First Majestic Silver Corp

TSX:FR

Earnings Call Transcript 2019-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the First Majestic Fourth Quarter Production and 2020 Guidance Conference Call. [Operator Instructions]. And the conference is being recorded. [Operator Instructions]I would now like to turn the conference over to Keith Neumeyer, President and CEO. Please go ahead, sir.

[Keith N. Neumeyer, President, CEO & Director]

Thank you. Before I speak, I'm just going to pass the call over to Connie Lillico, our Corporate Secretary.

[Connie Lillico, Corporate Secretary]

Okay. 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 within the meaning of the United States Private Securities Litigation Reform Act of 1995 and Section 21E of the United States Securities Exchange Act of 1934 as amended. 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 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 funding and other risk factors as discussed in the company's filings with the Canadian security 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 statement.Back to you, Keith.

[Keith N. Neumeyer, President, CEO & Director]

Thanks, Connie. On our end here in Vancouver, we've got a full room of people. I'm not going to announce everyone's names, but just going around the table. First off, we have Ray Polman, our CFO. We've got Andrew Poon, our VP of Finance. We've got Todd Anthony, our VP of Corporate Development. And of course, myself, CEO. And you've just heard from Connie.So let's talk about 2019. Now we had a great year, 2019. Q3, Q4 were pretty substantial quarters for us. We have great success getting the HIG mill up and running at Santa Elena, which is the first HIG of its kind operating in all Latin America. It's really improving that operation and it's still destined to improve it even further throughout 2020 and 2021.We ended the year off with a substantial amount of cash in the bank of over $169 million, which is a record cash ever in the company's history. Recoveries, as I mentioned, at Santa Elena, hit 94%, which is pretty phenomenal.One thing that we decided over the last year is that the focus really became, in 2019, our 2 biggest -- our 3 biggest mines. Really, the focus was Santa Elena with the upgrades there. And San Dimas, a lot of planning went into what we're going to do with San Dimas over 2020 and 2021 with the successes we had at Santa Elena.At La Encantada, we've had some pretty great successes with Q3 and Q4 being the most silver that, that mine has produced in over 5 years. We are projecting a little bit higher cost at La Encantada in 2020. And the reason why that is, is because this is a caving process and it's difficult to really predict with any real certainty what the grades are going to be. Over the last couple of quarters, we've been very, very lucky and have had some great grades and that mine has been making some substantial profits in the last couple of quarters, but in 2020, we're being a little bit conservative. We've dialed that back, the grades a little bit and also dialed back production a little bit. So that's why it looks like it's slightly higher cost because of just us being conservative. Of course, the geos and all the engineers on site are hoping to maintain Q3 and Q4 grades, but when it comes to public disclosure and guidance, we have to shy upon the conservative.Another thing that investors and shareholders should know is, 3 years ago, we had 7 mines operating. And as we had very successful acquisitions of our 2 last purchases, the Santa Elena and San Dimas mines, those 2 mines are really generating the majority of the production and most of the profits. And it just makes business sense to really focus our efforts on those 2 mines. And unfortunately, the smaller mines, which were producing only really around 1 million ounces or less each, really -- insignificant really in the whole scheme of things, it just didn't make sense to continually pushing silver out of those mines and losing money on those ounces.So we made a couple of tough choices. We did shutdown the La Guitarra mine in 2018. We shutdown the La Parrilla mine in late 2019 and Del Toro is now also on its wind down mode and will be shutdown in the next couple of months. So we won't be reporting any lead or zinc production in 2020. All our production will be from the 3 mines: San Dimas, Santa Elena and La Encantada. Of course, San Dimas and Santa Elena are significant gold producers. So we'll be producing, from those 3 mines, just gold and silver in the form of doré bars, which obviously is a fantastic thing.Other things we're going to be focusing on. With the success we had at Santa Elena, we are going to continue that innovation projects with a focus at San Dimas site. The HIG mill just arrived in Mexico a couple of weeks ago. It will be transported to site. The engineering is almost done, and we hope to be breaking ground in the next couple of months on the rebuilding of this mill that hasn't had any investment for likely 30 years. So that's -- it's likely not going to affect production in 2020. At least, we're not guiding any production in 2020 for any of the improvements there. Those improvements will start to kick in, in 2021.Ermitaño is another big focus for us at Santa Elena. This is a large discovery that we made a couple of years ago. There will be another 43-101 resource estimate coming out in early 2020. We hope around March or April. And I'll show all the drilling that's taken place throughout the year, and there's substantial drilling that obviously has occurred. We're now running and add it into the ore body. We started that about 2, 3 months ago. I was down on site in late November, and I was very impressed with the progress that we're making there.We're going to be spending substantial amount of money doing 5 levels of underground development before we take out the first ounce of silver. And it's just a prudent way of doing things. It does show up on our cost obviously, which is in today's news release, but that's well spent money and that's going to bring a lot of extra ounces to Santa Elena because of just the grades itself from Ermitaño are much greater than the current grades that are being fed from the heaps, which is the blending operation that goes on in that operation. So Ermitaño will replace the heap feed, increasing the grade substantially at that operation. So that won't take place, unfortunately, until end of the first quarter in 2021. So we spend today and we profit later, but it's going to be pretty exciting when we get Ermitaño up and running.Another thing that we did in 2019 which will start to impact us in 2020 is the Tayoltita development. Tayoltita was the original mine, dating back something like 300 years. And it's always been known. This is a high grade area, particularly silver, but it was shutdown due to the silver by the previous operator because of the stream that was on the mine at that time. But with the new stream, it pays a lot to mine silver. We've been spending the last year redeveloping the old Tayoltita mine. There's still some work still underway, but we expect to have Tayoltita up and running by the end of Q1 and it will be ramped up over the full year. So by the end of 2020, it will even be producing more than it will be in Q2, for example.The improvements that we're going to get from the HIG, it's in the news release, but reduction of energy, eliminating steel balls, which is a big cost. And when you eliminate steel balls, you not only eliminate costs, but you also reduce the amount of reagents and cyanide used in the process because iron, obviously, absorbs these chemicals and you have to use more. So that's going to be great for us to get the system up and running.Santa Elena, we did get the hill -- HIG mill in. In 2020, we will be putting a new AG/SAG system in place with a brand-new filter system as well. So spending a little bit more money, but even improving it further, trying to get it up to 98%, 99% recovery, at least that's our objective internally to get to. And we'll see, of course, success by doing that.And the last thing I'll mention is converting Santa Elena over to liquid natural gas. La Encantada was converted over about 4 years ago. We had the 2 mines on diesel. And we spend about $14 million a year on diesel at Santa Elena, so it's quite a lot of money. We expect that once this liquid natural gas system is in place, which will be about October of 2021, construction is now underway, it will save approximately $9 million a year. So that's going to show up right on the bottom line as reduced costs. It's not going to affect 2020 to a great degree because it's only going to be up and running for a very small amount of time right at the end of the year, but 2021, it's going to have a fairly major impact on costs at Santa Elena. And it's also, from an environmental standpoint, a much smaller footprint. And just -- it's a win-win for everyone involved in that operation and the region.So that's really it for me. We're going to open this up to questions. Anyone that wishes to ask questions of us, please feel free to do that by prompting the system.

