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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to Bear Creek Mining’s First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Barbara Henderson. Thank you. You may begin.
Good afternoon, everyone, and welcome to Bear Creek Mining’s Q1 2023 financial and production results conference call. Yesterday evening, Bear Creek filed its financial statements and MD&A for the three months ended March 31, 2023. And earlier this morning, we issued a news release summarizing our financial and operating results for this period. These documents are available on SEDAR and on the company’s website, bearcreekmining.com.
Today’s conference call will run approximately 30 minutes and consist of a brief introduction by Catherine McLeod-Seltzer, the Chair of Bear Creek; and a review of our financial and operating results by Eric Saba, President and COO. We will follow the presentation with a question-and-answer session. Unfortunately, Tony Hawkshaw, CEO of Bear Creek is unable to join the call today.
Information provided by Bear Creek during this call may include forward-looking statements that are based on information and expectations current as of today, but that may be subject to change. We urge you not to place undue reliance on any forward-looking statements we make in this call and to thoroughly review the risks and uncertainties outlined in our most recent annual information form.
I would now like to turn the call over to Catherine McLeod-Seltzer.
Thank you, Barb, and thank you to, everyone, who’s taken time out of their schedule to join this call. We appreciate your interest in Bear Creek Mining. We have a lot to cover in today’s call. Firstly, we are happy to report that Mercedes production for Q1 fell within our guidance range and AISC was lower than projected.
We have some important productivity upgrades underway at Mercedes that we believe will both improve production and lower costs. Eric will tell you more in a few moments. That said, as you may recall from our 2022 year-end and our Q1 2023 news releases, the level of free cash flow we expected to achieve at this point in time is taking longer than anticipated to come to fruition. But the end game is still in sight, which is to have Mercedes at the point where it is generating significant free cash flow. Eric, again, will go over the progress we are making to that end.
Let me stress, while the time lines have changed, our confidence in Mercedes ability to achieve higher levels of gold production at lower costs, its ability to generate robust free cash flow and its potential for the discovery of additional mineralization and new deposits has not changed. These delays have put some strain on our financial condition in Q1 2023, which has persisted into Q2.
However, as you will have seen in our news release yesterday, we have restructured the overhanging $25 million final Mercedes payment owed to Equinox Gold Corporation by converting the payment into a five-year convertible debenture. This longer-term debenture replaces the two-year promissory note we had previously negotiated and does so at a significantly lower interest rate and more manageable repayment schedule. The debt restructuring is subject to final documentation and exchange approval.
Also subsequent to the quarter-end, we announced that the terms of the Sandstorm Gold purchase agreement were amended to extend the monthly stream to Sandstorm up 600 ounces of gold for an additional seven months, which is now 49 months in exchange for a payment of US$5 million cash.
Once fully executed, the Equinox convertible debenture will reduce our net current working capital deficit by $25 million, and together with the amended Sandstorm gold purchase agreement, put us in a substantially stronger financial position to execute on our Mercedes strategy. Eric will provide more details about how we are addressing the development delays at Mercedes and making measurable progress in lowering costs and meeting 2023 guidance as changes in mining method and plans are executed.
But let me reiterate, we continue to have strong confidence in Mercedes ability to achieve higher levels of gold production at lower costs and its potential for the discovery of additional mineralization and new deposits.
I’ll now turn the call over to Eric Caba to discuss our Q1 2023 results and recent technical changes at Mercedes.
Thank you, Catherine. I’d like to start with a brief recap of our financial results for the first quarter of 2023 and then dive a bit deeper into the Mercedes operations, recent developments and some of the significant changes in progress at Mercedes.
From January 1 to March 31, 2023, Mercedes produced 12,038 ounces of gold and 40,241 ounces of silver, well within our guidance for the quarter. During this period, we sold 9,304 ounces of gold and delivered 3,182 ounces of gold under streaming arrangements.
