Sierra Metals Inc

TSX:SMT

Earnings Call Transcript

[Operator]

This is the conference operator. Welcome to the Sierra Metals Inc. Second Quarter 2023 Consolidated Financial Results Conference Call. [Operator Instructions]. And the conference is being recorded. [Operator Instructions].

I would now like to turn the conference over to Jean Pierre [indiscernible], Manager of Business Development and Investment Relations for Sierra Metals. Please go ahead.

[Unknown Executive]

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 these slides and other forward-looking information contained in the company's annual information form, which is publicly available on SEDAR and the company's website.

Please note that all dollar amounts mentioned in today's call are in U.S. dollars, unless otherwise noted.

I will also remind everyone, as previously announced, we have made a strategic decision to classify Cusi Mine as a noncore asset. So Cusi results are not included in the consolidated results and in our guidance. We continue to operate Cusi while we explore strategic alternatives on that mine.

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 management discussion and analysis are also posted on our website and on SEDAR.

Our speakers today -- our speakers on today's call are Ernesto Balarezo, our CEO, and Jose Fernandez-Baca, our CFO. Following management's prepared remarks, a question-and-answer period will follow.

And now I would like to turn the call over to Ernesto.

[Ernesto Balarezo Valdéz, executive]

Thank you, Jean Pierre, and good morning, everyone. Let me begin my remarks today by discussing our #1 priority, safety. Our strong operating performance since I joined as CEO is doing large part to our improved approach to safety. As you'll hear me say on every call, a safe mine is an operating mine. And our focus is to ensure we provide a workplace environment where all our employees and contractors are safe and can be productive.

As shown on this slide, we can see how everyone at Sierra Metal has embraced our renewed focus on safety. On a consolidated basis, for the first half of 2023 we have improved our safety performance over 2021 and 2022. Everyone at Sierra Metals should be proud of these accomplishments. I know we will continue to strive to maintain these high standards.

Now on to an overview of our results. We released our Q2 2023 production results on July 25 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 of each mine, but I will instead provide highlights from yet another strong quarter of operating results.

Tonnes of ore processed of 702,000 in the second quarter of 2023 was 22% higher than in the first quarter of 2023. When comparing Q2 2023 to Q1 2023, silver, copper, zinc, lead and gold production have increased 19%, 26%, 16%, 39% and 14%, respectively. Production in copper equivalent pounds in Q2 2023 was 21.7 million pounds versus 18 million pounds on Q1 2023 for a 21% increase.

For our 2 core mines, The Bolivar Mine in Mexico achieved a record 10.7 million pounds of copper equivalent production with increased production for all metals. Throughput averaged 4,640 pounds per day in Q2 2023, resulting in total pounds of throughput of nearly 406,000 pounds, an increase of 36% over Q1 2023. This was Bolivar's third sequential quarter of increased throughput.

Exiting the quarter, Bolivar has been able to consistently achieve its target of 5,000 tonne per day run rate by increasing the number of ex locations sold.

At our other core operations, the Yauricocha Mine in Peru delivered an 11% increase in throughput and a 6% increase in copper equivalent production over the previous quarter. Until the permits to operate below the 1120 level are obtained, which we anticipate being in the hand -- in hand later this year, we're doing everything to maximize production above the 1120 level.

All in all, I'm very pleased that we have been able to achieve quarter-over-quarter improvements across many of our key -- of the key operating metrics. This is a testament to the hard work of our entire team as we always strive to maximize the value of the company's assets.

Now let me hand the call over to Jose, our CFO.

[Jose Fernandez-Baca, executive]

Thank you. Following the comments just discussed by Ernesto, let me provide the following quarter over quarterly financial highlights. Consolidated revenue from metals payable of $62.7 million in the second quarter of 2023 was an increase of 7% from the first quarter of 2023. The increase was mostly through higher metal sales at Bolivar.

In Q2 2023, Yauricocha's cash cost per copper equivalent payable pound was $2.29 and all-in sustaining costs per copper equivalent payable pound was $3.97. Bolivar, respectively, 12% and 27% higher than in Q1 2023. All-in sustaining costs were higher in the quarter than the previous quarter primarily due to higher treatment and refining charges and the timing of sustaining capital.

At Bolivar, Q2 2023 cash cost per copper equivalent payable pound was $1.62 and all-in sustaining cost per copper equivalent payable pound was $3.02. These were respectively 12% and 2% lower than in Q1 2023. The quarter-over-quarter change in lower cost per payable copper equivalent pound was primarily due to the increase in production despite higher treatment and refining charges and the timing of sustaining capital in the quarter. Adjusted EBITDA in Q2 2023 of $13.5 million was slightly lower than in Q1 2023.

Adjusted net income attributable to shareholders for the second quarter of 2023 was $4.3 million or $0.03 per share on a basic and diluted basis, an increase over Q1 2020. Cash flow generated from operations is for movement in working capital of $11.6 million for Q2 2023. As of June 30, 2023, cash and cash equivalents were $4.4 million in working capital was minus $88 million primarily due to the reclassification of long-term debt deposits.

During the quarter, we finalized the agreement to refinance $18.75 million of our $25 million debt obligation during 2023. As a result, we repaid $2.1 million of principal in June 2023, with further installment of $2.1 million to be repaid in September and December 2023, with $18.75 million deferred to 2025.

