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First Majestic Silver Corporation (NYSE:AG)
Q4 2019 Earnings Call
Jan 21, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

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]

I would now like to turn the conference over to Keith Neumeyer, President and CEO. Please go ahead, sir.

Keith Neumeyer -- President and Chief Executive Officer

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 on 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 in 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 Neumeyer -- President and Chief Executive Officer

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 had great success getting the HIG mill up and running at Santa Elena, which is the first HIG of its kind operating in all of Latin America. It's really improving that operation, and is 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 the 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 two biggest -- or our three biggest mines. So 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 five years. We are projecting a little bit higher costs 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 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 it's just us being conservative. Of course, the geos and all the engineers inside her 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 three years ago we had seven mines operating. And as we had very successful acquisitions of our two last purchases, the Santa Elena and San Dimas mines, those two 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 two mines. And unfortunately, the smaller mines which were producing only really around 1 million ounces or less each, 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 shut down the La Guitarra mine in 2018. We shut down the La Parrilla mine in late 2019. Del Toro is now also in its wind-down mode and will be shut down in the next couple of months. So we will be reporting any lead or zinc production in 2020. All our production will be from the three 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 three mines just gold and silver in the form of dore 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 sites. The HIG mill just arrived in Mexico a couple of weeks ago. It will be transported to site. The engineering is almost done. We hope it'll be breaking ground in the next couple of months. So, on the rebuilding of this mill, it hasn't had any investment for likely 30 years. So it's likely it could 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.

Ermitano is another big focus for us at Santa Elena. This is a large discovery that we made a couple of years ago. There'll be another 43-101 resource estimate coming out in early 2020, we hope around March or April in order to show drilling that's taken place throughout the year, and there is substantial drilling that obviously has occurred.

We're now running an added [Phonetic] into the ore body. We started that about two, three 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 a substantial amount of money, doing five levels of underground development before we take out the first ounce of silver. And this is just a prudent way of doing things. It does show up on our costs, 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 at Santa Elena because it just upgrades itself from [Indecipherable] much greater than the current grades that are being fed from the heaps which is the blending operation that goes on with that operation. So Ermitano will replace the heap feed, increasing the grades substantially at that operation. So that won't take place, unfortunately until end of the first quarter in 2021 so we stand today and profit later. But it's going to be pretty exciting when we get Ermitano 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 as a high grade area, particularly silver, but it was shut down 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, and we've been spending the last year redeveloping the old Tayoltita mine. There's still some work still under way, 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 valves, which is a big cost. And when you eliminate steel valves, you not only eliminate cost, but you also reduce the amount of reagents and cyanide used in the process because the iron obviously absorbs these chemicals and you have to use more. So it's going to be great for us to get the system up and running.

Santa Elena -- we did get the 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 objectives internally to get to, and we'll see if we're successful 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 four years ago. We had the two 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 under way -- 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 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.

Questions and Answers:

Operator

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

Jake Sekelsky -- Roth Capital Partners -- Analyst

Hey, Keith and team, thanks for taking my questions.

Keith Neumeyer -- President and Chief Executive Officer

Okay. No problem.

Jake Sekelsky -- Roth Capital Partners -- Analyst

You touched on this a bit, but can you 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 Neumeyer -- President and Chief Executive Officer

Yeah. We're updating the 43-101 now. There has been significant amount of drilling that's gone on at San Dimas over the last 18 months since we acquired that mine in May of 2018. And then since we -- and we've 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.

Jake Sekelsky -- Roth Capital Partners -- Analyst

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

Keith Neumeyer -- President and Chief Executive Officer

Yeah. It's H1, yeah. First half, we'll get that up.

Jake Sekelsky -- Roth Capital Partners -- 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 additional upside to the guidance you put out this morning?

Keith Neumeyer -- President and Chief Executive Officer

Yeah. San Dimas spend in 2020 does not show up as any benefit for 2020 which is -- you can say, well, why not, but it's just a conservative approach. The Ermitano also -- it doesn't show up as any benefit. The LNG does show up only for two months in the budget.

Jake Sekelsky -- Roth Capital Partners -- Analyst

Got it. That's all on my end. Thanks, guys.

Keith Neumeyer -- President and Chief Executive Officer

Yeah. 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

And our next question is from Adam Graf with B. Riley. Please go ahead.

