Andean Precious Metals Corp

XTSX:APM

Earnings Call Transcript

[Patricia Moran, executive]

[Audio Gap] and welcome to Andean Precious Metals webcast for the 3 and 6 months ended June 30, 2023. As a reminder, this webcast is being recorded. I'm Trish Moran, Andean's VP of Investor Relations.

Before we get started, I'd like to point out that during today's call, we may make forward-looking statements as defined under Canadian securities law. I ask that you view our slide presentation for cautionary language regarding forward-looking statements and the risk factors pertaining to these statements. Our MD&A, financial statements and relevant filings are available both on SEDAR+ and on our corporate website, andeanpm.com.

With us on today's webcast is Alberto Morales, Andean's Executive Chairman and CEO; Juan Carlos Sandoval, our CFO; and Segun Odunuga, our EVP, Finance. Following management's formal remarks, we will then open the call to questions.

And now over to Alberto. Alberto, over to you. I think we're having a problem with the sound.

[Technical Difficulty]

[Alberto Morales, executive]

Thank -- can you hear me now, Trish?

[Patricia Moran, executive]

Yes, we can.

[Alberto Morales, executive]

Thank you. Thank you, Trish, and welcome, everyone. As expected, year-over-year, this quarter showed an improving trend for production and operational efficiencies. And we sustained recovery rates well in excess of what we saw last year. Moreover, I am pleased to report the upward trends and momentum continued into July.

Additionally, we continue to make progress against our 2023 strategic growth objectives, namely to extend the life of San Bartolomé and to grow through M&A. We've signed several new contracts for third-party material, which contributed to the 1.2 million ounces produced during the quarter. While we have contracts with more than 30 suppliers across the department of Potosí, the map on Slide 6, reflects the most important ones in terms of volume and grade.

I would like to highlight our newest addition, Alta Vista. At the end of June, we signed a contract with Bedrock, the owner of Alta Vista, for 170,000 metric tonnes of material with an expected head grade of approximately 350 grams per tonne. And based on our preliminary analysis of tonnage and head grade, approximately 1.7 million contained ounces of silver. There are other potential contract of size and grades in the pipe, and we will keep you appraised of our progress.

As you may recall, late last year, we brought in a new management team and moved the corporate head office from Toronto to Monterrey, Mexico. With 6 months behind us, we are starting to see the fruits of our efforts. As mentioned, we've signed new material contracts. The recovery rate has increased to 79% from 76%. G&A has decreased, and our capital allocation is more strategic and proactive.

First, we are expediting the tailings silver recovery project. And secondly, we implemented a conservative investment strategy for our large cash balance. Year-to-date, we've earned interest of $1.1 million. This is 10x more than for the first 6 months of 2022. In essence, the interest income that we're earning is essentially funding our share buyback program.

With respect to the tailings project, work is progressing as planned. We have started assessing engineering and construction options, and our focus is on bringing the tailings into production in the first half of 2024. In parallel to the construction work, consultants from SRK are completing an update of the material resource estimate, incorporating the silver ounces containing -- contained in the tailings stockpiles. The mineral resource estimate is expected to be announced shortly. This will be followed by the filing of an NI 43-101 technical report.

Strategic growth through acquisition is our second key objective for this year. We're well positioned to now execute against this goal. Our balance sheet is liquid and our assets remain strong. The high interest rate environment with low market liquidity, it's giving rise to M&A opportunities at attractive valuation. We have analyzed a significant number of opportunities at different development stages and in various jurisdictions and are now down to a handful of alternatives that we're evaluating.

We are not happy with our share price, and thus, our buyback program continues. Since inception of our normal course issuer bid late last fall, we have repurchased and canceled nearly 2.4 million shares at an average price of approximately CAD 0.80.

Before I hand over to Juan Carlos, I would like to update you on our full year 2023 guidance. Based on where we stand midyear together with the new Alta Vista contract, we are reaffirming our 2023 production guidance. With respect to all-in sustaining costs, although we continue to successfully address last year recovery issues and other challenges, further works remains. While we are anticipating production to increase and cost to improve in the second half of the year, we believe the results may not be sufficient to offset the impact of the first 2 quarters.

