Earnings Call: Q2 2021

Aug 12, 2021

Good day, ladies and gentlemen, and welcome to the Fortuna Silver Mines Second Quarter 2021 Financial and Operational Results. At this time, all participants are in a listen only mode, and we'll open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Luis Genoza, Director of Investor Relations. Sir, the floor is yours. Hi, Matthew. Thank you. By the way, Luis Canosa is our CFO. It's Carlos Baca, Director of Investor Relations right now speaking. Good morning, ladies and gentlemen. I would like to welcome you to Fortuna Silver Mines and to our financial and operations results call for the Q2 of 2021. Hosting the call today on behalf For Fortuna will be Jorge Alberto Ganoza, President and Chief Executive Officer and Luizarillo Ganoza, Chief Financial Officer. Today's earnings call presentation is available on the featured presentation box on our homepage at fortunasilver.com. As a reminder, statements made during this call are subject to the reader advisories included in yesterday's news release and in the earnings call presentation. Financial figures contained in the presentation and discussed in today's call are Before I turn over the call to Jorge, 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 a conclusion, forecast or projection in the forward looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward looking information is contained in the company's annual information form and MD and A, which are publicly available on SEDAR. The company assumes no obligation to update such forward looking information in the future, except as required by law. I would now like to turn the call over to Jorge Alberto Ganoza, Co Founder of Fortuna. Thank you, Carlos, and good morning to all. I will start the presentation on Slide 6, which shares our 2nd quarter highlights. In spite of COVID-nineteen related challenges at Lindero, which have led us to revise guidance for the year, Our second quarter results continue to reflect the strength of our business with record sales of 120 million EBITDA of $55,000,000 and an EBITDA margin over sales of 46%. Adjusted earnings of $0.12 per share came in largely in line with analysts' consensus. We maintain a liquidity position of $122,000,000 with a debt to EBITDA ratio of 0.2. Our healthy balance sheet plus incremental planned contributions to free cash flow from Lindero and Yaramoko in the second half add to our ability to fund Seguela construction under various price metal scenarios. Lindero produced 19,500 ounces of gold in the period, A dramatic surge of COVID cases in Argentina during the quarter impacted Lindero, leading to a 16 day Stopped spread over the 3 months. In addition, continued restrictions in the country Inferred our ability to support our ramp up, which relies on foreign vendor technicians. These entry issues into the country have been partially resolved over the last couple of months. Today, we have specialized technicians on-site for all stages of crushing, including the HPGR, And we're working to get superior technicians for the stacking system in the country in this Q3. On July 2, we closed the Roxgold acquisition. We're working on a 100 day integration plan, which is advancing well and in many instances exceeding our expectations. With this acquisition, Fortuna is cementing a diversified low cost production platform, Sourcing precious metals from 4 operating mines and with a robust permitted development project in Seguela, where we expect a construction decision this Q3 as we close the mining convention We provided Revised production guidance on July 19, which incorporates the Yaramoko gold mine contribution for the second half of the year and our downward revision of gold production at Lindero. Lindero gold production is 50,000 ounces lower to 100,000 ounces now. The 50,000 ounces are not lost but postponed for next year as we do not believe This year, we will be able to make up for the days of stoppages and the slow ramp up due to the reasons described in the Q2. Our revised consolidated guidance for silver does not change from the original and stays at 6.8000000 to 7.6 1,000,000 ounces and for gold is revised to 194,000 to 223,000 The gold equivalent production guidance is 283,000 to 323,000 ounces, still representing a year over year increase of 90% to 116% in terms of gold equivalent production. In Slide 7, we share our 12 month rolling average performance on Safety KPIs or trend of improvement on safety performance has seen a flattening, and in some cases, We observe a reversal across operations. The start of operations at Lindero at the onset of the COVID pandemic last year has weighted Heavily on heavily performance at this particular mine. We have had 10 lost time injury Accidents in the second quarter. We have in place a cultural change Initiative, we are committed to and we have we're displaying and