Gatos Silver Q4 2023 Earnings Call Transcript

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February 21, 2024

Key Takeaways

  • Gato Silver generated $22 million of free cash flow in Q4 and $85 million for full-year 2023, enabling capital distributions of $85 million in 2023 and a further $30 million in February 2024.
  • The Cerro Los Gatos mine set a new throughput record, averaging over 3,000 tonnes per day in Q4 and boosting silver production by 15% to 2.6 million ounces, while full-year silver output reached 9.2 million ounces at all-in sustaining costs of $11.33/oz.
  • 2024 guidance targets an average throughput of 3,100 tonnes per day, production of 8.4–9.0 million ounces of silver at $9.50–$11.50/oz AISC, and 13.5–15.0 million silver-equivalent ounces at $14–$16/oz.
  • The company remains debt free (including the 70% Los Gatos JV), closed 2023 with $55.5 million in cash, and the JV held $43.1 million as of January 31, 2024.
  • Gato Silver extended its mine life to 2030 and is advancing 12 drill rigs on the high-grade Southeast Deeps and near-mine targets, aiming to add three more years to the life-of-mine plan in Q3 2024 and study mill expansion to 4,000 tpd and enhanced recovery circuits.
AI Generated. May Contain Errors.
Earnings Conference Call
Gatos Silver Q4 2023
00:00 / 00:00

There are 4 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Gato Silver's 4th Quarter and Full Year 2023 Financial and Operating Results Conference Call. Presenting today will be Dale Andres, CEO of Gatto Silver and Andre Van Dijkirk, Chief Financial Officer. We will conclude today's session with a question and answer period where other members of Gatos Silver management team will be available. 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. Gautasilva does not assume the obligation to update any forward looking statements. I would now like to turn the call over to Dale Andres.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Turning to Slide 3, I'd like to highlight 3 points for the quarter. Number 1, we continued to further strengthen our balance sheet, increasing the cash balance while remaining debt free, including at the 70% owned Los Gatos Joint Venture. Andre will speak to this in more detail, but I want to highlight Gatosilvers' free cash flow of $22,000,000,000 in the 4th quarter and continuing distributions received in the Q1 of this year. Number 2 point I want to highlight is that operations continue to perform very well with the Cerro Los Gatos mine setting another record for throughput rate.

Speaker 1

We ended the year within our upwardly revised production guidance range and we finished the year at the lower end of our cost guidance range for all in sustaining costs. As a result, our free cash flow was approximately $22,000,000 for Q4 $85,000,000 and that's at the Los Gatos joint venture for the full year 2023. And the third point is, yet again, we're aiming to extend the mine life by an additional 3 years when we update our life of mine plan in the Q3 of 2024 and we continue to drive operational performance with a medium term goal of ramping up production to 3,500 tonnes per day on a sustainable basis. Turning to Slide 4, mill throughput in the quarter was over 3,000 tonnes per day while silver grades improved compared to the prior quarter, which resulted in a 15% increase in silver production of approximately 2,600,000 ounces. Importantly, we demonstrated in December that the current capacity of the mill is closer to 3,500 tonnes per day and we are planning some minor upgrades to make sure it can sustain those kinds of rates.

Speaker 1

Silver equivalent production, which includes zinc, lead and gold was 3,900,000 ounces for the quarter. For 2023, we produced 9,200,000 ounces of silver and 14,300,000 ounces of silver equipment. Cost of sales for the 4th quarter increased by 10% compared to the comparable quarter last year, primarily due to the increased milling rates. However, cost of sales for 2023 were only 4% higher and on a cash cost basis were only 1% higher than in 2023 compared to 2022 and that's despite mining and processing 10% more tonnes year over year. And that's also despite the strong Mexican peso and inflationary pressures, which we managed to largely offset.

Speaker 1

All in sustaining costs per payable ounce of silver for the full year after byproducts credits were $11.33 per ounce compared to $10.24 per ounce in 2022, which is a great result considering the lower plant production in 2023. Turning to Slide 5, this shows our production and cost guidance for 2024. We plan to increase throughput rates at the Cerro Los Gatos mine to average between 3,003 100 tonnes per day in 2024, with rates expected to increase through the year as we focused on ramping up mining rates to fill the extra build capacity that we proved up in December. Fee grades are expected to be lower in the Q1 versus the average grades expected for the full year. Sustaining capital expenditures are expected to be similar to last year's guidance at $45,000,000 with the majority of spend on underground development with continued focus on opening up the Southeast area.

