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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for standing by. This is the conference operator. Welcome to the First Majestic Silver Fourth Quarter and Year-end 2018 Production and 2019 Guidance. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Keith Neumeyer, President and CEO. Please go ahead, sir.
Thank you, operator, and welcome, all listeners. Happy New Year, it's our first conference call of the year, obviously. We've got a full room here in Vancouver on our end, and we also have Dustin VanDoorselaere on the line from Durango, Mexico, our Chief Operating Officer. So I'll just quickly go around the room here, Ramon Mendoza, VP, Technical Services; Andrew Poon, VP, Finance; Ray Polman, CFO; myself, of course, Keith Neumeyer, CEO and President; Todd Anthony, VP, Corporate Development; Mark Carruthers, Manager of Investor Relations; and Jill Arias, VP of Marketing; and also, Connie Lillico, our Corporate Secretary who has just stepped in right now and just kick it off with the statement.
Thanks, Keith. Prior to us beginning today, I'll read our disclaimer and forward-looking statements. Certain statements contained in this conference call regarding the company and its operations constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and Section 21E of the United States Securities Exchange Act of 1934, as amended. All statements that are not historical facts, including, without limitation, statements regarding future estimates, plans, objectives, assumptions, our expectations of future performance, constitute forward-looking statements. We caution you that such forward-looking statements involve known and unknown risks and uncertainties that could cause actual results and future events to differ materially from those anticipated in such statements. Such risks and uncertainties include fluctuations in precious metal prices; unpredictable results of exploration activities; uncertainties inherent in the estimation of mineral reserves and resources; fluctuations in the cost of goods and services; problems associated with exploration and mining operations; changes in legal, social or political conditions in the jurisdiction where the company operates; lack of appropriate funding and other risk factors, as discussed in the company's filings with the securities -- Canadian securities regulatory agencies. Resources and production goals and forecast may be based on data insufficient to support them. The company expressly disclaims any obligation to update any forward-looking statements. Back to you, Keith.
Thanks, Connie. So before we get into 2019, let's just talk about 2018 a little bit. 2018 was full of great stuff and full of challenges. And obviously, on a positive note, the San Dimas acquisition, it's in the making for almost a decade, it was several meetings took place over several years to pull that transaction off, and obviously, we were -- ended up the winner of the acquisition, and it's now effectively doubled the size of the business, the single transaction valued at somewhere around $320 million. So a pretty big chunk for us to grab onto, our staff went from 3,000 people to 6,000 people overnight, and even our production, as I said, almost doubled. So it's pretty chunky, and it's taken us some time. We just converted all the accounting systems over to SAP as of January 1, 2019, which was credit to our finance team and to our IT department for pulling that off. There's all kinds of other things that you can do internally to bring that asset into our fold, into our family. We kind of reduced our workforce substantially over the last 6 months as a result of that acquisition, but also as a result of metal prices, which we didn't really anticipate coming into 2018. Now we peaked out at about 6,000, just a little bit over 6,000 employees, that's total employees, including union, contractors and then direct staff, and we're somewhere close to about 5,200 currently, so there's been quite a lot of layoffs in the last 6 months, unfortunately. Some of that is just efficiencies, merging the entities together, also some of those due to metal price. We're also able to pull off a pretty substantial financing in early 2018, where we raised USD 156 million at an astoundingly low interest rate of 1.875% interest rate, which is almost unheard of, a 5-year money, so that's a pretty cheap money we were able to grab onto in early 2018 to help us facilitate the acquisition of San Dimas. The roaster has been under construction for longer than we had actually hoped. This is a very complex machine, the largest roaster of its kind, as you know, in Mexico. It's coming along quite nicely in the last couple of months, but there has been some startup issues with it. Just this weekend, it looks like it was running pretty smoothly, so we're still anticipating that it will be fully up and running sometime in Q1. And with that, and then the HIG mill, which was originally ordered for San Dimas, but due to some pretty interesting metallurgical results that we've gotten in our own labs as