Accordingly, we are increasing our full year 2023 all-in sustaining cost guidance to a range between $20.9 and $21.95 per ounce. We are also adjusting our CapEx guidance, lowering it to between $6.5 million and $8.5 million. This adjustment is due to revised engineering design and procurement plans relating to the tailings project. Overall, [indiscernible] a solid quarter. And based on July's numbers, momentum is building.

I would now like to hand things over to Juan Carlos, who will review our financials in more detail.

[Juan Sandoval, executive]

Thank you, Alberto. Turning now to our operating and financial highlights for the 3 and 6 months ended June 30, 2023, starting on Slide 13. Production increased by 22% to 1.2 million silver equivalent ounces in Q2 relative to the first quarter, taking us to 2.2 million ounces year-to-date. As was always the plan, the second half of the year is expected to be stronger, representing 54% of 2023 production Accordingly, we are reaffirming our full year 2023 production guidance.

With our recovery rate stable at 79%, Q2 production benefited from a 3% increase in tonnes milled versus Q1 and a 12% improvement in the average head grade. Approximately 60% of ounces produced in the second quarter came from purchased material with an average head grade of 186 grams per tonne. We are continuing to look for new feed contracts, focusing on volume, grade and profitability.

Our average realized price -- silver price in Q2 was $24.65. To maximize silver prices, we closely monitor the market to mitigate price volatility risk and defend against steep volatility. Accordingly, in April, we entered into forward and silver collar contracts. In May, based on high volatility and short-term swings, we sold the forward contracts for a realized gain of $2.3 million.

We maintained the silver collar contracts, which have an average foot strike price of $23 per ounce and cost strike price of $30 per ounce. The contracts are for 200,000 ounces per month, which is less than half of our forecast monthly production. The contracts begin this month and carry through to the end of 2023.

To mitigate our exposure in May and June when prices fell, we deferred the sale of approximately 540,000 ounces of silver. Given the deferral, our revenue declined by 34% to $15.3 million despite quarter-over-quarter increases in both production and the average realized cost of silver per ounce. The deferred ounces, which were valued as inventory at $11.3 million, were subsequently sold in July at an average price of $24.7 per ounce for a total revenue of $13.3 million.

Moving to the cost side. Let's look at it on a per ton basis. Mining and haulage costs were -- as well as material purchasing costs improved in Q2 when compared quarter-over-quarter and year-over-year. That said, we still have some work to do to improving milling and processing costs, which were hit particularly hard by cost inflation. We are reviewing our purchases of high-value consumables, such as cyanide and [indiscernible], and considering options such as long-term fixed pricing and/or implementing a min-max inventory management system.

Our Q2 cost per ounce sold metrics improved compared to Q1. We achieved these improvements despite the sale deferral of nearly half of our Q2 production. We continue to successfully address issues and challenges that began last year and that negatively impacted us in 2023. We anticipate costs will improve as production increases in the second half of the year.

Moving to our profitability metrics on the next slide. Quarter-over-quarter income from mine operations increased sixfold to $2.5 million. Gross cash profit rose to $3.5 million from $1.7 million. EBITDA more than doubled to $3.7 million, and adjusted EBITDA more than tripled to $4.9 million. With higher production expected together with the silver collar contracts put in place, we expect our production and profitability metrics to improve in the second half of 2023.

Moving on to our capital structure as of June 30. Our cash position was $70 million -- $7.4 million. We had no debt. Working capital was $90.3 million, and we had close to $90 million in liquid assets. With respect to our cash balance, the decline from year-end was primarily due to the net cash used in operating activities of $9.6 million, the majority of which is attributable to deferring the sale of bullion in Q2. As mentioned, the bullion inventory was sold for revenue of $13.3 million, and our inventory returned to more normal levels. Overall, it was a good quarter, and we continue to preserve the strength of our strong balance sheet.

This concludes our formal remarks. Now back to you, Trish.

[Patricia Moran, executive]

Thank you, JC. We'll now start the Q&A section. [Operator Instructions] We have a question from the chat line, and that is why have you stopped mentioning tin in the tailings?

