Sierra Metals Inc. (NYSE:SMTS) Q2 2022 Earnings Conference Call August 12, 2022 11:00 AM ET
Company Participants
Christina Papadopoulos – Manager of Investor Relations
Luis Marchese – Chief Executive Officer
Ed Guimaraes – Chief Financial Officer
Conference Call Participants
Heiko Ihle – H.C. Wainwright
Mark Reichman – Noble Capital Markets
Leon Cooperman – Omega Family Office
Operator
Good morning and welcome to today’s Sierra Metals Second Quarter 2022 Financial Results. My name is Candice and I will be your operator for today’s call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question-and-answer at the end. [Operator Instructions].
I’d now like to hand the conference over to our host, Christina Papadopoulos, Manager of Investor Relations to begin.
Christina Papadopoulos
Thank you, operator, and good morning, everyone. Welcome to Sierra’s second quarter 2022 results conference call. On today’s call we are joined by Luis Marchese, our CEO; and Ed Guimaraes, our CFO. Today’s call will be followed by a question-and-answer period, as mentioned. The accompanying presentation for today’s call is available for download through the webcast or from the company’s website at sierrametals.com. Yesterday’s press release, the financial statements, and the Management’s Discussion and Analysis are also posted on the Company’s website.
I’d like to note that this morning’s 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 conclusions, forecasts, or projections, as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusions, forecasts, or projections in the forward-looking information and the material factors or assumptions that were applied in drawing a 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 available publicly on SEDAR or EDGAR via Form 40-F, or the Company’s website. Please note that all dollar amounts mentioned on today’s call are in U.S. dollars, unless otherwise noted.
I’d now like to turn the call over to our CEO, Luis Marchese for an overview of the quarter’s highlights, as well as a summary of what’s ahead for the second half of 2022, followed by Ed Guimaraes, our CFO for the financial highlights.
Luis Marchese
Thank you, Christina, and good morning, everyone. Looking at Slide 4. Following the release of our Q2 results and the summary in the press release, you can see that this quarter provided for mixed results. At Yauricocha, although the mine processed 317,000 tonnes during Q2, in line with throughput in Q1 2022, higher grade in all metals with the exception of lead resulted in an 11% increase to copper equivalent pounds produced. Also to highlight, during the quarter, we reached the new high grade Fortuna area which has started supplying ore to the plant feed. Nonetheless, improvements at Yauricocha on a quarter-over-quarter basis have helped offset lower production coming out of Bolivar.
On a consolidated basis, copper equivalent production has achieved within guidance for the first half of the year. The turnaround effort continues at Bolivar, albeit at a lower pace than expected. Restricted spread for operations and limited ventilation due to the delays on new raise bore in the Bolivar North-West zone continued into the overall delay, which resulted in lower throughput and grades than we had anticipated. The Bolivar mine processed 256,000 tonnes during Q2 or 37% higher as compared to Q1 2022. Underground mining is being slowly discontinued at Bolivar West zone due to depletion and phasing into the Bolivar North-West zone and El Gallo Inferior. Higher copper, silver and gold grades resulting in a 62% increase to copper equivalent pound production when compared to the previous quarter.
When compared to Q2 2021, throughput at Bolivar was 33% lower and grades were lower for all metals, except for gold, resulting in a 46% decrease in copper equivalent produced. The change in grade profile is due to the depletion of Bolivar West and the new contribution of Bolivar North-West orebody together with the low grade at El Gallo.
I would like to mention that Bolivar has been operating in a difficult security environment over the last few months due to intense police and military presence in the area following recent criminal activities. Our priority is to ensure the well-being of all personnel and appropriate measures are being taken by Sierra Metals in this regard.
At Cusi throughput was 66,722 tonnes during Q2 2022 or 24% lower as compared to Q1, due to the unexpected flooding in the underground mine. Lower throughput and lower grades resulted in a 38% decrease in silver equivalent production. When comparing Q2 2022 to Q2 2021, the mine processed 9% lower tonnes of ore. Silver production decreased 4% to 0.3 million ounces, gold production increased 13% and lead production increased 112%. Silver equivalent production of 283,000 ounces for the quarter was in line with Q2 2021.
The unexpected operational setback during Q2, coupled with lower metal prices, resulted in a 13% decrease in quarterly revenue over last quarter and 37% over the same quarter in 2021. Specifically, closing prices for Q2 for copper, zinc, metal, silver were 20%, 24%, 22% and 18% lower than the closing prices at the end of Q1, resulting in $11 million mark-to-market adjustments to the unsettled open sales positions at the end of this quarter and impacted revenue.