Throughout the process, all our lenders have been very supportive in our plans as we improve our operations and balance sheet. In one final comment, we are reviewing several other initiatives to improve our balance sheet, including opportunities to the [indiscernible] keeping value of regulation projects in Mexico and other financial levers available to the company. We hope to be able to speak further about these 2 groups.

Now back to you, Ernesto.

[Ernesto Balarezo Valdéz, executive]

Thank you, Pepe. As a result of the great work by the team in the first half 2023 production results achieved, I am pleased to confirm that we are on track to meet our 2023 production guidance range of 74 million to 83 million copper equivalent pounds.

As for cost guidance, in the first half 2023, costs at Yauricocha have been higher than previously guided, which has been partially offset with lower costs at Bolivar, which we have been trending towards the lower end of 2023 guidance.

As such, we have revised our cost guidance at Yauricocha to reflect this new reality. In spite of this revision, I would like to emphasize that our revised 2023 cost guidance is lower than 2022 actual costs. And while much has been done to reduce costs, we will continue to be diligent to do more to preserve cash by streamlining operations, reducing expenses wherever possible and deferring growth-related capital.

This focus on cost reductions and expense containment is one of the hallmarks of our new management team and part of the renewed culture at Sierra Metals.

One of our key growth initiatives is centered around our recently completed life of mine plants at Yauricocha and Bolivar. These new internal plants are guiding us as we build the business.

Among the many initiatives being implemented during Q2 at Bolivar, we optimized the tailings dam to operate more efficiently and effectively. Commenced a pre-feasibility study to fill the underground mine with dry tailings and purchased new, more efficient drilling equipment.

At Yauricocha, we've implemented automated doors to improve the underground ventilation system, increased efficiency in mining development, 3.3 to 3.5 meters per blast by using the same operating resources, renegotiated fuel and energy contracts and are optimizing the deployment of company mining contractors.

At the community level, we are pleased to have offered 21 scholarships to local students, providing them with training and education on mining skills, such as electrical and mechanical maintenance and heavy equipment returns. We see this as both an important initiative and a smart investment in the future workforce at our mines.

Now that we have stabilized and have initiatives in place to optimize our operations, we can turn our focus to growth. An important part of the company's growth will be increasing our mineral resources.

At Bolivar, Q2 2023 -- excuse me, at Bolivar, during Q2 2023, we drilled over 20,000 meters at the Northwest, Cieneguita and Dulce zones, where we encountered skarn intersections with mineralization. We'll announce this after [ FA ] results shortly.

While at Yauricocha, we recently conducted surface exploration on 4 areas to increase geological resources while also diamond drilling more than 3,300 meters underground. Our goal here is to add mineral resources until we have the permits in place to mine below the 1120 level.

Mining below the 1120 level will be a game changer for Yauricocha and Sierra Metals. The ore body below 1120 is in main and will allow us to implement bulk mining techniques, utilizing sublevel caving mining methods. This will increase throughput and lower costs. Given the importance of these initiatives for the past 9 months, we have had a dedicated team in place, working to obtain the needed permits.

They are making great progress and are currently on track to obtain this permit before year-end. Once the permit is in place, we expect it will take between 6 to 9 months of development work to prepare the mining below the 1120 level.

In summary, over a very short period of time, our team has been able to service value across our very strong base of assets. I said last call, and I'll say it again, we firmly believe Bolivar and Yauricocha are cornerstone assets capable of underpinning Sierra Metals for the benefit of all our stakeholders.

Long-term success in mining requires a focus on things such as safety, proper mine planning, sequential and logical mine development and operational excellence. I know we have the team to ensure Sierra Metal delivers on these keys to success.

As always, we appreciate the ongoing support of our shareholders, Board, dedicated employees and all stakeholders as we move Sierra Metals forward.

With that, I hand the call back to the operator to start the Q&A question -- session. Operator?

[Operator]

[Operator Instructions] The first question comes from Lee Cooperman with Omega Family Office.

[Leon Cooperman, analyst]

I think you kind of touched on this, but maybe you could repeat it. What is your expected cash generation in 2023? And what does the current balance sheet look like? And do you have any sense of what additional equity you might or might not need?

[Ernesto Balarezo Valdéz, executive]

Okay. Thank you for the question, Lee. Our current situation regarding cash, we don't have an operating problem right now. Our 2 mines, Yauricocha and Bolivar are self sufficient. We do need cash -- well, the balance sheet, your second question, we have a net debt of 82 -- a bank debt of $82 million, as you all know.

We are working with the banks in order to extend the repayment period, but it's only 3 years. So that's where we are right now with the liabilities.

And we are exploring many alternatives on next steps in order to fund actually 3 things: CapEx to develop 1120 in Yauricocha; CapEx to develop a new tailing dam in Bolivar; and we need money for working capital. We're still finalizing those numbers. We are juggling with many options on how to do this as soon as we get something clear, hopefully, in the next few weeks, we can come back to you guys.

[Operator]

[Operator Instructions] As there are no further questions, I would like to turn the conference back over to Ernesto Balarezo for any closing remarks. Please go ahead.

[Ernesto Balarezo Valdéz, executive]

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 we are heading in the right direction, growing our business in a safe and responsible manner. Have a good day, everyone, and thanks a lot.

[Operator]

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