[Alberto Morales, executive]

Thank you, Trish. We have taken a decision in connection with our tailings programs. As we have expressed in the past, we had an option to look into the recuperation of both tin and silver. Based on current market conditions and in order to expedite the strengthening the length of the life of San Bartolomé, we're primarily focusing now on the recuperation of silver and deferring the decision of the recuperation of tin when there would be better market conditions for us.

[Patricia Moran, executive]

All right. Our next question comes from Jon Egilo from Desjardins.

[Jonathan Egilo, analyst]

Could you comment on the driver of the lag in sales? I don't think we've seen it quite to this extent before.

[Juan Sandoval, executive]

Thank you, Jon. Are you referring to the deferral of the roughly half our production from the first -- from the second quarter to July?

[Jonathan Egilo, analyst]

Yes. Yes, correct.

[Juan Sandoval, executive]

So we have -- as we have mentioned, we monitor on a constant basis the price of silver. During that second quarter, there's been, as you know, a lot of volatility. And it was a strategic decision at that point in time to defer based on the outlook that -- to postpone -- to defer the sale of around 50 -- 540,000 ounces, which were sold in the following month at a higher price. It was a strategic decision taken at that moment and based on what we are seeing on the volatility of silver prices.

[Jonathan Egilo, analyst]

Okay. Understood. Another question for me. Mine grades at the Pallacos have really kind of fallen off this year. When I look at the Pallacos grades at the year-end resource statement, it's around maybe $80 per ounce per ton. So where should we kind of expect these mine grades to go? Are they going to stay low until Pallacos are depleted or kind of come back to levels closer to resource grade?

[Segun Odunuga, executive]

Thank you, Jon. So as you know, we are getting closer to the end of life of Pallacos. What we are seeing right now is still consistent with what we estimated it to look like. And we believe that right now it's averaging around 80 grams per tonnes.

[Jonathan Egilo, analyst]

Okay. So right now, it's averaging around 80 grams, but unless I'm mistaken, if I look at the mine grades disclosed, I think it was Q2 this year is 43. Q1 this year was 53. We're expecting it to get back up to 80?

[Segun Odunuga, executive]

Okay. From what we see for the production in Q2, I think that was a little bit surprising to us too because what we saw -- what we see -- what we saw from the production was 88 grams per tonnes. And we are trending towards -- I mean we know right now that what [ we made ] in Pallacos within the next few months is to be fully depleted. And we are assessing our options right now on what to do.

[Jonathan Egilo, analyst]

Okay. And last one for me. You disclosed a new resource estimate is coming on the FDF and dry stack. I guess, what work has been going on that you can discuss where maybe we could expect the new resource to come in directionally? Like presumably, the FDF isn't getting bigger. So is this kind of new MRE just more so confirming the grades, increasing confidence? Or like directionally, I guess, what are you kind of looking for in this new resource?

[Segun Odunuga, executive]

We -- as disclosed in the MD&A, we are expecting to get the technical part shortly. We will disclose the information in the technical [ 53-101 ]. But from what we see right now, we are confident of what we're going to -- what the operation would look like from the FDF. We just said that we'll get back to you once we get more understanding. We don't want to speculate here. But once we have the draft of the technical report, then we analyze it more and then get a better understanding of what the grade will look like. But from the initial analysis that we performed, we believe that, that FDF project will be more positive to us.

[Patricia Moran, executive]

Our next questions are from Justin Chan at Sprott Capital Partners.

[Justin Chan, analyst]

Can you guys hear me?

[Patricia Moran, executive]

We can.

[Alberto Morales, executive]

Yes, we do.

[Justin Chan, analyst]

So just maybe first question, just as a follow-up to Jonathan's, so is that -- to clarify the grades in the Pallacos, I think the number in the MD&A is 43, but Segun was mentioning 80. Is that after ore sorting? So you got rid of the fines fraction, you get better grade and that's the 80 number that gets fed in? Is that -- can you just confirm that interpretation so we can model it going forward?

[Segun Odunuga, executive]

Look -- yes, what you said is true based on what we published in the -- on our resource estimate. But like during the Q2 -- and as you know, last year, we had some issues with our recovery. We increased on our blending, and that give us some higher grade from Pallacos. Like what you said is also true that we blend it from other sources, and that helped us with the better grade we realized.

