Gatos Silver, Inc. (GATO) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and Thank you for standing by. Welcome to the Gatos Silver Q1, 2021 Earnings Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Stephen Orr. Please go ahead. Stephen Orr: Thank you. Good morning, and I'd like to welcome everyone to Gatos Silver's Q1 2021 Earnings Call. Before I begin, I want to caution our attendees that I'll be making forward looking statements. And these statements aren't guarantees of future performance. They involve risks, uncertainties and assumptions regarding future events that are quite difficult to predict. Adam Dubas: Thank you, Steve. I'll continue here on slide seven of the presentation. In Q1 we had a solid start the beginning of this year and with Q1 production, on the payable side, we had 1.3 million ounces of silver, 9,000 ounces of gold, 7.2 million pounds of lead, and 7.4 million pounds of zinc. And the all sustaining cost basis -- by-product basis, we had approximately $19.76 per silver ounce. It's important to note here too, this includes an element we've estimated about $250 per silver ounces, associated with COVID-19 costs, in the last ounce produced to the power outages that Steve discovered. On a co-product basis, our cost was $21.29 on a silver equivalent ounce basis for all-in sustaining costs. On a cash cost side, our by-product basis at $10.44 per silver, and our co-product basis $15.21 per silver equivalent ounces. Both the sustaining cost and the cash cost by-product basis were calculated on $24.15 for silver, 1.16 for lead, sorry, $1.16 for zinc, $0.93 cents from lead, and $18.12 per ounce for gold. Our operating costs this quarter were in line with our expectations given the temporary suspensions of the power outage and the near-term or the out flashing events. We've also were able to successfully sustain the 2,500 tonnes per day for all the operating days in Q1 with our processing plant. Moving to slide 8. As we've previously communicated in our Investor Day and in our Q4 earnings call. 2021 was a year of optimization and we're happy to report that it is well-underway. Numerous strategic capital initiatives were commenced during this period, including the paste plant engineering, which is expected -- the construction of that paste plant is expected to be completed in Q2 of 2022. The paste plant will have many efficiencies from a mine operation. Most notably it will help with the efficiency of the backfill operation itself, but it will also free up the haulage trucks to be more efficient and streamlined to be only four haulage trucks, they won't have to move -- press rockfill underground on the return leg or crushed. We also commissioned the second mine refrigeration unit construction, which is expected completion in Q3 of this year. The third tailings lift also begun and it's expected completion is early Q1 2022. We've also been working on underground pumping stations and both of those are currently underway. The pumping stations will allow more efficiency in our pumping operations by extracting clean water underground and pumping it immediate to surface, this will help keep the areas for development be clear of water into a lot more efficiency in such development. Once that water is pumped to the surface, that's only treatment that's required, it's just cooler given the temperature of the water prior to being released into this stream. Both of those are expected to completion -- are to be completed later this year one in Q3 and one in Q4 of this year. Roger Johnson: Thank you, Adam. I'm looking at slide 10, which is the Gatos Silver financial results. We almost broke even for the quarter, we had a net loss of just 1.6 million ounces, which represents $0.03 cents per share. Our exploration and general administrative expenses for the quarter were essentially as we had expected. G&A cost for 2021 are significantly higher than 2020 as you can see. That's due to the fact that we are we now dealing with public company governance and the reporting requirements there under. As a reminder, we became a public company near the end of October 2020. Accordingly, the Q1 2021 costs reflect these increased responsibilities. Earlier, Steve talked about our significant financial events for the quarter. Specifically, on March 10, we completed the re-acquisition of 18.5% ownership in the LGJV from Dowa. And we simultaneously repaid -- made a capital contribution to repaying the advance Gatos Joint Venture debt facility. Though of course, they will also contributed $80 million to allow that fork extinguishment of the facility. These transactions returned our ownership to 70% of joint venture. For the first quarter, our equity income for the LGJV was $2.7 million. And that represents our 0.5% ownership through March 10 and our 70% ownership from March 11 to March 31. I'll talk about the LGJV results in a moment. But this is the third consecutive profitable quarter for the LGJV. We also pay Dowa from previous financings arrangement fees and in the first quarter of 2021 the arrangement fees were significantly lower as the working capital facility was extinguished in March. Looking to the next slide, you'll see the joint venture performance on this slide