Good afternoon. My name is Lester, and I will be your conference operator today. At this time, I would like to welcome everyone to Amerigo Resources Q4 and full year 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the formal remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the number two. Thank you. Mr. Graham Farrell of Harbor Access Investor Relations, you may begin the conference.
Thank you, operator. Good afternoon, and welcome everyone to Amerigo's quarterly conference call to discuss the company's financial results for the fourth quarter and full year of 2023. We appreciate you joining us today. This call will cover Amerigo's financial and operating results for the fourth quarter and full year ended December 31, 2023. Following our prepared remarks, we will open the conference call to a question-and-answer session. Our call today will be led by Amerigo's President and Chief Executive Officer, Aurora Davidson, along with the company's Chief Financial Officer, Carmen Amezquita. Before we begin with our formal remarks, I would like to remind everyone that some of the statements on this conference call may be forward-looking statements. Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties.
Company's actual results may differ significantly from those projected or suggested by any forward-looking statements due to a variety of factors, which are discussed in detail in our SEDAR filings. I will now hand the call over to Aurora Davidson. Please go ahead, Aurora.
Thank you, Graham. Welcome to Amerigo's earnings call for the fourth quarter and 2023 annual results. All dollar figures in this call are U.S. dollars, except where we specifically refer to Canadian dollars. In 2023, we faced significant challenges, including a 10% year-over-year hit to production and a $0.15 lower average annual copper price. Despite these hurdles, Amerigo's capital return strategy proved its resilience. Even when revenue fell by almost $11 million and EBITDA decreased by $14 million, we delivered four more quarterly dividends to shareholders. This has confirmed the inherent strength and the well-constructed nature of our capital return strategy, which should reassure you of our unwavering commitment to returning capital. Looking ahead, we are excited about 2024.
Our excellent operating team at MVC delivered a strong fourth quarter, and the challenges of 2023 are now behind us. We are back on track, generating cash to return to shareholders through our strategy of regular dividends, share buybacks and performance dividends, each activated under specific market conditions to maximize shareholder returns. We just declared our 10th consecutive quarterly dividend with an annualized yield that remains best in class. Our capital return strategy is robust and adaptable. The quarterly dividend, which is a key element of our strategy, is complemented by additional mechanisms such as share buybacks and performance dividends. These instruments are designed to be activated when copper prices rise, showcasing our preparedness for positive market fluctuations and providing a comprehensive approach to returning capital to our shareholders. As I mentioned last year, Amerigo is a cash flow story, not an earnings story.
But today, I want to emphasize another aspect. For almost three years now, Amerigo has fundamentally been a story of returning capital to shareholders, and this commitment was clearly demonstrated in 2023. Last year, we returned $17.2 million to shareholders, and we continued to pay down our bank debt, making principal payments of $5.3 million, repaying all outstanding leases. By the end of the year, Amerigo's debt level was reduced to $20.7 million, and we had cash and restricted cash of $22.5 million. The strength of our capital return strategy comes from our ability to generate cash and the conservative construction of the strategy itself. 2023 showed us that Amerigo can weather tremendous external shocks and still return healthy amounts of capital to shareholders. Operationally, our team could not have performed any better.
We got off to a strong start in 2023, beating our first quarter production and cost targets. However, these annual targets were shortly of little use due to the historic flooding that affected Chile towards midyear. MVC recovered from these events as quickly and efficiently as possible. These operational accomplishments were detailed in Amerigo's news releases and social media from June to November of 2023. From a market perspective, the magnitude of the operational issues we faced last year overshadowed the progress we had been making with investors in recent years. But the fact is that investors who were with us throughout 2023 were paid handsomely to wait for both a recovery at MVC and the strengthening of copper prices.
While investors waited, Amerigo provided the security of the cornerstone quarterly dividend with a total payout of CAD 0.12. Here is a recap of our fourth quarter financial results. These numbers reflect the complete operational recovery after the flooding events. Amerigo's Q4 production was 16.4 million pounds of copper. Under a copper price of $3.82 per pound, EBITDA was $11.2 million, and net income was $3.9 million. Free cash flow to equity, which is our ultimate financial performance measure, was $6.5 million. Yet the markets still need to catch on, as our annualized dividend yield remains at almost 10%. As we continue doing what we have been doing, we expect that yield to fall as investors increasingly value the security and size of this fundamental component of our capital return strategy.
