First Majestic Silver Corp

TSX:FR

Earnings Call Transcript 2021-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the First Majestic Silver Fourth Quarter Production 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, sir.

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

Thank you, operator, and thanks for everyone who's dialed into our first conference call of the year. It's been quite an interesting 2022 -- 2021, which I'm looking forward to talking about. We have a variety of people on the line from management spread around the world with Connie Lillico, our Corporate Secretary; with Andrew Poon, our Interim Chief Financial Officer. We have Steve Holmes, our Chief Operating Officer. We have Todd Anthony, our Vice President of Corporate Development. We have Jill Arias, VP, Marketing; and Ramon Mendoza, VP of Technical Services. But before I get into my presentation, I'd like to pass the call back to Connie Lillico.

[Connie Lillico, Corporate Secretary]

Prior to us beginning today, I'll read our disclaimer on 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 COVID-19 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 any 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 N. Neumeyer, Founder, President, CEO & Director]

Thanks, Connie. So just getting into some of the Q4 highlights as news release this morning, I'm hoping everyone on the call has had a chance to look at the company's news release. We did have a record fourth quarter, a record in the history of the company. We produced 8.6 million ounces of silver equivalent, which was a 17% increase. That was made up of 3.4 million ounces of silver and 67,411 ounces of gold, which amounted to a 24% increase. The San Dimas mine had a record quarter, quite honestly, due to grades, produced 4 million silver equivalent ounces, 2.2 silver ounces and 23,000 -- just under 24,000 ounces of gold, representing a 17% increase, which is very nice to see. Santa Elena, we were ahead of schedule getting Ermitaño online. We have telegraphed to the market over the last year that Q1 was going to be really the beginning of production there, but we are fortunate enough to be able to get some ounces produced from Ermitaño. And it produced well the mine itself, including Ermitaño produced 2 million silver equivalent ounces, including 426,000 ounces of silver and 19,800 ounces of gold, 86% increase in production, which is pretty amazing and unexpected. We didn't expect to see that come through that quickly. It was really refreshing, and it really sets up 2022 as a pretty fantastic year. A couple of other things we really needed to focus on was Jerritt Canyon, the tailings dam, it was really necessary to get that built before winter came in, and we came in slightly under budget and right on time. So it's now being operated as far as I know, but it's completed. And without that, obviously, the [indiscernible] some challenges over the winter, but it was done $13 million investment, which did it hit our costs during those couple of quarters. But those costs are now gone, of course. And we ended the year off with 21 drill rigs active throughout the entire company. So going into some highlights before we get into the question and answers for the year, we had a record year, as I said, 12.8 million ounces of silver, which was an increase from 11.6 million ounces the year before. And then gold ounces, of course, is really the big increase. We saw 192,000 ounces of gold produced compared to just over 100,000 ounces in 2020. We also successfully completed the acquisition of Jerritt Canyon. As many people know, it was our first investment outside of Mexico in the 19-year history of the company. It's great to be in the San Nevada. We've got a great mine there, which is going to grow over time. It used to be the largest mine in the state of Durango -- in the state of Nevada. And we're expecting it's going to grow substantially over the next couple of years with the proper type of investment and mostly focused on exploration and development. The -- also the LNG plant at Santa Elena was converted over from diesel quite successfully. It took some time to get that built and slightly behind schedule due to COVID situation, but it finally got up and running in April. And we know now -- we can now be quite proud that most of the energy from Santa Elena is actually now coming from LNG. We're actually looking to expand it even further in order to take advantage of some of the power needs at Ermitaño. Another interesting tidbit of information for those who follow our retail store. We do sell our own silver over our e-commerce website. People should go ahead and have a look at the different products we sell. But we had a record year. We actually had revenues of $10.9 million through our e-commerce website and our average selling price for those ounces going out the door was $31.29 (sic) [ $31.21 ]. So quite a successful year for that department [indiscernible], and we're looking forward to another pretty nice-looking target with the Reddit anniversary coming up in the next few weeks, I look for a nice sale being announced over the e-commerce website. Going forward, for 2022, we're expecting a record year with what's happening in Ermitaño, what's happening in Jerritt Canyon, where we've guided today production between 32 to 35 million silver equivalent ounces, which consists of about 12.2 to 13.5 million silver houses and 258,000 to 288,000 gold ounces. So it's going to be a pretty exciting year for the business. And we're always looking for other ways to grow as well. There's a couple of major projects coming in. We are spending about $207 million. And the 2 projects, really the biggest one is really the dual filter processing system at Santa Elena, which will help us improve recoveries of the silver there, which is something that is obviously quite needed, including the fine grinding technology. So -- and also the last thing before I get to questions, is a drilling program. We had a record amount of meters drilled in 2021, 227,000 meters of drilling, that's a lot of drilling, and a lot of people, a lot of rigs are involved in that program. And this year, 2022, we're actually expecting about 320,000 meters of drilling spread over all assets with the focus at Jerritt Canyon, of course, but also focusing on San Dimas and also some of the regional areas around the Santa Elena mill, hopefully, finding another look like [indiscernible] over the next couple of years, which would be just wonderful for that asset. So that's about it for my presentation. Why don't we go to questions?

