Silvercorp Metals Inc. (SVM) Q1 2023 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to Silvercorp's First Quarter Fiscal 2023 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Lon Shaver, Vice President, for opening remarks. Please go ahead, sir.

Thank you, Michelle. On behalf of Silvercorp Metals, I'd like to welcome everyone for joining the call to discuss our first quarter fiscal 2023 financial results, which were released yesterday after the market. A copy of the news release, the MD&A and the financial statements for today's call are available on our website. And before we get started, I'm required to remind you that certain statements on today's call will contain forward-looking information within the meaning of applicable securities laws. Please review the cautionary statements included in our news release and presentation as well as the risk factors described in our most recent 10-Q and Form 40-F as well as our Annual Information Form. Now to jump into the results. We started off fiscal 2023 with a respectable quarter with all our mines delivering solid performance. Revenue in the quarter was $63.6 million, up 8% compared to last year's quarter. Based on the production levels and realized prices this quarter, silver was 54% of revenues on a net basis, down slightly from 58% in Q1 of fiscal 2022. Our Q1 net earnings attributable to equity shareholders were $10.2 million or $0.06 per share. That compared to $12.2 million or $0.07 for the same period last year. The main contributor to the slight decrease were a 13% decrease in the realized selling price of silver, a 7% increase in unit production costs, a 5% decrease in zinc sold and the booking of a $2.7 million mark-to-market loss on equity investments. These were offset by higher silver, gold and lead sales, which increased 17%, 10% and 14%, respectively; as well as higher realized selling prices for gold, lead and zinc; and a foreign exchange gain of $1.7 million. Our adjusted earnings for the quarter were $13.5 million or $0.08 per share compared to $15.8 million or $0.09 per share for the same period last year. And just a reminder, our adjusted earnings is a supplemental non-GAAP measure which we're releasing to provide investors with another metric to better measure the performance of our underlying business, its continuing profitability and growth potential. Adjustments were made to remove the impacts from noncash and unusual items, including the elimination of share-based compensation, foreign exchange loss, impairments, adjustments and reversals, the share of loss in our associates' operating results and gain or loss on investments and onetime items. Our cash flow from operations in the quarter was $40.2 million, up 10% or $3.7 million, compared to $36.5 million in the prior year quarter. Capital expenditures in the quarter totaled approximately $18.1 million. That was up from $11.3 million in the prior year quarter, primarily due to increased underground exploration, development, equipment and facilities investments at Ying. During this period, we paid $2.2 million of dividends to shareholders, and repurchased, under our existing normal course issuer bid, 334,990 shares of the company for a total of approximately 900,000. And earlier in this current quarter, we also repurchased an additional 404,970 for a total of $1 million. We ended the quarter in a strong financial position with $215.8 million in cash and cash equivalents and short-term investments. And this does not include the investments in associates and other companies, which had a total market value of $147.4 million as at June. Of that number, New Pacific was $125 million of that total. Just for a quarterly production recap. As we previously reported, we mined 300,104 tonnes of ore and milled 298,176 tonnes. Those numbers were up 30% and 23%, respectively, compared to last year's Q1. We produced approximately 1.9 million ounces of silver, 1,100 ounces of gold, 19.1 million pounds of lead and 6.9 million pounds of zinc in the quarter. And those were increases of 26% in silver, 10% in gold, 20% in lead production and a decrease of 4% in zinc production over Q1 fiscal 2022. We're on track to produce between 7 million and 7.3 million ounces of silver, between 6,300 and 7,900 ounces of gold, 68.4 million to 71.3 million pounds of lead and between 32 million to 34.5 million pounds of zinc in fiscal 2023. Recall, these are -- this guidance represents increases of between 14% to 19% in silver, between 85% and 132% in gold, between 6% and 11% in lead and between 19% and 29% in zinc production compared to our actual fiscal 2022 numbers. The cash cost per ounce of silver net of by-product credits was negative $1.57 in this Q1, and that compared to negative $1.43 in the prior year quarter. And our all-in sustaining cost per ounce of silver net of our by-product credits was $9.25 compared to $7.46 in Q1 of fiscal 2022. Cash costs and all-in sustaining costs per ounce of silver during the quarter were impacted by some inflationary cost pressures that resulted in higher material costs and utility costs; an average 9% increase in employee pay rates; increased drilling and tunneling, resulting in higher costs included in mining costs and sustaining capital expenditures; but was offset by our higher by-product credits and average 2% depreciation in the Chinese RMB against the U.S. dollar. Now turning to our growth projects. We completed just under 2,000 meters of drilling during the quarter at the Kuanping Project, which is a satellite property located North of Ying that we acquired last November. We have submitted the application for a mining permit at Kuanping which is now being reviewed by the provincial government. At Ying, we continue to make progress on our new 3,000 tonne per day flotation mill and a new tailings storage facility. The preliminary design and engineering survey, the water and solar conversation -- conservation studies for the new mill and the accounting storage facility. And the feasibility study for the tailing storage facility has been completed. The company also received the construction permit for the new mill and is in the process to negotiate purchases of major equipment. We expect that the final approval of the environmental and safety assessment studies as well as the detailed engineering design of the new mill and the tailings storage facility will be granted later this quarter. In addition, the company continues to work with its consultant to complete an updated NI 43-101 resource and reserve estimate for the Ying Mining District, which is expected to be completed this fall, the early fall. And with that, I'd like to open the call for questions.