implementing initiatives To continue with this success, we enjoyed Lowering and improving performance on safety KPIs. Slide 8. We pre released production for the Q2. Our gold equivalent production in the quarter was 56,000 ounces of gold. When measured against the previous quarter, silver production is up 49%. This difference is Mainly by the 54 days of government mandated COVID stoppages at the San Jose mine in Mexico last year. All production for gold production is up 3 37%, explained by the same loss of days at The San Jose mine and the fresh new contribution of ounces coming from Lindero. Our byproducts, zinc and lead also exceeded growth with respect to last year. This is also Slide 9. Precious Metals Made 85 percent of our record sales of $120,000,000 silver contributed 40% to revenue. In the period, we realized a silver price of $26.85 per ounce and a gold price of for $18.12 per ounce. Next slide, Slide 10. For the comparison of year over year quarterly financial performance, The takeaway here is a significant rebound driven by improved COVID conditions in Peru and Mexico, Plus the new contribution of Lindero to the business. Sales of $120,000,000 up from $44,000,000 Adjusted EBITDA of $55,000,000 up from $9,400,000 and adjusted net income of $21,500,000 up from a loss of Slide 11. Our all in sustaining costs at all operations were aligned with guidance. San Jose came in at $13 per ounce, Caylloma at $18 and Lindero at $12.14 Even though we produce lower gold at Lindero than our guidance plan called for, The timing on the execution of capital projects over the year at Lindero helped offset all in sustaining costs. Slide 12. For the first half of the year, we have executed capital projects totaling $32,000,000 out of an annual budget of $80,000,000 for Latin American operations. Exploration investment amounted to 6 $900,000 Our Greenfields and Brownfields budget for 2021 for LATAM is $21,000,000 Total approved capital for West Africa for the second half of the year amounts to 42,500,000 Yaramoko's sustaining capital and brownfields initiatives amounts to $22,000,000 Seguela and Vosura exploration Total $9,500,000 and the Fortuna Board approved in July And early works budget for Seguela of $11,500,000 which includes long lead equipment packages and focused in engineering work. All these in anticipation of our construction decision later in the quarter. Slide 13, please. Focusing again on Lindero. Here, the reconciliations of tons, gray and gold ounces mined for the Q2 continue to indicate a good correlation with the reserve model with differences of less than 5% for all parameters. So reconciliation of the reserve model to production Expected parameters for the granularometric compositions and metallurgical type ores that we have placed on the leach pad. As of July 21, ramp up of operations continues. Pit operations are performing and delivering according to design. Primary and secondary crushing systems performed at 80% of design over the period with sustained days exceeding design parameters HPGR agglomeration and stacking system, the 3 work in tandem, operated at 72% of design capacity. Today, with foreign vendor support currently on-site for HPGR and crushing circuits, we expect to beat And in Slide 14, we share with you the asset portfolio In the portfolio pyramid, a post Roxgold acquisition where you can see Our 4 operating mines, our development projects and the baskets of exploration opportunities that we have ranging from advanced explorations at greenfields explorations at Bossura in Burkina Faso, Santa Fe in Mexico, Ivo Blanco in Mexico, A large land package covering 250,000 sorry, 160,000 hectares in Cote d'ivoire And for Cerro Lindo project in Argentina, Bavorigame in Mexico, So it's certainly a robust So with that, I will let Luis now take you through the financial results. Yes. Thank you, Jorge. So on Slide 16, Just a moment to Confirm your Slide 16. So as Jorge has mentioned, we had record sales in the quarter and overall a Strong financial performance across our main financial metrics. As a reminder, And also as mentioned by Jorge, results in the comparative period in 2020 were depressed due to the impact of the pandemic And related government mandated stoppages. So the emphasis will be mostly about the absolute figures in the quarter as opposed to The variance year over year earnings per share were $0.09 in the quarter and adjusted earnings per share was $0.12 After adjusting for $3,500,000 of expensed amounts related to the Roxul transaction and other noncash nonrecurring items. Adjusted EBITDA of 54 €900,000 was at an all time high except only for the €60,800,000 recorded in Q1 2021 Q1 of this year and free cash flow from ongoing operations was $18,500,000 reflecting the capacity of our business to translate EBITDA results into free cash flow in spite of COVID related challenges