[Justin Chan, analyst]

Got it. So regardless of what you're mining, you're probably mining around 40 to 50 and feeding 70 to 80, call it?

[Segun Odunuga, executive]

We're feeding more than 80.

[Justin Chan, analyst]

I just mean from Pallacos and then blending with, call it, 170 grams from purchased or...

[Segun Odunuga, executive]

Absolutely, yes. Okay. From Pallacos-specific [ extracting ] area, they are having around 53 grams per tonnes. But there's other area that we start. Pallacos included about [ 3 vessels ] are cleared up pits that we are mining from. But so -- based on the improvement of the geological formation that we performed on that area, and that's why we see some slight increase. And then we are -- on our blending of materials from other sources that we purchase.

[Justin Chan, analyst]

Right. Got it. And then just -- for the second half, production is going to be higher. Is that going to be grade or volume or both? And can you give us some detail? And do you think that's from ore that you're purchasing or ore that you're sourcing from your own deposits?

[Segun Odunuga, executive]

We -- as we disclosed in the MD&A, one of the things that we will be producing for the Alta Vista, which is very high-grade materials and also too, we are improving our materials purchases right now, and that -- we have the confidence that, that will help us to achieve our production guidance.

[Justin Chan, analyst]

Okay. So it sounds like it will be more so grade?

[Segun Odunuga, executive]

Yes. More of grade, yes. And also the recovery -- actually, we see that we are improving our recovery. So we expect that we -- I think consistent with what we saw in Q2, if not slightly above that. But it's a combination of recovery and also on the grade and also materials that we are sourcing.

[Justin Chan, analyst]

I see. And then in terms of your CapEx budget, you revised it to $6.5 million to $8.5 million. You spent approximately $1 million in the first half. So just confirming that means $5.5 million to $7.5 million in the second half is what you expect for projects?

[Segun Odunuga, executive]

Based on our guidance that we put out right now, the $6.5 million to $8.5 million, we -- based on the revised engineering and also our procurement, we are convinced that we -- our CapEx will be lower. And we -- so that's what we're expecting to see right now based on the -- we definitely see a lot of savings from procurement side. We have seen some equipments from other operators that -- we are going to source from them to augment our revenue to do. And also from the local fabricators, it is cheaper for us to fabricate the equipment locally than importing. So that saves a lot of money.

[Justin Chan, analyst]

Okay. Got it. But you do expect that to be spent in the second half of this year. So there will be materially more CapEx in the second half?

[Segun Odunuga, executive]

Yes, yes. No, we already disclosed this in our commitments that we are already committed to that EPC project.

[Justin Chan, analyst]

Yes. Okay, okay. That's helpful on that. And then just, I guess, going forward to the upcoming resource update. I know it's kind of hard to speak too much on it before we see it. But I guess, high level, how much more production from the Pallacos do you expect? Or I guess, when do you think you'll need to switch your ore sourcing to either predominantly purchased or bring the FDF online? How many more years of Pallacos ore do you have?

[Alberto Morales, executive]

Yes, Justin, let me address that one. As we begin to do our preliminary analysis of the FDF project and as we have seen Pallacos grade trending into lowering its grade going forward, we have had some preliminary analysis that actually showed that it would be more beneficial for the company to now replace that blending source of [indiscernible] Pallacos some mix with the hard rock higher-grade materials.

So it would be our intention to start replacing Pallacos and deferring the utilization of Pallacos when we see -- when the market gives us a better spot prices for the silver and in the interim, try to replace them as soon as possible with the FDF materials.

[Justin Chan, analyst]

Okay. I guess, do you have kind of a year or a date that you can give us in terms of roughly when that might -- the FDF will start to replace the Pallacos? Or I guess, is that preliminary...

[Alberto Morales, executive]

Yes. Right now, we're basically -- yes -- no, and it's a good question. Right now, what we've been referring to is we have expressed that it would be in the first half of next year, 2024. Obviously, there are sometimes construction and procurement and delivery terms and accessibility of equipment that sometimes are not within our control. But to the extent that our team can expedite all those things, we're hoping that it will be in the earlier part of next year as -- in the earlier part of the first half as opposed to the later part of the first half. But we just have to be cognizant that there are variables that are outside of our control.

