Silvercorp Metals Inc. (SVM) Q3 2023 Earnings Report, Transcript and Summary

Thank you for standing by. Good morning. My name is Lara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Silver Corp's Third 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, Lara. On behalf of Silver Corp., I'd like to welcome everyone for joining this call to discuss our third quarter fiscal 2023 results, which were released yesterday after market. A copy of the news release, the MD&A and financial statements for today's call are available on our website and on 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 applicable securities laws. Please review the cautionary statements included in our news release and presentation as well as the risk factors in our most recent 10-Q and Form 40-F and Annual Information Form. So to kick it off with a review of our quarterly financial results. With respect to the quarter, revenue in Q3 was $58.7 million. That's down 1% compared to the prior year quarter, and that's mainly due to a decrease of $4.6 million from lower silver, lead and zinc prices, but offset by an increase of $4.2 million from higher silver and lead sold. Based on production levels and realized prices in this quarter, silver was 54% of revenues on a net realized basis, the same as in Q3 of last year. Q3 net income attributable to equity shareholders was $11.9 million or $0.07 per share. That compares to a net income of $5.1 million or $0.03 per share in the same period last year. The main contributor to the gain was an increase of 8% and 12% in silver and lead sales, respectively, a 13% increase in the realized selling price for gold and a gain of $3 million on equity investments. Also, you'll recall we had a write-down in the previous quarter, which affected net income. These were partially offset by a 6% decrease in zinc sales. And as I mentioned, lower realized selling prices for silver, lead and zinc, which decreased 7% -- 8% and 13%, respectively. We also experienced a foreign exchange loss in this quarter of $800,000, and that was from the depreciation of the U.S. dollar, which occurred over the quarter. On an adjusted basis, with the adjustments made to remove the impacts of noncash and unusual items, such as impairment charges, share-based compensation, foreign exchange loss that I mentioned, the share of loss in associates operating results; gains and losses on investments and onetime items. The earnings for the quarter were $11.8 million or $0.07 per share, which compared to $13.4 million or $0.08 per share in the same period last year. And just a reminder, we're providing the suggested earnings as a supplemental non-GAAP measure to give investors 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 $25.7 million. That compared to $28.7 million in the prior year quarter. The decrease was mainly due to the previously mentioned factors on income, but offset by a $1.7 million change in noncash working capital. Before changes in noncash working capital, our cash flow in the third quarter was $24 million, and that's compared to $20.9 million in Q2 of this year, about $28 million in Q3 of last year. Capital expenditures totaled approximately $15.6 million in the last quarter down from $18.7 million in the prior year quarter, mainly due to decreased underground exploration and drilling. We ended the quarter with $210.3 million in cash and cash equivalents and short-term investments. up from $201 million at the end of last quarter, but down modestly $2.7 million from our March year-end of last year. And again, largely due to a negative $9.9 million translation impact from the appreciation of the U.S. dollar against the Canadian dollar and Chinese RMB. This cash position does not include our investments in associates and other companies which had a total market value of $121.8 million as of December 31, not necessarily the best ending period to track these investments as, obviously, we've seen a rebound in the markets here in January. At December, New Pacific represented $98 million of that $121.8 million. Now we've released our production numbers, we'd just to give a quick recap quarterly production as we reported, we mined 296,000 tons of ore, milled 303,000 tons of ore. Those were essentially flat compared to the same quarter last year. We produced on a consolidated basis, approximately 1.9 million ounces of silver, 1,100 ounces of gold, 20.1 million pounds of lead, 7 million pounds of zinc in the quarter. And that was increases of 1%, 0 and 6% in silver, gold and lead and a decrease of 13% in zinc production over Q3 fiscal 2022. Sales in the quarter, 1.9 million ounces of silver, 1,100 ounces of