Fortuna Mining Corp. (FSM) Q3 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Fortuna Silver Mines' Third Quarter 2015, Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. Carlos Baca, Investor Relations Manager. Thank you. You may begin.

Thank you, Matt. Good morning, ladies and gentlemen. I would like to welcome you all to Fortuna Silver Mines and to our third quarter 2015 financial and operations results call. Jorge Alberto Ganoza, President and CEO; and Luis Dario Ganoza, CFO, will be hosting the call from Lima, Peru. Before I turn over the call to Jorge, I would like to indicate that this earnings call contains forward-looking information that is based on the company's current expectations, estimates and beliefs. This forward-looking information is subject to a number of risks, uncertainties and other factors. Actual results could differ materially from our conclusion, forecast or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing our conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were applied in drawing our conclusion or making a forecast or projection as reflected in the forward-looking information is contained in the company's annual information form, which is publicly available on SEDAR. I would now like to turn the call over to Jorge Ganoza, President, CEO and Co-Founder of Fortuna.

Thank you, Carlos, and good morning to all. In Q3, the company produced 1.10 million ounces of silver and 10,900 ounces of gold down 4% and 12% respectively when compared to Q3 2014. For nine months, we have produced 5 million ounces of silver and 29,700 ounces of gold. We are meeting our plan to reach our consolidated guidance of 6.5 million ounces of silver and 35,000 ounces of gold for 2015. For Caylloma mine, under the new adjusted plan and the response to the dropping in silver price produced 392,000 ounces of silver, 6.3 million pounce of lead and 10.1 million pounce of zinc in the quarter. For the nine months, we produced 1.3 million ounces of silver, which is 72% of our revised guidance. And then on zinc production is 15.4% and 26.2 million ounces respectively or 79% or 82% of revised guidance. Mine production is now concentrated in the Animas mine. From a consolidated production perspective, the guidance shortfall in silver production from Caylloma is being covered by San Jose. In the quarter, San Jose produced 1.3 million ounces of silver and 10,690 ounces of gold, 10% and 14% respectively above production in Q3 2014 and 28% higher silver and 34% higher gold production against guidance. The San Jose mine is operating comfortably within its annual plan and has added flexibility as we advance with preparations to serve 3,000 tons per day next year. With respect to costs for the quarter, at San Jose, we achieved a cost per ton of $62 basically in line with Q3 2014. And at Caylloma, we achieved $88, this is 3% down from $91 in the comparative quarter both operations are performing inline with our cost per ton guidance for the year. Looking at all-in sustaining cash cost net of by-products for the quarter, we achieved $13.80 for silver and up from $11.85 in Q3 2014. Our guidance for 2015 is $16.50. We expect to be within guidance or slightly below for the year due to the scheduled capital investments in the coming quarters related to the construction of a tailings filters and dry stack facilities in San Jose, which is to be recommissioned in late November or December. Looking forward, we continue to plan for consolidated all-in cost in the range of $10 per ounce once the expansion of the San Jose mine is commissioned mid-next year. For the quarter, all-in sustaining cash cost net of by-products at San Jose came in at $11.80 per ounce up from $9 in the comparative quarter, but below our guidance for the year $15.50 per ounce. The increase in all-in sustaining cost with respect to the previous quarter fixed grade and grade measured by the capital projects related to the tailings and dry stack construction. At Caylloma, all-in sustaining cost came in at $15.30 per ounce up from $13 in the comparative quarter, the higher all-in sustaining cost is explained by the lower silver production, the lower base metal prices netted against or higher lead and zinc production with [indiscernible]. With respect to our capital project, our CapEx guidance through the year for 2015 is $17.6 million; the allocation is $56.5 million to the San Jose mine and $14 million to the Caylloma mine. We have executed $31.6 million at the end of the quarter, $26.1 million at San Jose and $5.5 million at Caylloma. Our key San Jose project advancing according to schedule. The first -- of initially two tailings filters is installed and commissioning of agreements is taking place. For the plant expansion, we have an advance of 40% as of the end of the quarter with the aim of concluding again in mid-2015 for expansion. The ball mill which is a main equipment for this expansion is scheduled to arrive on site in January. With respect to exploration, this last -- late over the year, main exploration work is started on the expansion of resources in the central portion of the Trinidad North -- Trinidad Central, the Cuzcatlán at San Jose were currently preparing drill chamber and we expect to be drilled testing the depth expand of the central portion of the main Trinidad deposit at the San Jose mine which remains opened out there. We look forward to report on that when drilling take place when we get results. So with that, I will let Luis now take you through the financial.

