Silvercorp Metals Inc. (SVM) Q2 2023 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Silvercorp Metals Inc. Second Quarter Fiscal Results 2023 Conference Call. [Operator Instructions] This call is being recorded on Friday, November 4, 2022. I would now like to turn the conference over to Lon Shaver, Please go ahead.

Thank you, Colin. On the back of Silvercorp Metals, I'd like to welcome everyone for joining this call to discuss our second quarter of fiscal 2023 financial results, which we released yesterday after market. A copy of the news release, the MD&A and the financial statements that we're talking about on today's call are available on our website and SEDAR. 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 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 and Annual Information Form. Beginning with the quarterly results with respect to the quarter. Revenue in Q2 was $51.7 million. That was down 11% compared to the prior year quarter, mainly due to lower metals prices with the realized selling price of silver, gold and lead down 18%, 11% and 5%, respectively. I just note the solar price hit a 2-year low in September. Based on production levels and the realized prices this quarter, silver was 54% of revenues on a net realized basis compared to 56% in Q2 of last year, but that $54 million was the same as in Q1 of this year. Our Q2 net loss attributable to equity shareholders was $1.7 million or $0.01 per share, and that was compared to net income of $9.4 million or $0.05 per share in the same period last year. And the main contributor to the loss was a $20 million impairment charge for the La Yesca project, where we don't currently have any future work planned. In addition to the decrease in metals prices, zinc sales also decreased 22%, and the company booked a $1.6 million mark-to-market loss on equity investments These were partially offset by a 3% and a 50% increase in silver and gold sales, respectively. A 5% increase in the realized zinc price and foreign exchange gain of $4.3 million. On an adjusted basis, however, with adjustments made to remove the impacts of noncash and unusual items such as share-based compensation, foreign exchange loss, impairment adjustments and reversals. The share of loss in our associates' operating results, gain or loss on investments and onetime items, earnings for the quarter were $6.8 million or $0.04 per share, and that compared to $13.6 million or $0.08 for the same period last year. Just a reminder, the adjusted earnings is a supplemental non-GAAP measure, and that's to give investors and market followers another metric to better measure the performance of the underlying business, it's continuing profitability and growth potential. Our cash flow from operations in the quarter was $14.1 million. That compared to $30.9 million in the prior year quarter. The decrease was mainly due to the fact that we were reporting this cash flow after noncash working capital. And in this quarter, we had a $6.8 million change to the negative in noncash working capital. And that's in addition to the previously mentioned income factors. Excluding the noncash working capital, our cash flow was $20.9 million and that compared to $31.2 million in Q1 and 31.7% in Q2 of last year. In Q2, the capital expenditures totaled around $17.4 million. That was up from $14.2 million in the prior year quarter, and that was mainly due to increased equipment and facilities investment at Ying. During this period, we also repurchased under our existing normal course issuer bid, just over 500,000 shares of the company for a total of $1.2 million. We ended the quarter with $201 million in cash and cash equivalents and short-term investments. That's down $11.9 million from the March number, and that's mainly due to a $15.6 million negative impact in terms of translation of currencies arising from the appreciation of the U.S. dollar against the Canadian dollar and the Chinese RMB. The cash position doesn't include our investments in associates and other equities, which had a total market value of $111 million as of September 30. And just note out that 111 new Pacific was $93 million of that. For a quarterly production review, as we previously reported, we mined 291,000 tonnes of ore and milled 292,000 tonnes of ore, down 1% and up 7%, respectively, compared to Q2 of fiscal 2022. Our Ying Mining District delivered another strong quarter in terms of operations with mine and mill productivity up 4% and 19%, respectively, compared to the same period in last year. However, at GC Q2 mine and mill productivity was down 12% and 16%, respectively, year-over-year. Operations at GC were partially affected in August and September as we worked on improving ventilation and electric power facilities to comply with new safety production regulations that were issued by China's National Mine Safety Administration, and these became effective on September 1. Improvements that were required were completed in October, and we expect mining at GC to return to its normal operating levels for the rest of the year. So for the period, we produced on a consolidated basis of around 1.8 million ounces of silver, 1,200 ounces of gold, 18 million pounds of lead and 6 million pounds of zinc in the quarter. That was increases of 6% for silver, 50% for gold and 2% for lead and a decrease of 20% in zinc over Q2 of last year. Year-to-date, we're at 3.7 million ounces of silver, 2,300 ounces of gold, 37 million pounds of -- and 13 million pounds of zinc. We're still aiming to hit the lower end of our fiscal 2023 production guidance that we're recognizing we may come up a bit short in silver, in particular when zinc, now the cash cost per ounce of silver net of by-product credits was $0.77 in the second quarter, and that compared to a negative $1.65 in the prior year quarter. The increase is mainly due to safety production requirements to switch to digital detonators. That's for blasting in the mine, and also inflationary cost pressures resulting in higher explosives and utility costs. We also had an average 9% increase in employees pay rates and as well lower by-product credits due to the metal prices I discussed earlier. And these were offset by a 4% depreciation in the Chinese RMB against the U.S. dollar. The all-in sustaining cost per ounce of silver net of by-product credits was $825 compared to $7.35 in Q2 of last year. And the increase reflects those cash cost impacts I mentioned above, offset by a modest decrease in admin expense, taxes and sustaining capital. Now turning to our growth projects. We completed an additional 5,525 meters of drilling during the quarter at the Kuanping Project, which is a satellite property located north of our Ying Mining District that we acquired last November. Last quarter, we reported that we have submitted the application for a mining permit at Kuanping, which is pending review and approval by the provincial government. Satellite opportunities like Kuanping and other recent near-mine discoveries, such as the new high-grade silver-lead-zinc structures at LMW that we announced in October were not included in the updated Ying mineral resource and reserve estimate that we announced in September. That was update, which is expected to be published on SEDAR today incorporated results from the 2020 and the 2021 drill program, which showed that most of the major mineralized structures in the district are open for expansion. During the quarter, we spent a total of $2.5 million on the construction of a new 3,000 tonne per day flotation mill and a new tailings storage facility at Ying. A total of 645 meters of graded channels were completed. And the site prep for the new mill was also substantially completed. Additionally, the first batch of milling equipment has been ordered. With regards to permitting, the Environmental and Safety Assessment study reports have been revised and are submitted and pending government approval. And with that, I'd like to open the call for questions off there.