[Operator]

[Operator Instructions] The first question comes from Heiko Ihle from H.C. Wainwright.

[Heiko Felix Ihle]

A very warm welcome to Andrew.

[Andrew Poon]

Yes. Thanks, Heiko.

[Heiko Felix Ihle]

Let's talk a bit about Jerritt Canyon. And let me preface all of this with the fact that I think it's pretty cool you've got 9 rigs operating at site. Your production at Jerritt was down 10%, which in the grand scheme of things is obviously pretty much irrelevant. But to clarify, the weather in January thus far seems to have been pretty good with limited snow actually just looked it up online. So I assume these issues should subside. And more importantly, maybe just provide a bit of color on the changes that you've made to site in the last couple of months and just give a few examples of that.

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

Sure. The guidance for the year 2022 is an increase, as you can see in the news release, 116,000 to 129,000 on ounces of gold. But to get into specifics, I'll pass that question over to Steve.

[Steven C. Holmes, Chief Operating Officer]

Okay. Thank you, Keith. Yes, Jerritt Canyon in '21, probably the biggest change that we made was the leadership team there. We brought in a large group with a lot of technical and management talent that is basically managing that asset and working pretty hard on 2 main areas. One is environmental compliance, which Jerritt has a history of, and we've made great progress on that. And the other one is just the production improvements. And the issues that we had mainly late in December, middle December with the storms have been mostly all resolved. We're able to get the throughput up and back online in early January. And I think we're going to be off to a good start to see this growth expansion in 2022, still going to be a very busy year and a lot of investment in gas handling off the roaster to make sure we can take care of the mercury issues that we have there, but we've made a lot of progress, and we expect that team to continue to make progress in 2022.

[Andrew Poon]

The roaster was also down part of the quarter. It was -- the roaster comes down twice per year for approximately 2 weeks each time. We're hoping to reduce those downtimes in 2022, but the downtime did affect Q2 and Q3 by about 2 weeks. It's about a $5 million investment that we made, and we've actually made -- during that shutdown, we were able to make a number of other improvements that is actually having quite the benefit now for us is because it was quite the advantage to shut it down what we did. The pipes that were frozen due to the winter, these pipes were not properly protected for, and they weren't properly winterized. That is now all been mitigated. So things were put in place to prevent those freezing situations to occur in the future. So if we do get another major weather event like that, we will have the same impact.

[Heiko Felix Ihle]

Fair enough. And I think you started answering my second question already in your answer to the first one. But -- and just following up on it though a little bit. In your outlook, you have a $96 band between the high and the low end of guidance for all-in sustaining costs for Jerritt Canyon. And as for a site in particular, can you maybe just provide us a little bit of color on the factors that might sway towards one end or the other?

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

Manny, you there?

[Ramon Mendoza Reyes]

Yes. Yes, Steve -- it's Keith. It -- so it's a factor of 2 things. Our denominator. We -- it's going to be a lot of grade driven depending what the production is. Our deviser is going to be fluctuating and that's really the main driver of the range and the all-in sustaining -- the investments going into all-in sustaining are really some of the compliance projects that we have in the capital budgets. They're well defined. So we're not expecting a lot of changes in those. Detailed engineering and scopes have been put in the budget. So the projects should not have much deviation to the numbers in the capital budget right now.