Thank you. For Q3 2015, we recorded sales of $39 million, that's down 16% from Q3 of 2014, and net income of $2.6 million down from 66% from the $7.8 million of Q3 2014. The main driver for lower income and sales were lower realized prices for all of our products, silver fell to 22% quarter-over-quarter to $14.90 per ounce, gold was down 11% and zinc and lead were down 20% and 21%. The negative price effect was partially compensated by higher gold sold of 12% and higher zinc and lead sold of 35% and 45% respectively. Silver sold was 5% below the comparative quarter at 1.7 million ounces. Our mine operating earnings were $10.4 million, 38% below Q3 of 2014, mainly as a result of the decreasing sales derived from lower metal prices. Gross margin came down from 36% to 27% reflecting the impact of lower metal prices and partially compensated by the strong operating performance at the San Jose mine, which saw higher head grades and metallurgic recoveries. We recorded selling, general and administrative expenses of $2.3 million, a decrease of $1.3 million compared to the prior year period. The decrease is explained mostly by a stock-based compensation credit of $1.5 million in Q3 of 2015 compared to a credit of $0.8 million in Q3 of 2014. This is related to the major performance of the stock price in the period. Also considering the lower SG&A was a reduction in corporate expenses of $0.3 million. We had recorded a foreign exchange loss of $1.7 million; the bulk of it has been realized and related to net monetary asset positions in local currency. Operating income was $6.1 million, 54% below the comparative period. We have recorded $3 million of income tax expense for the quarter of which $2.4 million is current taxes; the effective tax rate for the quarter was 53% and 63% year-to-date. Finally, net income as mentioned $2.6 million or $0.02 per share compared to $0.06 per share in Q3 of 2014. Moving down to the cash flow statement, cash flow from operation before changes in working capital and after tax is paid for the quarter was $7.7 million down 57% from the prior year period. A significant portion of the decrease in cash flows when compared to 2014 is related to the fact that we were not yet paying tax installments at our Mexican operation last year. EBITDA for Q3 of this year $11.3 million down 39% from $18.5 million a year ago. Expenditures in mineral properties plant and equipment was $14.7 million for the quarter and $31.5 million for the year. Considering the net movement year-to-date in deposits of long-term assets of $7.5 million which is comprised of advances to contractors and equipment suppliers. The total funds allocated to CapEx were $39 million. As Jorge mentioned, our total CapEx budget for this year was $70.6 million including brownfield, of which we now expect $8 million to $10 million to recur into Q1 of 2016, this leads between $22 million and $24 million for Q4 of this year. Finally, on the balance sheet, our total cash position including short-term investments as of the end of the quarter was $109.9 million that's an increase of $32.6 million over year end reflecting the draw down of $40 million term loan with Scotia Bank. Thank you. And back to you Carlos.

We would now like to turn the call over to any questions that you may have.

At this time, we would be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Rahul Paul of Canaccord Genuity. Please proceed with your question.

Hi, everyone. Congratulations on a strong Q3. Looks like short-term investments went down by $26 million from the end of Q2 to the end of Q3, and even that was what you have deemed to cash, but your cash flow statement shows you $34 million, just wondering, if you could explain that difference, did you record a profit on the security?

No. These are just reflection of movement between short-term investments and actual cash. Our short-term investments are comprised basically of bank deposits, bank term deposits between three months and 12 months. So there is really nothing to read into it. We carry a portion of our attrition in short-term deposits and all of that business I mentioned basically bank term deposits, so nothing else is going on there.

Okay. And then no restrictions on how much you can redeem at any point of time?

Yes. Yes. That's all readily available. No issues with respect to access to short-term investments.

Okay. And just following on one question on the dry stack, tailings, I think, you did mention, you did indicate during the call that there is a chance that some of the committed funds maybe pushed out into early 2016. I just wanted to clarify there is no delays to the project as such; this is just a timing of payment?

