SilverCrest Metals Inc. (AMEX:SILV) Q3 2023 Earnings Call Transcript

SilverCrest Metals Inc. (AMEX:SILV) Q3 2023 Earnings Call Transcript November 9, 2023

Operator: Good morning, ladies and gentlemen and welcome to SilverCrest reports Second Quarter (sic) [Third Quarter] 2023 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, November 09, 2023. I would now like to turn the conference over to Eric Fier. Please go ahead, sir.

Eric Fier: Thank you, operator. Good morning, everybody and thanks for joining. Today, we will be providing commentary on our Q3 2023 results. After which, we will be happy to take questions. The slide deck we will be referring to is available on our website at silvercrestmetals.com under the Investors tab. Before I get started, I would like to direct you to the forward-looking statements on Slide 2. All figures discussed this morning are in U.S. dollars unless otherwise stated. All of the ounce and per ounce references discussed will be based on silver equivalent ounces sold unless otherwise specified. Our silver equivalent reference are based on a gold per silver ration at 79.51:1. On the call with me today is Chris Ritchie, President; and Pierre Beaudoin, Chief Operating Officer.

Starting on Slide 3, Q3 marked another successful quarter for Las Chispas, and we remain on target to meet our 2023 sales and cost guidance. Our strong operating margins continued to substantial free cash flow in the quarter. Las Chispas continues to perform well with gold sales of 14,500 ounces of gold and silver sales of 1.53 million ounces. Silver equivalent sales totaled 2.68 million ounces, bringing year-to-date sales to 7.69 million ounces, positioning us well to meet our annual guidance of 9.8 million to 10.2 million ounces. All-in sustaining costs in the quarter were better than expected and compares favorability to the annual guidance. Pierre will discuss the factors that led to this in his portion of this presentation. We remain debt-free and our total treasury assets increased by nearly 40% from Q2 to $81.7 million.

Our financial strength and resilience are unique attributes that deserve attention in the market where accessing capital is both difficult and expensive. Our robust free cash flow and healthy balance sheet provide us with significant capital allocation flexibility, which we used in the quarter to optimistically explore, buy back shares, and increase our bullion holdings. On the ESG front, we signed a collaboration agreement to work on agricultural infrastructure, sewage system, and water concessions for agricultural use for our nearby communities. This is another positive step in the company’s five-year water stewardship plan. This agreement advances our continued efforts to help our communities secure state and federal funding for water-related infrastructure to protect their livelihoods and create long-term economic resilience.

The benefits of these efforts are already being felt in the community. The improved access to water allows for a second planting season, creating an opportunity for increased household income for our local partners. I will now pass on to Chris to discuss the financial results for the quarter.

Chris Ritchie: Thanks, Eric. Moving to Slide 4. The operational performance of Las Chispas was highlighted by our strong free cash flow and continued growth of our treasury assets. In the quarter, we generated revenue of $63.8 million. Our cost of sales was $26.4 million, reflecting a notable [minus of] 9%. Net income in the quarter was $29.9 million or $0.20 per share. Net free cash flow was $33.4 million, or $0.23 per share. As in previous quarters in 2023, our net income and net free cash flow in the quarter benefited from financial items like the return of value-added taxes and the application of net operating losses, which are commonly known as tax loss carry-forwards. Our net operating losses were fully utilized in Q3, and beginning in Q4 2023, we anticipate accruing income taxes at Mexico’s corporate tax rate of 30%.

Our 2023 income taxes, as well as the extraordinary and special mining duties, will be due and paid in Q1 2024, which will impact our income and cash flow in 2024. We will begin making quarterly income tax installments and annual payments for the extraordinary and special mining duties in 2024. Now on Slide 5. Prudent capital allocation has always and continues to be an important area of focus for our team. As a single asset company, our first allocation priority is to maintain a defensive balance sheet that allows us to proactively manage risk, weather the uncertainties of our industry, while also being positioned to take advantage of the opportunities that arise in cyclical businesses. After the $7.1 million spent on the share buyback, we were still able to grow our treasury assets in the quarter by nearly 40% to $81.7 million.

Our total treasury included $70 million of cash and $11.7 million of gold and silver bullion. We remain debt-free, with access to an undrawn $70 million revolving credit facility. We have also resumed our focus on growth. In Q3, we announced a $10 million exploration budget for Las Chispas that will run through the end of Q1 2024. This program is focused on both conversion of ounces and the discovery of new ounces. In the quarter $2.8 million was spent on exploration. Opportunistically returning capital to our shareholders was a focus in the quarter. In the middle of the quarter, we announced and launched a share buyback that allows for the repurchase of up to 5% of our shares outstanding. In the 7.5 weeks that the buyback was active, we repurchased $7.1 million, or 20% of the allowable limit.

We are also focused on increasing exposure to gold and silver for our investors by adding bullion to our balance sheet as another currency to be managed. In the quarter, we increased our bullion position by $6.1 million. We are actively managing this position through the utilization of an option strategy which helps to manage both the upside and downside risks. Our objective is to earn a superior yield over our other balance sheet instruments while increasing exposure to our preferred store of value in a risk-adjusted manner. Subsequent to the quarter, we have continued to add to our bullion holdings. With that, I will now pass it on to Pierre to discuss operations at Las Chispas.

Pierre Beaudoin: Many thanks, Chris. I am now on Slide 6. Underground mining rate increased during the quarter, averaging slightly over 900 tonnes per day. This increase in mining rate is linked to a higher proportion of long-hold stopes than planned and, to a lesser extent, higher localized dilution in Babi Main Vein. In Q4, it is expected that mining rates will be in the range of 800 to 900 tonnes per day, in line with the ramp-up rates outlined in the technical report. During Q3, lateral development averaged 34 meter per day, in line with the plan. During the quarter, the Las Chispas Portal was further advanced ahead of the mining in this area in 2024. We continue contract negotiations with mining contractors, including our current contractors.