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

So I guess, first thing on this write-down of the, that was the project that was in the new infinity subsidiary, right? And are there any other projects still in that subsidiary? Is that effectively write off that full subsidiary?

Yes, that write-off was that full venture on that project, La Yesca in Mexico. And really, I think it's important to note that really from the work that was done, we did get results. We did hit mineral mineralization. But really, what we found didn't really fit with the models that we had and so kind of results inconclusive. So at this point, we don't have any plans and the accountant spot it was prudent given that we're not planning on spending any money in the near future that was just best to read it off completely. But we still own a project. And at some point, if we have a different view on what's going on there, we could go back...

Okay. And then kind of given some of the other operators have been taking, let's say, advantage of the current market and buying up some more assets. Do you see you guys doing some M&A in the near future to kind of put that cash balance that you have to work?

Yes. I mean that has been and remains our strategy and those activities are ongoing in terms of looking at that project. Some of the term loan we've seen in the equity markets right now has impacted share prices, but some of the companies, some of the targets still have resources still have runway. So are not necessarily looking to transact at this point. But yes, we're an open door and continue to look at a wide range of projects in a range of geographies.

Okay. And then one final thing. Just you kind of indicated that you think you guys might be able to still make the low end of guidance. I guess the bigger issue seems to be the GC is behind. Can you guys make up some of the tonnage before the end of the year that you lost in Q2?

I mean, that's certainly really the objective and the team is focused on doing that. And I think you've followed the company before to notice that where we've had disruptions, there really is a hard effort to try to make a pack. As we said, we're back running at more normal levels, but we're going to put a push on to see if we can get back what we've lost.

Your next question comes from Gabriel Gonzalez from Echelon Wealth Partners.

Lon, I was just wondering on the subject of the new mill and that expenditure with the first batch of milling equipment being ordered. I'm just wondering what is the time line for having the bulk or I guess, what would functionally be the completed mill already on site for installation. And how long after that, would it be effectively ready to put the switch to turn on.

Okay. Yes. I mean where we've gotten to is, as I mentioned, all the permitting applications and everything have been submitted in terms of we have largely the permits to go ahead. What we're waiting on is some of the environmental assessment reviews that are outstanding. And so with that, we're going to probably take a bit of a pause until we can get that all confirmed and tucked away before continuing with those purchases and moving ahead. What it probably means at this point is potentially a 6-month delay in terms of the mill, likely no delay on the tailings storage facility. But at this point, we're getting sort of prepared for the fact that we might be delayed a bit.

