Sierra Metals Inc

TSX:SMT

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Sierra Metals Fourth Quarter and Year-end 2020 Financial Results Conference Call. [Operator Instructions] I would now like to hand the call over to your speaker today, Mike McAllister, Vice President, Investor Relations. Thank you. Please go ahead.

[Michael McAllister, Vice President of Investor Relations]

Thank you, operator, and good morning, everyone. Welcome to Sierra's Year-end 2020 Results Conference Call. On today's call, we are joined by Luis Marchese, our CEO; and Ed Guimaraes, our CFO. Today's call will be followed by a question-and-answer period. The accompanying presentation for today's call is available for download through the webcast or from the company's website at sierrametals.com. Yesterday's press release, the financial statements and the management discussion and analysis are also posted on the company's website. Before I turn the call over to Ed, I would like to indicate that this earnings call contains forward-looking information that is based on the company's current expectations, estimates and beliefs. This forward-looking information is subject to a number of risks, uncertainties and other factors. Actual results could differ materially from our conclusions, forecasts or projections as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from our -- from the conclusions, forecasts or projections in the forward-looking information and material factors or assumptions that were applied in drawing conclusions or making a forecast or projection as reflected in the forward-looking information is contained in the company's annual information form, which is publicly available on SEDAR or EDGAR via Form 40-F or on the company's website. Please note that all dollar amounts mentioned on today's call are in U.S. dollars unless otherwise noted. I would now like to turn the call over to Ed Guimaraes, our CFO, for the financial highlights; then to Luis Marchese, our CEO, for the company outlook. Please go ahead, Ed.

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Thanks, Mike, and good morning, everyone. Turning now to Slide 4. The company achieved exceptional results in 2020 despite managing the implications of COVID. We reported a 6% increase to our consolidated throughput and record adjusted EBITDA of $97 million. We also reported strong cash flow and net income, and we finished the quarter and year-end with approximately $71.5 million in cash. These solid results are the product of evolving optimized operations and expansions ramp-up, providing stronger financial and operational performances, which we expect to continue into 2021. Our revenue mix by metal continues to be led by copper followed by silver, which have taken an increasing percentage of the overall revenue mix with the ramp-up of the Bolivar copper mine and the Cusi silver mine. Gold has also seen a continued increase as a percentage of the mix, aided by improved production at Bolivar and supported by higher gold prices. In 2020, we saw an improvement in copper, silver and gold realized prices. Copper has continued to improve by the end of the year and remains strong currently. Precious metals have also remained relatively strong as we finished the year and into 2021. Turning now to Slide 5. Compared to the same period in 2019, cash costs were down at all mines. And this was attributable to higher throughput, lower operating and lower contractor costs due to the operational challenges from COVID. All-in sustaining costs were also lower at Bolivar and Cusi. However, we did see a 10% increase in the all-in sustaining costs at Yauricocha due to the higher treatment and refining costs. Other costs were in line with the costs that were incurred in 2019. With that, I will now turn the call over to our CEO, Luis Marchese. Luis?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Thanks, Ed. Good morning, everyone. Turning to Slide 6 and looking at it in 2021. We continue to see a strong growth of the company as the operations in Mexico are on their way to value at an increased capacity of 5,000 tonnes per day at Bolivar [indiscernible]. Furthermore, we recently received an ITS environmental permit and expect to receive the final ITS permit in Q2 2021, which would see the Yauricocha increased permitting throughput by 20% to 3,600 tonnes per day. We are optimistic that with improved operating efficiencies and continued strength in metal prices, we will be in a position to meet the annual production and EBITDA guidance provided. COVID-19 is certainly still challenging us, and case counts remain high in Mexico and Peru. However, policies and practices are in place to manage these issues while prioritizing our employees and surrounding communities' health and safe. At Yauricocha, we continue to complete drilling to grow our mineral reserves and results and complete the development work requiring operations to increase production in the future. We expect this capital expenditure projects to result in increased cash flows and lower cash costs. Additionally, we expect to fund this capital expenditure projects through the [ iteration ] of operating cash. At Bolivar and Cusi, similar to Yauricocha, we are ramping up mineral operation programs when completing the construction and operational [ inputs ]. These improvements include an expanded tailings facility at both mines and driving an underground tunnel that will connect the mines to the concentrator plant at Bolivar to improve efficiencies and reduce haulage costs. Furthermore, we continue to work on the pre-feasibility study, which built upon the previous PEA completed at all 3 mines. This studies the expansion of the Yauricocha mine to 5,500 tonnes per day and a doubling of production at the Bolivar and Cusi mine to 10,000 and 2,400 tonnes per day, respectively. In conclusion, turning to Slide 7. The company has had a solid year despite the adversity we faced on the COVID-19 pandemic. And we're still able to emerge with a stronger balance sheet and cash position. While we continue to operate in a vulnerable environment due to COVID-19, we still remain optimistic. We expect further cash flow and liquidity improvements in 2021, a benefit of improved production and metal price. The company has made the necessary capital investments on infrastructure improvements to grow production and improve costs, and we are now reaping the rewards. We remain committed to the company's prudent and sustainable growth and, more importantly, to improving the per share value relating to our shareholders. With that, I will now turn the call back to Mike.

