Great Panther Mining Ltd

TSX:GPR

Earnings Call Transcript

[Operator]

Good morning, and thank you for standing by. Welcome to Great Panther Mining's Third Quarter Earnings Call. [Operator Instructions]I would now like to turn the call over to Meghan Brown, Vice President of Investor Relations.

[Meghan Brown, Vice President of Investor Relations]

Thank you, operator, and good morning, everyone. I'm Meg Brown. Thank you for taking the time to participate in our call today. Before we begin, I'd like to mention there is some legal language at the end of this presentation, which advises 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 our MD&A for the period ended September 30. All dollar amounts expressed in this presentation and on the associated financial statements and MD&A are in U.S. dollars unless noted. For reference during the call, AISC refers to all-in sustaining costs. I would like to remind everyone that this conference 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 on our website at greatpanther.com. On the call this morning, we have Rob Henderson, President and CEO; Neil Hepworth, Chief Operating Officer; and Jim Zadra, Chief Financial Officer. I'll now turn the presentation over to Rob.

[Robert Duncan Henderson, President, CEO & Director]

Thanks, Meg, and thank you, everyone, for dialing in today. I'm very excited to be sharing our record results with you today. The steady production from our mines, together with the increase in the gold and the silver price, helped us deliver a number of financial records for the third quarter. Turning to Slide 3. I want to say I'm extremely impressed with how our team is managing through COVID-19. Life and work as we know it has changed in the span of just a few months, and our people have adapted to a new way of working. We have developed and implemented robust prevention, monitoring and response plans at all of our operations, including mandatory medical screening and testing. COVID still remains our biggest risk to our business in 2020, particularly as we appear to be entering the second wave of infection. All of our sites have been affected. However, the majority of our COVID cases have been in Brazil. But I'm pleased to say that 97% of those affected have recovered and are back at work, with just 3% remaining in quarantine or restricted to working at home. We will continue to be diligent in our monitoring and response to keep our people safe and healthy. Turning to Slide 4. Since transitioning from Great Panther Silver to Great Panther Mining a little over a year ago, we now have 3 100% owned operations in 2 stable mining jurisdictions, Brazil and Mexico. Our largest asset is the Tucano Gold Mine in Brazil, which is by far our largest mine, contributing 83% of our gold equivalent ounces on a year-to-date basis. Topia and GMC in Mexico are essentially silver mines and have been steady contributors to Great Panther's cash flow for the last 15 years. When I joined Great Panther 6 months ago, my immediate priority was to support the team in getting our operations stabilized and generating strong cash flow. With the onset of COVID and an immediate travel ban, I have not been able to spend time at the mines as I normally would. However, I was able to spend a week at Tucano recently and have now met the team and senior operation firsthand. And I'm very pleased to report things are going in the right direction in terms of day-to-day operations and the exploration program is advancing as planned. We remain well positioned to meet our full year production and cost guidance on a consolidated basis, which is 146,000 to 158,000 gold equivalent ounces at an all-in sustaining cost of $11.50 to $12.50 per ounce. Moving to Slide 5. We delivered very good results in Q3, including close to 40,000 ounces of gold equivalent production in the quarter, slightly higher than that of Q2 and on track with our plans. Buoyed by the strong metal prices, with gold at $1,907 per ounce and silver at $26 per ounce, we were able to report a number of financial records, including revenue of $77 million, net income of $19 million and adjusted EBITDA of $35 million. These achievements resulted in a strengthening of the balance sheet, ending the quarter was $67 million in cash and equivalents. And this strong free cash flow puts us in a good position to internally fund our exploration and capital programs and further build working capital, which is currently at $25 million. Slide 6. I want to highlight that we published our first sustainability report in the quarter using the GRI reporting framework. It documents all of the good work being done in our sites in the areas of health, safety, environmental, social and governance. And I encourage you to have a look at the report on our website, and I welcome your feedback. I will now turn over to Neil Hepworth, our Chief Operating Officer, to discuss the operations in more detail.