a result of testing the HIG and the roaster in combination, showed some pretty interesting economics, so we're getting pretty excited about the future [indiscernible] with the roaster being turned on and this HIG mill being installed in each [indiscernible] deliver. We're hoping, in the next couple months, we'll be hopefully up and running by Q3 and Q4, in that timeline. You're taking -- and potentially taking that up to where it used to be 7 years ago. Silver production has obviously grown substantially as a result of the San Dimas acquisition. We've got couple of mines still challenged, La Parrilla and Del Toro still are challenging assets, clearly due to investments or the lack thereof with several -- last several 2 years. When we came into 2018, at $18 silver, as many of you probably remember, at $17.50, $18 it was hovering around in the early part of 2018, and we didn't expect, and I don't think anyone did expect, that metal prices would drop below $14 in a very short period of time over the next couple of quarters. And we really had to start cutting back investments, so La Parrilla and Del Toro still have not received the capital that we're hoping to invest in those assets to really turn them around. We do have some micro bubbles being installed in La Parrilla in the next couple of quarters, which is pretty interesting from an efficiency standpoint and then likely bring cost down in La Parrilla. Del Toro still remains a bit of a problem just due to its size. We really need to get and develop an exploration up and running there. But now with San Dimas and Santa Elena producing 70% of the company's ounces, and also majority of the company's profits, we're really focusing on those assets, and unfortunately, the kind of assets like Del Toro and the La Parrilla is somewhat a little bit left behind because they're just such small percentage producers of the overall company. And obviously, in 2019, if we do see metal prices improving, which we have seen over the last month-or-so, we've seen $1 added to the metal price, which was really helpful for us, for a company our size, and if that trend continues, which I think it's going to, then I think we can start to focus some more investment at Del Toro. Over the next couple of years, you will see the turnaround as well. So metal prices are very important to us. Obviously, we've always got our eyes on margins, we've always got our eyes on operating profitable ounces to the company through technology and through exploration development and just overall efficiencies. And that will not change. The presentation on the website has now been updated as of today, so after today's call, please feel free to have a look at the company's new presentation and that will be fully updated with today's guidance. And I think that's really about all I have. I'm not going to go through the 2019 news release, you'll see that we were projecting another record year in 2019 as a result of full year production from San Dimas, and we're also adding additional ounces La Encantada. Santa Elena is also looking quite good as well, particularly with their [indiscernible] development and permitting process is now underway, we're still forecasting the [indiscernible] come online starting to feed ore to the Santa Elena mill sometime in early 2020, and that's our objective for our operations. So why don't I just open the call up to questions, and we'll see where we can go with this.
[Operator Instructions] Our first question comes from Jake Sekelsky with Roth Capital Partners.
So just starting to get a handle on grades going forward at San Dimas. I know you mentioned you've been processing some of the lower-grade areas left behind by the previous operators. Should we expect silver grades pick up a bit here once the low-hanging fruit is mined?
There's a lot of fruits. It's quite interesting because the high grade there that's now we've been able to drop substantially, still generates sufficient profits despite the fact that the grades have dropped. It's really opened up several thousands of tonnes of ore that was previously not mined. Why not mine it? That's where all the infrastructure is, that's where all the mining activity is, so it's just simple for us to do that. Over the longer term, there's lot of old areas within the San Dimas mine that we're going to reopen up, these are areas that are high-grade silver that were left behind by the previous operators due to the older stream that was in place. But it's not going to happen overnight. We're talking about putting hydraulics and lights and everything else, water and air into these old areas that haven't had any mining activity for -- in the last decade-plus. And we said right at the beginning, you go back to mid-2018, it would take, 12 to 18 months, to start accessing some of these old silver areas that are in fact high grade. And that is underway, but we're not expecting to see any of those areas start to feed the mill this year, where we're thinking that's more of a 2020 story, so we'll look at grades to stay what they are today all throughout the year.