And finally, analyzing the overall picture, one cannot ignore the global inflationary cost pressures affecting the sector right now. In the second quarter, we were not immune to this. We faced costing pressures related to inputs such as fuel and plant consumables, reagents, using chemical analysis, explosives and drill bits. This also impacted costs related to the hiring of contractors during the quarter for increased mine preparation work and process improvements, particularly at Yauricocha and Bolivar. As a result of all these factors, EBITDA, net income and cash flow generation were all negatively impacted. Adjusted EBITDA for the quarter was $1.4 million.
Now turning to Slide 5. Turning to Slide 5 and looking ahead, in the second half of 2022, at Yauricocha, we are focused on meeting maximum levels of throughput at 3,600 tonnes per day and continue making up for lost production earlier in the year. I assume that, along with higher grades at the new high grade Fortuna zone, we have maximized our metal production within our current mining constraints. We expect that Yauricocha’s copper equivalent production will now fall within 49 million and 53 million copper equivalent pounds, bringing the infrastructure projects, also auxiliary at Yauricocha, including [wall] under the Yauricocha Shaft, ventilation infrastructure and the required expansion of the tailings dam.
At Bolivar we continue our plan to increase tonnes throughput while still in a difficult and highly uncertain operating environment. To reflect the delays in the first half of the year and continued operating difficulties, Bolivar production guidance has been revised to a range of 14 million to 16 million copper equivalent pounds for the year. In addition, with the continued monitoring of the project, of our turnaround time for the mine, we have scaled back on our capital expenditure guidance for the year, reducing Bolivar expenditures by $10 million. This includes the returning of the current expense line of capacity. We will continue with critical infrastructure projects, including ventilation, communication and tailings [at flow].
At Cusi, guidance has also been provided obviously with lower production in the range of 1 million, 1.2 million ounces. The area of focus remains the mine development into the high grade areas, aiming projects, including equipment replacement and tailings dam development.
And with that, I will turn to Ed to review the second quarter financial highlights.
Ed Guimaraes
Thanks, Luis, and good morning, everyone. Turning to Slide 6. In Q2, we reported a 19% decrease to our consolidated throughput and with a decline in all grades, this equated to a 28% decrease in consolidated copper equivalent production compared to the second quarter of 2021. With lower production and metal prices declining over the quarter, revenue from metals payable decreased 37%, when compared to Q2 ’21 as discussed earlier.
The adjustments on the open sales position as of June 30 relatively end of the first quarter of the year was $11 million. This impacted revenues from the first quarter — sorry, this impacted revenues from Yauricocha, Bolivar and Cusi by negative $8.4 million, negative $2.4 million and negative $0.2 million, respectively.
Adjusted EBITDA was $1.4 million, a 97% decrease resulting from lower revenues and lower gross margins, when compared to Q2 2021. We reported a net loss attributable to shareholders of $15.3 million or negative $0.09 per share and an adjusted net loss of $11.6 million or negative $0.07 per share. We finished the quarter with approximately $16.4 million in cash. Our three months revenue mix by metals continues to be led by copper, followed by silver and zinc at 48%, 20% and 20% respectively. Lead and gold continue to contribute revenue in line with previous quarters at 5% and 7% respectively.
Looking at the average realized prices compared to Q2 2021, copper had gained much strength during this time last year, but more recently increased fears of a global recession and climbing demand in China impacted copper demand, resulting in a 2% decline in Q2 2022. Zinc and lead on the other hand increased by 34% and 3% respectively. In the precious metals category, silver declined by 15% with gold increasing by 3%.
Turning now to Slide 7 to review balance sheet and financing and liquidity highlights for the quarter. The company reported $16.4 million dollars in cash as of June 30, 2022. Our total debt at the end of the second quarter was $80.8 million with a net debt of $64.4 million. Cash and cash equivalents decreased during the six month period due to $22.5 million in investing activities, $1.5 million used in financing activities, offset by $5.5 million of cash generated from operating activities. For the remainder of 2022, the company’s focus will be on improving operating cash flows through improved production and cost reduction.
Management will continue to review metal prices and retains the option to adjust the capital expenditures should metal prices experience any further dramatic changes within the year.