and this is slide 11 -- sorry, slide 10. February 2021, freezing temperatures that we've already mentioned, restricted the natural gas availability in Texas, and therefore, in northern Mexico. The lack of natural gas as a fuel source to generate the electricity caused our Mexican power plants to suspend their operations or too little power they could provided a very high cost. The milling operations were suspended for several days because of this. And the mining operations were effectively stopped for at least eight days with dewatering taking even longer to recover from. Phil Pyle: Thank you, Roger. Just wanted to give everyone a brief update on our definitional drilling plans and exploration plans for the Los Gatos district in our Santa Valeria project. As you can see on this slide, we have a very large land position for mineral rights through the Mexican government's covering 103,000 hectares of contiguous land. Within that block, we have a total of 11 zones of interest with mineralization that has already been identified by drilling in three other zones, which have NI 43-101 mineral resources. Most important, which is where our mine is Cerro Los Gatos. We also have two other zones with mineral resources at Esther and Amapola. At present, we have three drills operating at the Cerro Los Gatos deposit. And the principal focus of these drills is to convert inferred resources into measured and indicated resources along both the northwestern and southeastern flanks of the deposits outside of the areas where the reserve is located. At present, we've completed 23 holes on the southeastern side, we demonstrated continuous mineralization over a strike length of an additional 425 meters from the reserve block. We've also identified a new vein which has higher copper and a very strong base metals and silver, which is deeper into the footwall of a volcanic package. We don't yet know the extent of this new vein, but we are targeting in an additional future drilling. On the northwestern side of the deposit we've completed a total of eight holes, principally focused on adding definition to the short term mine plan over the next two years. Those holes are wrapping up and we'll be moving further to the northwest into the areas of inferred resources as we continue on our program. Stephen Orr: Thank you, Phil. Turning to slide number 12. We've mentioned a couple of times in this presentation about the improved performance that we're seeing now in Q2. And this just gives you some stats from our April performance. In April, we mined the highest monthly tonnage since commissioning Cerro Los Gatos. In fact, the mine recovered 7,000 tonnes of its 17,000 tonnage shortfall from the February power loss. We also set a record for mined grade at 331 grams per tonne and the mill recovered 3,000 tonnes of its 23,000 tonne shortfall from Q1. Silver recovery also set a record at 87.3% which contributed to the highest silver production since commissioning the project, and we produce 698,623 ounces. Cerro Los Gatos also set a record for zinc and lead production. This performance combined with favorable silver and zinc prices resulted in a record $21.2 million of revenue in April. We're confident that we can achieve our market guidance for 2021. And that concludes our presentation. I would like to ask the host now to open up lines for any questions. Operator: The first question comes from the line of Alex Hunchak with CIBC World Markets. Alex Hunchak: Hi, everyone. Thanks for taking my questions. And congrats on a pretty exciting sounding April as well. I wanted to ask on CapEx first. So I saw about $12 million in sustaining CapEx in the quarter. Can you guys confirm how much is left in total CapEx for the rest of the year? And sort of how that spend will play out over the next three quarters? Is it pretty even over the next three quarters or is it staggered a bit? Stephen Orr: Roger, would you like to take that question? Adam Dubas: I'm happy to feel that question, Steve. Stephen Orr: Okay. Yeah, no problem. Adam Dubas: On the $12 million -- so the guidance with sustaining capital too remains unchanged, that was a $65 million to $75 million range with previous communications we've made. The $12 million is in line with what we were expecting to spend during that first quarter as we ramp up through the rest of the year and getting those multiple key sustaining initiatives going throughout the year. So it would not be a linear relationship. We do expect that some of the sustaining capital would increase, therefore meeting that, I guess, remainder $53 million to $73 million in that range, sorry, $53 million to $63 million range of additional sustaining capital to be completed in the remainder of the year. Alex Hunchak: Okay. And that'll be sort of evenly over the next three? Adam Dubas: From the -- yeah from the recent medium term forecasts we've done that would be on a fairly consistent basis quarter-to-quarter and the following quarter. Yeah. Alex Hunchak: Okay. Roger Johnson: I do need to apologies, Alex, I was speaking to you on mute. And then -- so Adam, thanks for covering for me. Adam Dubas: No worries. No worries. Alex Hunchak: Okay. That's great. So then just given the current metals