First Majestic Silver Corp. (AG) Q2 2018 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the First Majestic Silver Second Quarter 2018 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Keith Neumeyer, President and Chief Executive Officer. Please go ahead.

Welcome everyone to our second quarter production call and renewed guidance call. We've got a full room here in Vancouver, starting with myself obviously, Keith Neumeyer, CEO and President. Beside me I have Ray Polman, Chief Financial Officer; also Dustin VanDoorselaere, Chief Operating Officer; Jill Arias, VP of Marketing; Mark Carruthers, Manager of Investor Relations; Andrew Poon, Vice President, Finance; Todd Anthony, VP of Corporate Development; Connie Lillico, Corporate Secretary; Ramon Mendoza, VP, Technical Services. So, we’ve got the whole team here. If there are any questions, I may choose to pass on questions to any of the individuals in the room. Now before we start, I’ll first go to Connie.

Thanks, Keith. Prior to us beginning today, I'll read our disclaimer on forward-looking statements. Certain statements contained in this conference call regarding the Company and its operations constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and Section 21E of the United States Securities Exchange Act of 1934 as amended. All statements that are not historical facts, including without limitation, statements regarding future estimates, plans, objectives, assumptions or expectations of future performance, constitute forward-looking statements. We caution you that such forward-looking statements involve known and unknown risks and uncertainties that could cause actual results and future events to differ materially from those anticipated in such statements. Such risks and uncertainties include fluctuations in precious metal prices; unpredictable results of exploration activities; uncertainties inherent in the estimation of mineral reserves and resources; fluctuations in the cost of goods and services; problems associated with exploration and mining operations; changes in legal, social or political conditions in the jurisdiction where the Company operates; lack of appropriate funding; and other risk factors as discussed in the Company's filings with the Canadian securities regulatory agency. Resources and production goals and forecasts may be based on data insufficient to support them. The Company expressly disclaims any obligation to update any forward-looking statement. Back to you, Keith.

Thanks, Connie. First off, before I get into some of the highlights, when the public companies put out, particularly mining companies put out quite positive news, they always hope for the metal to actually be at least flat if not up to date, you put out announcements of the nature that we just received or released. And this is obviously an extremely positive news release that we just put out last night, and we have silver price unfortunately today hitting 52-week lows. The last I checked, it was down about 1.5% and our stock has very high beta to the price of silver. And it’s not unusual to see our share price move 3 to 4 times what the metal price does, whether it’s positive or negative. And today, obviously, it is negative. So, we are being unfortunately affected due to that. And our news release, which should be viewed quite positively, unfortunately gets lost in the whole wind of the metal price move. But just going to some highlights, there’s nothing we can do about silver price. All we can do as a management team is keep working hard and doing the right things to build the business. And shareholders will see -- just see a record Q2 numbers in the history of the Company. Q3, we’re expecting another record as with San Dimas being a full quarter. We’re expecting H2 to show an increase of about 55% to 71% increase over the first half of 2018, which is obviously a pretty significant increase half over half. We did mention that in the news release. We’ve also increased our guidance as well, which obviously is pretty interesting. We are expecting to see double digit growth over the next couple of quarters. We’re seeing -- finally, we’re seeing some improvements at La Encantada, with the grades slowly improving there. I know that we did lose some production in Q2 as a result of grades and the delay in the roster, but now that’s all slowly turning around in Q3 and Q4. And microbubbles, which we’ve been talking about for several quarters now are due to be delivered in H3 and installed in H4 or probably Q -- they will be delivered in Q3 and will be installed in Q4 and in Q1. And we did announce the unfortunate decision of placing one of our mines, La Guitarra mine, which is our smallest operation producing, just slightly less than 1 million ounces of silver annually in care and maintenance. It was difficult decision but I think it's the best for the Company. There is $19 million in budget that was destined for that asset which we now moved those dollars over to San Dimas. And you can imagine they accelerated return on that capital is obviously a pretty substantial compared to what it would have been at though -- if that investment stayed at La Guitarra. So, that's really it for my highlights of the news release. I'd like to open this call up to questions.

[Operator Instructions] Our first question comes from Gabriel Gonzalez of Echelon Partners.

Just wondering of the $22.4 million that was indicated to be destined for San Dimas in the second half of 2018. I was wondering if you could just go over which of the -- the projects that were outlined on page five of the press release will correspond to that CapEx.

Just hold on a sec. Yes. We don’t have the breakdown for the purpose of this call. We can -- Todd Anthony or Mark Carruthers can speak to offline and give you those details. You have to go to finance and give the breakout.

Our next question comes from Andy Schopick, [ph] private investor.

I wanted to ask if could you just update us on the doré and concentrate mix from the mine and especially San Dimas. Could you go over that with us?

