Sierra Metals Inc
TSX:SMT
Earnings Call Analysis
Q4-2023 Analysis
Sierra Metals Inc
The company's finalized quarter and annual financials indicate a robust increase in revenue and a significant turnaround in earnings. Specifically, the fourth quarter of 2023 saw consolidated revenue from metals payable shoot up by 58% compared to the same quarter in 2022, reaching $60.6 million. For the entire year, revenues increased by 39%, totaling $229.5 million. This surge in revenue translated into a notable improvement in earnings before interest, taxes, depreciation, and amortization (EBITDA), with the fourth quarter adjusted EBITDA being $12.2 million, a stark change from the negative EBITDA posted in quarter four of 2022. Across 2023, the company generated an adjusted EBITDA of $50.3 million, marking a fourfold rise from the previous year.
The company's operations produced positive cash flow before working capital changes, with $12.8 million for the fourth quarter and a total of $43.3 million for 2023. These figures underscore the success of the company's operational enhancements and efficiency initiatives. Furthermore, the company has actively worked on improving its balance sheet through a refinancing package expected to ease repayment schedules and support future development opportunities. Combined with the Q4 private placement of $15.4 million CAD and optimization of operations, the company is entering 2024 in a notably stronger financial position.
Looking to the future, the company is intent on consolidating optimization efforts begun in 2023 and establishing a strong platform for growth. This includes an updated definition of cash costs, now encompassing treatment and refining charges, selling costs, and G&A costs, to better gauge the sustainability of capital expenditures. Both the Yauricocha and Bolivar mines are set for development works intended to ramp up production, with Yauricocha aiming for a 40% increase to 3,600 tonnes by Q4 2024, and Bolivar expected to increase production by 50% following a tailings facilities expansion to be completed in 2-3 years.
At Yauricocha, anticipating full production in 2025, the company expects to match the commendable cost figures of mid-2s that were achieved in 2020, establishing a competitive cost efficiency that will likely place them in the first quartile of the cost market. Moreover, a raise borer project in Mexico is anticipated to reduce haulage costs significantly, expected to be completed in the latter half of 2024.
With a strategic approach towards growth, the company is seeking partners for its greenfield projects in Mexico and Peru. The goal is to maximize asset value without overextending financially, as such projects could demand extensive capital. Thus, by collaborating with partners, the company can focus capital deployment on its core assets to enhance organic and inorganic growth. In line with strengthening the financial foundation, the company aims to further refine its balance sheet through debt refinancing which is tailored to allow a five-year standing. This financial structuring will enable a more concentrated focus on developing and creating value from core assets.
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Thank you for standing by. This is the conference operator. Welcome to the Sierra Metals Inc. Fourth Quarter 2023 Financial and Operating Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Jean Pierre Fort Del Rio, Manager of Business Development and Investor Relations for Sierra Metals. Please go ahead, sir.
Good morning, everyone. I'd like to note that this earnings call contains forward-looking information that is based on the company's current expectations, estimates and beliefs. Please review the slides and other forward-looking information contained in the company's annual information form, which is publicly available on SEDAR+ and on the company's website.
The accompanying presentation for today's call is available for download from the company's website at sierrametals.com. This morning's press release, the financial statements and the MD&A are posted on our website and on SEDAR+. Please note that all dollar amounts are mentioned today -- on today's call are in U.S. dollars unless otherwise noted.
I will also point out that the Cusi mine was deemed a noncore asset in 2023, placed on care and maintenance on September 20, 2023. And thus, the results of the mine are not included in the consolidated results or in our 2023 and 2024 guidance and has been reclassified as a discontinued operation in our financial statements with all historical results related to Cusi also reclassified.
Speakers on today's call are Ernesto Balarezo, our CEO; and Jose Fernandez-Baca, our CFO. Following management's prepared remarks, a Q&A period will follow.
And now I would like to turn the call over to Ernesto.
Thank you, Jean Pierre, and good morning, everyone. Let me begin, as we always do, by discussing our company's #1 priority, safety. It is without a doubt that our strong operating performance this past year is due in large part to our improved approach to safety.
Our focus is to continuously ensure we provide a workplace environment where all our employees and contractors are safe and as a result, are able to maximize their productivity. As you'll hear me always say, a safe mine is an operating mine.
As shown on this slide, we can see how everyone at Sierra Metals has embraced our improved focus on safety. For 2023, each mine trended in the right direction. We aspire to be a leader amongst our peer group within our industry.
Before I get into the details of the quarter, let me provide some highlights of the past year. I joined Sierra Metals 15 months ago knowing the company had strong assets. And with the right team, strategy and hard work, we could turn the company around in short order.
