Gatos Silver, Inc. (NYSE:GATO) Q3 2024 Earnings Call Transcript

Gatos Silver, Inc. (NYSE:GATO) Q3 2024 Earnings Call Transcript November 12, 2024

Operator: Thank you for standing by. My name is Janine, and I will be your conference operator. Presenting today will be Dale Andres, CEO of Gatos Silver; and André van Niekerk, Chief Financial Officer. We will conclude today’s session with a question-and-answer period where other members of the Gatos Silver management team will be available. [Operator Instructions] At this time, all participant lines have been placed on mute for the duration of the presentation to prevent any background noise. I would now like to turn the conference over to Dale Andres. Please go ahead.

Dale Andres: Thank you, operator, and good morning, everyone. I just want to remind everyone that Gatos we will be making forward-looking statements and those are subject to various risks and uncertainties that may cause actual results to vary and Gatos Silver does not assume the obligation to update any forward-looking statements. Just to start, as you can see on Slide 3, there was a lot going on in the third quarter. On September 5, the company entered into a merger agreement with First Majestic. The proposed merger consolidates three world-class producing silver districts in Mexico, and that creating a leading primary silver producer. We expect this transformative transaction to close in the first quarter next year, and that’s, of course, subject to certain conditions, and I’ll describe those a little bit more later in the presentation.

The Los Gatos Joint Venture had record cash flow from operations and record free cash flow. This was primarily due to the strong operating performance and higher metal prices in the quarter. We have revised guidance upward in early October, and the third quarter results put us in a strong position to achieve our revised annual guidance. I would also like to highlight the Los Gatos Joint Venture’s free cash flow, and that was $42.6 million in the third quarter which provided sufficient cash flow to allow for $54.2 million of distributions to the joint venture partners during the quarter. As a result of these cash distributions, Gatos Silver had a cash balance of $114.8 million at the end of October. And last week, the joint venture did make another $40 million distribution with our share being $28 million.

So far this year, the joint venture has made close to $150 million in distributions to its partners. On September 25, we announced new mineral reserves and resources and an updated life of mine. The new plan extends the life of mine to the end of 2032 and that’s at a milling throughput rate of 3,500 tonnes per day. Importantly, this added 36% to the total expected silver equivalent production over the life of mine, and that’s compared to last year’s plan. During the third quarter, we continued our focus on exploration drilling on both near mine and other targets in the large Los Gatos district. We are seeing some interesting initial results at Central Deep, and I will talk more about that in the exploration slide. Turning to Slide 4. No throughput for the third quarter was 3,246 tonnes per day, and that’s the seventh consecutive quarterly record.

We do remain mine limited we’re currently shutting the mill down for three to four days per month for extended maintenance, which we do with our own crews and whether we need to do that time for maintenance or not, we shut it down for that amount of time. And that does ensure that the mill stays in very good shape. But on an operating day basis, we’re processing ore at a rate somewhere between 3,600 and just over 3,900 tonnes per day higher mill throughput compared to the third quarter of 2023 resulted in silver production being 9% higher at 2.42 million ounces and silver equivalent production, which includes zinc, lead and gold was 11% higher at 3.84 million ounces for the quarter. Site operating unit costs were approximately $97 per tonne this quarter, and that’s 8% lower than the third quarter last year.

Q&A Session

Cash costs for the quarter were 4% lower than in the third quarter of last year as well. And that’s despite the higher throughput rates. Our continuous improvement initiatives continue to help drive costs lower and productivities higher. We do have a number of initiatives underway to further increase ore production from the mine including our underground equipment rebuild program and various operational improvement projects, which are focused on planning, maintenance and operational execution. All-in sustaining costs per payable ounce of silver after byproducts were $9.61 and that’s per ounce or 35% lower than the third quarter of last year, and that’s helped by strong byproduct production and sales, and well within our revised guidance range for 2024.

All-in sustaining costs per payable ounce of silver equivalent on a co-product basis were just over $16 and that’s 9% lower than the third quarter of 2023. This was slightly above our guidance range, and that really is a result of the higher realized silver price for the quarter for all-in sustaining cost performance, we do use actual realized prices. Moving to Slide 5. As a result of continued strong operational performance. In early October, we announced an increase to our full year 2024 production and cost guidance. Silver production is now expected to be between 9.2 million and 9.7 million ounces compared with the original guidance of 8.4 million to 9.2 million ounces, and this represents an increase of 10% at the low end of the range and 5% at the high end.