[Michael McAllister, Vice President of Investor Relations]

Thanks, Luis. That ends the presentation portion of the call. [Operator Instructions] With that said, operator, please open the line.

[Operator]

[Operator Instructions] Our first question comes from the line of Heiko Ihle with HCW.

[Heiko Felix Ihle]

Part of your press release in the -- and it's also on MD&A, Page 7, exploration at Yauricocha was suspended with COVID restrictions and all that stuff. You only drilled 10,100 meters of the 25,000 you wanted to do. In January, during your 2020 production release, you mentioned that $10 million have been carried over from the 2020 CapEx budget for carryforward projects. What's the delayed spend for Peru specifically? Has this expectation changed since January? And should we anticipate these expenditures to be quite front-loaded to the year, given that they were initially expected to be incurred last year? In other words, what are you starting to see for Q1, which is almost over?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Heiko, thanks for your question. Yes, they were largely -- the delays were largely due to COVID. And we have seen COVID into 2021. In terms of our guidance, we're still holding to our CapEx guidance. So they're not going to be front-loaded, as you indicated. I think you're still going to see some impacts into Q1, but we're still holding firm with our guidance that we put out in January.

[Heiko Felix Ihle]

Got it. And then just one more. Can you provide some color on what you've been seeing with the treatment and refining costs in Q1 so far? I mean in Peru last year, you spent $45.8 million on T&Cs, and I understand that figure isn't very comparable with the current environment. But is it -- maybe just a little bit more detail on what you can provide for 2021 for us there.

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Sure. I can't really go into too much details there, but I can talk in general terms in terms of where benchmark was and where indicative benchmarks we think we foresee. Last year, benchmark was just under 300. It was 299 per ton. And what we've seen so far and into the end of fourth quarter and into this year, we saw about 50% lower in terms of indications where benchmark might -- spot prices have been all over the place with the container shortages that are happening in China. So you've got higher freight costs. So all in all, it looks like they're going to be better than what they were in 2020 for 2021. And copper, it's looking like -- last year's benchmark was about $60 per tonne on the refining side. And we're seeing about -- indications are they about 25% lower in that regard. That's all I feel comfortable making comment.

[Operator]

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

[Mark La France Reichman, Senior Natural Resource Analyst]

This question is just on Page 6 of the presentation, where they talk about the new tailings dam both for Cusi and Bolivar. I was just wondering if perhaps you could comment on that and kind of how those expansions set you up or whether you'll -- whether that's going to provide enough capacity and kind of what's you're envisioning there.

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Thank you, Mark. Yes. As we speak, we're finishing the first stage in Cusi's new tailing dam, and we're finishing as well the first stage in Bolivar. Both are top out for the mid- to long-term operation of the mine. So these are going to give us the space for the next few years tailing from both mines. So this is CapEx that we are observing now, but it's going to let us operate comfortably for the next few years.

[Mark La France Reichman, Senior Natural Resource Analyst]

Okay. And then my second question, it's just that -- is there anything -- any updates related to the strategic review that you announced earlier in the year or anything related to that, that is worth mentioning?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Mark, I can take that one on. Yes, as stated in the company's press release of January 8, 2021, the company does not intend to provide announcements or updates regarding the strategic process unless or until it determines that further disclosure is appropriate or necessary. That's all we have to...

[Operator]

Our next question comes from Alex Hunchak with CIBC World Markets.