During this time, with the support of the Board and many of our shareholders, we recruited a new senior management team with the goal of improving safety, increasing efficiency and reducing costs throughout our business. It hasn't been easy, but we can now see our hard work being realized.
While there are many initiatives that I'm very proud of, some specific ones to highlight include ramping Bolivar's production close to 5,000 tonnes per day. This has proven to be the backbone of our operational improvements.
Our team obtained a permit to mine below the 1120 level at Yauricocha, which will be a great source of growth for the company going forward. This will allow us to ramp up Yauricocha's production by 40% by year-end.
Putting Cusi on care and maintenance and starting the divestment process. We replaced our mined mineral resources by more than 100%, ensuring our sustained production.
And at the corporate level, we improved our financial position through refinancing our debt, completed a CAD 16 million equity finance and uplisted to the OTCQX in the U.S., thereby expanding our shareholder base. And as such, we are pleased to see our stock price respond by increasing over 200%, thus validating our strategy.
Now let's move on to an overview of our results. We released our fourth quarter 2023 production results on February 1 and our financial results earlier today. I will assume everyone has had a chance to review them. So I will not be going into detail on each mine but will instead provide these highlights.
On a consolidated basis, our 2 operating mines, Yauricocha and Bolivar, processed nearly 774,000 tonnes of ore in the fourth quarter of 2023, which was 59% higher than in the same quarter a year ago. For the full year of 2023, our 2 mines processed nearly 2.5 million tonnes of ore, which was 24% higher than in 2022.
All metals produced in Q4 2023 and full year 2023 were significantly higher than in 2022. All of this resulted in 21.1 million copper equivalent pounds produced in the fourth quarter of 2023, which was a 78% increase over the same quarter last year. For 2023, we produced 76.7 million copper equivalent pounds, which was 37% higher than in 2022.
Needless to say, operationally, 2023 was a tremendous year for Sierra Metals. Through the hard work by everyone throughout the company, we turned around our operations. Our hands-on approach created a safe, dynamic and responsive operating environment, which has stabilized operations and built a platform for growth.
Now let me move on to some specific highlights of Bolivar and Yauricocha. Bolivar achieved a throughput of 410,000 tonnes in Q4 2023, a 52% increase from Q4 2022. For the year 2023, the mine increased throughput by 57% over 2022.
Our team did a great job during the year of getting the mine throughput levels back to its capacity of close to 5,000 tonnes per day. This was a key factor for Sierra Metals in achieving our goals last year.
Some of the initiatives undertaken in 2023 that helped boost productivity and reduce costs in Bolivar includes starting new tailings dam projects, increased development improving ability of available -- sorry, improving availability of stopes, improving water recovery using 50% less fresh water, upgrading definition drilling that improved the modeling process and purchasing new blasting equipment.
As a result of the increased throughput levels, copper equivalent production was higher, and costs were lower in 2023 versus 2022. Copper equivalent production was 36.6 million pounds in 2023, which was 116% higher than 2022.
We met our 2023 guidance. When comparing 2023 to 2022, grades for all metals and recovery rates were higher. Cash costs and all-in sustaining costs for 2023 were $1.87 and $3.29, respectively, per copper equivalent pound. Cash costs were lower than 2022 -- '23 guidance, while all-in sustaining costs were $0.04 higher than guidance.
Yauricocha highlights. Yauricocha processed nearly 264,000 tonnes during Q4 2023, an increase of 73% over Q4 2022. On each quarter throughout 2023, Yauricocha increased its throughput rates and increased the amount of metal produced.
Copper equivalent production for Q4 last year of 10.9 million pounds represented a 100% increase over the fourth quarter of 2022. As a result of higher grade mine, higher recovery and increased throughput rates, copper equivalent pounds produced was 40 million pounds or 2% higher than a year ago, thereby meeting 2023 production guidance as well as gold, copper, zinc, silver and lead production were higher in 2023 than in 2022.
In the fourth quarter of 2023, Yauricocha had a cash cost per copper equivalent payable pound of $1.84 and an all-in sustaining cost per copper equivalent payable pounds of $3.47. For 2023, cash cost per copper equivalent payable pound of $2.05 was above guidance and in all sustaining costs for copper equivalent payable pounds of $3.56, which met guidance.
I won't take you through all the significant productivity and cost reduction initiatives that we undertook at Yauricocha during the quarter other than to highlight the following: increased availability of stopes, improved main ventilation and pumping infrastructure, optimized mine haulage cycle with dumper trucks, improved mine development and improved copper recoveries.
All in all, the team at Yauricocha did a great job maximizing production and reducing costs where possible until we are able to mine the ore body below the 1120 level. As we announced on February 21, 2024, we obtained this permit to develop the mine below the 1120 level. The permitting team did a fantastic job in obtaining the permit in less than a year.