[Operator Instructions] And we have another question from Justin Stevens from PI Financial.

Just one question, I think other for me. Obviously, you guys are still waiting for the Kuanping approval, right? My question there is sort of are you guys planning to do any more exploration before you receive that permit? Or is it really going to be a week that you get the mining permit where to drill from underground before you sort of flesh that out further?

Yes, we're continuing the drilling and I would say the permits outstanding, not anticipating any issues, but I think maybe the comment to share here and some of this applies to some of the other [Technical Difficulty]

Yes, the clicking [indiscernible] it's been coming and going.

Yes, I don't know what is going on. I will try to disconnect and reconnect on another line. Justin, are you still there?

Yes, still here.

Okay. Great. Sorry about that. I don't know what the issue was with my lines, but seem to be probably reconnected with a good line. Yes. So to answer your question, yes, we're continuing to do the work and really from a permitting standpoint, some of the things that are happening right now, as many of you know, in terms of the COVID restrictions in China means that travel is a bit of a challenge. What we're happy to report is the fact that our operations have been running smoothly. So really, other than the GC disruption, which was a completely different issue. Our operations are running smoothly through this whole situation. But because of the limitations on travel and the difficulties for people in our operations office in Beijing to get back into Beijing. Some of the sort of face time needed to move some of these things ahead isn't happening. So that's why we're seeing some of these items they may drag on a bit longer. But it's just the situation we're dealing with right now. Hopefully, things change, hearing some chatter out there that things may improve here in terms of from a movement standpoint. And then that would allow for both the corn paying and the mill project to resume just because of getting, like I said, that face time with the people in the appropriate departments to work on and advance those items?

Got it. Now, that makes sense. I guess the only thing I was just kind of wondering about is, obviously, some of the drilling you guys have been doing on obviously, the modeling around these low-angle gold copper veins at Ying. I'm assuming that most of this is probably going to be left until the new mill was in place given the addition of the copper circuit makes it, I think, much more tenable to go after some of this stuff. Is that sort of the right way to think about this?

For the copper, I'd say, yes, for some of the gold only rich zones, we're into those, and you're starting to see some of that uptick in the gold production because of that. It's still early days and work in the Kingston just getting a handle on mining a different structure with a different mining method and also from a processing standpoint. But we've been working through the flow sheet. And it's mainly a gravity recovery for some of those gold-rich areas. And so some of that's being put into a gold concentrate to be sold separately. Some of that's being included in lead concentrates, where we get pretty good payment terms for the gold in that, but we're also considering things down the road like do we go right to Dore, which would be obviously a nice feature. So starting to see that, and that ramp-up has really been happening starting late summer and starting to see that now. So I think going forward, you will see an ongoing impact from the gold zones in the results.

Your next question comes from Felix Shafigullin from Eight Capital.

Just a couple of very quick questions. So the operational disruptions that you had at GC at the end of last quarter and in October of this quarter. Is there any risk that you might run into something similar at Ying? Could you just give a little bit more color on that?.

I would say the provinces do operate differently. And where we are at Ying is a more industrialized area with more mines and I'd say more familiarity with mining activity. Some of the challenges that maybe a GC is that there's not as many operations around. So whether that's from an understanding of what's relevant for the size of the lobby group, that's what's led to those things being implemented. Also being in a warmer climate certainly would have had an impact to some degree on some of the issues we had with ventilation and the maximum temperature allowable at the workplace that we reported, which less of a factor at Ying. So we're really not anticipating at this point any challenges at Ying.

And I noticed that your money market instruments have been declining by about $30 million per quarter for the past 2 quarters. So could you just provide just a little bit of color on this, like what's going on there?

Yes. I mean some of that is a bit complicated, but what it relates to is, obviously, we've got different currencies and different items in different currencies held both in Canada and through our offices in China. And so where we had RMB-denominated instruments from a reporting standpoint when we converted those to U.S. dollars. That would explain why with the strength of the U.S. dollar, some of those numbers are down.

There are no further questions at this time. Lon make your closing remarks.

That's great. Thank you, Colin, and thanks, everyone, for joining the call. I apologize for the sound issues in the call earlier. If there are any further questions related to the results or anything else about Silvercorp, but please do reach out to us, and we look forward to reconnecting with everyone on our next scheduled call for discussing our third quarter results.

Ladies and gentlemen. This concludes your conference call for today. We thank you for participating and ask you please disconnect your lines.