Q1 2024 Gatos Silver Inc Earnings Call

Participants

Dale Andres; Chief Executive Officer, Director; Gatos Silver Inc

Andre van Niekerk; Chief Financial Officer; Gatos Silver Inc

Tony Scott; Senior Vice President of Corporate Development and Technical Services; Gatos Silver Inc

Cosmos Chiu; Analyst; CIBC World Markets

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Gatos Silver's first quarter 2024 results conference call. Presenting today will be Dale Andres, CEO of Gatos Silver, and Andre van Niekerk, Chief Financial Officer.
(Operator Instructions) Turning your attention to slide 2, please note today's call contains forward-looking statements. Various risk and uncertainties may cause actual results to vary, but the silver does not assume the obligation to update any forward-looking statements.
I would now like to turn the call over to Dale Andres, please go ahead.

Dale Andres

Thank you, operator, and good morning, everyone. Turning to slide 3, our strong operating performance and cash flow generation continued in the first quarter of 2024. So most catalyst joint venture set yet another record mill throughput rate. During the quarter, we averaged a mill throughput rate of over 3,200 tonnes per day, and we are well on our way to our medium-term target of sustainable production at 3,500 tonnes per day.
Our first quarter production puts us in a strong position for the remainder of the year. And the surplus capital is production is expected in the top half of our guidance range as a result of the strong operating performance this quarter. Our all-in sustaining cost metrics for the full year are expected to remain in the lower half of the guidance range despite the strengthening peso and inflationary pressures Gatos Silver continues to receive regular cash distributions from the joint venture.
Andre will talk about this in more detail, but I do want to highlight the Los Gatos joint ventures free cash flow of over $25 million in the first quarter of 2024 and continuing distributions received in April of this year.
Capital silver had a cash balance of over $85 million at the end of April. We are on track to update our life of mine plan in the third quarter this year and are aiming to increase throughput and also extend the mine life. Importantly, we have now started to ramp up exploration efforts on both near-mine and other targets in the highly prospective Los Gatos district.
Turning to slide 4. As mentioned before, mill throughput in the quarter was over 3,200 tonnes per day with the higher throughput offset by lower silver grades as expected in the mine plan production was similar compared to the comparable quarter in 2023 for silver at 2.4 million ounces and silver equivalent production, which includes zinc, lead and gold and now starting copper soon at 3.7 million ounces for the quarter. In March, we achieved an average mill throughput rate of over 3,300 tonnes per day, which was the best monthly performance on record with some minor modifications to the mill made this year.
And we believe the current mill capacity is already at the 3,500 tonne per day rate on a calendar day basis. However, to achieve these levels through the mill, we need to first show that we can sustain and then increase mining rates, which continue to be the bottleneck. We have various initiatives underway to increase those mining rates, including rebuilding the core mining fleet for their maintenance improvement projects, optimizing mine plans and schedules to support the higher rates and a major focus on operational execution, including short interval control.
Cost of sales for the first quarter increased by 18% compared to the comparable quarter last year, but this was primarily due to the 12% increase in tonnes processed and a 17% increase in the concentrate tons sold. Cost of sales were also impacted by the continued strengthening of the Mexican peso during the quarter, all-in sustaining costs per payable ounce of silver, and that's after by-product credits. We're just over $10 an ounce compared to just over $6 an ounce in the first quarter of 2023, and that is in the lower half of our guidance range for 2024. We now expect full year production to be in the upper half of our guidance range for 2024.
And I'm speaking to slide 5 now. As you can see in the table, silver and silver equivalent production are at 27% and 26%, respectively, compared to the midpoint of guidance. And our unit cost metrics are tracking 4% below midpoint in the first quarter. Based on the strong performance in the first quarter, we now expect throughput rates at the Serra Los Gatos mine to average in the top half of our 3,000 to 3,300 tonne per day guidance range in 2024.
For the full year, we still expect exploration and definition drilling spend to be at $18 million for 2024 and our sustaining capital expenditures to be approximately $45 million, and that's with the majority of that spent on underground development with the continued focus on opening up the southeast area and some of those mine equipment rebuilds and other infrastructure projects.
As I mentioned, I will now turn the call over to Andres to present our financial results.

Andre van Niekerk

Thank you, Dale. Good morning, everyone. The 70% and Los Gatos joint venture, strong operating performance is underscored by yet another quarter of robust cash flow generation. Cash flow provided by operations was approximately $37 million. The joint venture generated free cash flow of $25.5 million this quarter, 14% higher than the $22.3 million in Q4 2023 and 11% lower than the $28.7 million in Q1 2023.
The drop from the comparable quarter last year was primarily due to lower realized metal prices and higher operating costs and in Q1 2023 associated largely with higher mining and processing rates. Cash flow used in investing activities was $11.8 million in Q1 2024 and similar to the $11.4 million in Q1 2023 of that amount, resource development drilling totaled $3.2 million for the quarter, with most of the spending focused on the infill drilling on the southeast states.
As a result of the continued strong free cash flow generation in the first quarter, the joint venture made a capital distribution of $30 million in February. As a reminder, a total of $85 million was distributed in 2023. Subsequent to the end of the quarter. In April, the joint venture made a further quarterly capital distribution to the partners of $25 million.
Now turning to slide 7 to look at the financial results of the Los Gatos joint venture for the quarter, revenue increased to $72.2 million in the first quarter of 2024. Higher volumes of metal sold were offset by significantly lower silver, zinc and lead prices. The provisional revenue adjustment was a $900,000 negative adjustment in this quarter compared to a $13.6 million negative adjustment in Q1 2023.
Cost of sales increased by 18%, primarily due to higher mining and processing costs as a result of a 12% increase in mill throughput and a 17% increase in the tonnage of concentrates sold. Cost of sales were further impacted by the strengthening of the Mexican peso against the US dollar which was partly offset by productivity improvement and cost reduction initiatives as part of our continuous improvement program.
Depreciation, depletion and amortization expense decreased by approximately 3%, primarily due to the increase in the mineral reserves and the extension of the mine life offset by additional DD&A on recent capital additions.
The income tax expense of $4.8 million for the quarter was 20% lower than in Q1 2023, primarily due to lower taxable income for the period.
Finally, the LG JV recorded net income of approximately $10.2 million for the quarter, 20% lower than in Q1 2023.
Moving on to slide 8 to review the financial results for Gatos Silver schedule. Silver recorded net income of $2.5 million or $0.04 per basic and diluted share. That's up 203% from Q1 2023. The equity income in affiliates increased to $7.3 million, primarily due to a reduction in the obligation under the priority distribution agreement with Delta, partly offset by lower equity income from the LGJV. corporate G&A was approximately $1.4 million higher than in Q1 2024 than in Q1 2023, mainly due to a $900,000 increase in non-cash stock-based compensation expense as a result of 2023 and 2024 equity grants and a $600,000 increase in nonrecurring legal fees.
Turning to Slide 9. As was mentioned earlier, the joint venture paid a capital distribution of $30 million to use partners to silver Endava during the first quarter, of which we received [$21 million] as a result of slower ended the first quarter with a cash balance of $70.6 million after the end of the quarter. In April, the LG JV made another capital distribution of $25 million, of which we received $17.5 million, bringing the company's cash balance to $85.4 million at April 30, 2024.
The company, along with these insurers has also fully funded both the US and Canadian Class Action losses and the cash balance at the end of April after our portion of the payments have been made. The distribution of the settlement amounts is now pending final court approval, which we expect by the end of Q2. The LG JV ended the first quarter with a cash balance of $29.8 million and had a cash balance of $20 million at April 30, 2024. Both GSILDLGJV. remain debt free and the company's $50 million revolver remains in place.
I will now hand it back to Dale.

Dale Andres

Thanks, Andres. Turning to Slide 10, we wanted to highlight how our business improvement initiatives and increased throughput are delivering results at the mine site. Operating costs per tonne have decreased by 9% over the past three years to split despite inflationary pressures, including the 5.5% per year increase in labor costs and a substantial strengthening of the Mexican peso. Our numerous continuous improvement and cost optimization programs also contribute to the lower cost per ton.
On the design side, we have successfully switched more of our mining areas from cut and fill to long-hole stoping, including transverse stopes where the geometry and ground conditions are suitable, which is a more cost effective mining method. We are continuing our equipment rebuild program this year and working on our underground productivity initiatives to work towards first, sustainable sustainably mining at the 3,200 to 3,300 tonne per day rate, which we're currently achieving. And then to further extend that towards the 3,500 tonnes per day in the medium term.
Turning to slide 11, we are on track to provide our updated life-of-mine plan and mineral reserves in the third quarter of 2024 this year and the throughput and targeting the throughput rate in the plan. The current plan averages 2,950 tonnes per day, and we're looking at increasing that, given with some even with mining more of our mineral reserves faster, we still expect an extension to the life of mine.
The new life-of-mine plan will be based on an additional 66 kilometers of drilling that's complete been completed over the past 12-month period up to the end of the first quarter. And we've now made that data cutoff and the Southeast deeps conversion drilling that we did between that April 2023 to end of March 2024 time frame was done on 50 meter spacing targeting the higher grade trends in the zone. We still have two drills dedicated to further infill drilling and resource expansion on the South East deeps.
On the recovery side of things we are completing detailed engineering for a copper separation circuit and anticipate making a decision in the third quarter of this year. We are also evaluating technology and various options for increasing the recovery of silver, gold and zinc.
Turning to slide 12. This figure shows a few of the key targets at or within a few kilometers of the existing mine workings and potentially accessible from existing underground infrastructure. Now that we have passed that database cutoff for this year's reserve update, we are excited by the opportunity to ramp up the exploration work on the rest of our 103,000-hectare land package.
After the end of the quarter, we announced the appointment of Chad, you have our new Vice President of Exploration and technical services, and we are really pleased to have Chad on board to guide these critical parts of our business. First up, we are starting on targets within three, three to four kilometers of the mine operations as it will be easiest to bring anything we find here into production. We do have two rigs working now towards the southeast of the mine and the port, the Glendale area, and the first tools stepped along the cattle salt and are now stepping self along the Dragon fall towards the two lead and real heartfelt talk targets.
A third greenfields rig will be moving on to the northwest deep target and central deeps targets from a and that's and then further out from the surplus gas was mined in the basin within the next few weeks, we will be getting the drill rigs further out from Cerro Los Gatos and the surrounding mine later in the year with some very prospective targets in the San Luis area, about five kilometers northwest of the mine and the number of targets in the Linz area for about 20 kilometers to the northwest.
On slide 13, and in summary, we continue to safely drive mill throughput increases together with productivity improvements and cost optimization, which is a core part of our business and operating strategy. We remain focused on developing a new life-of-mine plan by the third quarter of this year, which incorporates the Southeast keeps conversion drilling together with other value-enhancing initiatives, including higher throughput rates and the copper circuits.
We continue to be very excited as we start to increase our near-mine and district drilling in the large and highly prospective district, including particle annual and the Northwest and central Deeps, which I discussed. And importantly, we continue to generate strong operating margins and cash flow with regular distributions expected from the Los Gatos joint venture and a growing cash balance.
I will now hand it back to the operator for questions.

Question and Answer Session

Operator

(Operator Instructions) Cosmos Chiu, CIBC.

Cosmos Chiu

HI, thanks Dale and Andre and team. And as I read, you know, certainly a lot of exploration upside here, Tom, but my question is on South East Deeps, I guess, and I was reading up on it. As you mentioned in your press release from early April that the silver grade decreases with higher by-product credits. When you look at South East deeps versus central Central Zone and the Northwest zones. So you know, right now your reserve grade is sitting at about 217 gram per tonne. What can we expect? And to the extent that you can, you know, kind of describe what can we expect as we come through and to with your life of mine plan that's getting updated in Q3?

Dale Andres

Yes, thanks for the question, Cosmos and yes, I'm going to ask Tony to provide some color on that. But I will say we're right in the process of doing the resource modeling work and incorporating those drill results in the southeast Deeps. And so I don't think there's a lot we can say on a specific grade target. But Tony, do you want to comment further, please?

Tony Scott

Yeah, hi, Cosmos, thanks for the question. I'll probably just echo what Dale said. I mean, we think we've really just kicked it off so we like it. We can't comment until we've actually done the work and there's a lot of things that go into that in terms of where we end up on stope design where we like how much dilution get out of that. There's a whole bunch of stuff. I can really just sort of recommend you got to have a look at those I mean, I'm sure you have the exploration press releases that we put out. I mean what you can see from that when we report those effectively sort of similar cutoff to what we what we use for the reserve work.
So what you'll see from that is that it's higher, higher base metals. That's a lot of good zinc lead and particularly copper in those, but the silver is lower. And so I mean, all I can do to guide you is to have a look at those, but we can't sort of commit to final numbers until we've actually done all the work.

Cosmos Chiu

Of course, maybe asked a different way, Tony, it, Dale, you know, I see that your resource grade right now is 100 gram per tonne. Could you remind us was a lot of that resource from South East deeps?

Tony Scott

Yes, a lot of the --

Cosmos Chiu

Okay, So that's what you're trying to think it's good.

Dale Andres

And Tony, you can expand on this, but let's say we're trying to convert. I think it's just over four. I think it's for 4 million -- 4.5 million or 4.6 million tons. If I if I recall correctly, Tony can correctly some of inferred resource in the southeast states and we're trying to convert the highest the highest grade portions of that obviously. And as Tony mentioned, the silver grades are expected to be lower than reserve grades based on that based on the results that we have. But base metals are holding in very, very nicely. And the copper is a key differentiator for that zone as well.

Cosmos Chiu

And Dale and Tony, when we've talked about this in the past in the past, when you talked about the updated life of mine plans last year and this year as well. There was always a dual track in terms of targeting both and number one, the replacement of mine life and also number two, sort of to maintain on hopefully reserve grade. Is that still kind of like to target, you know, in the background in terms of what you're trying to do with each and every one of these life of mine plan.

Dale Andres

Yes, see we are trying to do this this time around these three things. One, one and I mentioned it in the script was to increase throughput, continue to increase throughput rates and we are driving towards that 3,500 tonnes per day. We'll have to see as we go through the mine planning work, whether we can sustain that and how we incorporate those higher throughput rates into our new life of mine plan. But from that but that's clearly a target for us.
We do plan to extend the mine life and just as we do higher throughput rates than we are taking and able to continue to lower, taking able to take lower grades and we're continuing to lower our unit cost. And that's just operating efficiencies operating well above 3,000 tonnes per day. And just as a reminder, our previous life of mine averaged 2,950 tonnes per day. And we do plan to extend the extend the mine life, including those higher throughput rates and then, as I said, we'll make a decision on the copper circuit, and that's, again a margin enhancement that we're looking to bake into the new life of mine plan as well, but we're just we're just current currently going through all of that work.

Cosmos Chiu

And maybe as a follow-up and broader scale as well in our deal, as you mentioned, great looking balance sheet these days, we're getting some cash sweep from the joint venture and $85 million in cash, no debt, and you're only spending about $80 million in exploration. So what's next is you continue to grow the company? Has everything really organic internal or you're looking externally as well. Can you maybe talk about the growth plans with the new exploration team now in place on a new VP Exploration and you're increasing potentially increasing exploration exploration budgets. So again, internal external, how are you going to continue to grow the company and can we see exploration budget into?

Dale Andres

Yes. Thanks for highlighting that, Cosmos. And including the cash, the cash balance, we're sitting on over $85 million. As you pointed out. And if you take our share of the joint venture cash, which was $20 million at the end of the at the end of April, the combination of that is over $100 million. Just to be clear that that $85 million and all the distributions made from the joint venture is after our exploration expenditures. And we do have plans straight $18 million this year. And that is a ramp up from what we did last year. And there is only so much we can do from an exploration perspective.
And maybe, Tony, you can comment or provide some additional color. Right now we're working towards that $18 million budget, about half of that on resource conversion and extension and house more on that, what I would call pure greenfields exploration, even though some of that is near mine, if we tag into something really interesting trust me, Cosmos, we will put the dollars and goes to work on that.
But it's important to make sure that we're probably we have a plethora of targets, and we need to make sure that we're properly prioritizing those doing the, you know, the work to make sure we're attacking the best areas first, and there's still lots of work to do. We've done a lot of foundational work over the last 18 to 24 months. We're in a position to start drilling and we are drilling. But yes, just that we do need to be a bit careful about just rent ramping up at such a big property. We're going to be here for many years, Tony, I don't know if you want to expand on that.

Tony Scott

Yeah, Dale, I think you captured it pretty well down there. I mean, realistically, look, we want to make sure that we're doing good exploration and that way, we've sort of modify that program on the results that we get. We don't want to just go out and drill an active program and not be following it properly. So we are going to we are going to do it sensibly and do it within the sort of capacity that we have like two actually make sure that we're doing the right work. So I think I mean, we are ramping it up. But I think that this is a this is a level where we can make sure that we're doing good, sensible exploration.

Dale Andres

And then maybe just to pick up on the other part of your question Cosmos, we will look at opportunistically of other opportunities. We're not going to comment about anything specifically, but we are looking to grow the company. We don't need to do anything beyond our current district, but we will look at things opportunistically as well. We have a great balance sheet, as you pointed out, great.

Operator

(Operator Instructions) There are no further questions at this time. Mr. Andres, I turn the call back over to you.

Dale Andres

Well, thank you, operator, and thanks to everyone participating in the call. We look forward to updating you as the year progresses. Thanks again.

Operator

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