[Justin Chan, analyst]

Yes, for sure. Understood. That's a very helpful answer. And then, sorry, just my last one. I realize I've been on the line for quite a long time. The Alta Vista purchase agreement, it's 170,000 tonnes over 24 months. Do you expect that to be a fairly even -- kind of fairly even fee over the course of that time? Or will we see more in the early period? Just how should we expect that...

[Alberto Morales, executive]

Yes, we're expecting it to be even. Depending upon availability of trucking materials, transportation and things, we could probably expedite it a bit more. But we're looking into it. But for the time being, we're considering to have it more evenly. But as I said, subject to availability and the possibility of expediting and front-loading it, we would consider that if the circumstances allow us to do that.

[Justin Chan, analyst]

Got you. So roughly it's about -- I would say, probably it will be about 20% roughly of your -- maybe 10% to 20% of your purchase material per quarter, roughly that?

[Juan Sandoval, executive]

I would -- yes, 70,000 -- 170,000. And yes, that's roughly the number. Correct, yes.

[Justin Chan, analyst]

Okay. So -- and basically, we should just assume then that, that will be higher grade at 350 and then the rest of your purchase material will be similar to what you're purchasing now?

[Juan Sandoval, executive]

Yes.

[Alberto Morales, executive]

Yes, depending upon the sources. And you'll have a blended average, yes, yes.

[Patricia Moran, executive]

All right. We have another question. Can you share more on the revised design and procurement plans for the FDF, which served to lower CapEx guidance?

[Juan Sandoval, executive]

I think that has already been addressed by the previous question on our reduced CapEx, Trish.

[Alberto Morales, executive]

It was basically -- Segun expressed that it was basically coming from the procurement side as we are now -- in order to shorten delivery terms, we're having the opportunity to probably source some of the equipment from previous upgrades.

[Segun Odunuga, executive]

Yes.

[Patricia Moran, executive]

Okay. Well, steps will you take to lower the all-in sustaining costs in the second half of the year to meet the revised guidance?

[Segun Odunuga, executive]

Thank you, Trish. During the first half of this year, we saw some increases in some of our consumables. And we are already looking at the option of what we can do to improve on those costs or to minimize -- sorry, to minimize those costs. And all these things that we are evaluating right now, we're trying to put in place is on for some better control of our consumables inventory management and also assessing the opportunity of us having a kind of long-term fixed contract that will help us to achieve a better pricing that we lower the price of our consumable, especially as mentioned previously in Alberto's remark, we -- sorry, with JC remarks about the higher cost of cyanide that we are seeing being impacted by inflation and also on the variables.

So all these that are variables, these are things that we are looking at that will help us to lower the all-in sustaining costs and also to -- with the expected increase in our production in the second half of this year that we also lower the all-in sustaining cost. The management are strongly focusing on our cost to [indiscernible].

[Patricia Moran, executive]

Thanks, Segun. And the last question is about M&A. I've got several people asking if we could just provide any more color on where we are. For instance, are the possible acquisition targets leaning more towards copper or gold and silver producers? What's the time line?

[Juan Sandoval, executive]

Well, Trish, what we can say at this point is that we have narrowed our search and we're looking into that. That's all we can disclose at this point.

[Patricia Moran, executive]

All right. Well, there are no further questions. We'll hand things over to Alberto for some final comments.

[Alberto Morales, executive]

Well, thank you, Trish, and thank you, everyone, for participating. As expressed during our year-end earnings call in March, I shared with you that as the major shareholder of Andean, I was not pleased with our 2022 year-end results. Today, I can now say that the results that we have seen for Q2 combined with our July results are showing a corrective trend. While there are still some challenges to overcome, we are committing to improving our future results and are encouraged by the achievements that we've made so far this quarter.

I want to thank you again for joining us today. And just as a reminder, our Annual and Special Meetings of Shareholders is scheduled for August 31 in Toronto. Hope to see you there. Thank you all.

[Patricia Moran, executive]

Thank you, Alberto. This concludes our webcast. If you have any follow-up questions, please don't hesitate to reach out to me at [email protected]. Thanks and have a great day.