[Operator Instructions] Your first question comes from Joseph Reagor at ROTH Capital Partners.

So first, the key topic, I think, that has been on every call this year is cost inflation. What are you guys seeing as far as inflationary pressures maybe year-over-year for consumables, labor, et cetera?

Yes. I mean, some of those things are just a bit of an uptick that we're seeing some costs. I mean, I think I'd like to point out that the labor cost, that uptick that we commented on. Last year, you recall, we had that renewal. And I think part of those numbers in terms of the new wage rates were in that quarter. This year, obviously, we have the full quarter at those higher rates, so that's had an impact. There's nothing really sort of particularly outstanding in terms of key items. I think it's just a general increase in some costs, but nothing that is really alarming for us at this point. And obviously, we've been benefiting from a depreciation in the RMB, which is helping to offset that a little bit.

Okay. And is there like a percentage you could put on what the total all-ins looked like?

Well, I think it's better to just go back to our overall guidance range. And I mean, I think for the most part, I think GC was slightly above the upper end of our guidance. Ying was just about bang-on. I think I would use that guidance range that we gave for the cost for the year and use that going forward from a modeling and a forecasting standpoint at this point.

Okay. And then a while back, you guys announced that there was going to be this investment in, I believe the name was New Infini. Is there any update you can give us there?

Yes. I mean, we've made a small comment in the disclosure, just that we've completed work at New Infini. That really was drilling done through the course of 2021. Results really weren't kind of what we expected. There were some surprises and we're still trying to assess exactly what the data means. So at this point, and then just given some of the other priorities, it hasn't been a rush to get back to it and drive it ahead. But at some point later this year, I think we'll have some more news on that. And Joe, I think what I would add to that comment would just be, from a budgeting standpoint, I wouldn't put any budget dollars or expenditures on our end at that project for the time being.

Your next question comes from Felix Shafigullin of Eight Capital.

I have a 2-part question really on all-in sustaining costs. So on a dollar per tonne basis, your all-in sustaining costs at GC, they came up at about $82 per tonne, which is noticeably below the bottom range of your fiscal '23 guidance. So I was wondering if you could give some color on where the discrepancy comes from. And should we be assuming sort of higher cost at GC on a per unit basis going forward?

Yes, I think I would look -- if you look at GC in that case, the actual cash costs on a per tonne basis were slightly above the guidance range. And the all-in sustaining is, yes, as you pointed out, is below. Again, I would comment that there's fluctuation quarter-to-quarter and it's not always the easiest to attribute some of the tunneling and development costs between operating and capital. But -- so for the purpose of, again, of modeling, I would go back and look within the ranges that we provided in terms of guidance. Yes, if you wanted to look on the all-in sustaining side for GC, and again, this isn't going to be a huge impact given the overall numbers at GC. But I think if you looked at GC somewhere in the middle of that guidance, it's probably a better number than what we experienced in the first quarter. And obviously, you know that with small tonnages that are being processed, the timing of costs can really swing those numbers on a per tonne basis pretty high. So again, I would guide maybe on all-in sustaining for GC more to the middle of the range.