gold, 19.3 million pounds of lead and 7.1 million pounds of zinc. Those are increases of 8% flat and 12%, respectively, in silver, gold and lead and a decrease of 6% in zinc sales over the same period last year. The cash cost per ounce of silver net of by-product credits was negative $1.15 in the third quarter compared to a negative $1.33 in the prior year quarter. The increase in the cost was mainly due to lower byproduct credits, but offset by a decrease in expense production costs. The all-in sustaining cost per ounce of silver net of by-product credits was $9.28 in compared to $8.82 in Q3 of fiscal 2022, increased mainly due to an increase in sustaining capital expenditures, but offset by a decrease in admin expenses and mineral resource tax. Looking at 9 months results, 887,000 tons of ore were mined, and we milled 893,000 tons. Both of those numbers up 9% compared to the prior period. Year-to-date, we've sold 5.5 million ounces of ore, 3,400 ounces of gold, 55.7 million pounds of lead and 20 million pounds of zinc, represent an increase of 9%, 17% and 9%, respectively, in silver, gold and lead sold and a decrease of 11% in zinc sold. For the 9-month period, the consolidated cash cost per ounce of silver net of by-product credits was negative $0.68 compared to negative $1.47 in the same prior year period. Consolidated all-in sustaining cost per ounce for this 9-month period, net of by-product credits was $8.94 and that compares to $7.88 in the same prior year period. Compared to our fiscal 2023 production guidance on a consolidated basis after 9 months or 75% of the year, our milling tonnage is at 83% of the target. And with respect to the metal production, we've hit 77% of our silver target, 82% of our lead target, but only 60% of our zinc target for the year. Turning to our growth projects. We completed an additional 978 meters of drilling during the quarter at the Kuanping Project, which is a satellite property located north of Ying that we acquired in November of 2021. Last quarter, we received the Kuanping mining license from the Department of Natural Resources, which covers the 6.9 square kilometer property and is good until March of 2029. Going forward in this year, fiscal 2024, we're planning to carry out studies to complete the environmental assessment, water and soil protection assessment and preliminary safety facilities and mine design reports. Further updates on the mine construction plan and cost estimates will be provided once we've completed those reports. And as a result of those reports, we should have the permits in hand. As of December 31, we spent a total of $4 million on the construction of a new 3,000 ton per day flotation mill and the new tailings storage facility at Ying, a total of 2,147 meters of drainage tunnels were completed, and the site preparation for the new mill was also substantially completed the first batch of $4.1 million of milling equipment was ordered. With regards to permitting, the environmental assessment study report was revised and is pending government approval. This is for the mill. We're fully good to go on the tailing storage facility. Now turning to the fiscal 2024 guidance that we've also provided in this release. So as it relates to production, cost and capital expenditures in fiscal 2024, we expect to mine and process approximately 1.1 million to 1.17 million tons of ore, which is expected to produce between 4,400 to 5,500 ounces of gold, 6.8 million to 7.2 million ounces of silver, between 70.5 million and 73.8 million pounds of lead; and 27.7 million to 29.7 million pounds of zinc. This guidance for fiscal 2024 represents anticipated increases of between 3% to 8% in ore flat, to up 26% in gold production; between 3% and 8% increase in silver; between 3% and 8% increase in lead; and between 14% to 23% in zinc compared to our expected production results completing here in fiscal 2023. In terms of cost guidance for the next year, we're anticipating between $78.2 and $80.5 per ton on a cash cost basis, between $136.4 and $142.4 on an all-in sustaining basis. Overall CapEx for fiscal 2024 is forecast at $64.7 million with roughly $21.8 million going towards Ying's equipment and facilities, construction of the tailings storage facility, pace backfill plant, and we're adding an extra [indiscernible] or storage system to optimize the mine plan and improve ore processing head grades. The tailings storage facility is expected to be completed in 2024. And we're now anticipating completing the new 3,000 ton per day mill at Ying being delayed by 1 year and being also completed in calendar 2024. With that, I would like to open the call for questions.

