Amerigo Resources Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 7 speakers on the call.

Operator

Good afternoon. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Amerigo Resources Q1 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the formal remarks, there will be a question and answer session.

Operator

Thank you. Mr. Graham Farrell of Harbor Access Investor Relations, you may begin your conference.

Speaker 1

Thank you, operator. Good afternoon, and welcome, everyone, to Amerigo's quarterly conference call to discuss the company's financial results for the Q1 of 2024. We appreciate you joining us today. This call will cover Amerigo's financial and operating results for the Q1 ended March 31, 2024. Following our prepared remarks, we will open the conference call to a question and answer session.

Speaker 1

Our 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 Amerigo's earnings call for the Q1 of 2024. All other figures reported in the call are U. S. Dollars, except where we specifically refer to Canadian dollars.

Speaker 2

Americas' 1st quarter results were operationally and financially solid. Copper production guidance and cash costs outperformed guidance by 9%. Our average copper price during the Q1 was $3.95 per pound. That is not a bad price, but it is nowhere near what we have today. At this $3.95 copper price, Amerigo's financial results included net income of 4,300,000 dollars EBITDA of $13,600,000 and free cash flow to equity of $7,300,000 dollars After my remarks, Carmen will provide a full recap of the quarterly financial results.

Speaker 2

During the quarter, Amerigo's quarterly dividend to shareholders was $3,700,000 representing a 7.7% yield against our quarter end share price. The investment yield remains best in class at today's higher Amerigo share price. And as you know, this secure quarterly dividend yield is only one of the ways in which we return capital to shareholders. As mentioned, our corporate price in the Q1 was $3.95 per pound. In April, the average price increased to $4.30 and today's spot price is 4.41 dollars This sharp increase in copper prices did not surprise us as it confirms our analysis of copper supply and demand dynamics.

Speaker 2

For several quarters, we have described the driving factors behind strong global copper demand and the factors enduring meaningful secular growth in global copper supplies. Demand is now outstripping supply. Global PMIs are coming in strong and improvement in manufacturing activity is expected to continue. Historically, recoveries in global manufacturing cycles positively correlate with copper prices. In particular, recent Chinese PMIs have been strong and there continues to be robust demand for green projects in China, as was the case in 2023.

Speaker 2

AMD's manufacturing activity is also very robust, recording the strongest PMI hold of all countries in March. India's copper demand grew 16% in 2023, double digit growth is again expected this year. One study quotes that for each $1,000,000 growth in Indian GDP, we will have a 300 percent kilogram growth in copper demand. Simply put, global copper demand continues to grow. And as demand continues to grow, there are clear risks to copper supply.

Speaker 2

Last year, global copper consumption was 25,400,000 tons, while global copper mine production was 22,000,000 tons. Consumption grew, but copper mine supply remained flat last year. For 2024, copper consumption is expected to grow by 3.5% and refined copper production is expected to grow by 3.1%. However, global mine production, which is the life of refined copper production is stalling. So consumption is outpacing refined copper supply and mine production, which feeds the smelters that produce refined copper, cannot be turned on like a light switch.

Speaker 2

So what needs to happen to get additional copper mine supply going? The old assumption that $4 per pound is the incentive price is no longer valid. This is clearly shown by the lack of recently sanctioned copper projects. The last time a batch of large copper projects was approved due to higher copper prices was in 2017 2018 with projects such as Quellaveco and QB2. However, the stronger copper prices we started to see in 2021 still have not incentivized miners to invest in new projects, although our copper is insufficient to justify the risk of approving new copper projects.

Speaker 2

New capacity is coming primarily from expansion projects, not from greenfields as used to be the case. Copper Myers has low expansion for over a decade due to higher capital costs, higher projected operational costs and more regulation. The permitting process are complex and they are lengthening with increased risk of resource nationalism. We also cannot ignore the declining quality of new projects. Copper prices were lower when copper was mined from higher grade mines or mine sectors.