Mining below the 1120 level will be a game changer for Yauricocha and Sierra Metals. To put it simply, the ore body below 1120 is huge. Access to it will allow us to implement bulk mining techniques, utilizing sublevel caving mining methods. This will increase throughput and lower costs, allowing the mine to reach its full potential of 3,600 tonnes per day, a 40% increase from current run rates within 6 to 9 months with a modest investment in development capital of between $4 million to $5 million.
Now let me hand the call over to Pepe, our CFO.
Thank you, Ernesto. I will now provide highlights on how the improved operations impacted our financing position. Consolidated revenue from metals payable of $60.6 million in the fourth quarter of last year was an increase of 58% from the fourth quarter of 2022. For 2023, revenues were $229.5 million or a 39% increase from the previous year.
Adjusted EBITDA in quarter 4 2023 was $12.2 million compared to a negative adjusted EBITDA in the same quarter of 2022. For the year, we generated $50.3 million of adjusted EBITDA, a fourfold increase from 2022.
Cash flow generated from the operations before movements in working capital was $12.8 million for Q4 2023, resulting in another positive quarter of cash flow from our mines. On a full year 2023 basis, cash flow generated from operations before movements in working capital was $43.3 million.
Cash at year-end was $9.1 million. While the improved operational results have helped to improve our financial position, we continue to look for ways to further strengthen our balance sheet. This includes reducing cash outflows by around $8 million per year by putting Cusi on care and maintenance, the potential sale of the Cusi mine, opportunities to surface hidden value from our more than 90,000 hectares of mining operation in Mexico and the ongoing and very productive talks with our lenders on a refinancing package.
We expect that the refinancing package will offer the company relief on the repayment schedule and help fund future development opportunities. Our lenders have very strong partners -- have been very strong partners and show a tremendous amount of support for our achievement to date and our growth initiatives. We hope to be able to speak further about all these initiatives in due course.
In summary, the private placement of CAD 15.4 million in Q4, along with the refinancing of our debt announced in the second quarter and improvement in our operation's ability to generate positive cash flow throughout the year has allowed us to enter 2024 with a significantly strengthened and improved financial position from what it was a year ago.
Now back to you, Ernesto.
Thanks, Pepe. Looking ahead, we see a 2024 as a year to consolidate the optimization efforts that started in 2023 and to establish the platform for growth. I'll just let everyone know that starting 2024, the company modified its definition of cash costs to include treatment and refining charges, selling costs and G&A costs. We think this is more accurate and more transparent to the market. Now we can clearly identify the sustaining CapEx portion of the total costs.
Mentioned earlier at Yauricocha, we will be focused on development -- developing the mine below the 1120 level. At Bolivar, we will continue our project to expand our tailings facilities with a goal of having them up and running within 3 years. That expansion should increase production by 50% to 7,500 tonnes per day throughput from current rates. And one last item to note, we expect to publish for both mines an updated NI 43-101 mineral reserve and resource report shortly.
Shifting now to a very important part of our success, which is to partner with our local communities. Listed on this slide are some images of the events and initiatives in Mexico and Peru. We remain committed to ensure their safety, wellness and environment are a top priority.
As I finish up my remarks, I'd like to take a moment to remind everyone that our success in generating shareholder value this year and the years to come are supported in the following 4 pillars on this slide. Given the challenges in 2022, our focus in 2023 was to stabilize and optimize our operations with much of our attention on the first 2 pillars: safety, health, environment and our communities of interest and operational excellence to improve efficiency and further reduce costs.
As such, we now believe we have the foundation and the platform to grow our company and focus more on the other 2 pillars: organic growth, which will come from within the company. This includes increasing capacity to such major initiatives such as mining below Level 1120 in Yauricocha and increasing the capacity of our tailings at Bolivar and always finding mineral resource expansion.
But it also includes the last pillar of inorganic growth, where we will look outside of the company for growth. And as Pepe already mentioned, one such area of potential growth is surfacing value from the large greenfield land package we have in Mexico and Peru through partnerships and joint ventures.
Rest assured, while we want to grow, we will continue to seek value across our very strong base of assets by generating positive cash flow from the operations, increasing production and lowering costs, all in a safe and responsible manner.
In closing, we appreciate the ongoing support of our shareholders, Board, dedicated employees, financial institutions and all stakeholders as we continue the positive momentum in moving Sierra Metals forward.
With that, I'll hand the call back to the operator to start the Q&A session. Operator?
[Operator Instructions] The first question is from Randy Rochman of West.
I'm sorry, we're not...
Pardon me, sir. Randy's line dropped off. We have Kate Nakagawa of CIBC.
