Gatos Silver Q2 2024 Earnings Call Transcript

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August 7, 2024

There are 4 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Gatas Silver Second Quarter 2024 Results Conference Call. Presenting today will be Dale Andress, CEO of Gatos Silver and Andre Van Meckert, Chief Financial Officer. We will conclude today's session with a question and answer period, where other members of Gato Silver Management team will be available. Turning your attention to Slide 2. Please note today's call contains forward looking statements.

Operator

Various risks and uncertainties may cause actual results to vary. Gatos Silver does not assume the obligation to update any forward looking statements. And now, I would like to turn the call over to Dale Andress. Please go ahead, sir.

Speaker 1

Thank you, operator, and good morning, everyone. Turning to Slide 3, I'd like to start with highlighting the excellent financial performance in the quarter. The Los Gatos joint venture had record revenues, record cash flow from operations and record free cash flow. This was primarily due to the strong operating performance and higher metal prices in the quarter. As previously announced, the Westcapo strength venture set yet another record for mill throughput during the quarter and we continue to make meaningful progress towards achieving our medium term target of sustaining a 3,500 tonne per day rate through the mill.

Speaker 1

2nd quarter production results puts us in a strong position to achieve our annual guidance.

Speaker 2

As a

Speaker 1

result of the strong operating performance this quarter, our all in sustaining cost metrics for the full year are expected to remain in the lower half of our guidance range despite the continued strong peso although that is starting to weaken and inflationary pressures in the first half of the year. I would also like to highlight the Los Gatos Joint Ventures free cash flow of almost $41,000,000 in the Q2 of 2024, a 60% increase compared to the Q1. Keeping to our quarterly cadence, the joint venture made a $40,000,000 distribution in July and as a result, Gatot Silver had a cash balance of nearly $109,000,000 at the end of July. Work on our new life of mine plan is progressing well and we are on track to announce the results in September. We are aiming to increase throughput and also extend the mine life.

Speaker 1

During the Q2, we shifted our main focus from infill drilling in the Southeast Deeps to more greenfields exploration drilling on both near mine and other targets in the highly prospective Los Gatos district. I'll talk about that more later on in the presentation. But first turning to Slide 4, mill throughput for the 2nd quarter was 3,240 tonnes per day, the 6th consecutive quarterly record. Mill throughput and metal grades were higher than in the second quarter of 2023, resulting in silver production being 15% higher compared to the Q2 of last year. And finishing this past quarter at 2,300,000 ounces and silver equivalent production, which includes zinc, lead and gold and a little bit of copper at 3,900,000 ounces for the quarter.

Speaker 1

Mill throughput increased 1% quarter over quarter with the mill regularly running at an operating rate of between 3,500 and 3,700 tonnes per day and that's on a calendar day basis. As we have stated previously, mining is the bottleneck to achieve further throughput improvements and we have a number of initiatives underway to address this bottleneck, including rebuilding the underground equipment fleet and various operational improvement projects which are focused on planning, maintenance and operational execution. Slight operating unit costs were approximately $101 per tonne this quarter and that's 3% lower than the comparable quarter in last year. Cash costs for the quarter were 14% higher than in the Q2 last year and that's primarily due to the higher production rates. Our continuous improvement initiatives continued to help offset the strong peso and the inflationary cost pressures.

Speaker 1

All in sustaining costs per payable ounce of silver and that's after byproduct credits were $6.57 and that's 57% lower than the Q2 last year and below our guidance range for 2024. And again that was helped by strong byproduct production and sales. All in sustaining costs per payable ounce on a silver equivalent basis, which is co product basis, were just over $15 and that's 13% lower than in the Q2 last year and well within our guidance range for 2024. And a bit more on guidance moving to Slide 5. Based on the strong production in the first half of the year, we continue to expect throughput rates at Cerro Los Gatos to average in the top half of our 3,000 to 3,300 tonne per day guidance range for the year and we continue to expect full year production to be in the upper half of our guidance range for 2024.

Speaker 1

As you can see in the table, silver and silver equivalent production are at approximately 53% on a year to date basis compared to the midpoint of guidance and our unit cost metrics are tracking below the midpoint in the first half of the year. We still expect the exploration and definition drilling spend to be about $18,000,000 for 2024 and sustaining capital expenditures to be approximately $45,000,000 with the majority of the CapEx spent on underground development with continued focus on opening up the southeast area and mine equipment rebuilds. I'll now turn the call over to Andre to present our financial results.