[Neil Hepworth, Chief Operating Officer]

Okay. Thanks, Rob. Okay. Starting with Tucano on Slide 7. Production in Q3 was around about 32,000 ounces of gold, which brought our production for the 9 months ending September 30 to about 93,000 ounces of gold, with plant recoveries remaining stable at about 92.1%. All-in sustaining cost for the quarter 3 came in at $1,061 an ounce, which is a 20% improvement over Q3 of 2019. This was due mainly to the benefit of the weakened real. Our 2020 exploration program with a budget of $6.6 million and 55,000 meters of drilling is continuing to advance with 22,800 meters drilled to the end of the third quarter. Right. Moving to Slide 8. The first phase of the exploration drill program is now complete at just over 14,000 meters, and this was focused on drilling immediately below the $1,350 per ounce designed pit shells in TAP AB1 and TAP AB3. This drilling was targeted to convert resources to reserves to extend the open pit mine life. These ounces will be included in the new reserve and resource statements, which we expect to release before the end of the year. The objective of this drilling was to at least replace this year's [ buying down system ]. The drilling resulted in a number of high-grade intersections, which, together with other intersections, indicated [ contingent ] continuity of the resources below the pits. And a further 2 diamond drills operating on Urucum East deposit, where infill resource drilling is happening and also some step-out drilling is being carried out to test for additional ore shoots in Urucum East. Okay. We move into Slide 9. On Slide 9, the second phase of the Tucano drill program is to evaluate the potential for an underground operation below the Urucum North pit. The previous owner have established or published a pre-feasibility study, which envisioned a 1,000 tonnes per day underground operation, contributing 40,000 to 50,000 ounces of gold per year. With the grading up to 4 grams a tonne, this underground ore would meet the high-grade [ sweetness ] that supplement the open pit ore. Okay. The initial target for Great Panther drilling this year was to extend the shallow stoping areas that would be available for mining first when developing the underground access ramp. That's just -- that drilling is finishing off now, and we're going to be moving into deeper drilling in this quarter. This is to gather more information on the extent of the deeper high-grade ore shoots. This is both in terms of continuity of these shoots and the extension, both up and down plunge. We aim to have a decision on whether to proceed with the feasibility study for an underground mine following the completion of the underground drill program and update of the geological model. Now at Slide 10. As noted on Slide 10, the Great Panther's tenement cover some of the most prospective and underexplored greenstone terrain in Brazil. During the third quarter 2020, a full reinterpretation of the regional exploration datasets was carried out, primarily by comparing the structure based on airborne geophysics with existing soil geochemistry data. An exploration model was developed that helped generate numerous targets with a specific focus on those within 20 kilometers trucking distance of the Tucano process plant. We are currently drilling 2 of the regional targets, Saraminda and Mutum, which represent the third phase of our Tucano drill program. In addition to this drilling, an extensive program of soil and stream sediment sampling has been undertaken, to both maintain compliance on tenements, but also to evaluate the other priority exploration corridors of the regional land package. All right. Turning to our Mexican operations on Slide 11. Topia reported a full quarter of stable operations, producing nearly 400,000 silver equivalent ounces with recoveries of 92.5%. All-in sustaining cost was $15.85 per payable silver ounce, which is a 29% improvement over quarter 2 2020. We're on track to meet 2020 production guidance of 1.2 million to 1.3 million silver equivalent ounces. All-in sustaining costs will probably come in lower than the guidance of $21 to $22 per payable silver ounce, with all-in sustaining costs for the first 9 months of the year below $18 per payable silver ounce. Okay. Topia is basically a high-grade narrow vein system and, by its nature, has a very small amount of reserves. But every year, we continue to drill and develop to replace mined ounces. We've been operating Topia for 15 years with good cash flow generation. Slide 12 is GMC. At GMC, the ore process is primarily sourced from the San Ignacio Mine, which we had some pretty good exploration success this last year, and this allowed us to increase contribution from Guanajuato Mine in 2020. The 2 mines together with a shared processing plant comprise our Guanajuato Mine Complex, or GMC. Production from GMC in the third quarter was just over 116,000 ounces of silver equivalent -- sorry, of silver and nearly 2,000 ounces of gold for 335,000 silver equivalent ounces. All-in sustaining cost in Q3 came in at $18.83 per payable silver ounce, which is 31% improvement over Q2 2020. The exploration program continues to advance the GMC with 4 underground drill rigs in operation, and the objectives of outlining in situ blocks of high-grade mineralization. And we've 25,000 meters of drill planned for 2020. And at the end of Q3, we have completed nearly 11,000 meters. At Guanajuato Mine, the drilling was focused mainly on the Los Pozos area where previous results have allowed us to increase production from this area in 2020. At San Ignacio, the drilling is focused on the Purisima hanging wall vein. Okay. I'll now turn the call over to Great Panther's CFO, Jim Zadra, to discuss our financial results.