So towards the end of the call, you briefly mentioned that you've modified your cash cost calculation method. Could you please provide a bit more color around this change?
Yes. Pepe, you want to go into more detail?
Before discussing [indiscernible], we saw that it was much clearer and transparent to include in our [indiscernible] our quotes and calculations, the commercial terms and the selling expenses so that the market will have a better idea of how the sustaining CapEx is in our numbers.
Yes. Note that for 2024, we are already using this new method. Like Pepe said, we think it's much more transparent to put it like that.
[Operator Instructions] The next question comes from Ben Pirie of Atrium Research.
Ben from Atrium. First, I just want to say congrats on the quarter and the good year. Just going back to the environmental permit you received last month and then the production that we're expecting to ramp up by Q4, when will we start seeing these efficiencies taking effect? And yes, could we start seeing production numbers begin to pick up as early as next quarter?
Okay. Thank you for the congrats. First of all, we can -- we are aiming by Q4 to have already production from below 1120 level. We are ramping up. So you're going to see some increase in Q3 probably. By Q4, we should be at full production, 3,600 tonnes, 40% increase of last year.
Okay. And just one more. At Bolivar, is there any opportunity to ramp the production further prior to the tailings dam completion? Or is there no ramp-up until the tailings dam is completely finished?
Okay. Thanks for the question. We don't plan on increasing the capacity of Bolivar until we get this new tailings dam in place. We have a few years of tailings dam capacity at 5,000 tonnes. We expect to have the new tailings dam in 2 to 3 years. But we want to keep a little bit extra time just in case something goes wrong. So we are not planning on increasing the capacity right now.
[Operator Instructions] The next question is from Randy Rochman of West.
Congratulations. You've done it. You and your team have done a wonderful job writing this company from the prior management.
My question is the following. Once you get production from 1120, let's assume we're talking about 2025, we get a full year of production. What kind of cost savings do you think we will see at Yauricocha? Because as you pointed out, you're absorbing unused mill capacity currently. And so I'm just kind of curious where you'll see the cost falling to once we have this rising production from below 1120.
Okay. First of all, thanks, Randy, for the congratulations to the team. Once we get a full year of production, 2025, as you say, we should be looking at cost numbers the same as we had been in 2020 when we were at full production. Those were in the mid-2s. I don't know exactly how much it will be, but they're going to be very, very good. We're going to be in the first quartile of cost market-wise for sure.
The next question is from Ben Pirie of Atrium Research.
Sorry, just one more question here, and I might be getting into the weeds a little bit. But I understand you're doing a raise borer project in Mexico. And I'm just curious how that's going and if there's going to be any material effect to mining productivity following this project.
Okay. You meant -- sorry, raise borer, you said?
Correct.
Okay. What we are doing there is yes, we are building a raise borer that is going to connect the underground mine to the mill. So instead of going by road, right now, we take them out of the mine and take it by road to the mill. We're going to take it underground straight to the mill.
This project, we should have it finished by Q3, Q4 this year, and it's going to reduce our haulage costs. So we'll tell you all about it as soon as we get it done, but we are working on that. And thanks for the question. Oh, sorry. This is going to decrease the haulage distance by around 12,000. So this is going to be very material.
As there are no more questions from the phones, management will now take questions sent by e-mail.
So operator, we have received a couple of questions from -- on our e-mail. Do you mind me if I go through those?
Please go ahead, sir.
Sure. So the first one is, why are you seeking partners on your greenfield projects in Mexico and Peru?
Okay. Thank you. The idea is to maximize the value of our assets. We have a potential offer in Peru. And like Pepe mentioned, we have more than 80,000 hectares in Mexico to explore in 7 projects.
And we don't have the financial ability to do so our own. As you know, appropriate project may involve hundreds or hundreds of millions of dollars to assess and a lot of time. And so our financial capability is going to be put this year more in our core assets. So we want partners to develop the organic and inorganic growth of our pillars.
The next question we have is, what's the objective of the refinancing package currently being negotiated?
Pepe, you want to?
Yes. Thank you, Ernesto. Yes, this will enhance our balance sheet position. Even though the size of the debt is still low for the company -- a company like ours, we need to adjust the terms and be able to stand the [indiscernible] down to 5 years. By doing that, Sierra will be able to focus on deploying capital in its core assets in creating value outcomes.
Okay. Thank you. No more questions on this end, operator.
This concludes the question-and-answer session. I would like to turn the conference back over to Ernesto Balarezo for any closing remarks.
Thank you for taking the time to join us today. We appreciate your continued support. I'm proud of what the team has accomplished to date. I believe the momentum we've built is heading in the right direction in growing our business in a safe and responsible manner. Have a good day, everyone. Thanks again.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.