Looking at 2024, let me address the inevitability of higher copper prices. The fundamentals of copper supply and demand continue to work in our favor, even with other macro factors such as interest rates, providing a headwind to market sentiment. This is apparent in the quick change in projected copper balances in the past few months. The projected slight surplus for 2024, which was the consensus, has flipped to a projected deficit on shocks to global supply. We have talked many times about the long-term challenges of increasing copper mine supply. More recently, we have also discussed the increased copper demand profile emerging from global electrification goals and other aspects of decarbonization. These trends remain in place.
What has changed is the speed with which the market can flip from apparent surplus to deficit, and the magnitude of the flips is being driven by issues in the copper supply chain. The size of supply disruptions from copper mines is now able to overwhelm the seasonal surges in refined copper production when the smelters draw down copper concentrate inventories. Ultimately, it is up to the copper mines to replenish those inventories, but it continues to be more complex and more challenging for the world to produce enough copper to meet expected demand, let alone to replenish stockpiles. For example, a series of mine production downgrades from copper producers, including Anglo and Rio Tinto, were announced in the past few months, and these production downgrades are more significant than any positive impact of companies announcing production increases.
This had a minimal impact on 2024's copper supply forecast, erasing about half of the global production increases expected for this year. Perhaps the biggest shock has been the shutting down of First Quantum's Cobre Panamá, despite the tremendous financial benefit and employment the mine provided to the country. By itself, Cobre Panamá represents 1.5% of global copper supply, and it looks like the mine could be permanently shuttered. A world producing over 20 million tons of copper annually must overcome around 5%, or 1 million tons per year, of supply disruptions due to politics, geology, rising costs, and capital starvation. The global copper industry must do this to tread water and maintain stable production, let alone increase production, and every year this becomes harder and harder, putting upward pressure on copper prices.
This is the environment we expect in 2024, and where Amerigo sets itself apart. In this type of supply and copper price environment, the strengths of Amerigo are evident. We have a long-term contract to process tailings without exploration or geological risk. We have no jurisdictional risk, as our contract is with Codelco, the Chilean state-owned copper company. Similarly, we do have no counterparty risk, as we also sell our copper concentrates directly to Codelco. Our sustaining capital expenditures are minimal, as is our declining debt level. In other words, we are primed to maximize the return of capital to shareholders in 2024. So far this year, our operational results are on track, and we are generating cash to support our capital return strategy. Our cash balances should build commensurately with rising copper prices.
We expect to produce $ 62.4 million pounds o f copper this year. This is in line with the guidance we provided for 2023. We also expect to produce $1.2 million pounds of moly. Regarding our 2024 financial obligations, we will make scheduled bank debt repayments of $9.75 million plus interest, and bank debt at year-end will then only be $11.5 million. I want to finish my comments by summarizing our capital return strategy and what we have already achieved. But more importantly, I want to reiterate what shareholders can expect as copper prices rise in response to the imminent copper shortages. First, under our 2024 production and cost guidance, which was press released on January 17, 2024, at current copper prices, Amerigo's quarterly dividend is safe.
We have conservatively budgeted a copper price of $3.60 per pound for our forecasts, and today's copper price is $3.85. We expect higher prices as the copper deficits fully emerge in 2024. Since implementing our capital return strategy, Amerigo has paid a cumulative dividend of CAD 0.26 per share, representing $33.2 million, and has used $23.7 million to purchase and cancel more than 20 million common shares. We renewed our share repurchase program under a normal course issuer bid. Under this program, we can repurchase up to 10.9 million common shares for cancellation through December 1 of this year. This represents 6.6% of the company's issued and outstanding common shares. We have temporarily suspended share repurchases due to the financial impact of our lower 2023 production.