Speaker 2

A company cannot mine its highest grade sections indefinitely. And as copper grades decrease, a higher price is required for profitability and most certainly to invest in new projects. Earlier this year, dollars 11,000 a ton, essentially $5 a pound was floated as the new incentive price, but that is just one price point to consider. Robert Friedland, perhaps the most local copper supporter and long term industry spokesman, says that an incentive price of 15,000 dollars €0.80 a pound is necessary to bring on new projects. If short lived, a price spike to these levels cannot incentivize substantial new projects.

Speaker 2

Copper miners would need a sustained period of higher prices to sanction new projects. Of course, to say that America would flourish in this pricing environment would be quite an understatement. Our capital return strategy has been designed to quickly maximize our returns to investors under the pricing circumstances I have just described. Industry analysts estimate that at least $200,000,000,000 of investment is required in the next decade to fix a 10,000,000 ton copper deficit. That massive investment figure is based on current capital intensity estimates and does not reflect inflationary pressures that are occurring in the industry.

Speaker 2

In a moment, I will tell you another example of Americas competitive advantage in this area. To sum up my comments on the macro situation, we know that for the rest of this decade, there will be limited new copper supply coming online. We also know that a higher incentive price is required to bring additional capacity online and that there are long lead times to add supply. In our opinion, this market dynamics will establish a new floor price for copper, just as occurred in 2,003 with the industrialization and urbanization of China. So this is where we are now in America, strong copper prices, stable operations, controlled costs, low CapEx, declining debt levels, and a proven capital return policy.

Speaker 2

The quarterly dividend of CAD0.03 per share is our live or die cash obligation to shareholders and it is very safe under this condition. We are building up our cash position to the desired target of $25,000,000 which happens very quickly under current copper prices. Additional cash will be distributed to shareholders via performance dividends, share buybacks or a combination of both. As a reflection of the increasingly positive market sentiment, the questions I receive from shareholders have changed from at what copper prices the quarterly dividend save to whether we will be buying back shares or paying a performance dividend. The Board of Directors analyzes multiple elements to determine how best to allocate surplus cash for the benefit of shareholders.

Speaker 2

For example, we know that the timing of our cash generation cycle is inversed to the timing of buybacks. At higher copper prices, ample cash is generated to buy back shares, but this would typically occur at a higher share price because Amerigo's share price is so responsive to changes in copper price. Of course, in a perfect world, we prefer to buy back shares at lower prices. And in fact, that is what we have done. In 2021, Amerigo shares have been repurchased at an average price of Canadian 1.50 We are currently trading at Canadian 1.76 dollars which is 17% above that average purchase price.

Speaker 2

However, the real strength of the capital return strategy we have is having multiple tools to return excess cash to shareholders quickly. We can use the quarterly dividend, a performance dividend based on elevated copper prices and thus higher cash balances or share buybacks. These different tools amplify the effect of shareholders' long term return on invested capital. It is also amplified because of how quickly the tangible effect of this strategy can be felt, particularly for the dividend components of the strategy. Now I will provide a brief operational update.

Speaker 2

During the Q1, we had another excellent safety record at NVC with no lost time accidents. In fact, on January 29 this year, we celebrated 2 years without lost time accidents at MVC. This is significant to all of us. This week we're not producing copper at MVC as we're doing the annual plant maintenance shutdown. This is a planned event that we factor into our annual production guidance.

Speaker 2

It is a monumental endeavor as we bring complete more than 500 necessary projects when all the equipment is shut down. This shutdown is a crucial part of our operational planning as it allows us to maintain and upgrade our equipment, ensuring optimal production in the long run. This shutdown period is also perfect for bringing any new production related projects online. MVC's standby power transformer, a significant risk mitigation project is coming online this week. As you may recall, when we issued our 2024 guidance news release, we informed the market that we were evaluating 2 CapEx projects that would contribute to increasing production.

Speaker 2

We also indicated that the projects could be initiated this year subject to further technical analysis and higher copper prices. I am pleased to report that we are proceeding with these projects and want to tell you more about them. Together, they will generate an additional 345 tons or around £760,000 of copper per year once they are completed. The projects will cost approximately $2,300,000 representing a very low CapEx intensity of $6,600 per ton, which is significantly lower than the $30,000 to $40,000 per ton capital intensity, which is typically required today for new copper projects. This is a perfect example of the benefits of Amerigo's low capital needs and operational excellence.