prices, and the cost guidance, are you guys still comfortable that's all of that CapEx remaining can be funded at the JV level with cash flow, or do you see, potentially you're going to have to put a little extra money from your end? Roger Johnson: This is this is Roger. Absolutely, with prices, particularly where they are currently, we're above $27 per ounce silver, zinc is in the $1.30 per pound, and lead for the first time in a long time is above $1, we will be able to -- we would be able to fund it at the prices we had previously planned, which Adam pretty much quoted when he mentioned what our numbers were based upon. And so we were very confident that we will not be having to provide any further capital contributions to fund the spending. Alex Hunchak: Okay. Now that's great to hear. Thank you for that. And then, I just wanted to ask as well, you talked about the additional pumping stations. So, can you just kind of give me a little more color on how the water situation has been underground? And has it impacted production at all yet, or is it just something you want to get ahead of where or you know, how are you dealing with the water as it is right now? Stephen Orr: So Alex, the only time water impacts our production is when we lose power, and we lose our ability to maintain the pumps. The pumping is essential, though, for us to be able to maintain our efficiencies at the mine. So one of the things we learned from the grid power loss is that we still have a backup power generation capabilities from diesel generators that we used to power the project during its construction phase. We are now adding additional diesel generation power capacity, so that even in the event of a power loss, we will be able to maintain power to all the essential items. And that includes all our pumping as well. Alex Hunchak: Okay, Okay, but so just to confirm that, you know, water hasn't been a bigger issue than expected, you're managing it fine. Stephen Orr: No. Yeah, we're managing it very well now. It's – but we need to keep the pumps active. Alex Hunchak: Okay. Okay. That's good. And maybe just one more quickly then on the expiration updates. When do you think we might see sort of the first results for Esther and even Santa Valeria, in terms of timing this year? Stephen Orr: Phil, do you want to take that? Phil Pyle: Sorry about that. I was on mute. With one rig operating an Esther and one rig operating in Santa Valeria, we will complete each all approximately in two weeks interim intervals. And it normally takes about four weeks to get essays from few days. So it will from the beginning to receipt of results in about six weeks. We won't want to release the results from Ester or Santa Valeria. So we have enough data to make a meaningful interpretation of what we've been finding. So my guess is that because we've been drilling in Santa Valeria a little bit longer, we'll be able to release results on Santa Valeria within the next month or so. And then Esther will probably be more like six weeks to two months out before we give a first release. Alex Hunchak: Okay, that's great. All right, thanks for all the info guys. And good luck in Q2. Stephen Orr: Thanks, Alex. Operator: The next question comes from the line of Ryan Thompson with BMO. Ryan Thompson: Hey, Steve and Phil. Thanks for the updates. I was actually going to ask the same question on CapEx. So Thanks for clarifying that. Maybe just on grade, you’ve talked about grade picking up in Q2 there 331 grams per tonne, I think you said. Can you just give us a little bit of color on Q1, where grades were, where they sort of in line with budget and how we should be thinking about, I guess, the trend through the next couple of quarters here and even into 2022, if you could give any granularity on that that would be great. Stephen Orr: Yes. Well, you'll see when you go through the quarter the grades were lower in Q1. And the reason that they were lower in Q1 is because we ended up mining in areas that were not originally budgeted for mining. And it was particularly because our development, the constraints that we had once we had the power loss, it put our development behind. And so we were not able to access to higher grade areas, when we thought we would be able to access them. So we continued mining in other areas of the deposit, therefore lower grade. So now we're in those areas. And this is the good news, Ryan, . Now that we are into those higher grade areas, the grades are pretty much exactly what the resource model said they would be. So as I mentioned, we were for the month of April, we were 331 grams per tonne. That's exactly where we expected that we would be. And I have to say the beginning of May is as good if not better than April was. Ryan Thompson: Perfect. Thanks. Thanks for that. Good to hear that. Things are reconciling. And can you say the same, sort of, lower grade areas that that you were mining in Q1 or they sort of reconciling well to the model? And if you can any, sort of, forward-looking guidance, maybe even into Q3 and Q4, should we expect sort of an upward trend or sort of the number that you mentioned in April, a good number to be thinking about? Stephen Orr: The number in April, it's a good number to