[Jim A. Zadra, Chief Financial Officer]

Thank you, Neil, and welcome, everyone. For Q3 2020, Great Panther's financial results reflected an average realized gold price of $1,907, a $400-plus improvement over Q3 of 2019 and almost $200 improvement over the previous quarter. The strong gold price, together with production tracking well to our annual guidance made for a very strong quarter in terms of financial results. Silver saw even greater percentage increases, which benefited our Mexican operations. However, we remain primarily leveraged to the gold price, with gold representing just over 85% of the value of our production in Q3. We also saw very good cost performance on a consolidated basis with our ASIC (sic) [ AISC ] before corporate G&A coming in at $1,023 for Q3, a 22% decrease over Q3 2019, driven primarily by the weaker Brazilian real. Net earnings for Q3 were $18.6 million or $0.05 per share and more than double the $8.6 million we reported in the previous quarter. Mine operating earnings before noncash items came in at $42 million, more than double the level of Q3 2019; and adjusted EBITDA was $35 million, an almost threefold improvement over Q3 of last year. Cash flow from operating activities, or operating cash flow, was $20 million. This reflected about a $6 million reduction in our trade payables to normalize this balance, which was at a high level at the end of Q2. In addition, it reflected $6 million in settlements on our BRL hedges. After adjusting for these items, our operations generated $32 million in operating cash flow before CapEx and capital lease payments of $10 million, which shows the strong free cash flow margin of our business. I also note that our operating cash flow includes exploration expenditures for our Mexican operations, which are expensed rather than capitalized, Coricancha project and care and maintenance expenditures and, of course, G&A and interest charges. For the full year, our consolidated AISC guidance is for $1,150 to $1,250 per ounce, and we're trending well to this with our 9-month actual AISC at $1,221 and the noted $1,023 reported for Q3. With gold and silver continuing at multiyear highs, we expect to see continued strong financial performance and cash flow generation in the fourth quarter. At $1,900 gold, Tucano is generating in the order of $800 per gold ounce of free cash flow. Other than the noted Tucano drill programs, there are no significant planned nonsustaining CapEx programs which are outside of our AISC guidance. In terms of our balance sheet, our cash position improved to $67 million at the end of September, while we reduced our debt by about $4 million and also further reduced our trade payables, as noted, by $6 million during the quarter. Therefore, working capital improved to $25 million, and our total debt at the end of Q3 sat at $46 million, well below our total cash balance. Thank you. That's all for the formal remarks for today, and I'll turn the call back to the operator for Q&A.

[Operator]

[Operator Instructions] The first question comes from Heiko Ihle with H.C. Wainwright.

[Heiko Felix Ihle]

It's nice to see your stock up 7% today. So I was going through your MD&A on Page 4 here earlier today, and you hinted some of the COVID protocols that you have, and you hinted at your contingency plans. Just a couple of follow-up questions on that. Can you elaborate on your contingency plans on asset-by-asset base? I don't know how much of that you're willing and able to have out in the public domain.

[Robert Duncan Henderson, President, CEO & Director]

Sure. I think our biggest contingency is obviously at Tucano, that's the biggest cash flow generator. We do have a large number of stockpiles on site. So we are able to continue processing if, for whatever reason, our mining contractor is down. We do have on-site diesel generators. We've got a good store of inventories there. So I think we were able to last quite a time at Tucano if a portion of the team is unable to operate for a while. So that's our biggest contingency plan there. Obviously, in Mexico, again, we're keeping our supply chains tight. We're making sure that our vulnerable employees are at home and not exposed to risk at sites. And we have a very extensive testing protocol for people coming on and off the mine. So I think, certainly, in Brazil, we managed the first wave well when we kept running. But as you know, I think we are entering the second phase. And I think the Brazilians are going to do just fine. I think they've gone through the first wave. The Mexicans didn't really hit the first wave. So they're experiencing it for the first time and learning a lot of the protocols from the Brazilians, obviously. But for Mexico, it's probably, for me, more of a concern in Brazil.

[Heiko Felix Ihle]

Fair enough. That makes perfect sense. Can you maybe also provide just a bit of color on your -- on how these plans have changed since June in Mexico when you restarted there? I assume the whole sanitation, not too many people in one spot, is still the same. But is there anything in regards to what areas of the mine you're going into?

[Robert Duncan Henderson, President, CEO & Director]

No. The mine plans essentially stayed the same. Obviously, we've got to respect social distancing, so our operating practices have changed radically. But the areas in which we're mining, we're still pretty much sticking to the plan.

[Heiko Felix Ihle]

Makes perfect sense. Great. And then cost-wise, has there any -- been any meaningful changes since this whole lunacy started? In other words, are your mitigation [ prep ] measures getting more expensive? And on the same token, I -- assuming you guys were obviously buying N95 masks before most people even knew what that was, so I assume you don't have any issues still getting your PPE, correct, given that it's just much more competitive to get that stuff now?