Speaker 2

Thank you, Daryl. Moving to Slide 6. Good morning, everyone. The 70% owned Los Gatos joint venture strong operating performance and strong realized metal prices resulted in another quarter of robust cash flow generation. Cash flow provided by operations was approximately $54,500,000 a new quarterly record.

Speaker 2

The LG JV generated free cash flow of $40,800,000 this quarter, 60% higher than the $25,500,000 dollars in Q1, 2024 and 107 percent higher than the $19,700,000 in Q2, 2023, also a new record for the LG JV. The increase from the comparable quarter last year was primarily due to significantly higher revenues, partially offset by our operating costs, largely due to higher volumes. Cash flow used in investing activities was 13 point $7,000,000 in Q2 2024, dollars 900,000 lower than in Q2 2023. Of that amount, dollars 11,400,000 was spent on sustaining capital expenditures and $1,900,000 on resource development drilling. The LG JV made a capital distribution of $25,000,000 in April 2024.

Speaker 2

And as a result of the continued strong free cash flow generation in the Q2, the joint venture made a $40,000,000 capital distribution in July, subsequent to the end of the quarter. Now turning to Slide 7 to look at the financial results of the Los Gatos joint venture for the quarter. Revenues increased 62 percent to CAD94.2 million in the Q2 of 2024. Higher volumes of metal sold and higher realized metal prices contributed to the significant increase in revenue for the quarter. The provisional revenue adjustment was a $700,000 positive adjustment compared to a $3,100,000 negative adjustment in Q2 2023.

Speaker 2

Cost of sales increased by 24%, primarily due to a 29% increase in the tonnage of concentrates sold and the associated higher mining and processing costs as a result of an 11% increase in mill throughput. Cost of sales were further impacted by the stronger Mexican peso in Q2 2024 compared to Q2 2023. Depreciation, depletion and amortization expense decreased by approximately 5%, primarily due to the increase in mineral reserves and the extension of the life of mine, partially offset by capital additions. An income tax expense of $12,500,000 was recorded compared to CAD 4,700,000 in Q2 2023. Income tax expense increased primarily due to higher taxable income at the LGJV.

Speaker 2

Finally, the LGJV recorded net income of approximately CAD20.5 million, a significant increase from the CAD700,000 net income recorded in Q2 2023, mainly as a result of the higher revenues. Turning to Slide 8 to review the financial results for Gato Sulva. Net income for the Q2 of 2024 was $9,200,000 compared to a net loss of $3,600,000 in Q2 last year. Basic and diluted earnings were $0.13 per share this quarter compared to a net loss per share of $0.05 in Q2 2023. Equity income affiliates increased to $14,500,000 primarily due to the increase in net income of the LGJV.

Speaker 2

The company incurred general and administrative expenses of $7,900,000 compared to $6,200,000 in Q2 2023. The $1,700,000 increase is primarily due to a $1,200,000 increase in non cash stock based compensation expense as a result of equity grants since September 2023 after an extended backup period and also a CAD600,000 increase in legal and consulting fees. Most of these higher costs are non recurring and we do not expect it to continue beyond 2024. G and A excluding non cash stock based compensation expense were CAD6,300,000 compared to CAD5.7 million in Q2 2023. And lastly, other income includes CAD1.5 million of the quarterly management fees received from the LGJV for the quarter.

Speaker 2

Turning to Slide 9. As was mentioned earlier, the joint venture paid a capital distribution of €25,000,000 to its partners, KatoScula and Tava during the Q2, of which we received CAD17.5 million As a result, Catascola ended the 2nd quarter with a cash balance of $82,500,000 In July, the LG JV made another capital distribution of CAD40 1,000,000 of which the company received CAD28 1,000,000 bringing the company's cash balance to CAD108.9 million at July 31, 2024. The LGJV ended the 2nd quarter with a cash balance of CAD45,500,000 and at a cash balance of $24,400,000 at July 31, 2024. Both GSI and the joint venture continue to remain debt free. I will now hand it back to Dow.