[Operator Instructions] Your first question comes from the line of Justin Stevens from PI Financial.

Good to see the quarterly results, the guidance for next year. I mean fiscal 2024 guidance seems to be pretty positive, I'd say, relative to '23. Costs are trending well on higher production than what I was looking for. I'm just curious, was the drop in dollar per ton costs that you're projecting here due primarily to lower mining cost for mechanization? Or is it something else? Because it seems to be a nice little drop from what you've been looking for, for fiscal '23.

Yes, that is part of the shift and really some of that comes down to already being invested in the tunnels and access. But yes, as you've noted, we are with some of the things that have been worked on and looked at both at GC and Ying seeing some opportunities to optimize with a bit of a shift in mining methods and also bringing in more mechanization. But obviously, the contributors to those numbers have a lot of factors, exchange rates, cost per ton for both tunnel development, ore development and that kind of thing. But overall, those are the numbers we're looking at, at this point.

Yes. On that, I mean, obviously, the consumables and sort of the steel and the like that goes in to the cost here. What have you sort of been seeing just from what you -- your suppliers in terms of the cost trend this sort of inputs stabilized? Or have you seen a big drop? Or is it just sort of keeping a steady of what you had last year?

I think for the most part, things are pretty steady. I think we've seen a few normal increases on RMB terms on a few items, but nothing really alarming and nothing sort of over what we saw and anticipated when we gave guidance last year for this year on some key items. So there really hasn't been a ton of changes. But obviously, in both from a quarter period, even within the quarter, if you look at exchange rates and things, what we end up reporting in U.S. dollars can fluctuate based on RMB to U.S. dollar rate.

For sure. Yes. So with -- just to make sure I've got my timing right here. The deferral of the mill 3 here by a year. So should we be now expecting that to be commissioned maybe like the end of calendar '24? And then ramping up, I guess, properly in fiscal '26?

Yes, that's right.

Okay. Got it. Obviously, it's good to see the receipt of the Kuanping permit. Maybe can you just give a bit more detail if you guys are planning to do more drilling there? Or is the focus really on the studies before coming back with any more exploration?

Yes. I think the drilling is pretty much wrapped up there from -- with the mining permit, really now, it's kind of more just an administrative thing to come back. There's sort of a checklist of a safety assessment, preliminary mine design and safety facilities design that has to get submitted. There's sort of routine sort of water protection assessment reports in terms of what you -- how you say you're going to address issues, overall, an environmental assessment report. And then that leads to getting those things signed off that you can then get into actual mine site construction and ramping it?

For sure. Now that makes sense. I mean on that, obviously, I think the dovetailing of the timing there with the new mill would make sense. Obviously, it's -- even if it's relatively straightforward, just to let you actually walk through the checklist that you need to do to get approvals here. I'm assuming, but yes, the time line that you'd be looking at for a potential production of that wouldn't be until the new mill is up running.

Well, we actually could see or I think earlier than that. And so it's just a matter though, like I said, of getting those reports done, getting in and really working through the mine plan to see sort of what's a healthy rate of production based on what you see when you get underground, the way the resources and reserves are oriented. So I think we could see it earlier than that, but really the timing of Kuanping isn't really the factor as it relates to the mill. I think really what we've identified is that there's opportunities in the meantime to really focus on some mine optimization. And ironically, some of the work that's been done at GC has led to looking at implementing some of these technologies at Ying. So it's more getting the mine at Ying and some of the facilities ready. And you'll notice that looking at Ying in terms of the numbers, both this year and next year, we've got some healthy spending and work plans in terms of ramping. So some of that ramp is to really open up and access more areas within all of the mines at Ying and really streamline the ability to up the production rate in the future.

Got it. And just one last one for me. Any plans to -- what should we expect in terms of the [indiscernible] reserve update? Obviously, you guys have been in [indiscernible] for Ying. Which has been good to see -- but is there -- are you planning to do sort of a regular annual update here to bring some of the -- obviously, the new drilling in? Or is that just going to be sort of ad hoc?

Well, typically, what our general policy had been was to do one a year and alternate between GC and Ying. Obviously, it was just having done the Ying report that we published last September. It might be early to go back and tackling it again. But as -- I think that remains open to see whether or not we've got real fundamental changes in terms of what we see in the numbers.

Your next question comes from the line of Joseph Reagor from ROTH MKM.

So a lot of stuff I want to touch on already was, but on the mill delay, is there any other color you can give us as to why is it a matter of like timing of equipment or just things have taken longer than expected? Or impacts from COVID? Or what? Like what was the reason for the push out by a year?

Well, I think we've kind of communicated in the last call that some of the face time necessary to deal with moving things ahead just wasn't happening because of inability to travel. And so now back on that, and the plan is definitely to push through what we're calling largely administrative items to get the final permits. But in the meantime, you realized that there's sort of other things that you can and should do within the mines themselves to get tuned up. The tailings storage facility is obviously a priority for the long term. We know there's a lot more tons that we're going to be pushing through whatever mills we're running. So we definitely have to get moving on that. So that's a priority. So I think it's just really a prioritization of management time and effort. And as I said, there are some opportunities that we see to work on addressing the mines with the pace backfill plants going in with -- the first one going in at probably the L&W mine. The sorting that we're going to put in -- that we've been putting in and are going to finish up at GC. We're going to put that XRT sorter in -- at the TLP mine, which we'll probably address or be used for the ore from TLP and both LMW and LME. So when you look at those sorts of things, the ramp development, I think that it was just viewed that let's work on some of those aspects prior to pushing ahead with a mill, which will obviously consume a lot of people's time and attention.

And then for the mill. What's the remaining capital to be spent like on the whole project?

I mean, largely, the bulk of it. We've ordered equipment, but we haven't paid for it hasn't been delivered. So that spending for the mill and the tailings facility, as we disclosed, was up to $4 million combined as of the end of December. And so we have the bulk of the roughly $70 million combined for both to spend.