Still, the company will again be positioned to buy shares for cancellation at its discretion. In addition to quarterly dividends and share buybacks, strong spot copper prices and a robust copper price outlook will eventually translate into the deployment of performance dividends. The yield an investor at Amerigo is paid to wait, while copper prices remain range-bound, is best in class. Had last year's flooding not occurred, the potential for additional share buybacks or a performance dividend is evident, even with stagnant copper prices. This year, with no operational impediments to face, the potential return, the potential to return additional capital should also be apparent, and this would boost our yields even further. However, as the market increases, its understanding of the stability of our business and our capital model and the increasing probabilities of higher copper prices, something different will change our yield.
I believe our share price will be bid up to bring the investment yield down to more appropriate levels. That means Amerigo will continue to shine as a total return vehicle for investors. I will now ask Carmen, our Chief Financial Officer, to discuss the company's financial results. Carmen, please go ahead.
Thanks, Aurora. I will now present the 2023 annual financial report from Amerigo and its MVC operation in Chile. In 2023, the company posted net income of $3.4 million, earnings per share of $0.02 or CAD 0.03, and EBITDA of $34.6 million. Amerigo's operations and financial performance were affected by heavy rains and flooding in Chile, negatively impacting copper production in the second and third quarters. This can clearly be seen in each of our 2023 quarterly results, which can be found on page seven of our MD&A. In Q1 and Q4, with stable production of $16.5 million pounds each quarter, the company posted strong net income and, more importantly, strong net operational cash flow.
Despite the hurdles faced in Q2 and Q3, Amerigo returned $17.2 million to shareholders, with $14.6 million paid through Amerigo's quarterly dividend of CAD 0.03 per share, and $2.6 million returned through the purchase and cancellation of 2.3 million common shares through a normal course issuer bid. Revenue in 2023 was $157.5 million. Revenue was comprised of lower gross value of copper tolled on behalf of DET of $220.7 million, compared to $255.4 million in 2022, from lower copper production and copper prices. Less notional items, including DET royalties of $58.8 million, smelting and refining of $23.3 million, and transportation of $1.6 million, with positive fair value adjustments to settlement receivables of $1.1 million.
Revenue also included increased molybdenum revenue of $19.4 million, compared to $15.1 million in 2022, due to stronger molybdenum production and prices in 2023. When you look at our quarterly revenue numbers, it's important to see the effect of settlement adjustments to prior quarter sales, as these can be material from quarter to quarter. We always include a breakdown of revenue in our financials and MD&A to facilitate this analysis. Tolling and production costs increased 3% from $139.7 million in 2022 to $143.3 million in 2023.
This included increases to direct tolling costs of $3.7 million, which were in line with our 2023 cost guidance, as well as increases to power costs of $1 million due to higher pass-through charges and the use of a temporary high-cost power source to produce fresh tailings while the plant remained disconnected from the central power grid. DET molybdenum royalties increased by $1.8 million due to both higher prices and higher production. This increase in costs was offset by a decrease in labor costs of $1.2 million, mostly due to a decrease in signing bonuses paid according to collective labor agreements year-over-year, as well as a decrease in grinding media costs of $2.2 million from lower consumption and input costs. General and administrative expenses were $5 million, down $400,000 from 2022.
In 2023, Amerigo had a $0.8 million expense associated with the fair value adjustment of the derivative to related parties and posted other gains of $1.3 million, which is comprised of foreign exchange gains of $2.9 million, environmental compliance plan costs of $1.1 million, equipment and supply write-downs of $0.3 million, and other losses of $0.2 million. The company's finance expense in 2023 was $2.9 million, compared to $1 million in 2022. Finance expense was lower in 2022, as it included a $1.4 million non-cash gain to mark-to-market adjustments on the interest rate swaps. This non-cash gain was down to $88,000 in 2023.
Income tax expense was down from $8.1 million to $3.4 million in 2023, including current income tax expense of $8.3 million and a deferred tax recovery of $4.9 million. As a side note, significantly, all the current income tax due for the year 2023 has already been paid by MVC through monthly tax installments. Amerigo's cash cost in 2023 was $2.17 per pound, which is below our updated guidance of $2.20 per pound following the flooding, and only $0.03 higher than the original guidance issued for 2023, which was $2.14 per pound. This was achieved despite lower production from stronger molybdenum byproduct credits and cost management at MVC. Moving on to the balance sheet.