Speaker 2

The first project involves installing more uniform in the regrind cyclone battery to improve the pumping equipment in that process stage. This should include the production. The second project involves installing new operational control equipment in the cleaning stage to better control water, air and level variables, further increasing efficiency. This CapEx should be seen as growth CapEx as it makes sense to initiate them now with higher copper prices. The fact that the cost of Amerigo's growth is so much less than the rest of the industry is compounded by how quickly shareholders will feel the benefits.

Speaker 2

For example, at the $3.80 copper price, the payback of the projects is 15 months, with the subsequent cash flows available to shareholders using any of our capital return strategy tools. To end my remarks, I will tell you that we performed strongly in April and so did copper. The potential to return additional capital to shareholders this year should be very apparent, whether through the payment of our first performance dividend, the retirement of shares or a combination of both. As a shareholder, I believe this is a great place to be. Last week, on April 30, we had Amerigo's Annual General Meeting of Shareholders.

Speaker 2

I want to thank our shareholders for their participation and support as they voted in favor of all business items before the AGM. Our next earnings call will be on August 1, 2024, to discuss the Q2 financial results. As usual, if you have further questions about Amerigo, Carmen, Graham or I are available anytime. I will now ask Carmen Amezquita, Amerigo's Chief Financial Officer to discuss the company's financial results. Carmen, please go ahead.

Speaker 3

Thank you, Aurora. We are pleased to present the Q1 2024 quarterly financial report from Amerigo and its MVC operation in Chile. As Aurora mentioned, we are pleased to report strong financial results in the Q1 of 2024. We posted net income of 4,300,000 dollars earnings per share of $0.03 and operating cash flow before changes in non cash working capital of $10,200,000 The comments on quarterly financial performance and quarter on quarter variances with Q1 2023 are as follows. Copper production in Q1 2024 was £500,000 lower quarter on quarter due to MVC's production plan sequence.

Speaker 3

This decrease in production and the fact that Amerigo's financial performance is sensitive to copper prices impacted our top line copper revenue. The company's Q1 2024 average copper price was $3.95 per pound, which was lower than the $4.02 per pound price we had in Q1 2023. Top line copper revenue was 61 point $3,000,000 in Q1 2024 compared to $66,800,000 in the comparative quarter. The notional items deducted from top line copper revenue were all lower quarter on quarter. These include BET royalties of $16,700,000 dollars smelting and refining of $6,200,000 and transportation of $400,000 In Q1 twenty adjustments to prior quarter sales of $1,500,000 which were lower than the $3,400,000 in positive adjustments posted in Q1 2023.

Speaker 3

After these revenue deductions, copper tolling revenue in Q1 2024 was $39,500,000 compared to $44,600,000 quarter on quarter. Our molybdenum revenue was lower this quarter at $5,500,000 compared to 8,000,000 dollars primarily due to the decrease in moly prices. In Q1 2023, moly prices were exceptionally strong, surpassing $30 per pound. Therefore, Amerigo's final revenue numbers in Q1 2024 were $44,900,000 down from $52,600,000 in Q1 2023, driven fundamentally by lower copper and moly prices. However, our tolling and production costs also decreased 5% quarter on quarter to $37,100,000 compared to $39,200,000 in Q1 2023.

Speaker 3

Reasons for reduced tolling and production costs included decreases in direct costs of $1,600,000 which I will address shortly and lower moly royalties to DET of 800,000 dollars due to lower moly prices and lower plant administration costs of $500,000 Offsetting these lower costs was an increase in depreciation of $800,000 quarter on quarter from CapEx projects put into use at the end of 2023 that began to be depreciated during the quarter. Regarding the performance of direct tolling and production costs, in Q1 2024, we faced lower power costs due to lower power consumption and lower pass through charges, lower grinding media costs due to less consumption and lower input costs, and lower costs overall due to 17% weaker Chilean peso quarter on quarter. However, we did have higher line costs of $400,000 due to higher consumption associated with higher were $1,300,000 consistent quarter on quarter. Other losses gains included a loss of 41,000 dollars compared to a gain of $1,500,000 in Q1 2023, mainly an unrealized foreign exchange gain coming from an intercompany loan balance that was cleared out at the end of 2023. The company's finance expense in Q1 2024 was $500,000 compared to $800,000 in the prior quarter.