Speaker 1

Exploration and definition drilling spend is expected to increase as we complete the current phase of conversion drilling in the Southeast Deeps and start to switch our focus to both near mine and district targets. We expect to produce between 8,400,000 during 2024 at an all in sustaining cost after byproducts of between $9.50 to $11.50 per ounce of payable silver and $13,500,000 to 15,000,000 silver equivalent ounces at a $14 to $16 per ounce on a silver equivalent basis and that's on a co product basis. I'll now turn the call over to Andre to present our financial results.

Speaker 2

Thank you, Dale. Good morning, everyone. The 70% owned Los Gatos joint venture had another great quarter generating cash flow from operations of approximately $38,000,000 2% lower than cash flow generated in Q4 2022. However, the joint venture generated free cash flow of $22,300,000 this quarter, 19% more than Q4 2022. This is due to lower capital expenditures offsetting the expected lower revenues.

Speaker 2

Cash flow used in investing activities reduced from $20,400,000 in Q4 2022 to $15,900,000 this quarter due to lower sustaining capital expenditures incurred. Resource development drilling totaled $3,000,000 for the quarter with most of the spending focused on the in full drilling of the Southeast Deeps. For the full year 2023, we incurred $41,600,000 on sustaining capital expenditures and $13,500,000 on resource development drilling. Free cash flow for 2023 of approximately $85,000,000 was 13% higher than the $75,000,000 of free cash flow generated in 2022. As a result of the free cash flow generation, capital distributions made by the joint venture totaled $85,000,000 in 2023.

Speaker 2

This is $30,000,000 more than the $55,000,000 of dividends distributed to the partners in 2022. In addition, the joint venture made a further quarterly capital distribution to the partners of $30,000,000 subsequent to the end of the year on February 15. Now turning to Slide 7, to look at the financial results of Rosgas joint venture for the quarter. Revenues decreased by $73,500,000 in the Q4 of 2023. Revenues before the provisional revenue adjustment were 4% lower in the 4th quarter due to lower silver sales volumes as expected, which were partially offset by higher silver prices and higher lead revenues.

Speaker 2

In Q4 2022, we recorded a larger positive provisional revenue adjustment, which contributed to lower Q4 2023 revenues compared to 2022. Cost of sales for the quarter were 10% higher than Q4 2022, primarily as a result of higher throughput, resulting in higher operating costs. The LGJV was impacted by the strengthening of the Mexican peso against the U. S. Dollar, which was partly offset by productivity improvement and cost reduction initiatives as part of our continuous improvement program.

Speaker 2

Depreciation, depletion and amortization expense decreased by approximately 8%, primarily due to the increase in mineral reserves and the extension of the mine life. An income tax recovery of $1,700,000 was recorded in Q4 2023 compared to income tax expense of $14,800,000 in Q4 20 22. The income tax recovery is due to an increase in recognition of deferred tax assets and additional tax deductions available for certain mine development expenditures that we incurred. Finally, the LGV recorded net income of approximately $25,000,000 for the quarter, 16% lower than Q4 2022. Now moving to Slide 8 to review the financial results for Gato Silver.

Speaker 2

Net income and net income per basic and diluted share are up 160% and 157% respectively for the quarter. Datto Silver recorded net income of $12,300,000 or $0.18 per share for Q4 2023. Equity income in affiliates decreased by 14%, primarily as a result of the lower net income reported at the joint venture. Corporate G and A was approximately $2,000,000 lower in Q4 2023, mainly due to lower audit, consulting and severance costs incurred in the Q4 of 2023 compared to Q4 2022. For the full year, we incurred general and administrative expenses of $25,600,000 compared to $25,500,000 in 2022.

Speaker 2

In 2023, general and administrative expenses included non cash stock based compensation of 6,000,000 dollars non recurring legal defense fees of $3,200,000 costs related to the restatement of the 2021 2022 financial statements of $2,300,000 and some severances of $200,000 Moving to Slide 9. Cuttle Silver and the Cuttle's joint venture continued to remain debt free. The LG JV ended with a cash balance of $34,300,000 and had a cash balance of $43,100,000 at January 31, 2024. As I've mentioned earlier, the joint venture paid a capital distribution of $30,000,000 to its partners, Gato Silver and Della on February 15, 2024, of which we received $21,000,000 gutter silver ended 2023 with

Speaker 1

a cash balance of $55,500,000

Speaker 2

and had a cash balance of $53,100,000 at January 31, 2024, just a few weeks before the receipt of the additional $21,000,000 capital distribution paid by the joint venture partner on February 15. The company and the Los Gatos joint venture remain well positioned to continue to execute on growth opportunities. I will now hand it back to Dalku.