Okay. That makes sense. And then, just on the reserves and resources, should we be looking for an update there this quarter?
Yes. We -- I've talked about upgrading the resources at San Dimas, the timeline is what?
In March.
In March? Okay. So that's going to be published with the AISC with all the other updated resources at all the mines. So that's comes out December 31.
Our next question comes from Heiko Ihle with H.C. Wainwright.
So you mentioned total CapEx of $137 million in the release, and that consists of $61 million of sustaining and $76 million for expansions. Two quick follow-ups based on that. Can you break down the $76 million of expansionary projects by quarter? Is this something that we just trend line $19 million, $20 million per quarter for the year?
Ray, can you -- Ray, do you want to jump on that or? We don't want to get into too much detail, Heiko, on that, because we could take up a lot of time here. But we do have $22 million or almost $23 million in corporate projects, so that would show up in expansionary, and of those projects, you've got 2 HIG mills, you've got 1 being installed at Santa Elena, 1 being installed at La Encantada, you've got the microbubbles being installed at La Parrilla, and then there'd be some miscellaneous stuff in there as well.
And the planned HIG mill for San Dimas as well, that's another 3.5 and microbubbles, so -- but I think, in general, it's pretty consistent quarter-over-quarter, but it depends on the timing of capitalizing the construction and progress for the HIG mills, the microbubbles and the HIG mill at San Dimas.
On that same token of question, given your all-in sustaining costs at $12.55 to $14.23, at what metal price, and I don't need a lot of detail, just sort of give us a number, I know you guys are pressed for time, at what metal price should we expect those numbers of expansionary capital to either increase or decrease above the current estimates?
Well, I think, historically, Heiko, if you go back and look at our guidance that we put out, we do our guidance every January, we try our best based on what we know today, the peso, the metal prices and then so on, and then we restate our guidance every July, and generally, we -- unfortunately, over the last 4 or 5 years, we came in relatively bullish on the metal prices, and then throughout the year, we've seen the metal prices dip and then we've always reduced our CapEx budget. I think, over the last at least 4 years, we actually spent less than our guidance that we put on in January, and that's a function of the metal price dropping. We had the reverse occur like back -- if you go back to 2010, 2011, 2012, we're actually pretty aggressive investing capital. But that was in a much different environment. If all of a sudden, we had $20 silver tomorrow, I would definitely start to speed up investment at Del Toro and La Parrilla to turn those assets around much more quickly than what we currently have in our budget. So we would argue that, potentially, the CapEx would even grow in a higher metal price environment, but we're not about to put numbers to that because we just simply cannot do that.
Got it. And then, the last one's a comment and a question combined. I saw that the 188,000 meters of exploration drilling, I mean, I sometimes speak with people that just say that companies no longer do any internal exploration. I mean, it's a 12% decrease, but I just put it into Google, Manhattan is 3.7 kilometers wide, so it's 50x the width Manhattan, just to put things into perspective. Anyways moving on to the question, cost-wise, how much are you able to squeeze suppliers given the current metal price environment? And what are you seeing with expenses there?
Well, the per meter cost of drilling is the lowest it's been in 5 or 6 years. It's probably about, Ramon, half of what it used to cost 4 or 5 years ago?
Yes. In San Dimas, we also used a combination of own operated machines, which is dropping the cost, too.
All right. Okay. Yes, so we're using our own machines. In some cases [indiscernible]. Yes, so our drilling cost per meter is 50% less than it used to cost in the more peak-type environment. So we get a lot done for that. And 180,000 meters is a lot, it -- and that reduction is largely due -- so if we get a look at Guitarra, it's no longer being invested in, so there's -- I forget exactly what the budget was last year but it was at least 30,000 or 40,000 meters of drilling that was planned in 2018 in La Guitarra, and that's now gone. So I would say, taking La Guitarra out, we're probably actually drilling a little bit more at San Dimas and Santa Elena with the 2 primary focuses.
The next question comes from Ryan Thompson with BMO Capital Markets.