Got you, okay. I understand. And at Ying, you essentially had an opposite situation. Your all-in sustaining there was above the 2023 guidance, which I understand was driven by sustaining CapEx. So I'm guessing that ties into the $300,000 drilling -- or sorry, 300,000-meter drilling program you were doing in Ying. So I was wondering if you could provide some information on the progress of that program, how it's going along, when you're planning to complete it. And just give more detail on that.

Well, I don't know if, necessarily, I think that drill program in terms of complete, I mean, it's been budgeted for the full year. And as you know, from looking what we've been doing at Ying going back to 2020 and through 2021, it's been a fairly aggressive drilling program. And this year, in terms of our production guidance, we are calling for some tonnages coming from the gold ore zones that we've drilled off, that we've been drilling since 2020. So I think that drilling campaign continues, and some of that development costs and some of the movement in numbers that you're seeing is related to bringing on some of these new areas as well as continue to drill off and add to the resource base. So just because we have a December cutoff for that 43-101 that we're looking to put out, it doesn't mean that the program that we started with multiple objectives of drilling at Ying is stopping. It's an ongoing activity.

[Operator Instructions] Your next question comes from Dalton Baretto of Canaccord.

Lon, I think you actually just answered this question. But can you remind me again when you're putting out the new mine plan on Ying?

Yes. So it's certainly been delayed from our expectations. We're hoping to have it out earlier in the summer. Remember, we guided you to that. Just summer slowdowns, people being away, dealing with the consultants, people being tapped out. It's been pushed. It's possible that we'll have a news release out on the conclusions of the report by the end of August. But more likely, it will be out some time in September. So I'll try to keep you updated as to when, but right now, it's more likely to be a September event.

Okay, perfect. And then there's been some news coming out of China around more and more power rationing, just given the heat waves and so on. And I'm just wondering, is there a risk to your downstream customers? And do you have contingencies in place?

That's not something that we've heard about or has been a factor discussed, so I can't really comment on that. I can certainly look into it for more detail and come back to you, but it's not something that we've been overly worried. And yes, while we're certainly not shipping our concentrates far or outside of province, I mean, we do have a number of different off-takers at each of the mines for each of the products. So at this point, we're not too concerned about that.

Okay, great. And then just maybe 1 last 1 on your balance sheet. It remains fairly healthy. You generally have a cash balance of $120 million to $150 million and no real major capital programs. You've been a little bit active on the buyback. But if can you just talk about how you're thinking about your balance sheet, how you're thinking about maybe potential acquisitions, maybe accelerating the buyback? Just anything around capital allocation would be great.

Yes. I mean, I think we've established a track record on the dividend. And at this point, I wouldn't anticipate any material changes. The buyback's something -- clearly, that's a tool we have at our disposal and we're going to be opportunistic on that. But we're also really trying to drive to a balance and retain the capital that we think would be necessary to deploy on a growth and development project and we remain active on that. So I don't want to sort of do anything hasty on that front and then find a great growth opportunity and then have it be funded, or at least the beginning of it funded. So I wouldn't really anticipate any big changes in strategy until we have something that we're prepared to announce in terms of a new project or an acquisition.

There are no other questions on the phone lines. I would like to turn the conference back over to Lon Shaver for any closing remarks.

All right. Well, thank you, Michelle, and thanks, everyone, for tuning in today on a Friday in August. We'll wrap up here. But please, if anyone has any additional questions or any new questions, feel free as always to call or email us, and we'd be happy to tackle those in due course. We look forward to updating everyone again in November on our second quarter results. Have a good day.

Ladies and gentlemen, this concludes your conference call for this afternoon. We would like to thank everyone for participating and ask you to please disconnect your lines.