First Majestic Silver Corp

TSX:FR

Earnings Call Transcript 2020-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the First Majestic Silver Fourth Quarter Production and 2021 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 N. Neumeyer, Founder, President, CEO & Director]

Thank you, and welcome, everyone, for the -- our annual conference call that covers our prior year 2020, and obviously, we'll go into 2021 as the news release outlined that hopefully all of you have read so far. We're pretty spread around the management team right now. And in Vancouver, we have Connie Lillico, our Corporate Secretary; Ray Polman, our CFO; Andrew Poon, our VP Finance; Mark Carruthers, Investor Relations; and Todd Anthony, VP, Corporate Development. In Mexico, we have our COO, who's currently at San Dimas, Steve Holmes. And I'm also remote as well.Before we get on to the topics of today, I'll pass the call on to Connie Lillico.

[Connie Lillico, Corporate Secretary]

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 that -- to differ materially from those anticipated in such statements. Such risks and uncertainties include: the duration and effects of the coronavirus and COVID-19 and any other pandemics on our operations and workforce and effects on global economics and safety; fluctuations in precious metal prices; unpredictable results of exploration activities; uncertainties inherent in the estimation of mineral reserves and resources; fluctuations in the costs 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 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 N. Neumeyer, Founder, President, CEO & Director]

Thanks, Connie. So we came into 2020 with a pretty aggressive plan. Going back to the January 2020 guidance news release, we had planned on producing somewhere between 23 million and 24 million silver equivalent ounces, and we had planned on spending about $172 million in innovation and capital programs, including exploration and development. But lo and behold, no one would have predicted what would have occurred in March and shut the mines down in May, June, and us producing, obviously less than our original guidance. And we've been adjusting our guidance at midyear, and we ended the year very strongly. It was -- credit has to go to our team for really what they pulled off. The amount of protocols that were in place due to the COVID pandemic are just astronomical. We've done over 60,000 COVID tests in the last 6 months, and we continually do tests. We had barriers and then all kinds of systems and protocols in place. We've expanded our medical team. And we've really, I think, shone in respect to our actions in respect to the pandemic, and that's really allowed us to have really 2 back-to-back super good quarters. Q3, Q4 being just fantastic quarters. The highlights, obviously, La Encantada producing more ounces than its produced since 2013, which is a pretty amazing feat for that operation. A lot of the work that's gone on there over the last couple of years is now paying off. San Dimas has only been on our portfolio for a couple of years, and it's starting to really shine as well. We've got lots of growth plans for San Dimas over the next couple of years and look for things to improve even further at San Dimas. Santa Elena was really the only challenging asset. The mine plan there is changing as of the ore structure changing over the last couple of quarters. That will all be resolved over the next couple of quarters, and it'll go back to its normal budgeted production we're expecting by mid-2021. But then, of course, we have Ermitaño coming in as well, which is going to be a big boost for that asset. So 2021 is looking good. We've got, again, very aggressive exploration program, very aggressive development program. Innovation is still key for us and our focus will remain there. I'm not going to be going into the details of news release, you're welcome to read it yourself. But some of the highlights, obviously, we ended the year off with record cash. So we're in a very good financial position. Our dividends were announced about a month ago, and we'll be paying our dividends while they're now adding up effective January 1, 2021, after the Q1 numbers are public. That dividend will be paid we're expecting sometime in April, May. And that'll mark our first ever dividend in the company's history, which is pretty exciting for me personally, and I'm hoping it's exciting for a lot of our investors as well. Yes, that's really it from the highlights. I've suggested the listeners that go to the news release and read it, look at our financial statements. There's lots of good reading there and feel free to contact the company at any time. So I'll go right into question and answers. I see there's a few people lining up right now for Q&A.

[Operator]

[Operator Instructions] The first question comes from Don DeMarco with National Bank Financial.

[Don DeMarco, Analyst]

My question has to do with -- you got some technical reports coming out for La Encantada and San Dimas. Can you maybe provide a little bit of color on any changes we should be looking for in these reports? And also wondering, do you think that they will reflect some of the higher costs that you might be -- some of the measures you're taking to -- for safeguards against COVID, would these be baked into these reports?

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

I'd have to divert to Steve on that, whether there's COVID costs in the technical reports. They're currently in draft form, and they are in the process of being written.Before I pass the call over to Steve, the San Dimas report is quite old. It was done by Primero, and there's several changes that have occurred on site, which I think is -- should be put out in an updated report. And also La Encantada, over the last several years, there's lots of changes there as well. So it's just part of the normal regulatory function in order for us to have updated and then current data out to shareholders or the investing public. Steve, do you have any comments?

[Steve Holmes, Chief Operating Officer]

Yes. The 3 technical reports that will come out at the end of the first quarter, plus the PEA for Ermitaño, they're fully updated with most current costs and what we believe is correct. So they are inclusive of those types of costs. I do not believe that the company anticipates the higher cost of managing the pandemic to be a long-term continuing cost, and it's probably not overly material to our total cost package anyway. So I hope that answers the question.

