Gatos Silver Inc.(GATO) Q4 2020 Earnings Call Transcript

Gatos Silver Inc. (GATO -0.31%)
Q4 2020 Earnings Call
Mar 29, 2021, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen thank you for standing by and welcome Gatos Silver Q4 and year-end 2020 earnings call. [Operator instructions] I would now like to hand the conference over to your speaker today Mr. Stephen Orr, CEO. Please go ahead.

Stephen Orr -- Chief Executive Officer

Thank you. I'd like to welcome everyone to Gatos Silver year-end and Q4 2020 earnings call. Before I get started, I just want to remind participants on this call that I will be making forward-looking statements with regard to future events. And by their very nature, they're subject to some degree of variability.

So turning to Slide No. 3. Our initial public offering in October of 2020 raised 173 million of proceeds to continue adding value to Gatos Silver's Cerro Los Gatos mine in the Los Gatos district. In March, we completed the purchase of 18.5% additional interest in the Los Gatos district and we now are 70%b owner of the entire district.

And we're now turning our attention to district-scale resource growth potential. Gatos Silver has the second-largest mineralized package of our in-production peers at 103,000 contiguous hectares. The package spans a distance of about 60 kilometers along the mineralized trend, and we've reactivated drilling at Cerro Los Gatos and our hundred percent-owned Santa Valeria project and soon at Esther, which is the zone that's closest to Cerro Los Gatos. And I'll speak more on that later in this presentation.

But we're not just an exploration company. We've demonstrated that we know how to build and operate mines and Cerro Los Gatos was built on time and below budget and we capitalized it properly knowing that we're not just building a mine but we're developing an entire district. And we think this is already paying dividends. The processing plant is operating at its 2,500 tonnes per day design rate.

And as of January, the underground mine achieved its 2,500 tonnes per day design rate. So we believe the commissioning has gone quite well. Given the challenges, Gatos Silver has had to prevent the COVID-19 outbreak at the Cerro Los Gatos mine. Turning to Slide No.

4. We devote a significant amount of attention to environmental, social, and governance factors at Los Gatos and have recognized its importance for the last 10 years. All of our achievements would not have been possible without the support of the regional government, regulatory agencies, and surrounding communities. And we recognize that it's essential to conduct our operations in a manner that protects our employees' safety, does not harm the environment, and ensures that the local communities benefit, not only from employment opportunities, but also through educational assistance, medical care support, and provision of sustainable clean water.

And we're very proud of our safety record at the mine. Through Q1 of 2021, our lost time injury frequency was zero. Over 99% of our employees reside in Mexico, and 60% of them reside in Chihuahua state. This devotion to improving the lives of those impacted by our project has been recognized by the Mexican government and local communities and we have never had any opposition to the project.

Turning to Slide 5. This is a summary of our performance during 2020. Given the challenges of COVID-19 management, we were relatively pleased with Cerro Los Gatos' performance last year. And I'll speak more about this performance in detail later in the presentation.

Turning to Slide 6. Despite interruption by Mexico's government-mandated suspension for COVID-19 during April and a portion of May last year, we did achieve record production of 652,739 ore tonnes. We also achieved record silver, zinc, and lead recoveries to the processing plant, and the third and fourth quarters of 2020 were profitable. Key to this achievement was effective COVID-19 management at the Cerro Los Gatos project.

All of this positions the company to take advantage of increasing investor interest in silver and silver equities and allowed us to successfully complete an initial public offering in late October of 2020. Turning to Slide 7. This covers the 2020 mine operations. This is a fully mechanized mine that uses long-haul smelting and mechanized cut and fill mining methods.

Following the COVID-19 mine suspension in April and May, we increased the mine production rate at a more moderate rate to ensure that we could maintain COVID-19 prevention protocols. Irrespective, we achieved our 2,500-tonne per day desired target in January of this year. As we increased the units in terms of more tonnes and metal ounces and pounds, the unit costs are getting closer to those expected in the feasibility study. Slide 8, the standout performance came from our processing plant.

This plant is fully instrumented with an on-stream analyzer that is monitoring silver, lead, and zinc recovery in real time during the concentrate production and will automatically adjust reagent additions to adjust to the changing conditions to maximize recovery. I call your attention to the table in the right-hand side of this chart. This shows the improvement of our metal recoveries over the four quarters of 2020. The silver recovery now exceeds the expected recovery from the feasibility study.

Zinc recovery has achieved our expectations, and lead recovery also now has exceeded expectations. I would now like to introduce Roger Johnson, chief financial officer, to present our 2020 financial results.