[Robert Duncan Henderson, President, CEO & Director]

Yes. No, we seem to be all fine in that area. No issues there. I think we're -- we do have new protocols. We've stood down [ black ] supervisors who are vulnerable and are at home. So we are seeing some inefficiencies translate into the workforce and that we can't work as quickly as we would have liked to before for safety issues because we don't have the full complement of teams there. But I think generally, the workforce has responded really well. And in terms of the costs, I think we are certainly benefiting from weaknesses in the currencies in the countries we operate. And maybe, Jim, you could have a bit more to say on the effect of the currencies on our costs.

[Operator]

The next question comes from Joseph Reagor with ROTH Capital Partners.

[Joseph George Reagor, MD & Senior Research Analyst]

Congrats on a good quarter.

[Robert Duncan Henderson, President, CEO & Director]

Thank you.

[Joseph George Reagor, MD & Senior Research Analyst]

I guess -- so I guess, first thing is on the debt front, how far along are you guys on doing any form of debt refinancing? What are you seeing -- if you can comment on terms out there and timing?

[Robert Duncan Henderson, President, CEO & Director]

Jim, you want to handle that one?

[Jim A. Zadra, Chief Financial Officer]

Sure. Joe, how are you doing? In terms of refinancing, we'd like to get the reserve and resource update for Tucano out first. I think that's an important piece of information that we'd like to get out and ensure the lenders have the benefit of knowing that. So we are in discussions with a number of lenders, we've provided information under confidentiality agreement, and we're waiting for the completion of the MR to take sort of discussions further. So timing, if we were to do something, probably more likely in Q1 of 2021. And in terms of the market, I think there seems to be good interest there and get good interest on the part of lenders.

[Joseph George Reagor, MD & Senior Research Analyst]

Okay. Sounds good. Switching gears quite a bit on Tucano. Sometime next year, you're going to run out of these aboveground stockpiles that you have. And then, I assume, go back to mining at a rate of close to 800,000 tonnes per quarter. Should we expect grade to go up but cost to go up on a per tonne basis as well? And is that 800,000 tonne per quarter number right? Is it a little higher, a little lower? Can you give us any color there?

[Robert Duncan Henderson, President, CEO & Director]

Yes, sure, Joe. We are going through our mine plans right now. It's just part of the normal budgeting process. But yes. We've got a mining contractor there who is pretty much fixed in what volume they can handle in their trucks. So the mining rate that we're obviously going to be running at the max mining rate. In terms of stockpiles, they are lower grade stockpiles. So we will probably process them only when we need to. So we don't intend to run them down. In a hurry we'd leave them in preference for higher-grade ore coming from deep pits. So I think the mine plan would include some stockpile, but certainly not all of it. But the -- yes, the mine planning process is still ongoing. So we're not in a position to give any guidance for the next couple of years yet. But we'll get that to you as soon as we can.

[Joseph George Reagor, MD & Senior Research Analyst]

Okay. Fair enough. And then at Topia, it looks like your gold sales versus your gold production is down quite a bit. Normally, you're -- it's like 80% or something, maybe 85%. In this quarter was 63%. Is that like an inventory build in gold at Topia, and if so, should we expect it to reverse next quarter?

[Robert Duncan Henderson, President, CEO & Director]

Jim, you want to handle that one?

[Jim A. Zadra, Chief Financial Officer]

Joe, our gold production at Topia is generally pretty nominal. It's -- the bulk of the production there is silver. And then there's a lead and zinc component. It's -- it will fluctuate from quarter -- what we do produce in terms of gold at Topia will fluctuate quarter-to-quarter depending on where we're mining and variability of the gold grade versus silver grade.

[Joseph George Reagor, MD & Senior Research Analyst]

Okay. But specifically, was there an inventory build there? Because your production was 308, and your sales was 194. So there's 100 ounce gap there. Is that -- or is that maybe a lag on the delivery of concentrates?

[Jim A. Zadra, Chief Financial Officer]

It's likely -- it's most likely that the timing of the delivery of the concentrates.

[Operator]

[Operator Instructions] The next question comes from Matthew O'Keefe with Cantor Fitzgerald.

[Matthew Dennis O'Keefe, Research Analyst]

Congrats on a good quarter. Most of my questions have been asked already by the other analysts, but I was wondering a bit on the exploration side. You're generating some good cash here. Your programs are -- your exploration programs are ongoing. It seems you've got some good regional targets. And you've already completed some of your near -- well, not completed, but done your plan for the near term targets. How are we going to -- are we going to see an increase in like a significant increase in your exploration effort in the short term? And maybe you could just discuss a little what's next -- near-mine as well as regional?