[Alex Hunchak, Research Analyst]

Just want to ask on cost. So obviously, they were up a bit in Q4. And I think most of that was due to COVID. But should we expect basically flat costs into Q1 as well, given that COVID hasn't really improved as much as we would have liked? And then is there a risk to guidance if vaccine rollouts are delayed later into the year? Or how have you sort of incorporated, I guess, COVID assumptions?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Thanks, Alex. I'll take the first part of the question, and then I'll pass the second one to Luis. Yes, in terms of costs -- COVID has continued. It's not like it ended in 2020. Obviously, we're seeing some additional waves happening into 2021, in January and so forth. So I believe that you will see there could be some repercussions on costs, but we're still sticking to our guidance that was put out in January. I'll pass it over to Luis for the second part of the question.

[Luis Carlos Marchese Montenegro, President, CEO & Director]

So as I said, we are maintaining our guidance for 2021. And in Peru, we are in the second -- in the height of the second wave now. We started mid-January, and we are still there. And Mexico has had the hit of COVID along with America. And we've also had the hit of the winter wave that went down to Texas and Northern Mexico. So that also hit us a bit. So we are feeling the pain of those 2 issues that come on top of us.

[Alex Hunchak, Research Analyst]

Okay. No, fair enough. Just wanted take a temperature check on that, so that sounds good. And then maybe just -- so obviously, we don't have any reserves right now because of the PEAs last year. But then I assume that when the pre-feasibility study has come out, we'll get reserve updates with those. But will there be anything that changes in terms of price assumptions in your calculation? Or can we just kind of assume that we take the last year statement, subtract depletion, and we should be sort of matching up when the new reserves are out?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Yes, that should be the way to do it, Alex. Yes, we are planning to release reserves once we have finalized -- on the PFS during this year.

[Alex Hunchak, Research Analyst]

Okay. So no change to sort of metal price assumptions or anything?

[Luis Carlos Marchese Montenegro, President, CEO & Director]

Not for the time being, no.

[Operator]

Next question comes from James Young with Midwest Investments (sic) [ West Family Investments ].

[James Young, VP & Investment Analyst]

A couple of questions here for you. Number one is regarding your guidance for EBITDA in 2021 of 1 70 to 1 85. Can you give us a sense as to where that -- what is your range of EBITDA, given the fact that you had copper prices up about 16% since that guidance was issued, and silver has also been a little bit higher?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Jim, thanks for your question there. Yes, copper is up. Since our guidance that we put out in January, copper is up about 10%, actually, and silver has remained relatively the same. So we're still sticking with our consensus. And I think I would have you -- or direct you to analysts' updated EBITDA price. I believe Alex of CIBC just put out a revised target. That's all I have to say on that.

[James Young, VP & Investment Analyst]

Okay. And I guess the question -- regarding, of course, the strategic alternatives that you're pursuing. I heard what you said about no analysis, but can you give us a sense as to when you made this announcement on January 8, there's some price expectation about the ability to follow through and get this executed and done. Can you give us a sense as to are you feeling less confident today or more confident today if you'll reach some mutually agreeable agreements?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Jim, I can't comment beyond what I commented in answering Mark's question.

[James Young, VP & Investment Analyst]

Okay. Can you give us a sense at all as to about -- I mean, here we are, it's March 19. And I would expect that if something is going to occur that we should be hearing something, say, by the end of April?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

I appreciate your understanding, Jim, in this matter, but we don't intend to provide announcements or updates regarding the process unless or until it's determined that further disclosure is appropriate or necessary.

[Operator]

[Operator Instructions] Our next question comes from Lee with Omega Family Office.

[Leon G. Cooperman, President, CEO & Chairman]

It's Lee Cooperman. Anyway, there's something wrong with your financial communications. Let me explain why I say that. Freeport copper and gold is up 32% year-to-date. Your stock is down 13.9%. Okay. They have not announced an attempt to seek strategic alternatives, which would be a plus for your stock. So despite making that announcement in January 8, your stock is down 13.8%. And I couldn't think -- management has done an excellent job in managing the business, the earnings look terrific. And so you've kept people in the dark. So I think I have 3 questions. Question number one is, what do you think a reasonable free cash flow generation for this year is? The CapEx, you mentioned $78 million. I assume net interest expense will be very nominal because you're generating cash, and you have net debt coming into the year of $27.9 million. And you'll probably end the year, I assume, with net cash. But what kind of free cash flow are you anticipating for the year, a range.

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Thanks for your question. I'm not going to comment further than what's in our guidance that was published in January. I think there's...

[Leon G. Cooperman, President, CEO & Chairman]

What was your free cash flow guidance in January, February?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

I'd have you look at that, Lee. I'm not prepared to get into that on this call.