Speaker 2

Thanks,

Speaker 1

Andre. On Slide 10, it highlights how our business improvement initiatives are helping to drive cost performance together with the increased mill throughput. Site operating costs per tonne have decreased by 9% over the past 3 years and that's despite inflationary pressures and the substantial strengthening of the Mexican peso over that time period. We are continuing to focus on the efficiency of our underground workforce and equipment, including continuing our rebuild program on our equipment and advancing other productivity initiatives to sustainably mine at our current 3,200 to 3,300 tonne per day rate with targets to further extend up to 3,500 tonnes per day in the medium term. Turning to Slide 11, we remain on track to provide our updated LIFO mine plan and mineral reserves in the Q3 of 2024.

Speaker 1

And as I said previously, we're targeting September. We are working to incorporate a higher throughput rate in the new mine plan as the current plan averages 2,950 tonnes per day. So driving towards our 3,500 target would be a significant increase. However, we still expect an extension to the life of mine notwithstanding this higher rate. The new reserve will be based on an additional 66 kilometers of drilling that's been completed over the previous 12 month period and that was up to the end of the Q1 of this year.

Speaker 1

And as a reminder, the Southeast Deeps conversion drilling, which was completed during that 12 month period up to March 2024 was done on 50 meter spacing. We still have 2 drills dedicated to further expansion of this zone along strike with additional strong results for this area reported in our most recent exploration release in late July. On the plant recovery side of things, we are completing detailed engineering for a copper separation circuit and anticipate making a decision in the second half of this year on that. We are also evaluating technology and various options for increasing the recovery of silver, gold and zinc from fines that are currently being lost to tailings. Turning to Slide 12, we are highlighting a balanced approach to our organic growth strategy.

Speaker 2

The images

Speaker 1

on this slide show a few of the key targets that are located within kilometers of the existing mine workings. The 2nd quarter marked a clear pivot in our execution towards unlocking value in the Los Gatos district. With the completion of the Southeast Deeps infill program for the 2024 reserve and resource update, efforts were immediately redirected towards brownfield extension and growth related drilling. At the same time, our significant increase in greenfields work in the district provides the required balance between life extension and district exploration, ensuring we can continue to advance our knowledge of key targets across all levels of the exploration pipeline and that's from early stage mapping across our 103,000 hectare property through to resource and hopefully reserve additions. While we advance our drilling programs, we remain committed and excited about the potential of our field mapping programs, which is continuing to help unlock value in this exciting district and firm up additional targets for us to drill.

Speaker 1

On Slide 13, it shows tangible results of how we're executing on this strategy in the district. Starting in the northwest, we have our San Luis target located 4.5 kilometers from Cerro Los Gatos infrastructure. We mobilized a drill rig to this target in the mid part of the last quarter and we've already completed 2 holes. Both holes in San Luis have returned wide intervals of faulting, baiting and silicified breccias with elevated precious and base metal results. We are excited about the potential results that lay ahead of us and we continue to drill test this target.

Speaker 1

Moving closer to the mine, we have the Cerro Los Gatos Deeps, which we're targeting the potential faulted portion of the central and northwest zones at depth. And so this is similar to the southeast deeps. We are mobilizing a new drill rig and we actually have mobilized a new drill rig to site and this was done last quarter that began drilling a 1200 meter deep geological framework hole within the target footprint in the Central Deeps. This target is a key priority in our strategy as any success will immediately open up a large and currently untested search area directly below our current mine infrastructure. Further to the southeast, we also have our Puerto Gueno target and that's located approximately 2 kilometers from the mine.

Speaker 1

Our drill results are confirming a complex structural corridor returning geochemically anomalous results. Our initial drill program continues to indicate all the right ingredients are present for a possible discovery. We will continue to advance our balanced strategy to unlock value in the Los Gatos district through the remainder of 2024 and plan to build off the exciting start realized in the Q2. So in summary on Slide 14, we continue to safely drive mill throughput increases together with our productivity improvements and cost optimization, which continues to be a core part of our business and operating strategy. We remain focused on developing our new life of mine plan by September that incorporates the Southeast Deeps conversion drilling and together with other value enhancing initiatives including higher throughput rates and the copper circuit, which I mentioned earlier.

Speaker 1

And we continue to be very excited as we continue our exploration drilling on our near mine targets and that's on Puerto Gueno, both the Northwest and Central Deeps targets and our district drilling in the large and highly prospective district that we have and that includes the San Luis prospect. And importantly, we continue to generate strong operating margins and cash flow with regular distributions expected from the joint venture and a growing cash balance at the corporate level that now exceeds $100,000,000 which is available to support future growth of the company. I'll now hand it back to the operator for questions.