Yes. San Dimas is 100% doré bars. Approximately 50% of the value of the doré bars are in silver and about 50% of the value is in gold. Santa Elena, the second largest mine is about exactly the same mix, all doré bars as well about the same value on a 50-50 basis. La Parrilla is doré bars, mostly of silver, very little gold but it also produces a lead concentrate and a zinc concentrate. It’s the only mine that actually produces zinc. Del Toro produces a lead concentrate only with silver. And by the way the silver reports the lead concentrate of La Parrilla as well, no silver reports to zinc. And San Martin is 100% doré, about 20% of the value is gold, 80% of the value is silver and then La Encantada is 100% doré. 100% of the doré is silver. You can see we're very much a doré producer.

Okay.

And that's one of the area -- just to add further comment. One of the reasons why the La Guitarra operation was put on care and maintenance, because that mill is quite an old mill. And it should really be producing doré bars. But obviously, to build a brand new mill there, it’s going to take capital to convert that over. And it was a plan that we've had on our books for quite some time, but we just never got around to doing it. And it was actually going to be done in the next couple of years. We are just all -- we are in the process of doing all the engineering. And then, San Dimas came along and then we ended up buying it of course. And it's now taking priorities. So, ultimately La Guitarra should be producing doré sometime in the future, whether it's under our ownership or somebody else's ownership, time will only tell.

Given what you've told us about La Guitarra, I'm wondering to what extent you may be able to comment on any financial charges that will be associated with putting that mine on maintenance and everything will be -- and whether everything will be taken and charged in the current quarter or the next quarter?

Yes. There is about 400 people, I believe. Is it Dustin, 400?

Yes.

About 400 total people being affected. Some of those people will be moved to other areas of the Company. By law, they will all be severanced out according to law. I think the -- I forgot the dollar amount, it was couple of million bucks.

$1.5 million.

$1.5 million severance will be paid out to those workers. And then, there will be skeleton staff, a security staff maintained on site. We’ll continue with some permitting stuff that we've been wanting to do there and just keep it in care and maintenance. But there will be ongoing costs for couple of hundred thousand dollars per quarter just to keep it on care and maintenance.

Our next question comes from Jake Sekelsky of Roth Capital Partners.

Hey, guys. Thanks for taking my question. I'm just wondering, is that 1,700 ton a day run rate something you guys expect going forward over the medium to long term or do you think this is something you guys might go back and reevaluate as the improvements are made over the next year or so?

Well, we're trying to be conservative. We've got a couple of people internally I can tell you that would love to see it a lot higher. And we've got people onsite that are pushing for bigger numbers. But we’d like to just take a bit of a step back and not push the mine. The mine has lacked investments for a long time, and we don't want to do anything foolish. So, we think the numbers that we placed into the news release, 1,700 tons per day with estimated silver grades of 345 grams and estimated gold of 2.9, those are decent numbers. And then, we are comfortable that those numbers can be maintained. But, this mine has produced more and is capable of producing more. But, it's only been in our portfolio for a short period of time. We’ve been on site since January, but we've only been operating it for really two months now. So, when we give our 2019 guidance, I'm not going to give you any kind of indication of what the number is going to look like. But I wouldn't be surprised to see it slightly higher.

[Operator Instructions] Our next question comes from John Tumazos of John Tumazos Very Independent Research.

Thank you. I know things have been pretty good at your mines this year in Mexico, but there was some noteworthy press in May concerning train derailments and robberies in the line from Veracruz to Puebla, and sensational TV footage of seven derailment and robberies. And the national statistics for the last year or so have averaged about 200 train robberies a month. Are you having any disruptions in your raw material supplies, spare parts, reagents et cetera? And have your costs related to security stayed about the same?

We don’t use the rail system at all. The concentrates are shipped by vehicles that are -- they are followed with security and so on. And the doré bars are transferred by air and by armored vehicle. Everything’s is insured of course. We had a robbery in I think, what, early 2017?

March 2017.

March 2017 was first ever robbery in the history of the Company but it was insured. The insurance company actually paid us in full within 30 days, I think it was. Yes. So, it was pretty good experience, they were so on top of that situation. Some of the bars were recovered and -- but, we have security obviously and we do take security pretty seriously. But, we generally have been pretty unimpacted by these activities. Now, the states that we’re active in are pretty mining friendly states, Durango, Zacatecas, Sonora, Jalisco. These are pretty mining friendly areas.

[Operator Instructions] We currently have no questions in the queue.

Okay. I guess, we can close off then. Nice shorts to the point, sweet call. Please feel free to call Mark or Todd with any further questions, any further details that anyone would like to have. And we look forward to great second half of 2018. And as I said, Q3 and Q4 look like they’re going to be pretty good years -- or pretty good quarters I mean. We’ve got the big mills arriving in the end of the year and will be installed in Q1 which is also going to bring some pretty interesting improvements to the operations. So, despite the silver price, there’s lots of really good things happening at First Majestic. So, hang on and feel free to call us at anytime. Thank you.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.