First Majestic Silver Corp

TSX:FR

Earnings Call Transcript 2022-Q2

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the First Majestic Silver Second Quarter Production Results and 2022 Guidance Conference Call.

[Operator Instructions]

And the conference is being recorded.

[Operator Instructions]

I would now like to turn the conference over to Mr. Keith Neumeyer, President and Chief Executive Officer. Please go ahead.

[Keith Neumeyer, executive]

Thank you, operator. Welcome, everyone, to our H2 guidance call and production announcement, both -- I think everyone online has seen the 2 news releases that went out yesterday.

Before I get into it, I just wanted to introduce the people in the room with me today. I have Steve Holmes, the company's Chief Operating Officer; I've also got Connie Lillico, our Corporate Secretary; and I've got Todd Anthony, VP Corporate Development; Mani Alkhafaji, from -- he's VP of Procurement; Andrew Poon, VP Finance; and also Mark Carruthers, Manager of Investor Relations.

Also, we -- calling in remotely, we have our CFO, David Soares, as well. Before I speak any further, just going to pass the call over to Connie.

[Connie Lillico, executive]

Prior to us beginning today, I'll read our disclaimer and forward-looking statements. Certain statements contained in this conference call regarding the company and its operations constitute forward-looking statements in accordance with applicable Canadian and U.S. securities laws.

All statements that are not historical facts, including, without limitation, statements regarding future estimates, plans, objectives, assumptions or expectations of future performance constitute forward-looking statements.

We caution you that such forward-looking statements involve known and unknown risks and uncertainties that could cause actual results and future events to differ materially from those anticipated in such statements. Such risks and uncertainties include the duration and effects of the coronavirus and any other pandemics on our operations and workforce and its effects on global economics and society, fluctuations in precious metal prices, unpredictable results of exploration activities, uncertainties inherent in the estimation of mineral reserves and resources, fluctuations in the cost of goods and services, problems associated with exploration and mining operations, changes in legal, social or political conditions in the jurisdictions where the company operates, lack of appropriate funding and other risk factors as discussed in the company's filings with the Canadian and U.S. securities regulatory agencies.

Resources and production goals and forecasts may be based on data insufficient to support them. The company expressly disclaims any obligation to update any forward-looking statements. Back to you, Keith.

[Keith Neumeyer, executive]

Thanks, Connie. So -- just getting into the news releases briefly, I'm not going to go through it in detail, but obviously, second quarter was an improvement over Q1. We were expecting to see that. There's no cost associated with the [indiscernible], but I can suggest that around -- the numbers are improving on a cost basis, and we expect that to continue to improve as throughput increases that at Jerritt Canyon.

Good increase in production. Santa Elena is just booming away. It's -- with the Ermitaño ore coming in, it's just -- it's actually producing above budget. We've actually -- if you noticed in our guidance for H2, we've actually increased the production there, which is pretty exciting, and the costs are quite nice as well.

Throughout the years, as we bring in West Gen and Saval II mines at Jerritt Canyon, you're going to start seeing the increase in throughput there, and we're expecting to see that positively impact not only the gold production numbers but also cost on an all-in sustaining basis.

There will be other events occurring in 2023 as well. So we're expecting 2023 for both Santa Elena and Jerritt Canyon to be pretty exciting times for both of those 2 mines. Going into -- we have had some questions coming in on a couple of topics.

So I'm going to address the ATM right now, just in case there are questions around that. We did announce an ATM after the -- this announcement that came out on H2 guidance and Q2 production.

And just to preempt any type of questions, it is our view or my view that every public company should always have a share buyback program in place, and they should also always have an ATM in place.

And that allows management to take advantage of certain events that occur in the marketplace, whether they're very positive, high-metal price environments or very negative, kind of low-metal price environments that we're currently experiencing with mining stocks out of favor and First Majestic shares underperforming over the last couple of quarters.

So -- we have bought stock back. Just so as you know, we will be putting the exact numbers out in our production -- or pardon me, our financial numbers, which come out in the next few weeks. But we've been in the market buying stock and we don't plan on using the ATM at these crazy share prices.