[Operator]

[Operator Instructions] Our first question is from Jake Sekelsky with Roth Capital Partners.

[Jacob G. Sekelsky, Director & Research Analyst]

You touched on this a bit, but do you think you can give any additional color on mining at the Tayoltita mine at San Dimas? I guess, I'm wondering if you're able to quantify the impact it could have on silver grades from, I guess, Q2 onward this year.

[Keith N. Neumeyer, President, CEO & Director]

Yes. We're updating the 43-101 now. There's been significant amount of drilling that's going on at San Dimas over the last 18 months since we acquired that mine in May of 2018. So -- and then since then, we never updated that document since we acquired it. So it's kind of overdue to get it updated. So we're anxiously getting that out. So I can't really comment on that without that document being made public.

[Jacob G. Sekelsky, Director & Research Analyst]

Fair enough. And is that a first half release we should expect to see? Or is the timing still kind of up in the air on that?

[Keith N. Neumeyer, President, CEO & Director]

Yes, it's H1. Yes, first half, we will get that out.

[Jacob G. Sekelsky, Director & Research Analyst]

Got it. Okay. That's helpful. And then just more broadly, does the guidance include the benefits you're looking to see from the investments like the HIG mill at San Dimas and upgrades at Santa Elena? Or are you looking at some of this as additional upside to the guidance you put out this morning?