On December 31st, 2023, the company held cash and cash equivalents of $16.2 million, restricted cash of $6.3 million and had a working capital deficiency of $12.3 million. Borrowing at year-end was $20.7 million, and all leases had been paid. In terms of cash flows during the year, Amerigo generated cash flow from operations of $22.3 million, and net cash flow generated in the year, which includes the changes in working capital, was $20.2 million. In terms of uses of cash, $16.9 million was used in investing activities and $24.9 million was used in financing activities. I will explain this further. We made CapEx payments of $16.9 million during the year.
As we have stated before, 2023 was a CapEx intensive year at MVC due to the construction of a new sump in Cauquenes, which has been completed and has an expected life of 3.5 years, and the purchase and most of the installation of a standby power transformer at MVC, which is a significant risk mitigation project for our operation. With respect to the cash used in financing activities of $24.9 million, here is where the returns to shareholders come into play. There were $14.6 million in dividends paid and $2.6 million used to repurchase shares. Additionally, we made bank repayments of $5.3 million and used $1.9 million to fully repay our leases. We drew $2 million from the operating line of credit, and there was a $2.1 million dollar change in restricted cash.
As a final comment, we reported a provisional copper price of $3.83 per pound on our Q4 2023 sales. The final settlement prices for October, November, and December 2023 sales will be the average LME prices for January, February, and March 2024, respectively. Each 10% change from that $3.83 per pound provisional price would result in a $6.2 million change in revenue in Q1 2024 regarding the Q4 2023 production. We now know the January price, which was $3.78 per pound. We will report Amerigo's Q1 2024 financial results in May 2024, and want to thank you for your continued interest in the company. We will now take questions from call participants.
Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press star, followed by the number one on your touchtone phone. If you wish to cancel your request, please press star two. Your first question comes from Steve Ferazani from Sidoti. Your line is now open.
Afternoon, Aurora. Appreciate the detail on the call. Wanted to ask about the CapEx guidance. Obviously, you made a number of investments this year, some planned, some obviously resulting from flooding. Looks like current guidance is significantly lower, could be a benefit to cash flow significantly, particularly if we get prices rising. Just want to think about how you're thinking this year and longer term in terms of CapEx. Obviously, there might be some additional risk mitigation efforts you might consider post the summer. Overall, your view on short-term and long-term CapEx for the company.
Steve, as, as Carmen mentioned, 2023 was not a representative year regarding CapEx.
Right.
For 2024, our sustaining CapEx is projected at $5.7. Those are the real capital sustaining projects that we have. In terms of accounting, we also capitalize around $3.7 million of maintenance that is subject to capitalization and our strategic spares. If you take both of them together, it's $9.4 million, and that would be a good benchmark to use on a going forward basis. Of course, inflation may have an impact, but right now we're seeing also an easing of inflation. So it is back to normal-
Yeah.
- under the parameters that we disclosed in our guidance.
Great. When you mentioned the easing inflationary pressures, it looked like... I mean, if I look at your Q4 numbers, not comparing it to Q2, Q3 on a per pound basis just because of the production issues, but even if I go back four or five quarters, it certainly looks like some easing of costs. Would you agree with that and how that plays into 2024?
Yes. Inflation is coming down in Chile. In 2023, the Chilean CPI was 3.9%, compared to 12.8% in 2022, which was a year when we saw significantly higher inflationary pressure. In January, inflation was 0.7%, which is even lower than what we saw in January of 2023. So we're not seeing a significant impact. And the Chilean peso is also at very, very manageable levels. Because one factor is inflation, and the other one is basically just how strong or weak the Chilean peso is compared to our reporting currency, which is the US dollar. So both of them are behaving in a very stable way.
Just so that you're aware, in our guidance news release, we always provide the sensitivity to changes.
Yeah.
- in Chilean peso.
... how that would have an impact or not on cash costs. But right now we're seeing a very stable actual result of financial performance in 2020, in January 2024, compared to our projections.