On a silver equivalent production basis, we’re now expecting between 14.7 million and 15.5 million ounces, and that compares to the original guidance of 13.5 million to 15.0 million silver equivalent ounces. And this represents an increase of 9% at the low end of the range and 3% at the high end. Based on current mine plan sequencing at Cerro Las Gatos, the company expects full year zinc, lead and gold production to be near the high end of the original guidance range – the guidance ranges for each of those metals. On the cost side, we now expect full year byproduct all-in sustaining costs to be between $8.50 and $10 per ounce of payable silver and that compares to the original guidance range of $9.50 to $11.50 per ounce, and this represents a decrease of 11% at the low end and 13% at the high end.

And on a co-product basis for the all-in sustaining cost full year is expected to remain within our original guidance range, and that’s between $14 and $16 per ounce of payable silver equivalent. We remain on track to meet the sustaining capital expenditure guidance at Cerro Los Gatos of $45 million and remain on track for total exploration and resource development drilling expenditures of $18 million in 2024. I’ll now turn the call over to André to present our financial results. André?

André van Niekerk: Thank you, Dale. Good morning everyone. The 70% owned Los Gatos Joint Venture, strong operating performance and strong realized metal prices resulted in another quarter of robust cash flow generation. Cash flow provided by operations was $58.2 million, a new quarterly record. The LGJV generated free cash flow of $42.6 million this quarter, 199% higher than the $14.3 million in Q3 2023 and also a new record for the LGJV. The increase from the comparable quarter last year was primarily due to significantly higher revenues as a result of higher metal prices and higher sales volumes. Cash flow used in investing activities was $15.6 million in Q3 2024, $400,000 higher than in Q3 2023. Of that amount, $12.9 million was spent on sustaining capital expenditures and $2.1 million on resource development drilling.

The LGJV made cash contribution – distributions of $54.2 million during the third quarter to the LGJV partners and as a result of the continued strong free cash flow generated in the third quarter, the joint venture made an additional $40 million in capital distributions on November 7 subsequent to the end of the quarter. In total, the joint venture has made $149.2 million of distributions to the two partners this year. Now turning to Slide 7 to look at the financial results of the Los Gatos Joint Venture for the quarter. Revenues increased by 40% to $93.8 million in the third quarter of 2024. Higher volumes of metal sold and higher realized metal prices contributed to the significant increase in revenue for the quarter. The provisional revenue adjustment was a $1.5 million positive adjustment this quarter compared to a $3.2 million positive adjustment in Q3 2023.

Cost of sales decreased slightly despite the higher sales volumes. Depreciation, depletion, and amortization expense increased by approximately 7% primarily due to the larger capital base, partially offset by the impact of the increase in the mineral reserves and the extension of the life of mine. An income tax expense of $13.9 million was recorded compared to an income tax benefit of $900,000 in Q3 2023. Income tax expense increased primarily due to higher taxable income. Finally, the LGJV recorded net income of approximately $25.7 million, a significant increase from the $15.1 million net income recorded in Q3 2023. Turning to Slide 8 to review the financial results for Gatos Silver. Net income for the third quarter of 2024 was $9.9 million, approximately 200% higher than in Q3 2023.

Basic and diluted earnings were $0.14 per share this quarter compared to $0.05 per share in Q3 2023. Adjusted net income was $15.2 million for Q3 2024 compared to $3.3 million for the prior year period. Net income was adjusted for the costs associated with a proposed merger with First Majestic. On a per share basis, adjusted net income was $0.22 per share basic. Equity income in affiliates increased to $18.2 million primarily due to the increase in net income of the LGJV. The company incurred general and administrative expenses of $10.4 million compared to $7.5 million in Q3 2023. The $2.9 million increase is primarily due to the $5.3 million of costs in the quarter associated with a proposed merger with First Majestic, partly offset by a decrease of $1.1 million in non-cash stock-based compensation expense, a decrease of $900,000 in legal and consulting fees that are not associated with the proposed merger, and a decrease of $400,000 in insurance expense.

And lastly, other income includes $1.5 million of the quarterly management fees received from the LGJV for the quarter. Turning to Slide 9. As was mentioned earlier, the joint venture paid cash distributions of $54.2 million to the JV partners, Gatos Silver and Dowa during the third quarter of which we received $37.9 million. As a result, Gatos Silver ended the third quarter with a cash balance of $116.7 million. The company and the LGJV had cash and cash equivalents of $114.8 million and $47.3 million, respectively on October 31, 2024 and on November 7, the LGJV made another capital distribution of $40 million, of which the company received an additional $28 million. Both GSI and the LGJV continue to remain debt free. I will now hand it back to Dale.