[Operator]

The next question comes from Ryan Thompson from BMO.

[Ryan Thompson, Analyst]

Maybe I'll just start with a question on inventory. I think you had a fairly sizable buildup in Q3. Should we be plugging that inventory in as sales figures in Q4? Just how should we be thinking about that?

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

Manny, How about I give that one to you as well.

[Ramon Mendoza Reyes]

Yes. So there was some inventory, obviously from the down at Jerritt and just also timing of when some of these were sold. So yes, the answer is those would have been fleshed out in Q4.

[Ryan Thompson, Analyst]

And same on the silver side of things?

[Ramon Mendoza Reyes]

Yes, Keith also can confirm this, but I think most of the inventory silver has been priced and fleshed out in Q4.

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

Yes. If you're talking about the actual silver held over the quarter, Ryan, yes, all of that silver was sold in Q4.

[Ryan Thompson, Analyst]

Okay. Perfect. That's helpful for our modeling purposes? And then maybe just one other question on Jerritt Canyon. I know when you acquired the assets a few quarters ago now, there was some talk about maybe potentially toll milling, other material within the area. Could you just give us an update on what the latest thinking is there?

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

We're still investigating it, and it's not in our budget. We haven't gotten any of our production in our guidance that is toll milled. The issue is we don't want to be affecting our own production by bringing in ores that aren't compatible with our other ores. So the sulfur content is quite critical and then we don't want to be doing modifications to the mill just for the sake of having some other type of ore coming through it. So we are very much focused on filling this mill with our own ore. That's why we've joined the SSX mine and the Smith mine underground. That has now completed. That was a full effort that took most of the year to accomplish. And that's going to really open up these 2 mines and make it much more efficient. And also the drilling that is into some of the old open pits that were operated back in the '90s has been quite successful. And we're looking to bring at least one pit online in the mid- to late 2022, hopefully, maybe even another one. But the whole focus is working with our own property. This is a very large land package that's extremely underexplored and underdeveloped. And we think we can fill the mill ourselves with our own ore by 2024. And that's the focus. If some other toll treating ore just happens to come along the way and then fit into the mill's requirements, then we could do a deal, but there's nothing pending.

[Operator]

The next question comes from Craig Hutchison from TD Bank.

[Craig Hutchison, Research Analyst]

Question [indiscernible]. In terms of your guidance, 7.4 to 8.2 million ounces. Can you give some context around grades? I know you had good grades in Q4. Could we expect sort of similar grades to 2022? Or is it more like a reversion back to the reserve level?

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

Steve, do you want to grab that one?

[Steven C. Holmes, Chief Operating Officer]

Yes. The grades that we're looking are pretty similar, slightly higher on silver and a slightly higher on gold, but they're pretty similar on the grades. And so we're going to be doing most of our work in the Fernando area. We've kind of consolidated back to the Jessica, Victoria, Regina veins, which have some of the better grades and bigger stopes for long-hole stoping. So that's what's driving the outlook for 2022 for San Dimas.

[Craig Hutchison, Research Analyst]

Okay. So it'll be similar to Q4, yes. How about throughput? Do you guys sort of expect to get back to around 2,400 tonnes a day or I think more on the lines of 2,200.

[Steven C. Holmes, Chief Operating Officer]

Yes. Our intention is to go above 2,400 tonnes a day in 2022. Most of that is contingent, not so much on the plant, but it's really about the mine output. And that's where a lot of our effort is focused is improving the efficiencies of our long-hole drilling, go into the bigger veins that I just mentioned. That kind of activity, which is helping push up the ore deliveries and the ore flow. We're targeting about 2,500 tonnes a day on ore flow in 2022.

[Craig Hutchison, Research Analyst]

Okay. And maybe a similar question at La Encantada. I know for the second half of 2021, I think you guys are targeting close to 150 grams per tonne of silver, came in a little bit light in Q4. In terms of 2022, should we expect the production to be driven largely by higher throughputs? Or do you guys expect to kind of get back closer to that H2 guidance around 150 grams a tonne?