Your next question comes from the line of Felix Shafigullin from Eight Capital.

Congratulations on quarter 1. Most of my questions have actually been answered, but I just wanted to -- I was just curious, I'm seeing some very pronounced drops in mining and milling costs sort of in the later quarter compared to the previous ones. So could you give a little bit of color on that, what's behind that?

Well, some of that relates to -- if you're referring to the mining cost, some of that relates to -- from a development tunnels and access. We had said that we were looking to shift some of our priorities in the past from more development exploration tunnels that get expensed to drilling. We're now several years into drilling fairly aggressive programs. And the main focus of that was to identify the near-term reserves in the mine plan that already had easy access to them so that we could be mining material without those development costs. I think that's probably the largest shift other than, as I mentioned, changes in exchange rates and things like that, that have had an impact on cost.

So it's mainly a change in exchange rate and the fact that I guess more drilling is getting capitalized to cost the extent.

Well, it's not just that it's being capitalized is the fact that from a mine planning standpoint, there's been a major exercise at the mines to go and say, all right, let's look at the quality of the resources we have, the reserves that we have and determine from a prioritization standpoint. Where is the material that we have that is sort of ready to be mined in a month, 3 months, 6 months and do that based off of the existing access we have underground and the drilling, so that we can then go and say, look, let's take a bit of a break here on some of the tunneling access, cut back on some of that cost because we know where the near-term material is coming from.

[Operator Instructions] Your next question comes from the line of Gabriel Gonzalez from Echelon Capital Markets.

I was just wondering, I noted that the recent Ying tax report and prior quarter's MD&A didn't mention the exit backfill plant as part of the capital projects pipeline. I was just wondering if these were always considered part of that pipeline, but just which the related to the plant. It's worth mentioning that explicitly as part of what you're doing? Or are these effectively new items that have been brought on, I suppose, in view of the delay or in view of the delay to the plant expansion?

Well, there are definitely new items as it relates to Ying, but I think as we get experience and see things, and obviously, GC last quarter had posed some challenges. And so some of the work that has been done at GC was to bring in that XRT to help upgrade the material out of the mine before it went to the mill. And so as we look at things and we look at trends and opportunities, the ability to bring in some of this technology -- on what I'd say is fairly modest in capital expenditure items are ways to just fine-tune the mine plan and the cost profile. And so while they weren't contemplated before, we're constantly as a group, a team looking at what our trends. And we touched on it on the call ability to add some mechanization and decrease a bit of the labor intensity that is being considered because, obviously, as was raised on this call, everybody is worried about cost inflation, whether that be consumables, energy or labor. So as we see areas where we can tweak and fine-tune and adjust, we're going to do that. We haven't really -- so put a lot of air time on this. But as anyone who's followed the Ying mines has known that we've gone from having more shrinkage to moving to cut and fill resuing. Now we're actually seeing an opportunity to move back to shrinkage. Because from a productivity standpoint, the numbers are higher. And then if you combine that with an XRT, you can make up for some of the additional dilution you might face in that shift in mining method, but not hurt what the actual mill grades are. So along with but these are -- these are new opportunities and new things that we see that we can add to the mix.

Yes. Sure. No, I think that's -- it's always good to weigh technology and the benefits where it's appropriate. I was just wondering in regards to the experts XRTs at the GC mine, do you have maybe a ballpark figure of what the NPV of that item would have looked like in terms of the impact that it's making? And do you also have an estimate of what that benefit -- NPV benefit might be to using it at the Ying mine?

I don't have those numbers handy. I mean you can see from a cost standpoint, it's a pretty nominal cost to bring it in. So yes, so I don't have a solid number than what the actual NPV contribution to that is. But obviously, we think there's an opportunity there to combine that with some of the mine shifts that we're seeing, but not use up or work ourselves out of the current capacity that we have with mill 1 and 2.

No problem at all. It was -- it was more just the curiosity, recognizing that it is a modest capital cost, but had just been curious about the IRR and PV, but that's all fine.

This concludes the question-and-answer session. I would like to turn the conference back over to Lon Shaver, Vice President, for any closing remarks.

That's great. Thank you, Laura, for hosting the call, and thanks, everyone, for tuning in today. That's it for this call. Look, please, if you have any additional questions. As always, please reach out by phone or e-mail and be happy to answer, and we look forward to connecting next time for our call for our year-end results for the end of fiscal 2023. Thanks very much. Have a great day.

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