Dale Andres: Thanks, André. On Slide 10, this highlights how our business improvement initiatives are helping to drive our cost performance at the mine site together with increased mill throughput. Site operating costs per ton milled have decreased by 9% over the past three years and that’s despite inflationary pressures and the substantial strengthening of the Mexican peso and that’s on average in 2024 compared to 2021. We are continuing to focus on the efficiency of our underground workforce and equipment, including continuing our rebuild program as I mentioned earlier, and advancing other productivity initiatives to sustainably mine above 3,200 ton per day rate that we’ve been achieving so far in 2024 and with plans to further extend to 3,500 tons per day by mid-2025.

Turning to Slide 11. We announced our new mineral reserve and life of mine on September 25. The large infill drilling program in 2023 and 2024 in the South-East Deeps have resulted in a successful conversion of 3 million tons in that zone to reserve status. This has enabled the mine life to be extended by another two years to the end of 2032 and that’s even at the higher throughput rates of 3,500 tons per day were the previous life of mine averaged only 2,950 tons per day. So that’s a significant increase. The life of mine continues to have a low all-in sustaining cost, providing for significant cash flow generation over the life of mine. The average annual after-tax free cash flow is expected to be approximately $80 million per annum based on reserve silver price assumption of $23 per ounce, and that’s well below the current spot price and the operation does have significant leverage to higher metal prices.

At a silver price of $30 per ounce, the average annual after-tax free cash flow is expected to be approximately $111 million per annum and at $35, that average annual after-tax free cash flow would rise to $136 million per annum at those assumptions. Total silver equivalent production over the life of mine is expected to increase by 36% and total silver production expected to increase by 22%. And again, that’s compared to the previous life of mine. An average annual production of 7 million ounces of silver and 14 million ounces of silver equivalent is expected during the 2025 to 2027 period over the next three years, and that is without further optimization potential, which we’re driving towards. We are continuing to optimize the design of the copper separation circuit with a decision anticipated in early 2025, and we are also evaluating various recovery improvement options in the mill to help drive margins higher.

Turning to Slide 12. The third quarter marked a clear pivot in our execution towards unlocking value in the Los Gatos district on exploration with the completion of the South-East Deeps infill program for the 2024 mineral reserves and resource update earlier in the year, efforts were redirected towards resource expansion, and that’s both near mine and on growth-related drilling more broadly in the district. While still early days, we had some very positive results in the Central Deeps area, and we’re particularly encouraged by these results in Central Deeps as it opens up a large area for potential mineralization close to our existing infrastructure. And we currently have three surface rigs drilling in this zone. Further to the south, we are continuing to follow the high-grade plunge in the South-East Deeps zone.

So we’re continuing to drill there. And we continue to follow up on our previously announced results that hit mineralization at San Luis and we’re mobilizing to start drilling at Lince this month, which is an exploration target in the northwest corner of the district that hasn’t been drilled in the past 10 years. At the same time, we continue to advance our knowledge of key targets across all levels of the exploration pipeline from early-stage mapping across our 103,000 hectare property through to continued resource additions at Cerro Los Gatos. On Slide 13 and in summary, the transformative combination with First Majestic that we announced in early September is expected to close in the first quarter of 2025. We are progressing both the Mexican antitrust approval process and securities regulatory approvals.

In the meantime, we continue to safely drive further mill throughput increases, and that’s building on the last seven consecutive quarters of records together with mine productivity improvements and cost optimization. We remain focused on driving margin improvement across all aspects of the business with several value-enhancing initiatives being evaluated right now, including the higher recovery rates in the copper circuit in the mill. And we are continuing our exploration drilling program for 2024, with a focus on near mine targets, as I said, and including the San Luis and Lince targets more broadly in the district. So we’ll continue to update results, both on operating performance and our exploration as we progress through to the end of the year.

We do continue to generate strong operating margins and cash flow with regular distributions from the joint venture expected to continue, and with a growing cash balance at the corporate level with close to $115 million in the bank at the end of October, and that’s before the recent receipt of the $28 million from our share of the most recent distribution last week. I’ll now hand the call back over to the operator for questions.

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Thank you.

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Operator: There are no questions. I will now turn the conference back over to Dale for closing remarks.

Dale Andres: Thank you, operator. We look forward to providing updates as we progress the First Majestic transaction and providing updates on our operational performance and exploration drilling as we progress in the meantime. Thanks for your time, everyone.

Operator: That concludes our conference call for today. You may now disconnect.