Adam Graf -- B. Riley FBR -- Analyst

Thanks. Thanks for taking my questions. Just a couple of quick ones here. Can you guys give us the capex split between the three operations?

Keith Neumeyer -- President and Chief Executive Officer

Yeah, 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 would like, for example, exploration or development, anything specific? Because there's quite a lot of line items.

Adam Graf -- B. Riley FBR -- Analyst

Yeah. There was a lot of moving parts. A lot of growth capital, I know. So I was just hoping for a split. That's OK. I'll follow up with Todd on that.

Keith Neumeyer -- President and Chief Executive Officer

I can throw some numbers out to you. Like at Santa Elena, $5.2 million, exploration; San Dimas, $10.4 million, exploration; you got Ermitano development of almost $13 million to build those five levels in preparation for mining in 2021. So there is a good chunk there going into mine development, right, to bring Ermitano online.

Adam Graf -- B. Riley FBR -- Analyst

But just in regards to Ermitano, is most of that development spend going to be completed in 2020? It seems to be hard to believe you can get five levels completed in one year.

Keith Neumeyer -- President and Chief Executive Officer

It won't. No, it won't be completed in 2020. Our 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 Graf -- B. Riley FBR -- Analyst

So by the end of 2021, you should be pretty much there as far as the initial capital at Ermitano?

Keith Neumeyer -- President and Chief Executive Officer

Yeah. Exactly.

Adam Graf -- B. Riley FBR -- Analyst

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 at 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 from 3,000 tonnes a day down to almost 2,000 tons a day.

Keith Neumeyer -- President and Chief Executive Officer

Yeah. So the budget's calling for 2,500 tonnes per month for the entire year. And it's got to do with just the difficulty of this breccia [Phonetic]. These are breccia pipes. Caving is 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 year ago, you look at 2018 compared to 2019, you can barely compare the two. 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 two pretty big back-to-back quarters for that operation.

Of course, we're crossing our fingers for that to continue. But because you can't drill these caves, it's almost impossible to really get an average grade of the entire structure.

Adam Graf -- B. Riley FBR -- Analyst

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

Keith Neumeyer -- President and Chief Executive Officer

Yeah. There is -- as you probably know, we launched an ATM program in early 2019. Nothing crazy. But we did two back to back programs of $50 million. They're not finished. And 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 that. But we're very nimble and not very aggressive at all.

Adam Graf -- B. Riley FBR -- Analyst

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

Keith Neumeyer -- President and Chief Executive Officer

No warrants. There was stock options. There was a round of stock options that expired on I think January 5 or something -- 4, I mean, [Indecipherable] January 4, 2020. Most of the employees 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 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 Graf -- B. Riley FBR -- Analyst

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 Neumeyer -- President and Chief Executive Officer

I don't have it at the tip of my fingers. But I might be able to find it before the call is over.

Adam Graf -- B. Riley FBR -- Analyst

All right. Very good. Thank you for your detailed answers. I appreciate it.

Keith Neumeyer -- President and Chief Executive Officer

Okay. And also, Todd can follow up with you as well.

Operator

Our next question is from Andy Schopick [Phonetic], a private investor. Please go ahead.

Andy Schopick -- Private Investor

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

Raymond Polman -- Chief Financial Officer

Yeah, it's roughly $6 million.

Andy Schopick -- Private Investor

Okay. By 6 million, we're talking US dollars, right?

Raymond Polman -- Chief Financial Officer

That's right.

Keith Neumeyer -- President and Chief Executive Officer

Yeah, Andy, I'd like to step in for -- Andy, let me just finish the question as well. When it comes to La Parrilla and Del Toro, the Company has made 10s of millions of dollars in profit over the last years on those two 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 the two very large mines [Indecipherable] still being grown and expanded. So, despite the fact that we were producing slightly less ounces in the form of silver and gold in 2020 versus 2019 -- and that's for three mines versus seven, 2021 and 2022 are going to be pretty exciting times for us with pretty substantial increases in production just from those three operations.

So we made the call to shut down those other two mines -- 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 the business, and I think it's good business sense to continue 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. But 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 two 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 turning back on when the timing is right to do that. But in the meantime, we're going to keep the communities running.

Andy Schopick -- Private Investor

That's fine. And thank you for the additional color, Keith. 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 streaming 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 to 1, gold to silver -- silver to gold...

Keith Neumeyer -- President and Chief Executive Officer

$600.