Just a couple questions to follow up there on the HIG mill. Could you just try and give us a sense of where you see recovery is going, I guess, more specifically, at Encantada?
We don't want to really comment yet, Ryan, on that. It's just there's not -- there's really no point in it at this early stage. Look, I know all of you would love to throw some numbers in the model and try to figure it out, but I can tell you that their recoveries are absolutely fantastic. So this is a mine that suffered from recoveries right from the time it was turned on back by -- in the '70s like [indiscernible] due to the manganese, we've known for, well, 5 or 6 years, that roasting solved the problem. We had to come up with an energy source, then we had to engineer it, then we had to find someone to build it. Now we have to have the capital to do it. So fortunately, over time, when you've got this thing now done, and now with this new HIG technology on top of that, which is something we didn't really anticipate when we built the roaster, adding such a nice increment to the recoveries. If you go back and look at our guidance on the roaster, we were guiding 64% recovery after roasting, and that was after the 60% recovery from the main circuit. So that's 60% from the mined ore, that's 64% from the roasted ore, you're in the 75% to 80% range. And then, with the HIG mill and all that, you're even improving it even more than that. So obviously, we wouldn't spend the money if it wasn't economic, it's about an $8 million investment, and it does have quite a nice payback.
Okay. That's helpful. And I guess, we'll sort of stay tuned as you get it installed and the results that are coming out. Just 1 sort of quick follow-up question. How should we be thinking about the grades at Parrilla going forward, just kind of doing the comparison to reserve grades? It seems like you're coming in a little bit below. Is it a reconciliation thing? Is it just where you are in the mine plan right now? Is it dilution? How should we sort of think about that?
Well, the geological department, I can tell you, it's currently being rebuilt. And I mean that to say that we've been drilling a lot of meters over the last 2 years, and we've got over 100 geologists that currently are employed by the company. And we've really been looking for a very strong leader to lead that pack, and we're fortunate enough to add a VP of Exploration in June of 2018 with Ramon Mendoza, he has a contact to Ramon, and they used to work together. Ramon, is that correct? Ramon, do you want to just say something real quick?
Yes. Well, Greg Kulla brings more than 18 years of experience in exploration and about 13 as a consultant being a peer reviewer, and one of the experts in geology for AMEX, and he's bringing all his experience to help us improve all our modeling and estimation procedures. So we are also revamping our tools that we use. And yes, there will be a bit of a reconciliation, and we have to do all the models. We are getting into a more advanced estimation protocols.
And also, Greg's brought some pretty interesting geological ideas to the table. We've got, as you know, Ryan, a very, very large, chunky land packages surrounding our mills. And we've just not done the exploration that these properties have deserved over the last decade. And now Ray's taking a new step, he's got new eyeballs and is taking new approach. And he's focusing 2019 drilling on some pretty interesting ideas that he has, both for La Parrilla and Del Toro, and we're optimistic that we're going to see some pretty interesting results from his new look at this whole spend that we're going to be doing this year. So we're pretty excited about Greg's addition to the team, and he's looking at adding some other professionals to his group as well in the next coming couple of months.
The next question comes from Don DeMarco with National Bank Financial.
My question's on Del Toro, and I see that you're going to reduce the throughput in 2019, something on the order of 270 tonnes per day, that's down from over 600 tonnes per day in 2018. I see that there's some layoffs and so on associated taking place there as well. What should we think about with this reduced throughput in terms of grade? Would we expect the same grade or are you going to focus on a more higher grade portion of it? I don't know if you can add any color there, it would be appreciated.
Ramon, do you want to step in on that?
Sure. Some of the reasons we are reducing the throughput is, yes, to access better grade areas, more on the sulfite site, trying to avoid the transition zones that are very complex to be recovered in the plants. But also a very important research program where we're going to be testing several technologies to crack the potential to recover the seam from Del Toro. So what we're doing is, at the same time, we're trying to develop these sulfite zones with high lead and silver grades. We're going to be preparing both of the mining side on the vertical side, a potential recovery for seam from [ Level 3 ] in San Juan and from other areas. So that will bring a substantial increase in revenue for the dollar in the future, but we really need to take time and investigate that option.