[Keith N. Neumeyer, President, CEO & Director]

Yes. The San Dimas spend in 2020 does not show up as any benefit for 2020, which is, you could say, well, why not, but it's just a conservative approach. The Ermitaño, also it doesn't show up as any benefit. The LNG does show up only for 2 months in the budget.Yes. And just one other thing while everyone's listening before the next question, Ray just told me that I misquoted. I mentioned Q3 or October 2021 for LNG. LNG kicks in at Santa Elena in October 2020.Any other questions?

[Operator]

Our next question is from Adam Graf with B. Riley.

[Adam Philip Graf, Senior Mining Analyst & MD]

Just a couple of quick ones here. Can you guys give us the CapEx split between the 3 operations?

[Keith N. Neumeyer, President, CEO & Director]

Yes. Todd can follow-up with you, Adam, on that. We do have the split between -- we have the split between sustaining and expansionary, of course. That's in the news release. But on a per mine basis, is there something specific you -- like, for example, exploration or development, anything specific? Because there's quite a lot of line items.

[Adam Philip Graf, Senior Mining Analyst & MD]

Yes. There's a lot of moving parts, a lot of growth capital, I know. So -- but I was just hoping for a split. That's okay. I'll follow-up with Todd.

[Keith N. Neumeyer, President, CEO & Director]

Yes. I'll -- I can throw some numbers out to you. Like, at Santa Elena, you can go with $5.2 million exploration. San Dimas, $10.4 million exploration. You've got Ermitaño development of almost $13 million to build those 5 levels in preparation for mining in 2021. So there's a good chunk there going into mine development, right, to bring Ermitaño online.

[Adam Philip Graf, Senior Mining Analyst & MD]

But just in regards to Ermitaño, is most of that development spend going to be completed in 2020? It seems to be -- hard to believe you can get 5 levels completed in 1 year.

[Keith N. Neumeyer, President, CEO & Director]

It won't -- no, it won't be completed in 2020. The first production is expected to come into the mill at the end of Q1 2021, but the development will continue on after that for the balance of 2021.

[Adam Philip Graf, Senior Mining Analyst & MD]

So by 2020 -- by the end of 2021, you should be pretty much there as far as the initial capital at Ermitaño.

[Keith N. Neumeyer, President, CEO & Director]

Yes, exactly.

[Adam Philip Graf, Senior Mining Analyst & MD]

Excellent. Just switching over to Encantada. I know you mentioned that the numbers you gave for guidance for 2020 are sort of conservative and you're a little unclear or being conservative on the grade and the throughput. Could you give us a clue on the throughput number? Because I noticed that throughput at Encantada has varied quarter-to-quarter quite significantly, so from 3,000 tonnes a day down to almost 2,000 tonnes a day.

[Keith N. Neumeyer, President, CEO & Director]

Yes. So the budget's calling for 2,500 tonnes per month for the entire year. And it's a lot to do with just the difficulty of this breccia. These are breccia pipes caving. It's a fairly complex process. Blasting and drilling is quite difficult and you get oversized boulders that you have to deal with. And it's a bit of a methodical process.They're getting a lot better at it. If you compare a year ago, if you look at 2018 compared to 2019, you can barely compare the 2. They were struggling quite a lot in 2018 and they learned a lot and they really seemed to get into a rhythm in 2019. And then they had the luck at the grades as well. So not only were they able to get decent tonnages out over the last couple of quarters, they had -- nature played in their hand, and it turned out to be 2 pretty big back-to-back quarters for that operation. Of course, we're crossing our fingers for that to continue, but you -- because you can't drill these caves and they're almost impossible to really get an average grade of the entire structure.

[Adam Philip Graf, Senior Mining Analyst & MD]

Got it. And then just to change subjects, Keith, the cash on hand at the end of 2019, my recollection, USD 169 million. Did a portion of that or a significant portion of that come from new capital issued in the fourth quarter?

[Keith N. Neumeyer, President, CEO & Director]

Yes. There's -- as you probably know, we launched the ATM program in early 2019, nothing crazy. But we did 2 back-to-back programs of $50 million. They're not finished. We're not currently in the market and haven't been in the market for a while. But we use -- sometimes, when the strength is there, we do take advantage of it, but we're very nimble and not very aggressive at all.

[Adam Philip Graf, Senior Mining Analyst & MD]

So there's -- so would you say, Keith, there's some portion in the fourth quarter, in particular, that was issuing new capital and then potentially -- forgive me, if I don't remember correctly. So there were some warrants and potentially some options as well?