[Don DeMarco, Analyst]

Yes. Okay. Yes, that's helpful. I mean it sounds like you've been very responsive in stepping up to address COVID. But overall, you'd say, going forward, you're not really expecting kind of a material impact on costs to continue whatever method is unnecessary.

[Steve Holmes, Chief Operating Officer]

No. That's correct.

[Operator]

Our next question comes from Craig Hutchison with TD Securities.

[Craig Hutchison, Research Analyst]

My question is on Santa Elena. You've got the SAG mill conversion coming into place here in Q3, and I think the commissioning of the LNG generators, I think it's in Q1. Can you give us a sense of what the cost savings will be once you've got these 2 optimization efforts up and running?

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

Yes. Currently, Santa Elena consumes about USD 12 million per year in diesel. It'll still require some diesel despite the fact it'll be mostly LNG. Steve might want to step in with more detail on that, but our numbers are around $8 million to $9 million in savings in energy. Steve, do you want to...

[Craig Hutchison, Research Analyst]

And how about the SAG mill? Sorry, go ahead.

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

Over to Steve as well.

[Steve Holmes, Chief Operating Officer]

Okay. So yes, right now, the Santa Elena LNG project, they're just buttoning up everything in the generators there. We have 7 big generators in the building, and they'll commission in February and March, and we should be up running very smoothly by the second quarter. We're looking at $2.50 a tonne savings in terms of energy costs there in terms of the LNG versus the diesel. We also get a big boost on reduction in carbon footprint from the change in energy source, plus we get reliability. So it's a really good project for the company. And it's gone real smoothly through the pandemic. We had to slow down a little bit, but it stayed mostly on schedule and on budget.As far as the SAG conversion, that construction continues. It should be finished by the third quarter, I believe, we should have that in place, and that gives us even more energy efficiency and also some other reduction in grinding media in those savings. So those 2 projects are going to make a real positive difference for us going into the middle of 2021 and beyond.

[Craig Hutchison, Research Analyst]

Okay. And maybe just one follow-up question. La Encantada, the grades for this year, could we assume a sort of similar run rate to Q4?

[Steve Holmes, Chief Operating Officer]

Yes.

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

Yes. Go ahead, Steve.

[Steve Holmes, Chief Operating Officer]

Yes. Okay, Keith. So yes, I think the grades are slightly higher from the La Parrilla cave area in La Encantada, maybe a bit surprisingly higher. So we actually are expecting in the plan, a slight reduction in the grade. Not significant, but a slight reduction in the grade is more of a conservative approach in our release.

[Craig Hutchison, Research Analyst]

Okay.

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

Yes. These stretches are very hard to drill. And so we've had positive surprises throughout 2020, resulting in the mine outperforming budget. In our guidance for 2021, we are being slightly more conservative.

[Craig Hutchison, Research Analyst]

Okay. Great, guys. And look forward to seeing the technical reports.

[Operator]

[Operator Instructions] Our next question comes from [ David Smith ], a private Investor.

[Unknown Attendee]

Yes. Keith, could you give us a thumbnail schedule the HIG grinding process and how that contributes to the bottom line of recoveries? And then also, do you plan on implementing it or have you done so to all of your operations?

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

Yes. Well, thanks for the question. We're pretty proud to be the first installation of this technology in Latin America. There's a few other companies that are scrambling to get them installed, but ours was first. And it's also the only one that's getting direct feed from the mine. Most of the HIGs worldwide are used for regrinding after concentrates are produced. And it's worked quite effectively, but we decided to use it for ore right out of mine. And when we did the financial analysis, we needed about 2% more silver and 2% more gold to make it economic. The total investment was about $14 million. And then we ended up getting north of 5% of both silver and gold. So it's been extremely beneficial for the business. And it's now pushed us into even modernizing other parts of the mill, like the SAG, like the filtration system in the future. And then with Ermitaño coming in as well, that's going to even be more interesting, and of course, LNG.So Santa Elena is going through multiple changes over the last couple of years and into the next few years. So we'll look for continued improvements, and it's all got to do with technology. True to your question, the HIG will be installed at San Dimas. It's currently not in the budget because we're still doing engineering. It is sitting on site. La Encantada possibly as well might get one. We haven't determined that. There's some engineering work that's currently happening at La Encantada. So it's a little bit too early to tell exactly what we're going to be doing there. But it's definitely a technology that the mining center should be using. It uses less energy, and it uses no balls, and it's environmentally sound, and it's just a way more efficient technology. So we're very happy to be advocates of HIG milling.

[Operator]

Our next question comes from Eric Winmill with Scotia Bank.

[Eric Winmill, Associate]

Just wondering if you could provide a little more detail on Ermitaño developments. I see the CapEx spend outlined in the press release. Looks like you'll start pulling some ore there earlier this year. Just wondering what some of the critical items are and what we can expect for the balance of this year as we head into 2022, if you don't mind?

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

So before I pass the call over to Steve, I just want to make one comment because I noticed an analyst came out this morning, I'm not going to name names, but suggested that our CapEx was slightly higher than anticipated for in 2021. And I would dispute that because we came into 2020 with $172 million capital expenditure program, we only ended up spending $132 million. So we had to push a lot of that investment into 2021 due to COVID. So the numbers actually haven't increased that much year-over-year. If it wasn't for that rollover, it wouldn't be at the number it's at. So anyway, to answer your question more thoroughly, I will pass it on to Steve.

