Great Panther Mining Ltd

TSX:GPR

Earnings Call Transcript

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Great Panther Mining's Third Quarter 2019 Financial Results Conference Call and Webcast. As a reminder [Operator Instructions], and the conference is being recorded. [Operator Instructions]I would now like to turn the conference over to Alex Heath, Director of Corporate Development and Investor Relations. Please go ahead.

[Alex Heath]

Thank you, Ariel. Good morning, everyone, and thank you for taking the time to participate in our call today. With me here this morning are Jeffrey Mason, Chair of Great Panther and newly appointed Interim President and CEO; and Jim Zadra, Chief Financial Officer.Before we begin, I'd like to mention that some of the commentary on today's call contains forward-looking statements. You should be cautioned that actual results and future events may differ from those noted in today's presentation. The commentary also refers to various non-GAAP measures, definitions and reconciliations that are included in the company's MD&A for the quarter ended September 30, 2019. All dollar amounts expressed in this presentation and the associated financial statements and MD&A are in U.S. dollars, unless otherwise noted.I'd like to recommend -- remind everyone that this conference call is being recorded and will be available for replay later today. Replay information and the presentation slides accompanying this conference call and webcast will be available at our website at www.greatpanther.com.I'll now turn the call over to Great Panther's Chair, Jeffrey Mason.

[Jeffrey Robert Mason, Chairman, Interim President & CEO]