Okay. Makes sense. And then, with respect to silver grades, do you think, should we just kind of continue on with an average grade that we saw in 2018? Or model maybe something above 150 grams per tonne type thing?
We're looking at additional increase from 150. It will be much higher.
Much higher than that? Okay.
Around 200 or so.
Okay. Great. And looking at the AISC of this asset, is there -- I mean, I guess, you've taken some steps there obviously, has there been any thoughts about just putting it on care and maintenance in the interest of improving the cost complexion of your overall mine portfolio?
It comes down to social license, right? And the company has to make a call when it comes down to a decision like that. And in the case of La Guitarra, we did make that call in middle of 2018, basically for the reason that the capital investment that was required to really turn that operation around just didn't make sense for the amount of ounce that would have added and the payback at the metal price that we could use in our internal rate of return calculations. A $20 silver would have been a completely different animal. But at $14, $15 silver, it just didn't make sense to make the investment at La Guitarra. So we unfortunately did make the decision to put that mine into care and maintenance and reallocated that capital towards San Dimas primarily. We've had those internal discussion regarding both Del Toro and La Parrilla. Fortunately, metal prices have been -- have improved about $1.50 in the last couple of months, and that makes a big difference for us. We've got our eyes on the all-in sustaining costs. We know Del Toro is going to be losing money in 2019, that's something we're willing to do. If you look at the total of ounces that's producing and the amount of cost per ounce, it doesn't really add up to a whole bunch of money just because it's such a small producer on a percentage basis of the entire company. So we as a management team have to make the call, okay? So do we run the mine at a loss of $5 million or $6 million over the next 12 months? And if so, what are we going to get out of it in 2020, 2021? And we think that based on what you just heard from Ramon, and also Greg Kulla's feelings regarding the potential of the asset, we feel that it's worth running it in 2019, and if we're right, 2020 and 2021 are going to look quite a lot different for that asset. If we're wrong, we could make that call a year from now if metal prices haven't improved.
[Operator Instructions] Our next question comes from [ Andy Scopick ], a private investor.
I have several questions I'd like to ask. First, I regret I won't have a chance to see you this year, Keith, for that annual luncheon up at the Grand Central in New York, but I'm glad that you're hosting the call today. Here's a question I'd like to start with, relative to your expectations a year ago, at or about the time of the closing of the San Dimas deal, where are you relative to your expectations in terms of the operational and financial performance in the past 12 months? Better or worse?
Well, I think the only thing that would be worse would be the metal price. So that relates directly to the financial aspects of the operation. I think there's been a whole bunch of great things we've done there. Operationally, it's running much more smoothly, than it did under the old operators. The workforce has been reduced to some degree. Still, we're looking for further reductions there over the next year or 2. There is some technologies that we'll be adding there as well in the next 12 to 24 months. Exploration has been ramped up, costs have come down quite nicely. I think cost on a per tonne basis have dropped by 40%, in that range, while -- so all-in sustaining costs have dropped by similar amount. But there's lots more stuff we're going to do there and then more improvements coming. So operationally, it's as expected, if not a little bit better, but the only impact on the cash flow has been the metal price.
I'm going to ask you to speak up a little bit louder or maybe closer to the mic. I know I'm having some difficulties with you breaking up, maybe it's just our connection, I'm not sure. As a follow-up to that, obviously, the cash costs associated with the estimated production, they're eye-popping. The all-in sustaining costs, the question I'd like to ask here, relative to the estimate for this year, is there room for further improvement in your all-in sustaining cost expectations as we look out to 2020, 2021 for San Dimas?
What answer do you think I'm going to give you, [ Andy ]?
What answer do I think you're going to give me? Yes.