Operator

Your first question comes from the line of Kevin O'Halloran from BMO Capital Markets. Your line is now open.

Speaker 3

Hey, Dale and team. Thanks for taking my question. Maybe starting with the bigger picture question, you give us any thoughts around the Mexican election in June and any expectations or anything you're hearing or seeing from the incoming administration with respect to mining that might impact you?

Speaker 1

Yes. Thanks, Kevin. Yes, we're optimistic that things will be more pro business under the new administration. We're seeing the bulk of the ministerial appointments to date being pro business and I would just point out the Minister of Economy in particular Marcelo Erburd and I know the new incoming minister has also already met with the mining industry as a priority. So we're hopeful that things will improve for the industry.

Speaker 1

Just as a reminder, we don't need any immediate permits to continue operating. But I think it is healthy and for the future growth of our district. Obviously, we'd like to see that area improve for the industry and we're hopeful that, that will be the case with the new administration coming in October.

Speaker 3

Great. Thanks for that. My second question, you addressed this a little bit in your comments already, but can you give us a sense of your exploration priorities and maybe the pace of drilling that we can expect on near mine targets versus regional exploration now that the infilling is wrapped up?

Speaker 1

Yes. So I think we're currently if I'm not mistaken, we're at 5 surface rigs. I think we're going to be going up to 6. 2 of those will remain on the southeast deeps and continuing to extend mineralization and hopefully reserves and resources and ultimately reserves. As you would have seen from our July release, we have hit some additional intersections in the 2nd quarter since the cutoff date for our new life of mine plan.

Speaker 1

So we're going to continue to extend and expand the mineralization in that area. So that continues to be a priority. But I would say the other 4 rigs, we plan to have at least 2 of those on greenfield and right now we have 1 on central the central deeps. We may look at putting the 6th rig either on that or more broadly out in the district. And that's really speaking to the Q3.

Speaker 1

Obviously, it depends on success, but as we ramp up to the Q4, we're also looking at going further afield into the northwest of the property around the Linz area. And we definitely want to get the drills turning up in that area, which is just as a reminder, it's about 15 or so kilometers to the northwest of the mine. And we haven't done drilling in that area, I don't think since for more than 10 years since the early days. But there's some really exciting mapping and targeting that we're doing out there. Our geologists come back from the field every day more and more excited about that area and, yes, we're looking forward to getting the drills up there.

Speaker 3

Great. Thanks. That's helpful. Final one for me. Just a quick one on the rebuild program.

Speaker 3

Can you remind us about the timing on that? Is it still on track to wrap up in H2 here? And then should we expect to see that helping to bump up mining rates in the second half?

Speaker 1

Yes. We started our rebuild thanks again for the follow-up, Kevin. We started our rebuild program on our mining equipment last year. We've been continuing that program this year and it continues into the 1st part of 2025. Obviously, our priority equipment was up 1st and foremost, but that would include our trucks, our loaders, our boulders, our jumbos, we really are refreshing the entire underground fleet and we've been able to accomplish these increases that we've seen.

Speaker 1

We've used some rental equipment to help offset while we've had the equipment out for rebuild. But the program probably has less than a year to go or probably about 70% to 80% of the way through, we should be finished the bulk of that by the Q1 of next year. And the priority equipment is obviously first. So we've done the vast majority of that. That helps us.

Speaker 1

That's not the only answer to increasing up to 3,500 tonnes per day, which we've said is our medium term target. We're making good progress towards that. But it's using that equipment and it's everything like shift change times, blasting efficiencies, all continuing to optimize our backfill program, our cycling of long haul stopes. All of these types of things help us drive to that 3,500 tonne per day mark, but definitely having a refreshed equipment fleet is going to help that as well.

Speaker 3

Great. Thanks for that, Dale. That's it for me. Congrats on the strong quarter and I'll jump back in the queue. Thanks.

Speaker 2

Thanks,

Operator

There are no further questions at this time. Mr. Andres, I turn the call back over to you.

Speaker 1

Okay. Thanks. Thanks for listening, everyone. We look forward to updating you on our progress in the Q3.

Speaker 2

Thank you.

Operator

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

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Earnings Conference Call
Gatos Silver Q2 2024
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