have no further questions registered. Please proceed.

Speaker 2

Okay. So, that was sweet and easy. No further questions. Thank you for joining us today. The recording and the script will be available on the Amerigo website in the next few days.

Speaker 2

We will have our next earnings call in February, as Carmen mentioned, to report annual results, but also to provide our detailed 2025 production, cash cost and CapEx guidance. In the meantime, you can reach out to us at any time with your questions. And we thank you for your continued interest in Amerigo.

Operator

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.

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