Okay, great. I know you, moly is just a by-product and the focus tends to be on copper, but full year moly was up, but it's certainly been extremely volatile. Any thoughts on moly prices? And I know you can't really factor that in on your side of the business, but just general thoughts on the moly market.
It is hard to gauge. It's a little bit of a black box. Our budget-
Yeah.
- is at $0.21 per pound. It's now close to that, close to $19.6 per pound. It was $19.2 in January. So it's behaving close to what we had expected. And,
Mm.
Some outlooks are a little bit more positive than $22 or $23 per pound, but it remains to be seen. We saw, by this time last year, we had seen a significant ramp-up in moly prices, and then they came, the prices came down. As we say, if there is a strong moly price, it's gravy for us.
Right. Right.
It did help, as Carmen was saying, our cash cost performance last year, but we're not banking on it, but we don't expect it to be at significantly lower levels than what we're seeing right now either.
Great. Before I let you go, I always got to ask this one: What would be the parameters to start with everything normalizing and the balance sheet in decent shape, what would be the parameters to restarting the buyback?
We always speak about $25 million of cash as our desired target. I think I-
Mm-hmm.
- I provided some breakdown of that on our prior conference call. Around $50 million-
Yeah
- of operational cash, $10 million to be held at, at head office. We're not there yet. We're still-
Okay.
We're building up our cash. We're reducing our working capital deficiency. We'll see. It is very sensitive to copper prices. It is trending-
Sure
in the right direction. So I think it's just a matter of time, not a matter if it's-
Okay
going to happen.
Yeah, perfect. Thanks, Aurora.
Sure.
Your next question comes from John Polcari from Mutual of America Capital Management. Your line is now open.
Thank you. Aurora, thank you for doing the call. Just a few questions. The power prices, am I correct that they're indexed to the U.S. CPI? Is that? Do I have that fact correct?
That is correct.
How much of the increase would you say was attributable to just the CPI change? Because I know power costs were up about $0.07.
I would say that normally the big adjustment comes from the annual CPI adjustments, John. There is also a component of power costs, which are the pass-through charges. Those are the charges of the electrical grid system in Chile that are passed on to industrial consumers, and I've spoken about that before. Those tend to fluctuate as a matter of supply and demand within the electrical sector in Chile. And those are denominated in pesos.
So there's an element of volatility associated with those pass-through charges, and it was disclosed as such that in our 2023 variances of power costs, the significant changes that we saw were from this power, from these pass-through charges and from the anomalous use of higher cost generation that was temporarily used in June and July of last year while we were disconnected from the grid.
Okay. Thank you. With the dramatic increase in reservoir levels, would power costs or hydro costs be going down at all?
It doesn't affect us. No, it doesn't affect us. We have fixed tariffs on an annual basis, and-
Okay
... those are only subject to the changes on the U.S. CPI and to the pass-through charges. So, the rest of the balance items on the power matrix in Chile have no impact on us.
Thank you. I missed the prior answer. What were you budgeting for molybdenum for the year? $19-
$0.21 per pound.
$0.21. Okay. Just two other quick questions. One, if copper prices were to spike, there's some concern that the entire market's on somewhat of a knife's edge and could spike higher in the latter part of the year into $25. What would happen to the Codelco royalty agreement? I think it caps at $5, is it?
We have two caps. We have a cap for the fresh tailings, and we have a cap for the old tailings. The cap for the fresh is $4.80 per pound. The cap for El Teniente's old tailings is $5.50 per pound. Basically, copper prices would have to come out of this range and remain there for a period of three months. Market indications would be that they would remain at those levels. What happens after that is we sit with Codelco to basically continue the progression of the slope on the royalty to them, which is tied to copper prices.
Okay. Thank you. Lastly, would it be safe to assume debt levels, I believe you mentioned, would be down at year-end to approximately $11.5 million? Very modest, perhaps even de minimis amounts of repurchase by the third or fourth quarter. Copper prices averaging $4, which would only be another 3% above the current LME three-month forward contract. Looking at the free cash flow equity for the fourth quarter and not wanting to do a simple annualization, but would it be reasonable to think that free cash flow generation could certainly be, say, north of $35 million or $40 million, leading to, not to put words in anyone's mouth, but a strong likelihood by year-end of maybe additional performance payments?