We are still targeting to complete these discussions in Q4 2023 for implementation in the first half of 2024. In the updated technical report, we made assumptions as to the outcome of these negotiations, but the final details may differ. The Las Chispas plant averaged 1,245 tonnes per day, slightly above what we were expecting for the quarter. It was originally anticipated that the plant would have lower availability in the quarter due to seasonal conditions impacting the power supply. However, this did not materialize, allowing for higher average mill throughput than planned. As expected, average process gold and silver declined slightly from Q2 of 2023. The plant recovered 2.74 million silver equivalent ounces and metallurgical recovery remained solid at approximately 98% for both metals.

The company continues to benefit from strategic stockpile use to supplement plant feed as the mine is gradually developed and tonnage ranked up. It’s expected that this benefit will remain a significant contributor to plant feed through 2025. Our corporate level ASIC in the quarter was $12.23 per ounce compared favorably to our annual guidance. ASIC was lower than expected due to higher sales volume, decreased cash costs and lower capital spending at plant. Capital spending was below planned due to delays in procuring key underground material as well as some slight change to the scope both underground and on surface. These delays are not material and we’re expecting to progress with capital spending in Q4. I will now pass it back to Eric to conclude the presentation.

Eric Fier: Thanks, Pierre Moving to Slide 7. As noted earlier, we remain well positioned to execute our 2023 sales and cost guidance, as you can see on slide 7. Please note that our guidance is based on 20:1 Mexico peso to U.S. dollar exchange rate. We have seen a notable move in this rate to the levels of approximately 17:1 in Q3. We estimate about 40% to 50% of our costs are peso denominated. So what is next? My favorite subject, exploration. Our exploration efforts will continue with $10 million of drilling budget through Q1 ’24. The program is currently targeting $10 million higher grade inferred ounces proximal to current and planned operations for potential reserve replacement. We also look forward to exploring early stage opportunities with over 23 kilometers of underexplored veins at Los Chispas.

We are in the process of year-end planning now and as part of this, our exploration budget is being put together and our priorities for 2024 are being defined. This wraps up our formal commentary for today. Operator, please open the line for questions.

Operator: [Operator Instructions] Your first question comes from Eric Winmill with Scotiabank. Please go ahead.

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Q&A Session

Eric Winmill: Hi, good morning. Thanks for taking my question. Nice to see the stock outperforming this morning. Just wanted to ask a quick question. In the disclosure, you talked about spending on CapEx below plan from delays in procuring underground materials as well as some changes to scope. Any additional elaboration on that, please?

Pierre Beaudoin: So, it’s Pierre speaking. We had some delays in procuring some of the electrical material we need for the expansion of the mine and also some plans that was for underground. We decided to change the scope of our second furnace for the process plant. But none of this is material as I noted on the script – on the call.

Eric Winmill: Great, thanks Pierre. Very helpful. Just another question on the share buyback. So obviously a company has been active on the buyback. We assume then you’ll continue through the rest of the year. Any sort of thresholds you look at or rules you should think of on the buyback?

Eric Fier: Thanks Eric. We look at the NCIB as one of the tools in the toolkit. When we look at capital allocation, exploration is a key focus. Buying back shares is a key focus. Adding bullion to the balance sheet and the flexibility that, our balance sheet and the asset provide us allow us to make those choices at the right moment. That said, we do want to continue to return capital to shareholders. We don’t share the specific budget or price thresholds that the Board has set for that. But it is still a key focus for us going into the end of the year.

Operator: Your next question comes from [David McCausland].

Unidentified Analyst: Good morning. I have a couple of quick questions. Nowhere can I find what the special mining duty purchase rate is? Can you tell me? Your tax rate is 30%, but is it 10%, 15% on top?

Eric Fier: It is 7.5%.

Unidentified Analyst: 7.5%. Okay. Is there any cartel obstruction that you’re experiencing there any kind of we want to close you down and let’s get a piece of the pie here?

Eric Fier: We don’t have these issues in Sonora. We all go in town and we can enjoy a walk at night without any problems.

Unidentified Analyst: Very nice. Don’t hold it against me for asking, because it could be a big issue. I don’t know that it is. That’s the answer I’d like to hear. Let’s put it that way. I think pretty much all shareholders would. Do you have a man camp there? How many employees do you have? Are they living in the local town? Are they hard to get if you need to staff up? What’s the labor situation there?

Eric Fier: First of all, first question, we have a 500-man camp. But we allow our employees to live in the community or at the camp based on what they prefer. And this camp has been a good tool for us to keep our turnover rate at low level. Last year, we experienced an 8% turnover rate, which is among the best in the industry. And with regards to the difficulty to get people, the best way is to keep them, obviously. But also, we have a contract with a mining contractor that gets its manpower in the lower part of Mexico. So far, it’s been very good on our side.

Unidentified Analyst: Well that’s a good thing, too. For sure. Labor problems in companies today are big problems, I think, way too often. Hi, I really think you’ve done a great job. Since for the six years I’ve owned your stock, and your drilling, and your exploration, Mr. Beaudoin, the video of the plant that you built was amazing. Okay. So I can’t give you guys good enough credit for building such a high-percentage recovery plant with huge tonnage, maybe not huge, I mean but significant, and stockpiling with. I don’t know, the grades – dropped a little bit this quarter. Do you think that’s a trend that we’re going to continue to see, because maybe where the strongest mineralization was in your stockpile in your first couple quarters?