Cash cost and all-in sustaining cost per ounce of gold sold and streamed were 1,386 and $1,670, respectively. Cash costs were slightly higher than expected and AISC came in below the guidance range.
During Q1 2020, we realized revenue of $24.3 million from the sale of gold. The cost of goods sold was $14.4 million and after non-cash items such as depletion, amortization and depreciation, Mercedes had a gross loss of $1.3 million. This is on target with our 2023 cash flow model. All in all, Mercedes performed according to our expectations during the first quarter.
Inflationary pressure, especially on direct consumables such as diesel, tires, lubricants, explosives and concrete as well as the strengthening of the Mexican peso against the U.S. dollar continued to impact our costs, approximately 75% of which are denominated in pesos.
On a consolidated corporate basis, after operating expenses, other income and expenses, tax expenses and recoveries, we recorded a comprehensive net loss of $11.6 million or $0.08 per share. At March 31, 2023, we had a net working capital deficiency of $60 million. This deficit will be reduced by approximately 40% upon finalization of the Equinox convertible debenture we announced yesterday.
The restructuring takes the near-term pressure of our cash position and better aligns our debt to a longer-term mine plan with significantly lower interest payments, allowing us to more aggressively explore and develop Mercedes for the long-term benefits of our stakeholders and to realize those anticipated outcomes before the debt matures.
Development work aimed at reestablishing additional working phases at the Marianas and Rey de Oro deposits continued to experience delays during the first quarter. The unsatisfactory contractor performance equipment availability and unplanned ground control remediation work.
Although Q1 gold production is within the company’s guidance, these development delays and subsequent lower than predicted gold grades from the ore mine during the quarter will have a negative impact from the second quarter results. Subsequently, due to a focus on the overall contracting process and contractor management, we are seeing significant improvements in the performance of the compactors on site.
Q2 is still a transitional quarter. However, Mercedes remains on track to not only deliver on the company’s 2023 annual gold production guidance of 65,000 to 75,000 ounces, but we believe it will do so at an improved cost structure.
During Q1 2023, Mr. Pedro Calle, a mining engineer with 24 years of underground mining experience, joined Bear Creek as the General Manager of the Mercedes mine. Since joining the team, he’s led efforts to improve production efficiency and reduce costs. This has resulted in changes to mining methods utilized at the San Martin and Marianas deposits.
Moving away from the traditional cut and fill method previously in use, San Martin is a relatively thick and shallow dipping orebody, well suited to room and pillar mine. Marianas is a steeply dipping and fractured vein ore body, where various forms of block-caving can be used. These methodologies are not only significantly less costly than cutting film, but in the case of room and pillar mining, less dilutive.
The shift in mining methods is expected to lower operating costs starting late in the second quarter of 2023. The San Martin deposit began to provide feed to the mill in May and is expected to account for roughly 50% of Mercedes gold production in the second half of 2023.
Additional efficiency, grade control and cost reduction measures are being implemented and are showing early indications of success in reducing operating cost per ton. Although it has taken longer than we initially anticipated to realize the production potential of Mercedes, we still very much believe in the vision we had when we acquired the operation. Mercedes will become a solid operating asset, delivering the Envision cash flow.
Exploration potential as well remains excellent in the Mercedes district. In recent months, we have become increasingly convinced in the role of low-angle attachment faults on the mineralization at rest, mainly where these detachment faults intersect steeply dipping regional structures and create broad zones of structural preparedness. This structural model bears out at the San Martin and Lupita deposits, where mineralization is typically shallower and bulkier than the deposits that follow the main Mercedes structural trend and lend themselves to the cheaper mining methods mentioned previously.
Our 2023 exploration drilling program will test for mineralization where similar structural intersections are suspected to occur elsewhere in Mercedes concessions, including extensions to the Lupita and Diluvio areas as well as San Martin. While this structural model will play a significant role in our greenfield exploration drilling in 2023 and beyond, we are also seeing evidence of it in our ongoing delineation drilling and look forward to providing further results as they become available.