think about. And then to your earlier question, we've actually -- we actually did a reconciliation to the resource model for all of the mining we did in 2020. And interestingly enough the -- we actually ended up mining more silver than the resource modestly more silver than the resource model indicated. The difference was where we ended up mining because we didn't have access that we hadn't yet achieved development access into areas that we anticipated we would have. So we ended up going into areas that were lower grade, and the resource model showed that as lower grade as well. But the takeaway for us was that the resource is turning after -- our calculation is turning out to be very reliable, which is terrific news. And then secondly, we have to stick to plan. Ryan Thompson: Got it. Got it. No, that's very helpful. And that's good to hear that is reconciling well. Maybe just a follow-up question, can you just give us some color? I know, on the last update call you mentioned that COVID was still pretty problematic in Northern Mexico and you had to deal with it. Can you just give us an update on how things are on that front and mitigation efforts and so on and cost as well? I guess. Stephen Orr: Yeah. So the COVID detection rate at least relative to our employees seems to have peaked in December. And in the late November, early December timeframe, we were getting 40 to 50 employees testing positive, every shift rotation. As people that have been offered their 10 days leave came back. But it's now it's – in January drop precipitously and now its seems to be stabilized, it bounces around between maybe 8 to 12 each rotation, which is very manageable for us, when it was 40 to 50 that was difficult, because those people were replacing other employees. And if not with, 9 to 12 people, we can go back to the employee that was due to go off on their break, and ask them, if they'd like to stay for another rotation. And normally, they do when we had so many in November and December, we couldn't cover all of it. So we're really quite encouraged at what we're saying. But we haven't reduced any of our protocols. And we're still fortunate that we have not had an outbreak in low status. Ryan Thompson: All right. Stephen Orr: Rayan, if I – can I add one note - -sorry, I said, one note – about cost on COVID too, and I had earlier given that breakout of the talk for silver ounce on the byproduct ASIC basic basis. It's a steep, where we did cost, spike a bit too long with the infection rates. And to January, February and then into March we saw it precipitously declining to the amount of costs we are incurring for the COVID related elements of protocols in isolation. The cost for the whole quarter were approximately 1.1 million with all of our COVID efforts that were identified in that number that I earlier showed on a ASIC basis. Ryan Thompson: Got it. Okay. Perfect. I think that was all I had thanks for the update and looking forward to Q2 results. Stephen Orr: Thanks. Operator: And there are no further questions at this time, I will turn it back over to the management. Stephen Orr: Well, if there are no further questions, Thank you very much for attending our Q1 2021 Earnings Call. Well, this now concludes the call. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.GATO Ratings Summary
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Gatos Silver Shares Up 5% Following Q1 Results
Gatos Silver, Inc. (NYSE:GATO) shares closed more than 5% higher on Friday following the company’s record Q1 results, with silver production at 2.39 million ounces, which represents a 58% year-over-year increase. This was mainly the result of significantly higher silver grades, higher plant throughput and improved recoveries.
Analysts at RBC Capital upgraded the company to sector perform from underperform with a price target of $4, reflecting their view that the bottom for the company is likely in, pending further disclosure regarding the resource/mine plan expected in the second half of the year.
Nonetheless, the analysts said they continue to see uncertainty weighing on the stock and capping potential upside until then. While the analysts expect solid operating results and cash flow generation in 2022, they remain cautious until there is more visibility into 2023 and beyond.
Gatos Silver Shares Up 5% Following Q1 Results
Gatos Silver, Inc. (NYSE:GATO) shares closed more than 5% higher on Friday following the company’s record Q1 results, with silver production at 2.39 million ounces, which represents a 58% year-over-year increase. This was mainly the result of significantly higher silver grades, higher plant throughput and improved recoveries.
Analysts at RBC Capital upgraded the company to sector perform from underperform with a price target of $4, reflecting their view that the bottom for the company is likely in, pending further disclosure regarding the resource/mine plan expected in the second half of the year.
Nonetheless, the analysts said they continue to see uncertainty weighing on the stock and capping potential upside until then. While the analysts expect solid operating results and cash flow generation in 2022, they remain cautious until there is more visibility into 2023 and beyond.