at Lindero. Also in relation to free cash flow, we had negative changes in non cash working capital items of $8,300,000 in the quarter And $24,700,000 year to date. The amounts year to date are related mostly to accounts receivable at San Jose and Natural buildup of accounts receivable and leach pad inventory at Lindero. We expect these absolute amounts to maintain or slightly come down in Q3 and a stronger recovery of receivables towards year end. Next slide, Slide 17. Yes. So sales increased by $76,000,000 over Q2 2020, out of the total impact attributable to higher volume of metals sold of $51,800,000 As shown in the bridge chart, around 2 thirds is explained by Lindero, 30% San Jose and the balance Around 4% would be Caylloma. Similar to the prior quarter, the largest single impact on our sales excluding Lindero was the price of silver, with an impact of $17,800,000 as shown in the slide as well. Slide 18. Yes. On the left hand side, we provide a breakdown of EBITDA by mine. As mentioned before, financial performance for Caylloma and San Jose continues at historical highs, underpinned by higher metal prices as well as Delivery of production and cost performance within our guidance range. The higher all in sustaining costs for San Jose, shown on the right hand side of 26% compared to the prior year, is to a large extent explained by changes in the gold silver ratio and the impact this has on silver equivalent production. This effect is close to around $2 per ounce. At Lindero, lower gold production of over 30% in the Q2 compared to our internal plan had a significant impact on EBITDA and cash cost per ounce. However, all in sustaining costs for the quarter and for the first half of the year Remains within the guided range in our news release of January 19 due to a slower pace of planned CapEx execution. This is also worth highlighting variable unit costs per ton at Lindero as well as key operational mine KPIs are tracking well and with same expectations. With respect to Our revised annual guidance for Lindero, given the lower revised gold production of approximately onethree, as mentioned by Jorge, We are now expecting higher cash cost per ounce of about 50% and higher all in sustaining cost of just below 40%. Please refer to our news release of July 19 for more information. On Slide 19, Yes. Here we show the evolution of our liquidity and cash position. As a reminder, in In Q4 of 2020, our credit facility was scaled down from $150,000,000 to $120,000,000 This is reflected in the drop in liquidity in Q4. Since the end of the Lindero construction, towards year end 2020, we continue to show growth in our cash and liquidity position. For Q2 2021, we show the impact of the Roxgold transaction in the dotted segment at the top of the bar. Without these transaction related payments, total liquidity would have been in the range of $160,000,000 We are currently working in putting in place a new expanded credit facility, which we expect will be concluded in Q3. This will be a $200,000,000 facility with a very similar structure to the existing one. And importantly, It will bear a lower cost of interest. Based on as an additional comment, based on our revised guidance And excluding any Seguela construction budgets in the current price environment, we expect to generate Between $80,000,000 $85,000,000 of free cash flow for the second half of the year. So based on this and our And the credit facility, our total liquidity towards year end should be in the range of $250,000,000 giving us plenty of comfort to launch our construction activities at Regela. Finally, A brief comment on the information disclosed in the subsequent events note of our financial statements regarding payments done in relation to the closing of the Roxgold We have disclosed $29,300,000 in change of control payouts and settlements of long term incentive units To non continuing executives and directors, out of this amount, dollars 5,600,000 is actual change of control payments and the balance Is the cash settlement of RSUs, PSUs and DSUs. With that, I will pass it Back on to you, Carlos. Thank you. Thank you, Luis. We would now like to turn Call over to any questions that you may Your first question is coming from Don DeMarco. Your line is live. Thank you, operator, and good afternoon, gentlemen. Just a couple of questions from me. First of all, on the call, it was mentioned that some of the production at Lindero has been deferred to 2022. This year Lindero's, we're looking at maybe 100,000 ounces. Can you give us any indication of how much higher the production at Lindero might be in 2022? We are currently budgeting the year and done. We are in the process of we have started the budgeting process. And but the message Here is we have our capacity to produce in The range of 150,000 ounces and we are not achieving that based on the grade that we have