Yes. That is correct. The tailings project is already in 92% as of the end of October is 92%. We are in the stage of commissioning the first filter. The second filter should be assembled onsite next week. And so we are going to be in full commissioning mode with both filters this second half of November, we expect to be operational in December.

Okay. And then, just last question for me on Caylloma, some of the issues you had earlier this year looks like you have changed your short-term mine plan, but do you see any impact like on the areas that you have the challenges, do you see an impact on loss of reserves going into early next year or do you think the issue is just temporary, they can get resolved completely?

We do not see today an issue with loss of reserves. I believe all of us in the industry are struggling with the fact that repairs are by definition at least on assumptions of long-term prices and there is sometimes a big divergence with smart price not at the time that we serve estimation. So then we revert to adjusting our short-term, one year plan. We have not encountered really major technical challenges; it's just a reaction to the short-term price environment. These are short-term measures. We have concentrated the mines. The mine was operating on three different areas. The deeper portion of Animas where the mine is integrated on levels 13, 12, 11, 10 and 9. The other portion of Animas which is level 6, where the mine is not integrated that means that equipment that we are operating on level six could be used or cycled in other levels of the mine. And then Bateas, which is six kilometers north of Animas vein which required its own different infrastructure. So we have concentrated the mine on the [indiscernible] of Animas. So that leaves us the opportunity to achieve higher growth utility on equipment make a personnel reductions, make more efficient use of our supervision and operators. And at current prices the higher grade veins which we have traditionally been in mining on the north portion of the process where the Bateas vein -- mainly the Bateas vein. To-date although higher grading, it's also exposed to higher -- exposed to higher viability with respect to grade because of the nature of the mineralization there. So with $14, $15 silver, when you are 400, 350, 300 gram silver, which under other price environment is perfectly -- profitable rock, and these prices is not in the those vein. So we decided to just shut it down and concentrate on a -- shut it down in -- we just have to concentrate on the deeper levels of Animas, which is high productivity wider, more mineral to high mechanization and what not. So we do not expect that these stage and material impact on research, we just work on and we will be more efficient right now.

Okay. And thanks for that. I mean if I could just clarify a bit on that and just wondering, so would it be -- my interpretation is that when you do your reserves at the end of the year, you are not at this stage making any drastic changes to your longer term metal price assumptions. But you will tweak the mine plan in the near term in order to optimize cash flow. Is that a fair assessment?

That is a fair assessment. The reserves current from the life of mine planning exercise that we do manually. And then, looking at the sensitivity of our plants to different price scenarios, we are just the annual plan or the six month plan or even the monthly plan.

Okay. Thanks a lot. That's all that I had.

Okay. Thank you.

[Operator Instructions] And our next question comes from the line of Chris Thompson from Raymond James. Please proceed with your question.

Good morning, guys. Congratulations on a very solid quarter. Three quick questions here. The first one, and apologize, you probably mentioned that I'm just looking for the information again. The CapEx spend as far as the expansion projects at the time, I guess Q4 through to the middle of next year. Could you just highlight that for me again?

The expansion itself has capital roughly $30 million of which the bulk of it is being spent next year. We have $12 million allocated this year and the balance of the 30 going into 2016. Now, probably of the $12 million that we budgeted for 2015 probably half of that will be carried forward into next year.

All right. Thank you for that. And just moving on very quickly to Caylloma, I know we have spoken before Jorge, just remind me again, are you planning or currency carrying out any plants optimization programs there?

Yes. There are two -- there are three key project at Caylloma. First one is energy project, the interconnection through the power grid. We currently are consuming roughly 1 mega from self-generated power. So we are going to start next year -- first quarter of next year start -- growing power entirely from the National Grid. So we expect a significant resumption in -- a net impact of roughly $1.5 million -- $1 million to $1.5 million annually on savings migrating from self-generated power for that million that mega to -- drawing that mega from the power line from the National Grid. So that is one project. And then in the plant, we have two projects; one is the installation of high frequency screens instead of high grades. We believe that by doing that we can make more efficient dues of our ball mills and we can achieve 10% increase in throughput capacity bringing closer to 1500 tons per day from the current 1300. So that is one. And the second is increasing or quotation -- the retention time on our left fuel grid basically by changing and expanding the quotation capacity there. So those are the three main infrastructure projects that we have Caylloma and basically all of them are expected to -- the three are expected to be commissioned first quarter of next year.