[Steve Holmes, Chief Operating Officer]

Right. So yes, Ermitaño's development is advancing pretty rapidly. And right now, we have -- it's a dual ramp access system. Both big dual ramps are pretty much at the point of distributing into the ore body now. The on-site surface facilities are mostly in place, temporary power, water, all those types of things.In 2021, some of the big items for Ermitaño are going to be -- we're going to wrap up some of the geotechnical, hydrogeological testing. Our metallurgical testing of the ore in Ermitaño, which is a bit different than Santa Elena, is going to take place over the next few months, and that will allow us to understand how to set the plant up to take the ore. There's a large test stope level that will be developed in the next 6 months that will give us some idea about the best mining methods to be used. And it also brings out, by the end of the year, over 60,000 tonnes of ore in stockpile, ready to be fed. One other major investment piece of that is we have to do a 4.5 kilometer connecting road between the Santa Elena plant and the mine site. So that will take 7 to 8 months to complete. And so by the fourth quarter, Ermitaño is going to be in position to feed ore to the plant, and we'll be optimizing the mine plan and putting the workforce in place and all those types of things. So it's moving right along.

[Operator]

Our next question comes from Ryan Thompson of BMO.

[Ryan Thompson, Analyst]

Keith, apologies if this question already got asked. I missed the first couple of minutes of the call. But just 2 questions for me. Firstly, just on taxes, there's been some rumblings in Mexico about a new proposed bill looking to sort of change the tax regime. So just wondering if you could provide a little bit of color on what you're hearing or seeing? And just secondly, if there's any updates on the tax dispute at San Dimas, that would be helpful as well.

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

Yes. On the changes in the tax regime in Mexico, we read the same headlines you read. We don't have an inside scoop, and we don't have any additional color other than some politicians talking about this and that and everything else. And so it's really hard to predict what's happening in Mexico.There is -- I'm not sure how much you understand the new USMCA, but the Democratic party was very much against the Republic party to sign that agreement with the Mexican government because they felt that the Mexican government wouldn't comply to the USMCA. There's a lot of rumblings going on right now between the new Democratic incoming government and the Mexican government about them complying to certain terms and conditions that it goes right into several key areas of the Mexico's economy, which is obviously very relevant to Canada and the United States. So it will be very interesting to see how those high-level discussions occur. So -- and they will have an impact on what the Mexican government does going forward. And that also touches on our tax dispute as well because it's a very political issue. It's no longer a legal issue because it's beyond legality, right? So we're just basically there waiting for the governments to decide on how to deal with these very, very high-level issues because there's several issues similar to this with the energy sector from the United States and the energy sector from Canada, and of course, the mining sector as well. But the mining sector is actually quite small in comparison to the energy sector. So there's a big cloud or a big discussion that will evolve and maybe won't be under this administration. We don't know. The relationship between the new U.S. government and the Mexican government could really -- in my opinion, could dictate what's going to happen with these major issues going forward.Ryan, was there another question?

[Ryan Thompson, Analyst]

Yes. Maybe just a follow-up, not related to taxes. But you guys have a few mines that are currently on care and maintenance. We're obviously in a much better precious metals price environment. Is there any a thinking of evaluating restarts at any of those operations? Or if you could just provide an update there as well?

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

Yes. It's kind of nice just to be producing silver and gold in the form of doré bars. It's a great place for a mining company to be. It's very simple, very cost effective. It's -- our business is much simpler than it used to be. Going back to 2017 when we had 7 mines operating, of which 4 of them produced concentrates, and we're always at the mercy of the refineries -- or not the refineries, but the smelters. And we're such a small lead and zinc producer anyways that we had really virtually no impact and no influence on really the economics. And so if you're losing money on your base metals and you're hoping you would make enough on the precious metals just to make up for your loss in the base metals, then it's, quite honestly, it's not a particularly great business. You need these mines producing 2, 3, 4, 5x the amount that they're currently producing in my view, and that's going to take exploration. And that exploration is possible. Those assets, in my opinion, have huge exploration upside. It's just our focus over the last few years has been on the 3 core assets that we're currently operating. And we are trying to spend some money at Del Toro and La Parrilla in 2021 to continue on with the geological upgrades for those projects, but I'm not sure whether they'll be coming back into production under our portfolio. Only time will tell.

[Operator]

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 N. Neumeyer, Founder, President, CEO & Director]

Well, thanks for everyone's time today. We're starting off the year with a pretty positive note. Metal prices, in my view, are going to do quite well. And 2021, the environment is ripe for continued -- this continued bull market to keep moving metals higher, and we're going to obviously be taking advantage of that throughout the year and hoping to build the business over the next 2 to 3 years. And as it says in the news release, our objective with the current assets is to be a 30 million ounce silver and gold producer by 2023, and that's very much our focus. And we think we can get there with our 3 producing mines. If there's any other activity on top of that, then stay tuned and watch for our news, and best wishes for 2021.

[Operator]

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