Speaker 3

The difference mostly came from changes in the mark to market position of interest rate swaps. The company recognized an income tax expense of $1,700,000 with a current tax expense of $3,100,000 offset by deferred income tax recovery of $1,400,000 As a side note, most of the current tax expense occurs at the MVC level and under Chilean tax provisions, MVC is required to pay monthly installments on current year tax. This means that most of the actual tax expense for the year is being paid on the go, minimizing taxes payable and filing tax returns for the preceding year. All of the above items resulted in a quarterly net income of $4,300,000 compared to $9,100,000 quarter on quarter. Before moving to the statement of financial position, I should mention 2 non IFRS measures, cash cost and all in sustaining cost, which we started reporting this quarter.

Speaker 3

AmeriGold cash cost in Q1 2024 was $1.96 per pound, increasing from $1.91 per pound quarter on quarter. However, this includes $0.07 per pound paid to MVC's supervisors as the signing bonus of a 3 year collective labor agreement. The normalized cash cost excluding the effect of the signing bonus was $1.89 per pound. While this may look like only a $0.01 per pound reduction quarter on quarter, it's important to note that moly byproduct credits to cash costs were $0.15 per pound lower in Q1 2024 due to lower moly prices. We've started reporting all in sustaining costs this quarter to include cash costs plus DET royalties and depreciation, in other words, total cost, plus sustaining CapEx and corporate G and A.

Speaker 3

In Q1 2024, our all in sustaining cost was $3.57 per pound compared to $3.79 per pound in Q1 2023. Moving on to the statement of financial position, on March 31, 2024, the company had cash and cash equivalents of $13,800,000 restricted cash of $6,200,000 and a working capital deficiency of $4,200,000 which was a significant reduction from the working capital deficiency of $12,300,000 on December 31, 2023. A significant change in working capital items was in accounts receivable, which increased by $7,200,000 In our receivable cycle, MVC received payment for most of these receivables during the 1st week of April. The totality of MVC's restricted cash is also now a current asset, as $3,500,000 will be released per the terms of the finance agreement on January 1, 2025. Short term debt came down as a $1,800,000 payment was made during the 1st banking day of 2024.

Speaker 3

All other working capital items remain comparable to the December 31, 2023 balances. Regarding cash flow during the quarter, Amerigo generated cash flow from operations of $10,200,000 and the net cash flow generated in the quarter, including the changes in working capital was $4,500,000 In terms of uses of cash, $1,100,000 was used in investing activities for CapEx and $5,300,000 was used in financing activities, which included $3,700,000 in dividends paid to shareholders, a CAD0.03 per share, as well as CAD1,800,000 in the repayment of borrowings. As a final comment, our Q1 twenty twenty four copper sales were booked at a provisional copper price of $3.97 per pound. The final settlement prices for January, February March 2024 sales will be the average LME prices for April, May June 2024 respectively. Each 10% change from the $3.97 per pound provisional price would result in a $6,300,000 change in revenue in Q1 2024 regarding Q1 2024 production.

Speaker 3

We now know the April price, which was $4.30 per pound. Therefore, the adjustment for Q1 2024 sales in April will be roughly $5,300,000 and today's spot price is $4.41 per pound. We will report Amerigo's Q2 2024 financial results in August 2024 and thank you for your continued interest in this company. We will now take questions from call participants.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question comes from Steve Farazane with Sidoti. Your line is now open.

Speaker 4

Thanks. Afternoon, Aurora and Carmen. Appreciate all the detail on the call. I wanted to ask about cash costs, because I know you were comparing it year over year. But if we look at it, the significant decline sequentially and also well below your guidance just given a couple of months ago, anything one off in the quarter?