[Steven C. Holmes, Chief Operating Officer]

Yes. So we're going to continue to push volume there. We're seeing lower grades at La Encantada. Our targets are around 140 to 145-gram per tonne range for 2022. La Encantada is -- because of the block cave operation there, we're actually caving a lot of old workings and backfill and things like this. So being able to accurately model the grade and the quality of the ore, it's really challenging. One thing we are doing in La Encantada 2022 as we're moving towards a new resource called [indiscernible]. And we expect to bring that in later in the year. It is a higher-grade resource, but it does have some issues around recovery. So it's a bit of a trade-off, but certainly quite a bit higher grade. So final answer, we're targeting the 140 to 145-gram per tonne ore flow from La Encantada, but we will keep that throughput rate above 3,000 tonnes a day.

[Craig Hutchison, Research Analyst]

Okay. Great. And maybe one last question for me, a follow-up to a question to something Keith mentioned earlier. I think you mentioned that you're looking to bring an old pit online in 2022 with Jerritt Canyon. Is that in your guidance already? Or is that upside?

[Steven C. Holmes, Chief Operating Officer]

No, the new -- it's not a pit. It's actually an underground mine. It's called West Gen. And in the second half of the year, the intention is to reactivate West Gen. We have to go through a permitting process and clearance by [indiscernible] because it's a suspended older underground operation. We will continue to do some surface mining in areas that have the proper grade in the area. But the main difference is we'll get ore from -- in the second half of the year from 3 sources: Smith, SSX and then West Gen.

[Operator]

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

[Don DeMarco, Analyst]

My question has to do with Santa Elena. So I'm just looking at the 2022 guidance and seeing costs improving. And this is a mine that's seen some volatility in the cost over the last year. So it's nice to see the improvement. Can you talk about the factors that contribute to these cost improvements? I mean, obviously, Ermitaño plays into a factor, but if you could add a little bit more color to this would be appreciated.

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

Steve, why don't you grab that one as well?

[Steven C. Holmes, Chief Operating Officer]

Yes. So Santa Elena in 2022, the big impact is Ermitaño, the silver equivalent grade at Ermitaño is nearly double Santa Elena. So obviously, we're going to bring in the volume of Ermitaño ores. The fixed cost structure at these mines in Santa Elena has no exception as such that these kind of deviser improvements when you get your ounces up has a profound effect on the cash costs, all-in sustaining costs, et cetera. So that's the biggest factor for 2022. It's just the quality of ore that's feeding into the plant is significantly better for Santa Elena and thus, the leverage on cash cost is quite good.

[Don DeMarco, Analyst]

Great. Okay. And I'm seeing in Q4 recoveries eased a little bit, but I guess the quality of the ore just kind of overcomes that slight easing and recoveries? Or is that supposed to change in 2022?

[Steven C. Holmes, Chief Operating Officer]

Yes. So it's a great question. The Ermitaño ores compared to Santa Elena ores are different, the Ermitaño ores obviously have a lot more gold content, which is really nice because that's much more valuable. But to liberate the recoveries on those gold values and the silver values at Ermitaño, we actually have to grind finer, like around 30 microns. So one of the things Keith mentioned earlier is we have a major project in Santa Elena this year that's well underway, which is called the dual-circuit project, and we're going to add a leach tank, another CCD and we're going to put in a new high-capacity advanced Metso Outotec press filter for the tails. And that investment should be up and operated by the fourth quarter of 2022. It's going to allow us to batch process Ermitaño ores and then flip over to Santa Elena ores. So when we're batch processing Ermitaño, we're grinding finer, we reduced throughput because we're finding that sweet spot in terms of value of throughput, recovery grade. And then when we do Santa Elena ores, we're going to increase throughput, we're going to open the grind up a bit and find the Santa Elena ore sweet spot, if you want to call it that. So that's the plan for 2022. And as we get into the Ermitaño ore body, as we develop more production levels and our target is to get to 5 active major levels in Ermitaño, we will dial in on how we process these 2 ore bodies through this single plant.

[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, everyone, for joining today's call. I hope it was full of information, and you learn something today. If there's additional questions or information you'd like to receive from the company, please feel free to contact us by e-mail. Many of you know who we are anyways, but Todd Anthony, [indiscernible] myself, or our website, full of information as well. So look forward to further communication with you throughout the year, and let's hope for a good 2022. Thanks again. Have a great day, everyone.

[Operator]

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