At the mine, it's basically because the rate of production is down. So I would expect that our production for The second 2022 would be able to capture at higher rate Annual production closer to what our target was this year, right, in the range of Between, what, 120,000 ounces and 150,000 ounces. The message basically is this is not an absolute loss of ounces, but rather a deferral. I mean, the models are conciliating well. The metallurgy is conciliating well. And it's just So very painful ramp up in Argentina right now for the team. Okay. Thank you for that. My next question has to do with the Roxgold transaction. And I see On the cash flow statement, I see an item, the promissory note, dollars 35,000,000 promissory note. Can you give us an indication of the total transaction cost for the acquisition? Is it just the $35,000,000 in that promissory note or is it more than that? And any other details In terms of what the major items were will be appreciated. Yes. So The promissory note really is a balance Based on total costs to be paid out directly by Roxul at the time of Closing and their availability of cash. But in terms of total expenses or total transaction costs, The figure I mentioned of $29,000,000 of cash payouts to for change of control items and settlement of long term incentives is the largest amount. The rest really would be related to legal expenses, advisory fees, And these amounts will be fully disclosed in our Q3, right? But certainly, the largest component of that is the amount we the amounts we have disclosed in our subsequent events. The largest component of the 35. Yes. Okay. Okay, that's helpful. Okay, well, that's all for me. Good luck, gentlemen, getting Yaramoko added into your portfolio in Q3, and we look forward to Lindero rebounding as well. Thank you. Thank you. Thank you. Your next question is coming from Michael Anthony. Your line is live. Yes, sir. The mine that you just So the acquisition, can you tell me exactly what precious metals they have? If I understand your question, you're asking about the recent acquisition and the assets that we're bringing. That is right. They are all gold assets. The Yaramoko mine is a gold only mine and the Seguela project is a gold only project. Yes, sir. Well, I got one more. Will you all be paying a dividend any type this quarter or maybe in the future? Not in this quarter. The question of a dividend for us is not a question of if, but when really. And the purpose of bringing one of the purposes of bringing The Roxgold transaction is to build a portfolio of assets that can provide sustainability over the long term to provide investors with a return that is sustainable over time, right? Quality assets, high margin assets that can be sustainable over time will make Dividend or a means to return to shareholders sustainable over time. So for us, it's a question of when. We have a capital project, an important capital project in Seguela that's in the midst So far construction decision this quarter. So I think that with the in this price environment, Once we launch that project, the discussion of a dividend is one that the Board will be engaging on with. Well, this was a great quarter. It was a very strong quarter, and I appreciate everything you all are doing for shareholders. Thank you, sir. Thank you. That's all the questions. Thank you. Your next question is coming from Ryan Thompson. Your line is live. Yes. Hi, Jorge and team. Thanks for the update. Just a question for me on Lindero. I see you stacked about 1,500,000 tonnes to the pad in the second quarter. If I just look at sort of the ratio of ounces produced down to the stack, I'm getting about 43% on my math. Could you just talk a little bit or maybe give a breakdown of How much of that 1,500,000 tons was coarse ore versus sort of HPGR crushed and agglomerated ore? And are you seeing Differences in the metallurgical performance between those sorts of 2 types of ore types. Yes. Our Q2 disclosure, we provide a breakdown of The stacked ore, give me a second here. We provide a very detailed explanation here where we Trucked ore amounted for roughly 800,000 tons. So Q2 It was not particularly a good quarter in terms of the composition of the stacking mix. The truck door from the run of mine and coarse ore stockpiles placed on the leach pad Total 800,000 tons and it was 32% higher than originally planned. At this stage, we have completely stopped truck stacking. All the stacking is taking place with the conveyor stacking system. So everything that's going to the leach pad is going is running through the HPER agglomeration and conveyor stacking. So That's an important development and that speaks about the continued improvements and reliability and Mechanical efficiency, we are achieving with that part of the system. Now our metallurgical performance Based on the types of ore that we are stacking