In June 2021, the company commenced the quarterly repayment installments on its $100 million six-year credit facility with Banco de Credito del Peru and Banco Santander. The repayment period is four years from its installments in the amount of $6.25 million for a total of $25 million annually and ending in March 2025. In June of this year through our subsidiary, Sociedad Minera Corona, the company received approval for a $25 million loan facility to refinance the quarterly installments payable in 2022. $12.5 million has been used to repay the installments that were due in March and June with the remaining $12.5 million to be used to repay the installments due in September and December of this year. The $25 million loan facility will become payable beginning in June 2025 with quarterly installments of $6.25 million ending in March 2026. Interest on this $25 million facility is 3.65% plus three month standard overnight rate, which at the end of June 30, 2022 was 0.29%.
$1 million in loan interest was paid during the six months on the loan facilities during the six months ended June 30, 2022. The company also has further access to approximately $25 million of available credit lines with local banks, as well as opportunities for other short-term lines, the prepayment facilities with its commercial offtakers, should it be necessary.
Turning out to Slide 8. At Yauricocha, while we saw an improvement to cash and all in sustaining costs over the first quarter of the year when compared to Q2 2021, a 46% increase in cash costs and a 32% increase in all in sustaining costs were driven by an 18% decrease in copper equivalent payable pounds in addition to higher operating costs. At Bolivar, again, unit costs improved over the first quarter of 2022. But when compared to Q2 2021, cash costs increased by 93% and all in sustaining costs by 43% driven by higher operating costs, and a 40% decrease in copper equivalent payable pound.
Sustaining costs, including treatment and refining costs, and capital expenditures, decreased during the quarter, but could not compensate for the decrease in copper equivalent payable pounds, resulting in all in sustaining costs per copper equivalent payable pound of $5.49, a 43% increase from the all in sustaining cost of $3.85 during the same quarter of 2021. We are seeing some improvements quarter-over-quarter, and we hope to see that trend speed up during the remainder of 2022.
At Cusi, cash costs are up by 15% due to higher operating costs, while all in sustaining costs decreased by 5% when compared to the same quarter in 2021. Silver equivalent payable ounces reported during the quarter were in line with Q2 2021. All in sustaining costs decreased by 5% when compared to the same period as a result of lower treatment and refining charges, and general and administrative costs, as well as sustaining capital expenditures.
Turning to Slide 9, given the delay in the turnaround program at Bolivar, the decline in metal prices and rising costs due to inflationary pressures, we have revised production costs, EBITDA and CapEx guidance to reflect the company’s current position. Production guidance has been lowered to a range between 70 million and 78 million copper equivalent pounds for the year from an original guidance of 80 million to 90 million copper equivalent pounds.
While the delays in development and ventilation in Bolivar and the flooding event in Cusi are still considered a temporary issue, we believe that this requires downward revisions to the production estimates for these sites for the second half of the year, as appropriate. At Yauricocha though, throughput and grades are expected to improve due to the mining at Fortuna zones resulting in positive adjustments to the mine’s production for the second half of 2022.
EBITDA guidance has also been lowered to a range between 61 million and 67 million from the previous amount of 90 million to 105 million to reflect the decrease in expected revenues due to the decline in metal prices and lower expected throughput at our Mexican operations. Cost guidance revisions have also been applied. At Yauricocha, a decrease in cash costs is expected for the remainder of the year, given that we expect an increase in copper equivalent production. However, we have revised all-in sustaining costs slightly upward. While sustaining costs such as treatment and refining charges actually declined at Yauricocha in the first half of the year, it was not enough to offset the sustaining capital actually required to run the mine. We expect this will be the case in the second half of the year.
At Bolivar and Cusi, we have also adjusted cash costs as well as the all-in sustaining costs to reflect higher costs associated with the lower production guidance.
We have made efforts at some of these expenditures and preserve cash in order to position the company to weather any additional events that we cannot control, occur. As a result, capital expenditure guidance has been lowered to $59 million from our original guidance of $69 million. This includes a reduction of $10 million at Bolivar due to the slower-than-anticipated ramp up of plant throughput, initially planned for 6,000 tonnes per day by the end of the year.
As we continue to focus on the turnaround program at Bolivar, we have decided to suspend the dividend for 2022 and allocate the funds internally so they can generate returns at a higher level than what would be realized if the dividend is paid out. Our priority is to ensure we can get the company back on-track operationally and improve our cash position, and ultimately, return to declaring a dividend payment.
With that, I will now turn the call back to Christina.
Christina Papadopoulos
Thanks, Ed. That ends the presentation portion of this call. We would now like to open the call to questions from participants. In the interest of time and fairness, again, we ask participants to keep their question to a limit of two to give all participants an opportunity. Operator, if you can open the line, please?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. So our first question comes from the line of Heiko Ihle of H.C. Wainwright. Your line is now open. Please go ahead.