None of us are happy where the shares are trading. But we need to, as far as we're concerned, have both share buybacks and ATMs in place at all times. And the last ATM expired or it was actually used up, I think, late last year or early this year.

And it always takes time to put these perspectives together. There are big projects to get these things filed and they do have a shelf life for a couple of years, generally speaking. So you won't be seeing another one for quite some time. So -- that's really it for me. Why don't we just go to questions?

[Operator]

[Operator Instructions]

The first question comes from Craig Hutchison with TD Securities.

[Craig Hutchison, analyst]

My question is on Jerritt Canyon. Can you provide some kind of reference point with respect to grades or throughput that we can kind of expect in the second half year in order to sort of deliver on guidance?

[Keith Neumeyer, executive]

Yes. Thanks, Craig. I'll pass that question on to Steve Holmes, our Chief Operating Officer.

[Steve Holmes, executive]

Okay. Yes, Greg -- yes, our expectation is to see throughput at Jerritt Canyon begin to escalate in the third quarter and further increase in the fourth quarter as we bring on West Gen and the Saval II mines.

And we're getting good performance -- expected performance in many ways out of SSX and Smith. But -- what we're focused on is increasing the ore flow because the plant can accept double what we're putting through the plant today.

And that's all part of our plan as we move into 2023. We'll also see a grade increase, and we're anticipating that, which will come from both West Gen and Saval II. West Gen and Saval II will probably contribute another 1,500 tonnes a day by the fourth quarter in the 6 to 6.5 gram per tonne range. So hopefully, that answers your question.

[Craig Hutchison, analyst]

So additional 1,500 tonnes per day on top of the 2,600 tonnes a day or [indiscernible]?

[Steve Holmes, executive]

Yes, it will be a little bit of a trade-off because the 2,600 tonnes per day, there is some incremental material that's in there that's fairly low grade, and that's going to get displaced. So our target is to really push up to right at 3,000, 3,500 tonnes per day.

[Craig Hutchison, analyst]

And then just with respect to Saval II and West Generator, can you give us a sense of how long those operations or how long those deposits will feed ore into the mine plan? Is it a couple of quarters? Or is it more sustainable than that?

[Steve Holmes, executive]

It's more sustainable than that, and there is tremendous exploration potential between the Murray mine and West Generator. Longer term, we're going to connect those two mines. But right now, we're in process with the new mine contractor, which is RedPath, that's rehabbing down into West Generator.

And as soon as we clear one of the escape way passes, which is blocked -- this mine has been idle for about 16, 17 years, we'll get that done in the next few weeks and start shipping ore. And we need that escape way unblocked so that we can ship ore, and that's just according to MSHA regulations.

So it's coming in the third quarter. It's a little more work when we got in there than we thought for ground conditions, dewatering and then that escape way, but it's in front of us, and we're going to get it brought in.

[Craig Hutchison, analyst]

Maybe 1 last question for me. The dual-circuit at Santa Elena, I believe it's supposed to be operational by Q4 and will improve recoveries. Any sense in terms of what that performance increase will look like on the recovery business?

[Steve Holmes, executive]

Yes. It's -- the design, there's 3 pieces to dual-circuit. There's an additional leach tank, number 6. That's already commissioned, and it's in operation. So we'll see that impact in the third quarter.

There's another CCD, number 4. That was tied in last weekend, and we'll have it operational in August. So that's part of it. And then the big piece is that big Metso Outotec tailing filter, press filter. That will be later in the fourth quarter. And what that press filter allows us to do is to change the grind to a finer grind on Ermitaño ores and liberate more gold and silver.

So we're looking anywhere from 5 to 7 points at the high end based on the geomet testing. But we'll have to see as we get into it because we're still doing quite a bit of geomet testing.

[Operator]

[Operator Instructions]

The next question comes from Don DeMarco with National Bank Financial.

[Don DeMarco, analyst]

Congratulations on a good trend at La Encantada and positive outlook at Santa Elena. My first question is on Santa Elena. What do you find -- what's a good balance of contributions from Santa Elena and Ermitaño ore? We saw the contribution from Ermitaño increasing quarter-over-quarter. I'm just wondering if you expect that to continue or what's a good balance.

[Keith Neumeyer, executive]

Well, thanks for the question, Don. I'm going to pass that also to Steve Holmes, the Chief Operating Officer.