Great. Thank you for that. That's good news. And that's all will be covered in your current capital guidance, right?

Yes. We didn't carry -- the CapEx for Caylloma budgeted for 2015 was $14 million of which roughly $4.5 million were allocated these projects. And we will see some carry-forward of that into next year as well.

Great. Thank you. And then the final question, I guess exploration use float for -- my understanding is that obviously a lot of work it's going to be done from the surface drill programs of mine side stuff, when can we begin to see some results for that Jorge?

Yes. We have been advancing slowly, so with respect to the permits for La Noria drilling, La Noria is the parallel vein systems two kilometers due west from the main vein system we are working. We are currently waiting for permits from the [indiscernible] agency. So we expect those permits in December. So we might be drilling 30, December there. Our exploration group would like to advance -- we budgeted, we started thinking about budgeting that drilling for next year although we are planning to drill this year because of delays in the process. But now, where we are today, we might even see some drilling this year. In the northern parts of La Noria -- another area where we have initiated work is underground drilling in the center portion of the deposit. Most of our drilling -- exploration drilling over the past two years has focused on Trinidad North. We have been enjoying tremendous success there as you all know. And what we want to test right now is the central portion or the main deposit, add debt we call it Trinidad deep which remains open. So, with -- we were always thinking that the best place to drill or the best drill Trinidad deep portion of it, partially which will brings lines up and west, one of the decline with a certain elevation, basically the 11 high grade elevation. So we are now there and we are preparing drill chambers. And we just to be drilling also in the coming weeks, you may think that the expansion from that central portion nor we are excited about it. We have a not talked a lot about it, because we have been distracted by the success of Trinidad North, whether there is a very exciting targets to be tested in the central portion of the -- pass it as well.

Great. Thank you for that, Jorge. Congratulations guys.

Thank you, Thompson.

Our next question comes from the line of [indiscernible] Private Investor. Please proceed with your question.

Yes. Hi. Thank you. Congratulations again. It's a great quarter. I'm more interested to learn exploration activity just as management alluded to on the same vein, I want to know, just an information if any available on Ocotlan, new vein discovered recently. It looks like it is even more exciting than anything else, we have been observing. So any comments appreciated. That's all. Thank you.

Yes. We record in the second half of the year through the drilling -- drilling testing on the Trinidad North system. We discovered a new structure, a blind structure called Ocotlan. We have intersected Ocotlan vein runs parallel -- not parallel, it's the secondary structure that runs oblique through the main trends, north trends and behave structurally very similar to the vein where we have intersected it; it's some 200 to 300 meters away from the main north south trends. So we believe we are far away still because we believe that at this secondary features -- structural features run into the main north south trend. The ground preparation that of course as a result of that structure steady in favorable for wide of mineralization, which in the case of -- or deposits do correspond we usually we hired rates on. So we have several drill holes on land by now, I don't have the exact number, I believe they are like 6% or 7%, 8%, all of them ranging in -- for the most part in around that 100 ground silver over with kind of range up to few meters. We are excited by it, although, because what it means at an exploration target, we want to drill tested further north when -- if this vein tends to correlate with main north south trend. To do that, we need to evict underground infrastructure or in 2016 budget will carry roughly $3 million in tunneling to U.S. access from the underground further north to continue stress testing not only that Trinidad San Jose system, but also the Trinidad Ocotlan system. So we are excited about that. We will need time to get to that because we expect underground works will take at least the first half of the year. So perhaps second half of 2016, we can be drill testing this Ocotlan system. In the meantime, I would like to say as I mentioned before we are going to be drill testing La Noria two kilometers due west from where we get to the mining a new vein system as well. And the deep expense of the Trinidad Central, we are going to start drilling any time at this week. So --

Okay. Thank you.

No further questions at this time. Mr. Baca, do you want to make any closing remarks?

No. We just like to thank you all for joining us today. And I will thank you to visit our Web site. The photo gallery and you can follow upon the progress on our key capital project [indiscernible].

This concludes today's conference. Thank you. And you may disconnect your lines at this time.