Speaker 4

I know you cited the weaker peso, but anything to say that this lower level of cash cost, particularly the normalized cash cost, which we'd see, is more sustainable now?

Speaker 2

Steve, thank you for the call. The Chilean peso has an impact, obviously, and we have provided all of the variability that one could expect on our guidance in this release. In practice, we saw lower pass through charges as well. We don't know what the level of the charges is going to be from month to month. So, we basically project in our budgeting process the most recent information, plus any other changes that have been communicated to industrial consumers.

Speaker 2

So far in Q1, they were lower than what they were in the last quarter of 2023. So that's another source of impact. We use less grinding boats than we thought we would need. That has that varies depending on the mix of fresh and agaveillance that we are putting through the granting circuit. On the other side, we did have, as Carmen mentioned, higher line costs.

Speaker 2

In general terms, we monitor the operation constantly. We're always looking for opportunities of cost containment. So, I would say our guidance remains valid for the rest of the year depending considerably on how the Chilean peso behaves. It's surprising to see what has happened with the Chilean peso. There is a significant decoupling between CLP performance compared to copper prices.

Speaker 2

Normally, what you used to see years ago was a stronger Chilean peso in response to stronger copper prices. We haven't seen that yet this year. So it may be lagging or it may be more of a structural

Speaker 4

Perfect. Thank you. In terms of the production optimization equipment, it sounds like you're installing them during this right now, during the shutdown. Is that accurate? Are we going to see the benefits really as early as 3Q?

Speaker 4

Or what's your timing on that?

Speaker 2

I wish it happens like that, it doesn't happen like that. We have approved the projects have just been approved essentially this week when we presented the capital allocation proposal to the Board of Directors and we supported it with the technical analysis and with our projections for copper prices for the rest of the year. We are starting to work on them basically once we finish the current shutdown, which is taking place this week. It will take approximately 7 months

Speaker 4

for works

Speaker 2

to be completed. And then we have to wait for a shutdown period to put it on to put that in place. That's one of the reasons why we wanted to accelerate that deployment and those early works now, so that they would be they will be ready for the next plant shutdown to come online. Plant shutdowns have been occurring in May for the last years. They used to occur in January in prior years.

Speaker 2

So we have to be ready for that in case that's when El Camiente will be having their 2025 shutdown. So don't adjust the projections for this year. This is basically getting ready for 2025 with that project, with those two projects.

Speaker 1

Understood, perfect.

Speaker 4

It sounded like Carmen indicated that so you had the receivables build, but it sounds like that reversed rate at the beginning of So you So you're closing in on that target area where you might start considering a buyback again. Is that fair? And given where copper prices are now, you're probably closing in?

Speaker 2

We're getting close.

Speaker 4

Okay. And last one for me. On 2nd straight quarter, Cauquenes was a larger percentage of the mix than it historically has been over the last couple of years. And any reason for that or is that just quarter to quarter shift?

Speaker 2

That is in response to the feed or in response to the throughput that we get from El Teniente And it is one of the advantages that we have spoken about in prior quarters. We have that flexibility if we get lower throughput from El Teniente for their own mine sequencing or operational reasons. We can always go in and chunk up a little bit more of Cauquenes to keep up our production guidance online.

Speaker 4

Any reason to think that could extend into this year or?

Speaker 2

El Cimiente had a rolling incident in May, knowing its discussion. It is factored into our plan for this year that this will be a result in the second half of the year, and we would then be able to revert back to our normal parameters. Q2, Q1 2023 are good comparison points there. But if that doesn't happen and if they need some more time to get back to their normal operational parameters, it's not of concern to us. We can continue doing what we've done in

Operator

Q1. Your next question comes from John Polcari with Mutual of America Capital Management. Your line is open.

Speaker 5

Thank you. Aurora, thank you for taking the call.

Speaker 2

John, I'm not hearing your question. You may have cut off.

Speaker 1

I think he dropped off.