With that, I’ll wrap up the presentation part of the call, and we will now open up the call to questions.
Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Matthew O’Keefe with Cantor Fitzgerald. Please proceed with your question.
Thanks, operator. Hi, Catherine, Barbara and Eric. Good to see things are still progressing, a little bit of, I guess, slower than we’d hoped. But I do have some questions around these productivity upgrades and you’re looking at, you said, sublevel caving. Is there not a – I mean, it not take a little bit more development in CapEx despite having lower operating costs. I mean, is that – does that affect your timing as well?
Actually, it takes less capital development. Under the cut-and-fill plans that were in place prior, we had approximately 33 tonnes of ore per meter of development. That number has tripled. So in effect for the same production level, you dropped your development costs by two-thirds with the caving methodology.
Okay. And is there – what are the risks, I guess, I mean it’s not been done here before. I know it’s been – it’s a very common methodology. But I mean, here, I mean, has there been enough geotechnical work? Are you comfortable with the success of this? Is it – is there – are you all – are you increasing the risk as well by going this rep?
I don’t believe so. And from my understanding, it was actually a method that was used in the correct application during the initial days under Yamana. But that was the first thing that was done when we took a look at this, the General Manager, said, "All right, first thing we need to do is jump into the geomechanical calculations and nail those down. Initial indications we’ve had are that we aren’t going to have a problem with the flowability of the ore. So we’re just starting into the use of the caving methodologies, but at this point, I see nothing but encouraging signs on where we’re at.
Okay. That’s encouraging. Okay, can I just drill on another question here while I’ve got you. On the production, I guess, we’re in kind of a critical timeframe here. I mean you are still in the negative working capital position where Q2, you said is going to be – is it going to be flat relative to Q1 or a little bit worse than Q1? And then I assume we’re going to see a fairly large step-up in grade for the remainder of the year, like Q3, Q4. Can you confirm that or give me some clarity on that?
Q2 isn’t over yet, so I really can’t tell you where we would – but what I will say is we are seeing the results of the changes in methodology and the changes in control, and I am extremely encouraged with the cost numbers that we see coming out at the moment. And yes, the plan moving in with – as we develop enough working phases with the room and pillar methodology and San Martin and be able to put more equipment and we’ll start to see that grade having a much higher effect on what we’re doing.
The key on the caving methodology is going to be control in the cut-off grade and where you take and set that point that, all right, yes, we stopped pulling out of this blast and we move on to the next one.
Okay. I have more questions, but maybe I’ll pause and let someone else – I’ll get back in the queue and let someone else ask a question. Thanks.
[Operator Instructions] We have a follow-up from the line of Matthew O’Keefe. Please proceed with your question.
Oh, thanks, operator. Yes, just a follow-up is we – Corani, I think, you had mentioned in the previous call that you were going to give us more of an update at some point this year. Maybe you could tell us if give us what you can tell us now. And then if we are going to get an update, what will it entail? Will we be looking at any revised CapEx numbers because we have – I guess, the last CapEx was 2019. And then also what kind of work is planned for the year?
I think everybody who follows Peru understands the disturbance that occurred with the change in President and Pedro Castillo moving in – out of the presidency, the roadblocks and subsequent protests that occurred, that settled down for most of the country fairly quickly. Puno was the last area to actually return to a fairly normal set.
And so we have, just in the last couple of weeks, returned our people back into site, started to work back with the communities, start to pick back up. So at this point, I can’t give you a solid indication of what we’re going to be announcing. The delays cost us a little bit, but I suppose the stay tuned message is still valid.
Okay. We’ll stay tuned. Great. Okay, that’s it for me. Thanks very much.
There are no further questions in the queue. I’d like to hand the call back to management for closing remarks.
Thank you very much, and thanks for your questions, Matt. That concludes our Q1 2023 earnings call. We encourage you to contact us any time for an update on our activities or if you have any further questions. Thank you again for attending.
Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.