[Robert Duncan Henderson, President, CEO & Director]

Sure. Thanks, Matt. I think with Mexico, it's going to be more of the same. So this year, we budgeted $4 million for basically in-mine drilling at Topia and GMC. So we -- I think we'll continue to see that in order just to put confidence on the ounces ahead of the mine plan in Mexico. In Brazil is where we are more focusing on the regions. So we had a $7 million budget this year, and it was split near-mine and regional. So I think next year, we're going to continue on the near-mine stuff. We're going to be continuing to get more definition on the open pit resources. We're going to get a bit more detail on the underground, which Neil outlined. So hopefully, to get that into the mine plans. And then I think most importantly, is the region regional steps. So Nick Winer knows the area extremely well. We've identified a number of high priority targets, which we need to put diamond drill holes in the next year. So the budget next year is probably going to be the same, if not a little bit higher, and in order to advance some of those regional opportunities there.

[Matthew Dennis O'Keefe, Research Analyst]

Okay. And you touched on the -- some of the detailed work that you're doing this year will have an impact on your mine plan. Are you going to release some guidance for a new mine plan sort of mid- next year? Is there -- I know you're going to do a resource before the end of this year. But what about sort of mine plan guidance?

[Robert Duncan Henderson, President, CEO & Director]

Yes. I mean, typically, we issue the annual guidance early on in the year. We will be getting our reserve report out on Tucano in December, so that will have the life of mine details. And then 2021 guidance is when we have the budgets finalized. So that will be early next year we give that guidance.

[Operator]

The next question comes from [ Aaron Franklin ], a private investor.

[Unknown Attendee]

I'm just wondering about the Peru mine, the Coricancha Mine. You guys had purchased in 2017. And last year, you guys were saying that you guys were going to make a decision on this mine, if you guys were going to start it. Do you have any time frame, what you guys are looking to do with the Peru mine?

[Robert Duncan Henderson, President, CEO & Director]

Yes. Thanks, Aaron. We do. So we are currently on care and maintenance right now. So we're doing some cleanup activities there. We did, last year, run some material through the mill. And this year, we're looking at the -- how best to mine those deposits, it's -- it was last mined by Nyrstar in 2013. Used the long-haul mining method, which the grades never really got up to where they should be. So the mine is challenged by the terrain that's narrow vein. And so we're looking to get a more selective mining process there. And the challenge there is to fill the mill. So it is in study phase. Certainly with the higher silver prices, things are looking much more interesting there. And if we can crack the secret of mining more selectively, but getting enough headings in place to fill a mill, then I believe we'll have an answer. So I think it's still a work in progress, and we are looking at what the best way is to restart those facilities.

[Unknown Attendee]

Is there a cost to restart -- what would be the -- I [indiscernible]. What would be the cost to restart the mine if you guys did make a decision on this?

[Robert Duncan Henderson, President, CEO & Director]

It would be essentially just getting access into the mine -- into the stopes. So there would be a nominal amount of work that we need to do to rehabilitate the mining access. But the plant is in place, the infrastructure is in place. So we would have to spend some money on development of the mine, but it's not a significant initial capital.

[Unknown Attendee]

What do you think, $15 million, $20 million? Or is that too high? So any kind of just rough estimate?

[Robert Duncan Henderson, President, CEO & Director]

Yes. I wouldn't say that's too high. Yes. The challenge there is to get payable ore. And the previous operators failed in that challenge. So it's a tricky deposit.

[Unknown Attendee]

It sounds like it. So it's just -- you guys got to find the way to mine it profitably. Or what if you guys -- will you guys sell it if you guys decide not to continue with it?

[Robert Duncan Henderson, President, CEO & Director]

Yes. Obviously, that's a decision we're going to have to get to next year. If we can't do it ourselves, then we'd have to look at doing it with someone else or even selling it. Yes.

[Operator]

The next question comes from [ Troy George ] with -- a private investor.

[Unknown Attendee]

Okay. In the first and second quarter, you got beat up pretty bad with some currency swaps in the Brazilian real. I was wondering if you sold some of those swaps when the real strengthened a full real against the dollar. And also, do you have a currency trade here working for you?

[Jim A. Zadra, Chief Financial Officer]

It's Jim Zadra. We did settle some of those out in Q3 when the Brazilian real took a bit of a dip. We are currently -- we have about $40 million notional of the contracts that we're continuing to hold. We don't have an internal currency trader. We have -- we do have a treasury person that manages that function along with other treasury functions. And we work with various external parties on currency transactions.

[Operator]

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

[Robert Duncan Henderson, President, CEO & Director]

Thank you very much, everyone, for attending our Q3 call. We look forward to continuing to make money from our operations, and we will talk to you in the next quarter. 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.