[Keith N. Neumeyer, President, CEO & Director]

No warrants. There was stock options. There was a round of stock options that expired in, I think, January 5 or something, 4th I'm being told, January 4, 2020. Most of the employees in -- well, that are senior enough to get stock options had those options, which were expiring on that day. So of course, in November, December, those were all taken down and they exercised or sold or whatever employees do with them. It's part of their compensation. So we have no control over that. But of course, those were all done.

[Adam Philip Graf, Senior Mining Analyst & MD]

Do you know what the share count was at the end of the year? I think your last published number in November was about 214 million.

[Keith N. Neumeyer, President, CEO & Director]

I don't have it off the tip of my fingers, but I might be able to find it before the call is over.Okay. And also, Todd can follow-up with you as well.

[Operator]

Our next question is from [ Andy Schopick ], a private investor.

[Unknown Attendee]

Good morning, everyone. For either Keith or Ray, I have a couple of more financially related questions. What is the estimated combined cost in 2020 of carrying the suspended mines? I'm sure there's some aggregate expense number associated with that. There's no production coming from these mines.

[Raymond L. Polman, Chief Financial Officer]

Yes. It's roughly $6 million.

[Unknown Attendee]

Okay, about $6 million. We're talking U.S. dollars, right?

[Raymond L. Polman, Chief Financial Officer]

That's right.

[Keith N. Neumeyer, President, CEO & Director]

Yes, [ Andy ], I'd like to step in. Sorry. [ Andy ], let me just finish the question as well. When it comes to La Parrilla and Del Toro, the company has made tens of millions of dollars in profit over the last years on those 2 operations. And due to our successful investment strategy, our acquisition strategy to get the larger mines, we're very fortunate to be in the position today of having 2 very large mines with La Encantada still being grown and expanded.So we -- despite the fact that we were producing slightly less ounces in the form of silver and gold in 2020 versus 2019, '20 -- and that's what, 3 mines versus 7, 2021 and 2022 are going to be pretty exciting times for us with pretty substantial increases in production just from those 3 operations. So we made the call to shutdown those other 2 mines. And -- but we've also, as it says in the news release, we're keeping the communities up and running. These communities have been with us for the life of business and I think it's good business sense to continually -- our CSR programs. We have the school buses, the garbage collection, the water infrastructure, the electrical infrastructure, all the things that we do as a company to keep these towns operating while we've elected to continue that investment. So the money that -- or the dollar amount Ray threw out to you is mostly that. And we're prepared to do that for a couple of years. So that's why we're doubling the exploration.Our geological team has some theories. And with the focus being at La Encantada and San Dimas and Santa Elena over the last 2 years, these smaller mines have lost a little bit of focus. And now we're going back to them with renewed profits that are coming into the business, flowing some of those profits into some exploration that we have views on. And if our geological team is correct, then these mines will be turned back on when the time is right to do that. But in the meantime, we're going to keep the communities running.

[Unknown Attendee]

That's fine. I just wanted to get a handle on what that operating expense might be, that would be kind of an incremental cost.My second question relates to the Wheaton Precious Metals stream agreement. I just want to go over those details and see if I can understand the actual impact on the company. Now Wheaton Precious Metals received 25% of the gold equivalent production from San Dimas at a fixed exchange ratio of 70:1 gold to silver -- silver to gold?

[Keith N. Neumeyer, President, CEO & Director]

USD 600.

[Unknown Attendee]

Is that correct?

[Keith N. Neumeyer, President, CEO & Director]

USD 600.

[Unknown Attendee]

Okay. And is this in perpetuity?

[Keith N. Neumeyer, President, CEO & Director]

Yes. It's life of mine.

[Unknown Attendee]

Okay. Fine. Are you able to disclose at this time how many gold equivalent ounces you delivered for calendar year of 2019? I think it was 33-plus million for 9 months.

[Keith N. Neumeyer, President, CEO & Director]

Yes. They -- we're debating in the room whether we have that number or not, but the -- you're asking for numbers that aren't yet public.

[Unknown Attendee]

That's what I was...

[Keith N. Neumeyer, President, CEO & Director]

The Q3 numbers -- yes, the Q3 numbers, you're going to look at the financial statements and it's going to be -- you can do the math. You can just multiply our -- just multiply the production by 25% and divide it by 600.

[Raymond L. Polman, Chief Financial Officer]

Yes. We'll make an attempt...

[Unknown Attendee]

I got it.