Heiko Ihle
Hey there. Thanks for taking my questions. In your presentation, you state that the — and I quote ”Turnaround program at Bolivar is progressing” unsurprisingly here, but arguably the site has been a turnaround story for quite a while. And so just thinking bigger picture here, I mean, what tangible changes have happened in Q3 thus far and that were halfway through the quarter on Monday? And on that same token, what do you think you will accomplish at the site by the end of the quarter, maybe even by the year, given that you’re currently also talking about and I quote again that ”An uncertain operating environment?”
Luis Marchese
Thank you, Heiko. This is Luis. Our turnaround program will be going on for some time, it’s still, Heiko. There is quite a number of features that we’re addressing in Bolivar to bring it to the required efficiency.
In terms of what changes we’ll have during the year is basically that we are moving from the Bolivar West zone, which is pretty much depleted, there is only some recovery area into the new Bolivar North-West zone for the bulk of the production. So as we move into Bolivar North-West and we can develop that area, we can increase production from it. And we are adding to the production from Bolivar North-West what we have remaining also from El Gallo, the wet areas that we have from El Gallo. So that’s going to go on for some time, as we can bring more and more production from Bolivar North-West. Eventually, in next year, we’ll be able also to develop an area Cieneguita which is further up from Bolivar North-West. So by next year, we should have both Bolivar North-West and Cieneguita driving most of our production with better grades than what we have now. This takes time because of the nature of the business of developing the tunnels and the appropriate infrastructure.
Now when we talk about uncertainty, we are referring to the resource categories that we’re working with. We are aware we have quite a large part of our resource in the inferred category. So as we move from inferred — we have a very relative drilling program. As we move from inferred to indicated to measured, there we have more certainty. But in that process, we are still mining. So we are in this transition into getting to the position where we get more certainty into the resources that we mine, but this has all sorts of ramifications with what we do. So that’s what we referenced in terms of uncertainty.
Heiko Ihle
Building on the last question a bit and listen what I mean, you know we love Yauricocha and think it’s a great asset, so I’m really sorry to keep picking on Bolivar here. But just looking at the guidance that you put out, so you essentially — you cut guidance in half with really only a decent upside for Q2. At the midpoint, you’re implying 15 million pounds of copper equivalent, so then deducting the 6.8 million that you had on the first half, you’re looking at a 21% growth rate given that you need 8.2 million obviously.
That’s actually pretty good and it leads to two questions that build on my on my prior one. What’s the mental planning looking like for next year and what do you think this asset could realistically do once all your transformational changes and whatnot are completed in a couple of years? In other words, how you think the analyst community should look at the asset longer term?
Luis Marchese
I think it’s going to be much better than what we have now, Heiko. We’re going to move into as I said Cieneguita which has better grades. We are looking at increasing the throughput, reaching further 5,000 tonnes per day. And then we reach a profit, we can expand it into 6,000 tonnes per day. I think that our turnaround program is also focusing on improving efficiencies and productivity by adding the adequate infrastructure that the mine requires, tailing facilities, the integration tunnel, drainage, ventilation and the rest. So as we move into the future, we should have a fairly and more efficient mine operation, with better grades than what we have now, operating at full capacity. But we are still sometime from there.
The other obvious side of the equation here is that we have had a hit on the price. As I highlighted during my presentation, the drop has been over 20% in most of our metals. So that’s taking flexibility out of how we do this process into a new position — operating position. So we are looking at other options to manage this position more effectively, and having this reduced flexibility and various options on the way forward.
Operator
Our next question comes from the line of Mark Reichman from Noble Capital Markets. Your line is now open. Please go ahead.
Mark Reichman
Thank you. I guess on the bright side with the delay at Bolivar, you might be bringing new production on in a better pricing environment in a couple of years. But my question is, really, would you elaborate on the security situation at Bolivar that you mentioned earlier and its impact on operations and your mine development initiatives?
Luis Marchese
Yes. Thank you for that question, Mark. A couple of months ago, there was a very bad incident in nearby Bolivar, in a town called Cerocahui, which is between Bolivar — it’s like one hour from Bolivar and it has access road pretty much to the mine. A local burglar has been laying for hiding, killed two 80 year old Jesuit priests together with a couple of local residents. This is certainly a major issue that has highlighted the security issue that we have been facing over time in the area.