[Steve Holmes, executive]

Okay, Don. So right now, we actually campaign both mines. We don't run them and mix them together. So -- in Ermitaño, it's a little bit harder ore, but it's quite a bit higher grade, particularly on the gold content side.

And so generally, we're running about a 50-50 mix, campaigning one mine and then the other, usually in 2-week to 2.5-week intervals. And we're dialing in the Ermitaño ores with our HIG mill, which is our high-intensity grinding mill, and trying to pull that up to full power.

So we're running -- like, we'll run Ermitaño ore about 2,400, 2,500 tonnes per day. And then when we flip to Santa Elena, because it's a softer ore, we'll get up over 3,000 tonnes a day. So contribution is about 50-50 in tonnage.

But in terms of ounces, we're getting quite a bit more ounces out of Ermitaño because the grade is so strong. And we expect that contribution to continue for the next several years. So it's been a really good project for us, and it's surprisingly positive even on the grade side.

[Don DeMarco, analyst]

Okay. And so would the mining rate at Ermitaño support like maybe a 60-40 campaign rather than just the 50-50 tonnage right now? Is that something that you guys are thinking about?

[Steve Holmes, executive]

Yes. We're actually -- we developed Ermitaño this year to be over 1,000 tonnes per day average. And so if it's running half the time, that's about a 2,000 tonne per day contribution when it's running the campaign.

We're actually accelerating development in Ermitaño. So I'd expect that 50-50 mix to continue into 2023. And we're working on the '23 update plans because of our budget cycle. But I expect that pretty much a 50-50 mix between the two.

It's just that -- because the grade is so strong from Ermitaño, it's probably 2/3 of the ounces coming from Ermitaño and about 1/3 coming out of Santa Elena.

[Don DeMarco, analyst]

Okay. That's helpful. And just my other question is on Jerritt Canyon. So we see the guidance costs have ticked higher. Relative to the original guidance, how would you explain the higher cost? Is it -- is there a portion that's attributed to inflation? Or was it maybe operational considerations? How would you explain that, the delta there on higher cost at Jerritt Canyon?

[Keith Neumeyer, executive]

Yes. Go ahead, Steve.

[Steve Holmes, executive]

Okay. So it's a very good question. There's 2 big factors that are impacting Jerritt. The inflation is obviously one of them. Inflation is probably most pronounced at our Jerritt Canyon mine simply because in Mexico, we had a lot of protective measures in place like with our LNG plants, long-term contracts, long-term agreements on consumption reagents and things like that.

When we bought Ermitaño, they didn't have any of that -- or excuse me, Jerritt Canyon, we didn't have any of that in place. We are establishing that in place now and, obviously, rebidding all those things.

But Jerritt was more exposed to inflation pressures. And -- for example, they get their power from Nevada Power, and we saw in the last year a 53% increase in unit power costs that came in from Nevada Power, and it's all spot power. There's no long-term fixed or firm contracts or anything.

So -- that's part of the issue. The other part of the issue is just the ore quantity and grade. So our focus has been to get the ore flow up to feed the capacity of the plant. And that continues to be the plan going into 2023.

And so we have, as Keith mentioned, the West Generator and the Saval II mines that will be coming online in the next 3 months to support Smith and SSX with 2 different mining contractors delivering that ore. And then next year, we're going to look at the Murray mine.

So we'll have -- actually have the 5 underground operations feeding, pushing that rate up. And you'll see the ounces come up pretty strongly and, consequently, cash and all-in sustaining costs and those types of things will be cut significantly. And that's because the fixed cost structure of Jerritt is quite high.

[Operator]

[Operator Instructions]

As there are no more questions from the phone lines, this concludes the question-and-answer session. I would like to turn the conference back over to Mr. Keith Neumeyer for any closing remarks.

[Keith Neumeyer, executive]

Thanks, everyone, for joining today's call. Feel free to contact either Todd or Mark, if you have any additional questions. We look forward to ending -- or First Majestic ending 2022 on a very strong note, and a very strong 2023 with the work that's going on at Jerritt and at Santa Elena. So thanks again for your time, and look forward to the next one.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.