Roger Johnson -- Chief Financial Officer

Thank you, Steve. I am on Slide 9. For 2020, our loss from continuing operations was $35 million or $0.80 per share. You can see from this information that half of the loss was from the equity loss in the Los Gatos joint venture.

Adam will discuss the Los Gatos joint venture results in a moment. As Steve mentioned, Los Gatos joint venture was profitable in the third and fourth quarters of 2020 so I expect income in the LGJV for 2021. As for our operating expenses, as we discussed in our recent Investor Day presentation, exploration of the Los Gatos district is increasing. In addition, we spent a modest $800,000 in 2020 for the non-Los Gatos joint venture activities at east Santa Valeria and for maintaining a exploration staff.

Our general and administrative expenses were almost $8 million in 2020 as we have higher costs associated with becoming a public company. These include legal, consulting costs, additional personnel we've added, higher directors' fees and stock compensation, and higher insurance costs. The arrangement fees that you see here are similar to interest costs and they relate to dollar-provided loans in the Los Gatos join venture. A substantial portion of such fees will not -- will no longer be incurred with the repayment of that working capital facility that we announced earlier this month.

The interest expense you see here was for a convertible note provided by our majority shareholder, Electrum. This note was converted to equity as part of our IPO and therefore [Audio gap]financial result. Here we have a table for the financial results for the year ended 2020. It's important to note that this is on a 100% basis.

Throughout 2020, Gatos Silver's share of these operating results was 51.5%. During the fourth quarter of 2020, this is our second consecutive profitable year with 2.9 million income at the Los Gatos joint venture. We had 121.5 million of sales for the year ended 2020. This was comprised of approximately 21,000 tonnes of lead concentrate at average rate of nearly 5,300 g/t silver and nearly 59% lead.

This also included nearly 28,000 tonnes of zinc concentrate at average rate of 619 g/t silver and 55.6% of zinc. The average metal prices realized during the year were nearly $20 per ounce silver and about $1.03 in zinc for the two primary table metals of this operation. Turning to operating expenses of 126 million for the year ended 2020, this has primarily consisted of 65 million in costs of sales; 45 million in depreciation, depletion, amortization; nearly 10 million of G&A expenses; 3.4 million of non-recurring costs related to the COVID-19 shutdown in April and May of 2020; 2.1 million of royalty expenses; and a small component of just under a million for exploration expenses during the year. Our exploration expenses were reinitiated in earnest in December when we commenced the CLG definitional drilling program as previously announced in prior press releases.

Other expenses in the year consisted about 12.5 million of interest expense, nine -- nearly 9 million of noncash arrangement fee expenses, and about a one million dollar foreign exchange loss. Altogether, this resulted in a net loss for the period of about 27.7 million for the Los Gatos joint venture again on a 100% basis. And with that, I will turn it over to Steve Orr for our next slide.

Stephen Orr -- Chief Executive Officer

So turning to Slide No. 11. 2021 will be a year of optimization at the Los Gatos project. We'll be doing a number of sustaining capital projects to improve Cerro Los Gatos' efficiency and ability to sustain its production targets.

We'll be building a paste backfill plant to replace the cemented rock fill backfill that's currently used. The paste fill plant will directly inject tailings into open voids in the mine providing a stronger fill product reducing the amount of tailings placed in the surface tailings impoundment by about 50% and increasing the truck haulage capacity for more ores. We'll be adding another lift to the tailings impoundment. The construction of the paste backfill plant will meaningfully reduce the frequency of additional Los Gatos facility in the future.

The mine had a high geothermal gradient which is not uncommon in underground mines. Last summer, we commissioned the first surface refrigeration plant for the northwest zone of the Cerro Los Gatos deposit. The intake air during the warmer seasons is chilled to maintain a comfortable ambient air temperature in the mine environment. This proved its efficacy in the northwest zone, and we will now build a second plant for the central zone.

And by the way, these are the first surface refrigeration plants installed at an underground mine in Mexico. As previously released, we expect to produce between seven and a half and 7.9 million ounces of silver in 2021 and between four and a half and 5,000 ounces of gold between 40 and 42 million pounds of lead and 49 and 52 million pounds of zinc at an all-in sustaining cost of between $17 to $17.50 per silver ounce. This guidance is conservative and it assumes we will be maintaining all our COVID-19 prevention protocols throughout 2021, which does not hinder the productivity in the mine and increase our costs. All employees continue to be tested when they return from their break for their 20-day work rotation, and we still consistently have employees test positive.