Speaker 1

Thanks, Andre. And on Slide 10, I'd like to highlight our updated LIFO mine and the mineral reserve that we announced on September 6 that extended our current mine life to the end of 2,030 and we continue to believe we have substantial additional upside and we are focused on realizing that upside with a target this year to add another 3 years. And we're on track to announce that in the Q3 of 2024. Since last April, we have had numerous drills working on our southeast deep zone with the aim of having the higher grade areas of inferred drill to 50 meter spacing for conversion for that reserve and resource update that we have planned for the Q3 of this year. So right now, the Southeast Deeps is our major focus and we currently have 7 surface drills focused on that infill drilling.

Speaker 1

We also have 4 rigs underground focused on definition and resource expansion across the mine. We recently added another surface rig which is on our Puerto Gueno near mine target bringing the total number of drills on-site up to 12. In December, we showed our mill is capable of processing 3,500 tonnes per day consistently on an operating basis and we are now advancing future value enhancement projects including the potential expansion to 4,000 tonnes and of course that's linked with additional reserve growth. On the recovery side, we are completing studies for a copper separation circuit and evaluating technology and various options for increasing the recovery of silver, gold and zinc. Turning to Slide 11, this figure shows a few of the key targets that are within a few kilometers of the existing mine workings and potentially accessible from existing underground infrastructure.

Speaker 1

Our geologists have been hard at work for the last couple of years getting the southeast deeps defined and adding to our life of mine. And now in 2024, we are excited by the chance to ramp up the exploration work on the rest of our 103,000 hectare land package. We will still be doing a lot of work within 3 to 4 kilometers of the mine operations as it will be easiest to bring anything we find in this area close to the mine into production in a timely manner. You can clearly see the large number of veins we already know of just within that close range. We will be getting the drill rigs out beyond this area as well with some very prospective targets in the San Luis area, which is about 5 kilometers to the northwest of the mine.

Speaker 1

And we have a number of targets further to the northwest about 22 kilometers from the mine in the Linz area. So turning to Slide 12, in summary, we continue to safely drive mill throughput increases together with productivity improvements and cost optimization, which is a core part of our business and operating strategy. We remain focused on extending the mine life and that's by the Q3 of 2024 together with other value enhancing initiatives. And we continue to be very excited as we start to increase our near mine and district drilling in the large and highly prospective Los Gatos district. And finally and importantly, we continue to generate strong operating margins and cash flow with regular distributions expected from the Los Gatos joint venture and a growing cash balance.

Speaker 1

I'll now hand it back to the operator for questions.

Operator

And your first question is from the line of Lucas Panmata with Canaccord. Please go ahead. Lucas, your line is open. Lucas, you may need to check your line to see if you placed it on mute.

Speaker 3

Sorry, guys. I was on hold. Hey, Dale and Seem, thanks for taking my questions.

Speaker 2

Just wondering on the can you

Speaker 3

provide more sort of color on the mill or sorry, the mine debottlenecking efforts that you're undertaking to get you to 3,500 tonnes a day?

Speaker 1

Yes, sure. Thanks Lucas. Right now we have developments well ahead of production. And so to sustain mining rates above 3,000 tonnes per day, we need to continue to open up new areas and cycle through stopes faster. And our goal is and our midterm goal is to get up to that 3,500 tonne per day to fill the mill.

Speaker 1

That's just cycling through the stopes quicker. So it's not really a matter of developing. It's more just on a day to day basis, equipment productivities, utilizations, making maximum use of our paste plant to cycle through both cut and fill and long hole stoping faster. And then importantly, it's opening up the southeast zone. What we want to make sure of obviously for short periods of time, we can do 3,500 tonnes per day, but our goal is to drive towards that as a long term sustainable rate.

Speaker 1

And for that, we are going to need to open up the Southeast area

Speaker 2

and that's a lot of

Speaker 1

our focus on development as well.

Speaker 3

Got you. Thank you. And as you undertake this drilling and understand more about the Southeast Deep, do you think you'll be able to include that sort of 3,500 ton a day scenario in your new mine plan later this year?

Speaker 1

Yes, like I said, we're making like we put in our guidance, we're guiding to average between 3,003 100. So we're making good progress towards that 3,500 ton goal already expected in our guidance range. But yes, that's what we're going to work towards Lucas.

Speaker 3

Great. Thank you, guys. All

Speaker 1

the best.

Operator

And at this time, there appear to be no further questions. Mr. Andres, I will turn the call back over to

Speaker 1

you. Well, thanks to everyone who participated. We are very Thanks for everyone who participated. We are very excited about 2024. We think we're very well positioned to deliver additional shareholder value and we look forward to providing updates as the year progresses.

Speaker 1

Thanks everyone.

Operator

This concludes today's conference call. You may now disconnect.

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