We have provided on our corporate presentation on our website, we have provided a guidance at different copper prices for EBITDA and free cash flow to equity. Those are tied in to a series of parameters. So you can work out the math of
Okay.
what you expect copper prices to be and, and how much cash could be generated within the year, which obviously doesn't include the cash that we had at the start of the year, going in. That's why I always emphasize the nature and the mechanisms of the return of capital policy, because we don't wanna be guessing what's going to be happening.
Mm-hmm.
We know what's going to be happening, right? And the trigger points at, of higher copper prices are depending on, on where, the share price is. If it makes sense to continue to buy shares, that's where we would go next and where we have been before. And after that, it's a performance dividend. So, that is committed to, and, and those are the... That's why we always provide the guidance on what to expect, the company could be generating, in the year and what are our commitments within our-- Whenever you look at free cash flow to equity, and that basically is free cash flow to the shareholders.
Mm-hmm.
We've already factored in debt repayments, we've already factored in CapEx. So, it's all available for distribution.
Well, yeah, I guess what I'm wondering is, would the board perhaps be predisposed or consider just eliminating the debt in its entirety by year-end, since it's down to-
We have, we have low levels of debt, John. We have low levels of debt. Our, we do pay a finance expense for-
Right
... for having that debt in place. But it's also, it's just part of doing business. One of the aspects-
Okay
... of our finance expense is having a standby line of credit, which I think it's important-
Mm-hmm
... for the company to have. So I don't think that there would be necessarily a prioritization of reducing debt, because we have very manageable debt as we have it. We have low levels of debt within the company now.
Okay. So even the term debt, not the line commitment, but even the, perhaps even the de minimis amount of term debt wouldn't be an impediment to any potential future performance payments?
No, it wouldn't be. It wouldn't be.
Okay.
We can distribute that cash, as per the, the terms of our finance agreement.
Right. Aurora, thank you very much.
Thank you, John.
Your next question comes from Stephen Utteridge. Your line is now open.
Yeah. Hello there. I've been reading that treatment charges for concentrates have been declining in China. Does Amerigo benefit from this?
John, that's a good question. We don't. We don't in the sense that our TCRCs are set annually according to the annual benchmark, so they were set in December. That annual benchmark is for $80 ton TC and $0.08 RCs, which are significantly higher than what the spot prices are right now. However, your question is important because the decline in TCRCs is telling us something interesting in measuring the tightness of the copper concentrate market. As you know, the TCRCs are the fees that mining companies pay the smelters to convert the concentrate into the finished metal. And when TCRCs drop, what it's signaling isn't a tightness in the concentrate supply to the smelters.
One information that I was reading about earlier this month was that TC/RCs had dropped to $22.70 per ton and $0.70 per pound. So that's super super low, and it is showing that there is a huge tightness in the market and that smelters are struggling to get that concentrate for processing and to conduct their business.
Now, having said that, there's a significant amount of additional smelter capacity coming online as well this year, but all of this is indicating that the smelters are really looking at where they're gonna be getting their concentrate and starting to even reschedule part of their maintenance work to go idle now because they are not sure they're gonna be getting the material that they need to operate. There is the amount of concentrate that you need for each ton of use smelting capacity is quite significant. I think the ratio is 4 - 1. So this is all interesting and supportive of the discussion that we were having about the state of the market and how mine supply is challenged, very challenged this year.
Okay, thanks.
Ladies and gentlemen, as a reminder, should you have any questions, please press star followed by the number one. There are no further questions at this time. Aurora, please continue.
Thank you. Well, thank you all for joining us today. The recording and the script of this earnings call will be available on our website in the next few days, as soon as we get it from the providers. Our next earnings call will be on May 9 , 2024 , to discuss our Q1 financial results. As usual, if you have any further questions about the company, please reach out to Carmen, to Graham, or to myself. We are always available to answer your questions. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect.