Fortuna Silver Mines Inc. (NYSE:FSM) Q4 2022 Earnings Call Transcript

Fortuna Silver Mines Inc. (NYSE:FSM) Q4 2022 Earnings Call Transcript March 16, 2023

Operator: Greetings, and welcome to the Fortuna Silver Mines Fourth Quarter and Full Year 2022 Financial and Operational Results Call. I will now turn the conference over to your host, Mr. Carlos Baca, Director of Investor Relations. Please go ahead.

Carlos Baca : Thank you, Ali. Good morning, ladies and gentlemen. I would like to welcome you to the Fortuna Silver Mines fourth quarter and full year 2022 financial and operational results call. Hosting the call today on behalf of Fortuna will be Jorge Alberto Ganoza, President and Chief Executive Officer; Luis Dario Ganoza, Chief Financial Officer; Cesar Velasco, Chief Operating Officer, Latin America; David Whittle, Chief Operating Officer, West Africa; and Paul Weedon, Senior Vice President, Exploration. Today’s earnings call presentation will be available on our website, 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 presented in U.S. dollars, unless otherwise stated. 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&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, President, Chief Executive Officer and Co-Founder of Fortuna.

Jorge Ganoza : Thank you, Carlos, and greetings to all. Safety first, we closed the year with a strong trend of improvement on key safety performance indicators, which year-over-year continue coming down as a result of multiple initiatives implemented across the business. Our KPI for total recordable injury rate closed the year at 2.3, down from 3.2 in 2021 and below the industry average of 2.9. Lost time injury rate also showed a strong improvement ending the year at 0.39, down from 0.53 in 2021. We recorded 5 lost time injuries in the year, down from 6 in 2021. However, all this work was tainted by a fatal accident at our Lindero Mine in January 2022. Safety is a precondition for business, and we remain firmly committed to a zero harm work environment.

On December ’21, we made public or position statement on the adoption of the global industry standard for tailings management. Our commitment to generate shared value over the long term for our stakeholders involves adapting strategically our business practices and standards, enabling us to better cope with risks, opportunities and heightened expectations. We consider tailings management to be paramount to responsible mining and the adoption of GISTM allows us to refine our approach to safe tailings management in a way to ensure operational excellence. On March 14, we informed of positive news coming from Mexico with the court granting a permanent injunction to our San Jose Mine, effectively protecting the 12-year environmental impact authorization of the mine.

Cesar, our Chief Operating Officer for Latam, will expand on this later in the presentation. Our business generated adjusted net income of $7.2 million or $0.02 per share in the fourth quarter, in line with analyst consensus; and for the full year, $42.4 million or $0.15 per share, slightly ahead of the analyst consensus of $0.14. Net income, however, was negatively impacted by noncash impairment charges, net of taxes, adding to $164 million coming from Yaramoko, Lindero and San Jose mines. Luis, our CFO, will expand on the impairment analysis drivers later in the presentation. We generated free cash flow from ongoing operations of $4.4 million in Q4 and a healthy $69.1 million for the year, this after servicing sustaining CapEx and corporate expense.

Production for the year was well within the range provided in our 2022 guidance. We delivered 259,000 ounces of gold and 6.9 million ounces of silver or 402,000 ounces of gold equivalent. Measured against 2021, Fortuna is on an exciting growth path. We have grown our gold equivalent production from 305,000 ounces of gold to 402,000 ounces in 2022. And this year, we anticipate further growth to approximately 450,000 ounces in our guidance. Despite persistent inflationary pressures throughout 2022, all of our mines performed within the AISC range provided in our annual guidance. The only exception was the Lindero Mine, which recorded AISC of $1,142 per ounce of gold, marginally above guidance. Main consumables such as diesel, cyanide, cement and explosives have experienced increased costs to varying degrees depending on the mine and location.

For example, at our Lindero Mine in Argentina, year-over-year, cyanide costs increased by an average of 34% and at our Yaramoko Mine in Burkina Faso 44%. At our Caylloma Mine in Peru, year-over-year, diesel costs increased by an average of 60% and at our Lindero Mine 34%. While we have observed easing of inflationary pressures thus far, conditions remain challenging. Annualized cost increments at our mines over the past two to three years range from 6% at Caylloma to 8% at San Jose, 12% at Lindero and 17% at Yaramoko. As per World Gold Council figures up to Q3 2022, margin compression for the industry can be observed showing an 11% annualized increase in AISC — inflation since 2020. In Q3 2022, 50% of global mine supply was produced at an all-in sustaining cost of approximately $1,300 per ounce.

Only eight, seven quarters ago, that figure was $1,100. Our flagship Séguéla Mine construction in Cote d’Ivoire, West Africa, remains a primary focus for management. For the second half of 2023, we have provided production guidance for Séguéla of 60,000 to 70,000 ounces of gold at an all-in sustaining cost in the range of — ranging from $880 to $1,080 per ounce. That’s all-in. David will further expand on Séguéla later on the presentation. And on the exploration front, I would highlight our success with the delivery of growth in resources at Sunbird deposit, one of six deposits making the Séguéla mineral inventory. On December 5, we reported a new Sunbird open pit resource estimate of 279,000 gold ounces at an average grade of 2.66 grams per tonne in indicated category, plus 0.5 million ounces of gold at an average grade of 3.7 grams per tonne in the inferred category.

On Monday 13, we reported fresh results from the Sunbird infill program. Paul Weedon our SVP Exploration is here with us and can provide an exploration update. So Paul, do you want to go ahead, please?

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Paul Weedon : Thank you, Jorge. Sunbird, the latest at Séguéla deposits and is shaping up as potentially the largest. The current focus at Sunbird is on the conversion drilling to upgrade and expand the 506,000 ounces of inferred by the end of Q2 2023. We’ve currently got two drill rigs turning on that program. As seen in the news release this past Monday, results to date are consistent with or better than what was previously modeled in the optimized shell. We’ve also extended mineralization of approximately another 100 meters further North and beyond the optimization shell with several high-grade intersections, such as the 5.6 meters of 12 grams gold from 28 meters downhole in hole SGRC1566. In addition, deep drilling to the further North to extend these high grade — sorry, to the South to extend these high-grade shoots we resume in Q3, potentially setting up the foundations for a future underground development.

In our non-Séguéla division, exploration will continue into Q3 with the recently discovered high-grade at Kestral, Badior and Barana prospects, which we highlighted in December 5 news release. And then further target generation will continue on Séguéla with more than 30 known drills remaining to be tested. Moving further inferred into Burkina Faso, exploration work around Yaramoko continues to generate new anomalies. Our underground drill test in the Western strike extensions of the Zone 55 mineralization has extensive mineralization approximately 100 meters further beyond the current resource envelope and drilling is continuing in those areas. Moving to Peru, currently Caylloma is due to test the depth extensions of the 4-kilometer long Animas Vein later in Q2, targeting down depth projections of ore shoots 1 and 3, some 200 to 400 meters below the previous drilling in the previous mine and current mine workings.

Additionally, regional exploration work around Caylloma continues to highlight the prospectivity, including the emerging Antacollo area. And then finally, in Mexico, work at San Jose continues to test the depth extensions in the Northern strike extent as well as planned exploration work announced toward Taviche . Jorge, back to you.

Jorge Ganoza : Thank you, Paul. We’ll move on to update and from the Chief Operating Officer. We can start with LatAm. Cesar, please.

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Q&A Session

Cesar Velasco : Thank you, Jorge. And as you have already mentioned, last Tuesday, Fortuna announced that the Mexican Federal Administrative Court granted a favorable permanent injunction to Minera Cuzcatlan, which allows the San Jose Mine to continue operating under the terms of the original 12-year environmental impact assessment permit which the court reconfirmed in November of 2022. This permanent injunction will remain in effect, allowing for continued operations at the San Jose Mine up until the court rules in response to the resolution issued in January 2023 by the SEMARNAT to revoke San Jose’s EIA. Although uncertain, we expect that it could be in 1.5 to 2 years. Moving down to Peru despite social unrest and numerous road blockades throughout the country, operations at the Caylloma Mine have been unaffected and 2023 annual production guidance is the remaining.

I will now discuss the original results of our three operating mines in Latin America. The fourth quarter of 2022 marked the fifth consecutive quarter of consolidated gold production of over 35,000 ounces. For the full year, Latin America achieved record gold production of 153,319 ounces, a 14% increase compared to 2021. Consolidated silver production was 6.9 million ounces, achieving the higher end of annual guidance. All three mines delivered production results in line with their mining plans and mineral reserves estimates. In Argentina, the Lindero Mine delivered another consistent year with gold production totaling 118,000 ounces. This represents a 14% increase from 2021 and is directly related to an improvement in the performance of the 3-stage crushing and stacking system.

Throughout 2022, management implemented numerous high-impact optimization initiatives to better capture efficiencies, allowing the operation to offset some of the cost increases from inflationary pressures on key consumables. These initiatives included improving the efficiency of the SART plant, subsequently decreasing consumption of fresh makeup cyanide and sulfuric acid, and the optimization of the mine fleet’s tracking distance, reducing diesel consumption and improving productivity. In the last quarter of 2022, a project to improve the recirculation circuit of the HPGR was initiated with the aim of reducing granulometry and improving gold recovery of ore placed at the leach pad. In Mexico, the San Jose Mine’s silver and gold production for 2022 totaled 5.8 million ounces of silver and 34,124 ounces of gold, achieving the upper end and midpoint range of annual guidance, respectively.

Average head grades for silver and gold for the year were 191 grams per tonne of silver and 1.14 grams per tonne of gold, a 9% and 12% decrease, respectively, when compared to 2021, but remaining in line with the mine’s mining sequence and mineral reserve estimates. Last year, mine production using sublevel stopping methods represented 35% of ore sent to the processing plant; and for 2023, it is expected to reach 60%. In Peru, the Caylloma Mine continued to deliver steady production in 2022, producing 1.1 million ounces of silver, exceeding the upper range of annual guidance by 4%. Zinc and lead production totaled 46.2 million pounds and 34.6 million pounds, respectively, both exceeding the upper range of annual guidance. Base metal production benefited from higher mill throughput during the year and material mined at the level 16 of the Animas Vein, allowing for a significant improvement in ore grade and oxide sulfide ratios, therefore, boosting plant recovery.

Back to you, Jorge.

Jorge Ganoza : Thank you, Cesar. We can move on to David and West Africa.

David Whittle : Thanks, Jorge. Operations in West Africa continued solid performance in the year 2022 with Yaramoko delivering gold production of over ounces as a midpoint of annual guidance. Séguéla’s construction is striking well with respect to our schedules and budgets with first gold ore projected for mid-2023. Ongoing worldwide inflationary and supply chain pressures did not impact budgetary expectations at Yaramoko nor the construction progress at Séguéla. Recent political disturbances in Burkina Faso have had no impact on Yaramoko’s operations. Safety performance at the Yaramoko Mine was strong. Unfortunately, LTI incidents took place in the fourth quarter. The Yaramoko underground grade control and brownfields exploration program continued with encouraging outcome, extending our planned mining boundaries on the Western side of the .