in certain cells, be it coarse ore and conveyor stacked ore, Again, our metallurgical performance and cyanide consumption and lime consumption, All of that is tracking according to our planned extraction and recovery rates. So the key change that we'll see in the 3rd quarter Is a significantly higher contribution of conveyor stacked ore, As we have again stopped already, course, our stacking, right? That was always a temporary measure that we decided to implement knowing last year around March of last year or June of last year That it is a complex system running the HPE agglomeration and stacking, And we were doing it alone. We didn't have the benefit of foreign vendor technicians For any of the 3 components of the system, those being the HPGR, the WestPRO So now we're working with Technical support on-site, at least for the HPR and over time, our operators have gained More and more experience is taking longer than anticipated again because we're doing it alone. But that's a significant change, Ryan, right? This is the last quarter Has been the last quarter you will see in any way significant amounts of Tracked or placed on the leach pad. Okay. No, that's good to hear that those stacking systems Sound like they're starting to perform a bit better here. Maybe just switching gears a little bit, Going over to West Africa, you mentioned negotiations on the mining convention for Seguela. Could you maybe just dig into that a little bit more and just provide us some more color on those negotiations and what we should expect there? Yes. We are in, I'll say, the first round of negotiations with the Cote D'ivoire government, And we are getting back to them on This first draft of the convention, it is not far from where the team expected We would plan, but it is a negotiation. It's a process, and we're doing it with a lot of Care and respect for the country and the authorities. And we expect we can Have an agreement between the parts in a way that will allow us to launch the construction of the project towards the end of this quarter. But we are currently engaged We, the government, in the negotiations. Perfect. Thanks for that. And maybe I'll just ask one more. Are you able to provide any commentary on how Yaramoka outperformed in Q2? I know that, obviously, the deal didn't close until Q3, but If you can make any comments on how it performed in Q2 or even just in the month of July, anything would be helpful there. Yes. In Q2, Yaramoko had a small shortfall in ounces Due to the sequencing of some grade in the plan, They were in some extremely high grade areas, and those high grade areas do carry High variability as well. And in this case, that variability played against the plan. But we understand it as a local event, and We the mine is out of those clean high grade zones right now. So in July, we are already seeing Performance tracking in line with the short term and long term plan. And we all know Yaramoko is quite a reliable asset And we don't see this small shortfall in Q2 as anything of concern or a change in trend, but rather a feature of A particular area, extremely high grade area in the mine. Got it. Okay. Thanks for the update, Jorge. That's all I had today. Thank you. Thank you. Your next question is coming from Adrian Day. Your line is live. Yes, good afternoon. I had a couple of questions, if I may. Can you remind me please what the Anticipated CapEx as Seguela is, also if you have any other major CapEx items over, let's say, the next 12 months. And then given that, do you have any plans for financing? Good morning, Adrian. The estimated capital for Seguela is Approximately $150,000,000 as per the feasibility study. A big chunk of the CapEx around $65,000,000 $70,000,000 are encapsulated within the EPC agreement that we are aiming to Execute with Lycopodium for the execution of the project. So and this is usually the case with these Projects, the bigger capital expense since you start seeing flow through Towards half to 2 thirds of the construction, right? And this is probably 1.5 years construction. Okay. In terms of financing, as we mentioned during our prepared commentary, We believe we have plenty of comfort to launch into construction activities based On our the corporate facility, we are putting in place on our existing cash availability plus Just ongoing free cash generation. Okay. Okay. So I know you've got enough, but you've always ran a very conservative balance sheet, which I like, but you think you've got enough without any additional financing? Yes, that is an absolute yes. Okay, great. Thank you. Thank There are no further questions in the queue at this time. If there are no further questions, I would like to thank everyone for listening to today's earnings call, and we look forward to you joining us next quarter. Have a great day. Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.