Thank you, Alex. Good morning. Thank you for joining us on the call this morning. I'm Jeffrey Mason, the Chair of Great Panther and as of yesterday, the Interim President and CEO. I have met many of you on the call today as I first joined Great Panther's Board in May 2014, and was appointed Chair earlier this year. I've been very active in many of the key Board Committees, including serving as Chair of the Committees, which oversaw the acquisition and integration of Tucano earlier this year.Before we begin the review of the third quarter financial results, I wanted to touch on the departure of Mr. James Bannantine, which we announced yesterday. In short, the Board decided that a leadership change was necessary to improve the direction of our operations. We thank Jim for his contributions, including leading the acquisition of Tucano, which has added a key asset in terms of operating and long-term exploration potential and truly will transform Great Panther. However, it was felt that a change in leadership would be beneficial in terms of advancing to -- process of realizing the full value of Tucano and also our legacy assets. I will provide continuity of leadership in the role of Interim President and CEO until such time as we find a permanent successor, for which we have begun a formal search.From a very high-level perspective, the following are what I believe are the key themes we are focusing in on Great Panther. Number one, people. We continue to enhance our team with talented individuals. During Q3, we announced the addition of Fernando Cornejo, VP of Projects & Technical Services; Marcelo Batelochi, Director of Exploration, Brazil; and recently, we added David Wiens as VP, Corporate Finance & Treasurer. Today, we're also pleased to announce the addition of Neil Hepworth as Chief Operating Officer. Neil is a mining engineer with over 30 years of experience in both open pit and importantly, underground mining. He has worked throughout Latin America, including Brazil and Mexico, speaks Portuguese and Spanish. And to mention on David, he's a CFA and also has strong experience in the mining and capital markets. We're also in the search for a VPX to supplement our exploration programs.The second key focus is refocus on free cash flow. Great Panther's mining operations had historically generated strong free cash flow, and there have been a number of factors in 2019 which have resulted in higher-than-planned AISCs, both in operations in Brazil and Mexico. We're immediately initiating a thorough review of all our operations to refocus on free cash flow and reducing AISC.Number three, capital allocation. In concert with the focus on free cash flow and AISC is ensuring our capital is put to the best projects with the highest risk-adjusted returns. The focus will be an important basis for our plans and guidance for 2020, which we expect early in the first quarter. I'd also emphasize that we will keep our focus on maintaining our strong record of safety and importantly, our positive relationships within the communities to which we operate.I appreciate your continued patience and support as we progress through these plans to continue to improve Tucano and our Mexican operations, and adjust our focus on building a stronger foundation for success.Now turning to the third quarter of 2019. Consolidated gold equivalent production was up 270% compared to the third quarter of last year, an 18.6% increase compared to the second quarter of 2019. This highlights a significant impact of the acquisition of the Tucano Gold Mine in March of this year and the continued efforts to improve the operations since closing the acquisition.The increase in Tucano gold production over Q2 was the result of higher gold grades and recoveries made possible by the commissioning of a supplementary oxygen system in the second quarter. We also advanced an exploration program at Tucano, which will see over 35,000 meters of drilling completed over the 2019, 2020 campaign. We expect to publish an updated mineral resource and reserve for Tucano in the first quarter of 2020.At our Mexican silver operations, Topia achieved record metal production, while we continued to advance our exploration efforts at the Guanajuato Mill Complex (sic) [ Guanajuato Mine Complex ], also known as GMC. We also expect to release an updated resource estimate for GMC in Q1 2020.Mine operating earnings increased significantly during Q3, and we further enhanced our balance sheet by reducing debt by approximately $10 million and finished the quarter with over $27 million in cash. At our Tucano Gold Mine, we produced 36,317 ounces of gold during the third quarter, an increase of 21% from the second quarter. The commissioning of the supplementing -- Supplementary Oxygen System (sic) [ Supplemental Oxygen System ] at the end of April was a major milestone for Tucano, which has unlocked the ability to process higher-grade sulfide materials with increased recoveries. In addition to improved grades and recoveries, material movement increased significantly during the third quarter, allowing for pre-stripping in preparation for higher ore movement and production in the fourth quarter.During the third quarter, we released the first batch of the drill results from the exploration program at Tucano from the TAP-AB3 pit. These first results were highly encouraging and are the first step in unlocking the potential that we see at Tucano. The exploration program is expected to complete 7,450 meters and 36 holes by the end of the year, and is aiming at realizing Tucano's significant near-mine exploration potential to extend the mine life.In addition, work has commenced on a further regional exploration program focused on the extensive land package surrounding Tucano with the objective of capitalizing on Tucano's significant longer-term exploration potential.As announced in our press release on October 7 and October 15, we discovered a geotechnical issue in the west wall of the Urucum Central South pit, referred to as UCS, at Tucano on October 6. As a result of this geotechnical issue, we have taken UCS out of our short-term production plan and are conducting a full geotechnical review of UCS and other Urucum pits, which includes the engagement of an independent geotechnical consulting firm.To compensate for the loss of UCS production, we have resequenced and accelerated production from the other pits, primarily the Urucum North and Urucum South pits. Our UCS work program will identify the geotechnical analysis and update our plan for additional stripping and rehabilitation required to bring UCS back into production.Our objective remains to maintain UCS in its current position for production in 2021 and 2022. I know that UCS was not scheduled to provide ore feed in 2020, and planned activity for UCS in 2020 was pre-stripping in preparation for production in 2021. The company will provide an update when the UCS work program is complete.As a result of the change in the short-term mine plan to address UCS, Tucano's production guidance for Q4 has been revised to a range of 39,000 to 44,000 gold ounces and 129,000 to 134,000 gold ounces for the period from March 5 acquisition date to the end of 2019. Our primary metal production is focused on gold. However, we continue to use and report cost metrics per payable silver ounce to manage and evaluate our operating performance at our Mexican silver mines.Topia achieved record metal production with 501,469 silver equivalent ounces, which represented a 23% increase over the third quarter of 2018, which is attributed to higher grades and increases in processing rates.At GMC, ore continues to be sourced from the San Ignacio mine, while we continue exploration activities at the Guanajuato Mine. The 2 mines together with a shared plan comprise our Guanajuato Mine Complex, or GMC.Metal production from the GMC was approximately 383,000 silver equivalent ounces for the third quarter and was in line with production of the second quarter. The exploration program at Guanajuato advanced with 3 drill rigs in operation with the objective outlined in situ blocks of higher-grade mineralization.For Q3, consolidated cash cost was $995 per gold ounce sold, and all-in sustaining costs -- pardon me, sorry. I just wanted to wind back a little bit and comment on that. We expect to release an updated 43-101 resource estimate in the first quarter of 2020, which will be the basis for a decision on reactivation of Guanajuato.At this point, I'd like to hand it over to Jim on the financial aspects. Thank you very much.

[Jim A. Zadra, CFO & Corporate Secretary]

Thanks, Jeffrey, and welcome, everyone. Higher production in Q3 and stronger metal prices drove strong increases in our revenue, mine operating earnings and operating cash flow, both compared to the same quarter last year and quarter-over-quarter. Revenues increased 57% over the second quarter of 2019, and mine operating earnings increased almost threefold to $10.2 million or $0.03 per share. Operating cash flow increased to $13.3 million for the quarter. Despite strong increases in mine operating earnings and operating cash flow, we reported a net loss of $0.02 per share after accounting for noncash and unrealized foreign exchange losses, due mainly to the Brazilian real hitting a near-record low at the end of Q3. The unrealized foreign exchange losses totaled almost $7 million or $0.02 per share and were attributed to the translation of the Brazil balance sheet and to mark-to-market losses on Brazilian real forward contracts, which has now flipped to a net gain with the strengthening of the BRL subsequent to the end of the quarter.Reflecting adjustments for noncash items and the mark-to-market loss on FX, our adjusted EBITDA for Q3 was $13.7 million. This also reflected a significant fourfold increase over the $3.1 million in adjusted EBITDA generated in Q2. Our exploration, evaluation and development, or EE&D, expenditures increased 14% compared to the same quarter last year due to exploration programs at our Mexican operations and continued expenditures at Coricancha as we are now undertaking further processing of stockpiles, along with some limited mining.G&A expenses were also higher than Q3 of last year due to the addition of G&A costs from the acquisition of Tucano. Costs related to the former head office were about $400,000, and these continue to be reduced and are expected to be materially eliminated by the end of the first quarter of 2020.For Q3, consolidated cash cost was $995 per gold ounce sold, and all-in sustaining costs, excluding corporate G&A, was $1,327 per gold ounce sold.At Tucano, we advanced stripping in Q3 to prepare for the ramp-up in production in Q4, which increased AISC for Q3. We still expect a further step-up in production at Tucano for Q4. However, as noted, this will be less than originally planned and guided to due to the geotechnical event at the Urucum Central South pit.AISC and cash costs were also impacted by higher costs at our Topia operation in Mexico. Some of this was associated with our efforts to increase mining rates and less favorable terms for concentrates, so we've also seen an overall increase in our unit cost of production. As noted in the opening, a key priority is to reduce these costs and bring Topia's AISC closer to levels seen last year.During the third quarter, we further reduced our outstanding debt assumed through the acquisition of Tucano by approximately $10 million. Approximately $6 million of this reduction represented cash repayments, and the balance was conversion to equity. There are no further equity conversion rates associated with our debt facilities.As noted, we closed the Q3 with over $27 million in cash and the remaining debt on our balance sheet consists of about $15 million of revolving credit facilities with Brazilian banks and about $18 million with unsecured creditor with a term to June 2022.I will now turn the call back to Jeffrey Mason.

[Jeffrey Robert Mason, Chairman, Interim President & CEO]

Thanks, Jim. Just to reiterate, we've revised our 2019 guidance for Brazil and Mexico. For Brazil, we expect gold production between 110,000 and 115,000 ounces. For Mexico, we expect on a gold equivalent production of 40,000 to 45,000 ounces with an 80:1 silver-gold ratio. Total consolidated guidance is expected within the range of 150,000 to 160,000 gold equivalent ounces. Cash costs are expected to be between $930 and $970 per gold ounce sold, with all-in sustaining costs, excluding corporate G&A, of $1,230 to $1,270 per gold ounce sold.At Coricancha, we noted that we are undertaking further processing of stockpiles and some limited mining following the Bulk Sample Program we completed in Q2. We continue to plan for a restart, but this will be dependent on the availability of capital, and our overall capital allocation strategy.Thank you very much, and I now open to questions.

[Operator]

Our first question comes from Heiko Ihle of H.C. Wainwright.

[Heiko Felix Ihle]

Congratulations on the new appointment there. As for the pit wall at Tucano, and maybe it's a little bit too early to ask this question in the process. But I mean you hinted at some of this in your prepared remarks earlier. I'm just a little curious, what are the next -- and like quantify it a little bit, what are the next potential and actual steps to fix the issue? Maybe a time line for these steps, and if you can quantify the cost impacts of the UCS and when you anticipate to hit them? I mean my gut feeling is just using old guidance versus new guidance and the cash cost is not the right approach to cash impacts, right?

[Jeffrey Robert Mason, Chairman, Interim President & CEO]

Right. So let's -- I'll take that question, Heiko. So just to rewind the reel a bit, we were going to complete production out of the Urucum South Central this year. And because of the issue, we suspended that mainly for safety reasons. In next year, the plan was to take another phase of stripping back. So there was another phase to that pit. So what is basically occurring from a planning perspective is to consolidate that pushback into the production that would otherwise occur for this year has been deferred to 2021. Now with respect to quantity and time line, the current understanding is that it is somewhat equal or slightly greater than the initial planned pushback, but we need to do geology and geotech drilling in the high wall side beyond the pit wall to understand the competency of the rock that is there to determine how far we go back and the angle of repose and bench angles to determine the amount of quantity to move. So that process should take, including monitoring, drilling, assessment and design, it's probably in the order of 4 to 5 months. Currently, we're looking at ways to accelerate that process, and we have bids already in hand from 2 parties to undertake that work, well prepared to undertake that work, and then look to optimize that design of the pre-stripping to reactivate that pit. It will likely be more stripping, but there is a chance, in on the geotechnical, to optimize that through various buttress methods and otherwise. Back to you.

[Heiko Felix Ihle]

Fair enough. And just to clarify a little bit. Is it fair to say that Neil's primary responsibility at this time is Tucano, given that you pointed out that he speaks Portuguese in the release. I mean, that said, he speaks Spanish too, but still. And when does he start? And how soon can he hit the site?

[Jeffrey Robert Mason, Chairman, Interim President & CEO]

Yes. So we've been looking for a COO and been negotiating with various parties, and Neil popped out on top. He's got a great background both in underground and open pit, which we have projects on each. He does speak Portuguese and Spanish, and he has worked in Brazil. His targeted start time is November 5. There is a focus on Tucano but at the same time, we want to reengage people at each one of our legacy sites to recover what I believe we can be profitable in those operations and turn Tucano around. He has a big job. He's already active and will be starting November 5.

[Operator]

Our next question comes from Mark Reichman of NOBLE Capital Markets.

[Mark La France Reichman, Senior Natural Resource Analyst]

I'm just hoping that Jim Zadra might elaborate a little bit on how he's managing the balance sheet going into 2020, kind of your capital expenditure expectations and financing.

[Jim A. Zadra, CFO & Corporate Secretary]

Sure. Mark. Well, we -- even though Q4's production has been cut back due to UCS, we still expect Q4 to be profitable and cash generating. That said, we're carefully looking at our capital plans for 2020. And we did make mention of Coricancha. The focus on capital allocation will be to those projects that will give us the highest return. To do everything that we want to do next year, we will need additional capital, but we'll have to balance that with how appropriate and the cost of capital -- in the cost of that capital. So in other words, we're going through a...

[Mark La France Reichman, Senior Natural Resource Analyst]

Exploration versus Coricancha versus getting Tucano...

[Jim A. Zadra, CFO & Corporate Secretary]

We would put exploration in Tucano at the top. We have just...

[Mark La France Reichman, Senior Natural Resource Analyst]

Tucano. Well, I realize that much depends on the outcome of the Work Plan. But because those pits weren't scheduled to return to service until 2021 and 2022, I guess I'm just asking you, should there be a real sense of urgency to spend a lot of capital right away to bring it back into service? Or is there a figure in your analysis where you decide, let's just quarantine UCS and move on?

[Jim A. Zadra, CFO & Corporate Secretary]

Well, that's the analysis that Jeffrey was talking about. The analysis is not a significant cost, but we need to do it because there's a significant amount of ounces, of reserve ounces in UCS. There's about 150,000 ounces in that, that was scheduled for 2021 and 2022. What -- the big question is going to be, what is the incremental cost to strip over what we had in the previous mine plan, if you will. We think, as Jeffrey said, the initial indications are it's going to -- it's -- there's going to be some incremental cost. We don't think it's going to be -- at this point, we don't think it's going to be prohibitive. But need to do that analysis and assessment, it's going to take about 4 to 5 months to get through that. And that work in itself is not a huge cost.

[Jeffrey Robert Mason, Chairman, Interim President & CEO]

So Mark, one of the things I'd like to layer on, on this is we're not bashful of setting aside Coricancha, delaying, looking at different ways to get to the finish line with that and prioritize what our sequence is. So off the top, where our focus is cash generation from all operations, #1. So free cash flow. And the way we get there is having the right people, which we're working hard to get there. And #2, in-mine, close-at-hand exploration. So as we go through the capital allocation program, the view will be to accelerate and get to results on exploration sooner rather than later so we can get a defined life of mine certainty, greater certainty. And then 3 is the capital enhancement projects at Tucano, will be the third order, and they have drifted more to the backside because the mill, as it stands currently, is operating quite well.

[Mark La France Reichman, Senior Natural Resource Analyst]

And just lastly, is there an update you can provide on the exploration program at Guanajuato, the progress that's being made in bringing that mine back into service in 2020, and maybe your expectations on production from the entire complex?

[Jeffrey Robert Mason, Chairman, Interim President & CEO]

Yes. So exploration to date has been very, what I'll call, secondary mining; areas that were not necessarily been mined in the past but had access through various development access that was already in place. The focus now is going to shift to voids and areas that haven't otherwise been touched, so more within the mine scope area, but areas that have otherwise not been explored. We're looking to have a rigorous budget exercise leading into December. We're also going to do a reserve resource update for all our operations leading into Q1, and we're looking forward to a 1- and 2-year plan for all of our operations with respect to exploration. And we think adding the VPX on top of already very talented directors and managers of exploration will give us that insight into the strategic plan of rolling out exploration. Bottom line is our view is to be more intense sooner and have staged exploration.

[Jim A. Zadra, CFO & Corporate Secretary]

I think I would add, Mark, that we really can't formulate our plans and won't formulate and disclose our plans until we have that resource update for Guanajuato. That's really going to be the key, and that's the key marker for you and others in terms of what our plans will be.

[Operator]

[Operator Instructions] Our next question comes from Craig Stanley of Eight Capital.

[Craig Philip Stanley, Principal for Metals and Mining Research]

First off, you talked about the 150,000 ounces of reserves at Urucum Central South. Does that include the 35,000 ounces that you were hoping to buy in Q4 of this year but, well, you were hoping to be pushed back at some point?

[Jeffrey Robert Mason, Chairman, Interim President & CEO]

That's correct. Those ounces remain at that pit. They were otherwise scheduled. But for safety reasons, we decided to shut that pit down until we had a better assessment of the risk there on that wall.

[Craig Philip Stanley, Principal for Metals and Mining Research]

Okay. There is this pegmatite that's present all along the west side of Urucum. This comes into play for any -- does this come into play for any of the other pits at Urucum?

[Jeffrey Robert Mason, Chairman, Interim President & CEO]

Yes. And so we have done analysis on the other pits as well. So lessons learned across all the pits with respect to structure, rock type and geology. And that's why when I talk about the exploration side and understanding the geology, one of the key aspects is understanding the geology surrounding the pits as well because that leads to both understanding the ore and where the key areas are and where it resides, but also the structure and competency of the rock behind the walls as to supporting that. And as well, possibly additional ounces. So one of the analysis of drilling behind the wall is to see if there are any ounces or others material that will be worthwhile to put into the mill on the way down on the stripping. Right now, we do not have the data. Right now, our suspicion is that it is less likely than likely, but it is part of the program.

[Jim A. Zadra, CFO & Corporate Secretary]

That will be part of the geotechnical analysis that we're conducting on Urucum Central South that will also be extended to other Urucum pits, Craig.

[Craig Philip Stanley, Principal for Metals and Mining Research]

Okay. Okay. And like was there a ground monitoring equipment at Urucum Central South before the issue?

[Jeffrey Robert Mason, Chairman, Interim President & CEO]

What was the question? Sorry, say it again.

[Craig Philip Stanley, Principal for Metals and Mining Research]

Was there a ground monitoring equipment? I mean...

[Jeffrey Robert Mason, Chairman, Interim President & CEO]

Yes.

[Craig Philip Stanley, Principal for Metals and Mining Research]

There was equipment. Well, like there was like trucks and stuff, wasn't there, at the pit the day before?

[Jeffrey Robert Mason, Chairman, Interim President & CEO]

That's right. So we were actively mining. We had done a blast at the bottom of the pit in the north side of that pit. We were starting to mine that area and load it out. We did have monitoring equipment, but through this geotechnical review, we've upgraded that to lasers, drones and prisms, quite classic traditional. We have an independent geotech consultant as well as an overriding geotechnical firm that's providing guidance. Neil does have structure and geotech, rock mechanics experience in his background. We're also looking for similar in the VPX to supplement that. Short story is, we can do better. We're going to do better. There was some monitoring, but we're going to enhance that so that we don't have a systemic issue amongst the pits.

[Craig Philip Stanley, Principal for Metals and Mining Research]

Okay. And the final question is, the share price is well below the $1 level in New York. Does that come into play for any potential delisting?

[Jeffrey Robert Mason, Chairman, Interim President & CEO]

It currently does not. It's more of a fund effect. If funds consider that they have a certain tolerance for certain price ranges, that would be possibly the effect that we've seen in the past. But as far as the listing, we're meeting all of our compliance, all our regulatory requirements with respect to being listed.

[Operator]

Our next question comes from Matthew O'Keefe of Cantor Fitzgerald.

[Matthew Dennis O'Keefe, Research Analyst]

Just another follow-up on UCS. You've gone into pretty good detail. I was just wondering how foreseeable that failure was? And is it more of like a legacy issue that you inherited? Or was it potentially the result of some recent mining that you've made in aggressively going after that material?

[Jeffrey Robert Mason, Chairman, Interim President & CEO]

That's a good point. So Matt, one of the things that we're really getting on to now is getting out in front of our planning. Can we foretell everything is going to happen? I'm going to say no. Mining is like that. But we can plan and provide contingency. What we were doing is getting into the hard rock as we were progressing down. And this is a change for Tucano, don't forget, getting into the sulfides and the harder rock. We started to steepen the benches as we went down. We also removed some of the catch benches, believing that, that would lead to a better strip ratio. So we were very focused on the strip ratio and removal of waste to reduce that in order to optimize overall AISC. Lesson learned is that as we experiment with a change in mining practice, we need to up our game with respect to monitoring, design and review, and that includes independence. But our key focus now is to increase our internal strength to understanding. There is optimization. We will be going to Central North next year. We've done a thorough review of that preliminary. We're going to do some drilling as well there to confirm that. We believe the mining practice that we have now will suit the mining deposit. So it's a bit of a learn and -- live and learn exercise, but we believe that we have a far better understanding now.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Mason for any closing remarks.

[Jeffrey Robert Mason, Chairman, Interim President & CEO]

Thank you very much. Despite some recent challenges, I continue to be very positive. And as I mentioned to Matt, get out in front of these items by increasing our people's strength, both external and internal and planning prospectively out. We anticipate further growth in gold production from Tucano. We clearly are going to lay out a plan to do that and we will release as known. Once our geotech conclusions are reached, once our 43-101 reserve resource information is concluded, we will provide that as an update. We look forward to steady production from our Mexican operations and providing significant exposure to both gold and silver prices.I thank everyone for participating in the call and look forward to providing updates as we progress and advance all our mines. Thank you very much.

[Operator]

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