Operator

Yes, the line was

Speaker 1

Okay.

Operator

Your next question comes from John Tumazos with John Tumazos Independent Research. Your line is open.

Speaker 6

Thank you. I was attentive, Aurora, to how optimistic you are about the future of the copper market. Do you plan to make larger capital investments to expand your milling complex because of the good outlook for copper or will you acquire other assets beyond your tie up with El Teniente to increase your exposure to the copper market?

Speaker 2

John, our investments at MVC are at the optimal stage. We have done our expansion to increase our plant capacity. We worked that in conjunction with the mining plan for El Teniente from El Teniente. So we're fine at MVC. Obviously, the outlook for copper is very strong in our opinion, and we know how to operate very well with copper tailings.

Speaker 2

We look for these opportunities, but they have to be the right opportunities. We're not just going to go and seek operations that don't make economic sense. Obviously, with the stronger copper prices, I think that tailings will be an area of focus for other miners. They will see them as an area of opportunity rather than just an environmental liability. And when that is the case, we're better positioned than anyone to work with other partners in recovering copper from copper tailings.

Speaker 6

Thank you.

Operator

Your next question comes from John Polcari with Mutual of America. Thanks. Your line is now open.

Speaker 5

Thank you. Sorry about that. I'm not sure what happened. Arora, just four quick questions. First, is there any possibility or discussion as copper prices if copper prices continue to ramp up that you would move maybe to some partial hedging from a 0 hedging strategy or at the moment and for the immediate future, is that the continued strategy just to stay completely unhedged?

Speaker 2

We have no immediate plans of hedging. We are not looking at hedging right away, but we always analyze the costs and the potential benefits of doing that, but there's nothing in front of us right now.

Speaker 5

Okay. Secondly, the recently approved optimization projects, I think they might have answered this already. I was wondering what the estimated payback period was. I think you said something like 7 months to complete and then after that, it would start to have an impact. Is that what I heard earlier?

Speaker 2

It is 7 months of preliminary works to get them in hookup mode and then we're waiting we will be waiting for we need at least 8 days of equipment shutdown to bring them online. So they're happening in 2025.

Speaker 5

Got it. Thanks. And third question, what would be the level of sustainable cash balances that you would be comfortable with for the company, maybe $25,000,000 It is $25,000,000 I'm sorry?

Speaker 2

$25,000,000 is a sweet number.

Speaker 5

$25,000,000 Thanks. And then lastly, any possibility, I know there's been some talk over the years of possibly expanding the tailings relationship with Codelco. Any possible further discussions on that where they would be willing to allow Amerigo to expand its existing facilities?

Speaker 2

I think I answered that in the prior question.

Speaker 5

We remain interested. Disconnected. Sorry.

Speaker 2

Sorry about that. We remain interested for the right opportunities. I think there is no one else out there that has the experience recovering copper from copper tailings that Amerigo does. So as copper prices continue to be robust, copper tailings will be of of interest in a different way, most of those tailings and I think we're the 1st candidate they should look at there and then.

Speaker 5

Is there has there been an expression of interest maybe to expand their tailings processing arrangements or not at this time?

Speaker 2

Well, with El Camino, that's where we are at now. We are processing basically their fresh and token is sailing. So that relationship has expanded over time and has led us to where we are now at our stage with NBC and El Teniente. They have 6 other mines. Eventually, they will probably be interested in doing something similar and will be a prime candidate for them to consider.

Speaker 2

But there is nothing in front of us immediately to report back to you.

Speaker 5

Great. Thanks again and look forward to continued excellent management.

Operator

There are no further questions at this time. I will now turn the call over to Aurora for closing remarks.

Speaker 2

Thank you. Thank you for joining us today. The recording and the script will be available on our website as soon as we come back from our providers. And as I mentioned earlier, we will talk again on August 1 to discuss Q2 financial results. And in the meantime, you can always reach out to myself, to Carmen or to Graham.

Speaker 2

Thank you very much for being with us today.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your

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Earnings Conference Call
Amerigo Resources Q1 2024
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