[Leon G. Cooperman, President, CEO & Chairman]

What are you prepared to get into? Is it so ridiculous that it's like drilling a tooth basically. You gave various assumptions on EBITDA. You give CapEx. The interest expense is going to be a nominal number. What kind of cash taxes? I assume that you're going to generate cash flow of almost $100 million this year, maybe, I don't know, $80 million to $100 million or something like that. I'm sorry, excuse me, I was interrupted.

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

No problem, Lee. Just to get to your -- like it's all in the guidance, right?

[Leon G. Cooperman, President, CEO & Chairman]

It's in the guidance, just giving you a number. I don't have it in front of me. What do you think you're generating in the way of cash? Do you expect to end the year with net cash?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Well, take the adjusted EBITDA and that range and just deduct the anticipated CapEx. And that's...

[Leon G. Cooperman, President, CEO & Chairman]

And what about do you want to give me a number that you expect for taxes or interest?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

No. I don't want to do that now, Lee.

[Leon G. Cooperman, President, CEO & Chairman]

Okay. Now everyone has asked you a question about the strategic process, okay? And I hear your answers, but it's not an unreasonable question to ask when do you think the process will be concluded. Not ask you what the outcome is going to be. When do you think the shareholders should expect to hear from you as to the process? It was announced January 8. These prices take usually 3 or 4 months. I would guess before you announced in January 8, you had some insight into the process already. Basically, do you think we're likely to hear from you before the end of April? And I'm not asking what you're going to say. I ask you, when would the prices be concluded? Will you know that you have an acceptable offer or you don't?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

There's nothing more I can say on that, Lee.

[Leon G. Cooperman, President, CEO & Chairman]

Well, you're getting bad advice from your advisers. Okay. Last question before I give up on you people. What level of debt would management be comfortable in carrying? And let me explain what's behind the question. I think your stock is ridiculously mispriced, okay? I think you probably have a potential of earning $200 million EBITDA basically. If I put 2x leverage in the company, you have the capacity to borrow $400 million. I don't know if management will be comfortable in doing that. $400 million is not an inconsequential percentage of the market cap of the company. So would the company consider -- if you don't get an acceptable offer, I think the stock is very mispriced, if you don't get an acceptable offer, would the company consider recapping itself? And as one of the largest shareholders in the company, I would not be against that. The market cap is $472 million. So $200 million basically would represent a pretty significant percentage of the company. But I don't know what the management's attitude is towards taking on debt. Can you elaborate on that a little bit?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Right now, Lee, there's no need to take down debt. We have as you mentioned, EBITDA targets, there's really no need. Should there be a need down the road, for sure, we'll consider it. But right now, we're cash flowing enough to fund all of our growth projects. And -- but there's no need for debt at this time.

[Operator]

Our next question comes from James Young with Midwest Investments.

[James Young, VP & Investment Analyst]

Given where you were on a net cash -- on the net debt level ending the fourth quarter, can you give us a sense, are you already net cash positive? Because of -- when I think about the significant price increase that we've seen so far year-to-date in the metals markets and your cash-generating ability, can you give us a sense, are you currently net cash positive?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

Jim, no, we can't comment on that yet. That's not publicly disclosed. We're -- this is a Q4 and year-end conference call. I'm not prepared to comment on our net debt position into 2021. That, we will provide in the May conference call for Q1.

[James Young, VP & Investment Analyst]

Do you have a date? Do you already set a the date for your first quarter call?

[Edmundo Gontardo Guimaraes, Chief Financial Officer]

I think it's usually the third week, Jim. But I'm not sure, Mike, if that's -- it's around May 18 or thereabouts, but that hasn't been finalized yet. Mike, is there any comment you could add on that? You're on mute.

[Michael McAllister, Vice President of Investor Relations]

Yes. It's around that time, around the third week. We haven't finalized the date quite yet, but we will put out an announcement well in advance to that, Jim.

[Operator]

And that's all the time that we have for questions today. I will now turn the call over to Mike McAllister for closing comments.

[Michael McAllister, Vice President of Investor Relations]

Thank you, operator. That concludes today's call. On behalf of the management team, I would like to thank all participants for joining us today. A replay of the webcast and all the materials can be found on our website at sierrametals.com. If there are any further questions or concerns, you can reach out to us after today's call. Our contact information is in the presentation as well as on the company website. Thank you, operator. Please conclude the call.

[Operator]

This concludes today's conference call. You may now disconnect.