[Raymond L. Polman, Chief Financial Officer]

We'll make sure that the financial statements detail what that number is.

[Keith N. Neumeyer, President, CEO & Director]

Now the interesting thing -- and [ Andy ], interesting thing about this stream is that the old stream was based on $4.11 silver, and that's -- today, at USD 600 gold, that's the equivalent of about $9 an ounce silver. So we're actually making money on the gold component of the stream, which is pretty unusual for most streams. And of course, 75% is all ours.

[Unknown Attendee]

Can you quantify that any further on the gold?

[Keith N. Neumeyer, President, CEO & Director]

I thought I was pretty specific there, [ Andy ].

[Unknown Attendee]

Okay. All right. I misunderstood something.

[Operator]

[Operator Instructions] Our next question is from Alexander Scharp with Bybrook Capital.

[Alexander Scharp;Bybrook Capital LLP;Analyst]

I just got 2 questions. The first of which, I think, you've kind of already answered, but I just wanted to make sure that I understood it 100%. So the ATM program still has some room left in it in the sense that it hasn't been exhausted in Q4 was the first question. I think you kind of implied that it hasn't.And then the second question, just on the closed operations, I know that you guys still have sort of balance sheet values that you sort of carry for those assets. I mean, are we able to -- are you able to sort of give us any guidance on whether or not those -- we can sort of expect any impairments or write-downs or anything like that associated with the closed assets?

[Raymond L. Polman, Chief Financial Officer]

I think it's a bit premature. We're going through the process of assessing that. And that's a discussion we have with the auditors as we go through our audit process, which will not be complete now for roughly another 4 weeks.

[Keith N. Neumeyer, President, CEO & Director]

And they're not -- just a comment, side comment. They're not permanently being closed. They're temporarily being closed. And that does have an impact on -- not being a finance guy. I've got 3 finance guys in the room here maybe -- they're telling me perhaps.

[Raymond L. Polman, Chief Financial Officer]

Yes. I mean, it's a process of looking at the cash-generating capability of the mine and comparing it to the carrying value at the end of the year. And we can detail that more once we've gone through the process with our auditors. We don't want to say anything out of turn.

[Keith N. Neumeyer, President, CEO & Director]

And also just another comment I'd like to make is that these assets were written down a couple of times. When silver is trading at $13, $14 an ounce back in 2014, 2015, the entire mining sector was being forced by its auditors to write-down their investments, unfortunately. And the silver is still there in the ground. It was always a bit of an issue for me that all of a sudden, they value our silver at a lower value just based on market conditions. But anyways, I lost the bet obviously, and we had to take the write-downs. And so I'm not sure how much more there is to write-down quite honestly.

[Alexander Scharp;Bybrook Capital LLP;Analyst]

Understood. And then -- sorry, just the confirmation on the ATM.

[Keith N. Neumeyer, President, CEO & Director]

Yes. You're right on your comments. There's still some left. I don't know the number off the top of my -- okay. Yes, it's -- there's some left to it. We're not in the market. We're not in desperate need for capital. It's just a mechanism that is -- I think all companies should have an ATM and all companies should have a buyback program. That's just a view that I have. And they're just prudent tools to have in place. And the prospectus is filed. It's got a shelf life of 25 months. So any time during that period of time, the company can take advantage of whatever kinds of mechanisms it requires or deems -- requires to take advantage of.Okay. And we're going to wrap-up -- sorry.

[Operator]

We have a follow-up question from Adam Graf with B. Riley.

[Adam Philip Graf, Senior Mining Analyst & MD]

Just one more thing, it occurred to me. Regarding Ermitaño, is the design that you guys are currently planning on, is that for cut and fill? Or is that a long-holed stoping design?

[Keith N. Neumeyer, President, CEO & Director]

A combination of both.

[Adam Philip Graf, Senior Mining Analyst & MD]

Can you give me a percentage?

[Keith N. Neumeyer, President, CEO & Director]

No, I can't. We're putting those documents out. There's 2 documents coming. The 43-101 is March, April. And we're putting our pre-fees out prior to production at the end of 2021. So all those questions will be in there.

[Adam Philip Graf, Senior Mining Analyst & MD]

All right. Looking forward to the 43-101.

[Keith N. Neumeyer, President, CEO & Director]

Okay. So that's it? Thanks very much for everyone participating today, and feel free to call in to either Mark or Todd if you have any further questions. Thanks for your time.

[Operator]

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