What has happened after that is that, now we have very strong military and police presence in the area, over 1,000 officers. And these have obviously impacted the way we operate. We have got to be very careful on the movement of our people, our suppliers, our contractors. And for a few days when this happened, it also impacted our operations because we certainly couldn’t move some of our concentrate, for example, for all the gradation. So that’s — now it’s better, but it’s still ongoing. So that’s something that we address very seriously. And we have a plan in place. We are talking with authorities and they have been quite supportive. But it’s — still it’s an ongoing issue, lifted the way it happened. But it’s still something that we have to check into the future.
Mark Reichman
And then just on the deferral of the $10 million of the capital expenditures. I understand that’ll help you in terms of financial flexibility. But does that delay the ramp up at Bolivar in terms of turnaround, or do you think it’s just better times — it’s better times to ramp up?
Luis Marchese
Better time to ramp up…?
Mark Reichman
Expenditures that you are delaying?
Luis Marchese
It is a better time to ramp, Mark, we don’t have idle capacity.
Mark Reichman
Yes. That’s helpful.
Operator
[Operator Instructions] Our final question comes from the line of Lee Cooperman of Omega Family Office.
Leon Cooperman
Two questions and a suggestion. Question number one, do you have any concern about your financial solvency, the ability to pay all your bills? And question number two, as a best guess, because all of the moving parts, do you have any kind of sense of what the capability of producing EBITDA raise in 2023 assuming present prices?
And my suggestion to get out of the way is, most brokerage firms charge you a $0.01 per share to trade stocks. And the price of the stock is very, very low relative to the cost of commissions. And I would suggest that the Company consider reverse split, and put us back in a world of respectability. So the first two questions, any comments on them please?
Ed Guimaraes
Hi, Lee. It’s Ed. So to address your first question on solvency, there are no growing concerned uncertainties at this time with our expected production and cash generation over the next 12 to 15 months. We’re still focused very much on the turnaround plan at Bolivar. We have gone out and secured more lines of credit to help, should those production estimates fall off from that. We have recently seen strengthening in the metal prices environment from the lows that we saw in June. So that’s all helpful. But to answer your question, number one, no.
And as far as the question number two, we’re in the process of revising our life of mine plans. So I’m reluctant to comment on 2023 EBITDA until we have our strategic meetings and complete our 2020 budget.
Leon Cooperman
And you haven’t had to — back to suggestion of reverse split?
Ed Guimaraes
I think we should be looking considering all options, Lee. And that’s certainly something we’re looking at. Internally, we have talked about it and it’s when to do something like that, right now I think it would be better to do something like that on a more positive uptrend, is when we can really show the turnaround taking place. My concern with doing a reverse split now when you still potentially haven’t come — we are not out of it yet with Bolivar and that could even cause a further share price decline subsequent to the reverse split. But it is something we’re looking at for sure.
Operator
Thank you. We have a follow-up question from Mark. Your line is now open. Please go ahead.
Mark Reichman
I just wanted to know if you could just kind of touch on that mark-to-market adjustment on the unsettled open sales position. How can you kind of manage that? And how much of that would you expect to realize?
Ed Guimaraes
Thanks, Mark. So we have — with our offtakers, we have essentially sales positions where once we deliver the concentrates. So that’s important. They have the option to either pay us either one month out or four months out and they have been choosing to pay between three to four months out. So, you do have the — that exposure. And given the significant declines from March to June, we had copper dropped 24% in that period, zinc and silver relative around 20% mark. So it’s an accounting adjustment essentially, where they haven’t finalized. These have somewhat reversed themselves subsequent to June 30, but it’s a point in time, Mark. So some of that should be reversed should metal prices continue where I see them or even where they are now. You’d get a reversal of that $11 million coming in….
Mark Reichman
Okay. Well, that’s very helpful. And maybe just to follow-up on that. Is that a change in behavior that you have seen from that one month versus the three to four months out? Is that — are they just choosing to do that because of the uncertainty? Or do you think that’s becoming more normal?
Ed Guimaraes
I can’t really speak — yes, I can’t speak on behalf of the traders, and their views on that, Mark.
Operator
Thank you. As there are no more questions registered at this time, I’d like to hand the conference call back over to the management team for closing remarks.
Christina Papadopoulos
Thank you, operator. That concludes today’s call. On behalf of the management team, I’d like to thank all participants for joining us today. A replay of the webcast and all materials can be found on our website at sierrametals.com. If there are any further questions or concerns, you may reach out to us after today’s call. Our contact information can be found in today’s presentation as well as on the company’s website.
Thank you, operator. Please conclude the call.
Operator
This concludes today’s conference call. Have a great day ahead. You may now disconnect your lines.
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