There's -- okay, so you've answered the question. There's always room for improvement. There's HIG mill technology, we're -- that mill hasn't been invested in for almost 2 decades, and we've got -- we've only had it in our portfolio since May, costs per tonne have dropped from $160 to $110. I think that's pretty darn good. And then, the other mines are in the $70 range. I'm not going to say, I'll just call it we're going to get cost down to $70 a tonne, I think that would be kind of impractical just because of the size of this operation. But if we can get the cost down to sub-$100, which I think is quite realistic over the next 12 months, that's a big improvement. And if we get metal prices going our way as well, San Dimas is our already generating substantial amount of cash, it's just going to become that much more so.
All right. A couple more unrelated questions to San Dimas. Is there any change in the -- with respect to the Mexican Tax Authority on that value-added tax receivable refund? Kind of where is that today?
This is Ray Polman, I'll speak to the question. We have a couple of things going on with value-added taxes. We've been very fortunate over the past 2 or 3 months to be collecting a large amount of the value-added tax. Several months have been returned to us, but overall, there's also the ongoing tax litigation that has been in place for a number of years now with respect to the APA and what's known as a court case or [indiscernible], which is the Mexican Tax Authorities contesting their own ruling with respect to those taxes. So as you know, there's been a change of government in Mexico. The new government under AMLO really only took place as of December of this year. The new tax authorities there have been -- the top 3 individuals have been replaced, and the new authorities are now beginning to work with us. They've expressed an interest in continuing discussions with us. So until such time as we settle that issue with the authorities regarding the APA, we believe that they're holding on to some of those value-added taxes as a bit of a hedge to their own situation. So we'll have to continue working on it, but what I can say is they've been very cooperative with returning that claims, and we've caught up all of our vet submissions, and fortunately, we've received somewhere, I would say, in the neighborhood of about MXN 300 million in the past 3, 4 months.
Okay. A couple other of ones here that I'd like to ask. Going back to San Dimas, on the Wheaton Metals' renegotiated agreement, the cost associated with that, that you will incur, will we see that as an above the line or below the line operating line expense?
It will be up in the revenues.
Yes, it will be up in the revenue line. The -- it will be merged into our operating costs.
Okay. It will be merged into the operating costs. Two other ones here very quickly. You did have a share buyback program that had been authorized, and I believe you were active early in 2018 or late 2017, was there any continuing share buyback activity during the course of 2018?
No. We had -- I forgot the exact amount of shares, but it's somewhere in 200,000 or something that we bought back in Q1. But in 2018, during that really weak period in the share price, as many of you probably remember, we were active. We haven't been active since.
Also as a follow-up, the aftermarket offering that you have announced in late last year, has there been any activity -- further activity with that?
No, there's been 0 activities.
The next question comes from [ Marilyn de Blasio ], a private investor.
I was just wondering, what is the status of the mining permits with the Mexican government?
What do you mean by that? There's no statuses. There's no change in what's going on in Mexico with the new government.
Do they come up for renewal? Are they permanent?
Oh, maybe Ramon can give you more details. I think they're 25-year and they are rolling, another 25 years?
If you're talking about the mining concessions, yes, they are good for 25 years, renewable to another 25 years, no change on the mining rule regarding those. We have all our concessions in good standing and no change there.
Okay. You mentioned in 25 years, where along are you in that 25-year period?
Well, you have to understand the size of our land package, we've got thousands and thousands and thousands of claims in Mexico. We have a team of people in Durango that all they do is just manage our database of all our claims in Mexico. So they've got all those dates. And the dates are continually coming up, and some are way in the future. And every year, the dates come up. I think, it renewed. So just because the size of our portfolio. So it appears as if that's the last caller with questions. If there's anyone else who want to queue in, feel free or we'll end the call. I'll just wait for a few seconds.
This concludes the question-and-answer session.
Okay. Thanks, everyone, and good luck for 2019, and let's all cross our fingers collectively for higher metal prices. Maybe it will work if we all focus on higher metal prices. Okay. Have a great day, everyone.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.