Andy Schopick -- Private Investor

Is that correct?

Keith Neumeyer -- President and Chief Executive Officer

$600.

Andy Schopick -- Private Investor

Okay. And is this in perpetuity?

Keith Neumeyer -- President and Chief Executive Officer

Yes. Life of mine.

Andy Schopick -- Private Investor

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

Keith Neumeyer -- President and Chief Executive Officer

Yeah. We're debating in the room whether we have that number or not. But you're asking for numbers that aren't yet public...

Andy Schopick -- Private Investor

That's what I was...

Keith Neumeyer -- President and Chief Executive Officer

[Speech Overlap] Yeah, the Q3 number, you can look at the financial statements and that's going to be -- you can do the math. You can just multiply the production by 25% and divide it by 600.

Andy Schopick -- Private Investor

I got it.

Raymond Polman -- Chief Financial Officer

I'll make an attempt -- we'll make sure that the financial statements detail what that number is.

Andy Schopick -- Private Investor

Yep. Okay. Thank you very much.

Keith Neumeyer -- President and Chief Executive Officer

Andy, the interesting thing about this stream is that the old stream was based at $4.11 silver and that's today at $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 the 75% is all ours.

Andy Schopick -- Private Investor

Can you quantify that any further, on the gold?

Keith Neumeyer -- President and Chief Executive Officer

I thought I was pretty specific there, Andy.

Andy Schopick -- Private Investor

Okay. I misunderstood something. Thanks.

Keith Neumeyer -- President and Chief Executive Officer

Okay.

Operator

[Operator Instructions] Our next question is from Alexander Scharp with Bybrook Capital. Please go ahead, sir.

Alexander Scharp -- Bybrook Capital -- Analyst

Okay. Thanks very much for taking the question. I've just got two 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 just 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 we can sort of expect any impairments or writedowns or anything like that associated with the closed assets? Thank you.

Raymond 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 four weeks.

Keith Neumeyer -- President and Chief Executive Officer

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

Alexander Scharp -- Bybrook Capital -- Analyst

Sure.

Keith Neumeyer -- President and Chief Executive Officer

They're telling...

Raymond Polman -- Chief Financial Officer

Yeah. 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 Neumeyer -- President and Chief Executive Officer

And also just another comment I would like to make is that these assets were written down a couple of times. When silver's 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 [Indecipherable]. 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 at that obviously and we had to take the writedowns. And so -- I'm not sure how much more there is to write down, but, honestly.

Alexander Scharp -- Bybrook Capital -- Analyst

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

Keith Neumeyer -- President and Chief Executive Officer

Yeah, and you're right on your comments. There is still some left. I don't know the number [Indecipherable]. Okay. It's -- there is some left. 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 was filed. It's got a shelf life of 25 months. So anytime during that period of time, the Company can take advantage of whatever kinds of mechanisms it requires or [Indecipherable] requires to take advantage of.

Alexander Scharp -- Bybrook Capital -- Analyst

Sure. Thank you.

Keith Neumeyer -- President and Chief Executive Officer

Okay. And we're going to wrap up -- well, sorry?

Operator

Pardon me, sir. We have a follow-up question from Adam Graf with B. Riley. Please go ahead.

Keith Neumeyer -- President and Chief Executive Officer

Okay.

Adam Graf -- B. Riley FBR -- Analyst

Sorry. Thank you for taking my follow-up. Just one more thing. It occurred to me -- regarding Ermitano, is the design that you guys are currently planning on -- is that for cut and fill or is that a longhole stoping design?

Keith Neumeyer -- President and Chief Executive Officer

A combination of both.

Adam Graf -- B. Riley FBR -- Analyst

Can you give me a percentage?

Keith Neumeyer -- President and Chief Executive Officer

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

Adam Graf -- B. Riley FBR -- Analyst

All right. Looking forward to the 43-101. Thank you, Keith.

Keith Neumeyer -- President and Chief Executive Officer

Okay. You're welcome.

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

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Keith Neumeyer -- President and Chief Executive Officer

Connie Lillico -- Corporate Secretary

Raymond Polman -- Chief Financial Officer

Jake Sekelsky -- Roth Capital Partners -- Analyst

Adam Graf -- B. Riley FBR -- Analyst

Andy Schopick -- Private Investor

Alexander Scharp -- Bybrook Capital -- Analyst

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