Those who test positive return home before coming to the site, and we somehow have to cover for their absence. While these stringent prevention protocols hinder productivity and increased costs, they've allowed us to continue operations. And we have never had a COVID-19 outbreak at Cerro Los Gatos. Turning to Slide number 12.

In terms of exploration, this -- and you see on this map, the outline of the intersecting rectangles shows our 103,000 contiguous hectares mineral rights. And, of course, the oval -- the dark oval -- purple oval with the red star is Cerro Los Gatos deposit where we currently have three active drills. Two are on the southeast extension of the deposit and one on the northwest extension. The objective of this program is to convert the current 3.7 million tonnes of inferred resource to measure and indicate and we believe we'll do that, and we believe we'll add more inferred because the deposit is still open along strike.

A fourth drill is active at Gatos Silver's 100%-owned Santa Valeria project, which is depicted in the lighter color just outside of the Los Gatos mineral rights package. And last week, we received permit approval to begin drilling at Esther, and we'll be mobilizing a fifth drill to Los Gatos dedicated to a definition-style program to expand the Esther resource quantity and quality. The objective is to define a large enough measured and indicated resource to complete an NI 43-101-compliant feasibility study. In retrospect, had we not proactively acquired every available mineral right when we first started exploration, we would not have had the good fortune to discover, not just a deposit like Cerro Los Gatos, but an entire district that so far contains 14 separate discoveries.

Gatos Silver is a story about growth, and more importantly, organic growth. It is very rare for a resource company to control an entire district and even rare to have discovered the district, built a mine, and just be in the early stages of defining the vast riches in this district. We've only explored 15% of this massive land package. Turning to Slide 13.

We consider ourselves extremely fortunate to have accomplished an IPO that raised 172.5 million in proceeds and resulted in the largest precious metals financing on the New York Stock Exchange and the Toronto Stock Exchange in 2020. We also had some of the most respected institutional funds in the finance sector with our shareholders. The market understands what a unique asset in Los Gatos district is, and we understand our obligation to continue delivering value. We've been able to discover and develop this district in the span of 10 years.

And in resource development terms, that's a relatively short period. Every decision, this management team, our board of directors, and our joint venture partner Dowa has gone through the lens of ensuring that we build an enduring silver and zinc district for the future. There's complete strategic alignment between Dowa and Gatos Silver to ensure this district continues to increase its mineral resources and metal production for decades. That completes my presentation.

At this time, we're available to take any questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] I do have a question from Doug Groh from Sprott Asset Management. Your line is open.

Doug Groh -- Sprott Asset Management -- Analyst

Thank you, operator, and thank you, folks, for the presentation today. I have a question with regard to how you look at your operating costs relative to your various metals that you produce. You're indicating an all-in sustaining cost of $17 to 17.50 for gold, and I believe that's on a by-product basis. Would you have that on a -- I'm sorry, for silver, 17.50 for silver.

Would you have that on a silver equivalent basis as well?

Stephen Orr -- Chief Executive Officer

Thanks, Doug. I'm going to turn that over to Roger Johnson to answer.

Roger Johnson -- Chief Financial Officer

Yes. Doug, we do have that available. This -- I can get that to you. I don't have that right off the top of my head, but I can send that to you, Doug.

Doug Groh -- Sprott Asset Management -- Analyst

OK. That's fine. And then I'm going back to a presentation you had earlier in the month of March. I think it was at the BMO Conference.

I believe it's on Page 20. You profiled production, production costs, as well as free cash flow profile for the Los Gatos technical report on a hundred percent basis. And I believe you indicated that you're expecting to produce about 7.8 million ounces of silver in 2021, and I believe it's about 5.5 million ounces of silver equivalent from your lead and zinc. Is that correct?

Stephen Orr -- Chief Executive Officer

Go ahead, Roger.

Roger Johnson -- Chief Financial Officer

Yes. This is Roger again. Doug, the numbers that you are referring to, yes, those were the numbers that were in that technical report. As you can tell from the numbers that we are now providing this guidance now, these numbers are lower based upon where we are with the mine plan and the de-watery matters that we've been addressing.

Doug Groh -- Sprott Asset Management -- Analyst

OK. And then I believe in this presentation, you indicated a silver operating cost on an equivalent basis of about $14 an ounce. I think that's from the technical report. So I guess where my question is going is how are the costs tracking with regard to the technical report? Are they higher? Are they lower? What are you finding?

Stephen Orr -- Chief Executive Officer

So, Doug, I'll answer that question.

Doug Groh -- Sprott Asset Management -- Analyst

OK. Great.

Stephen Orr -- Chief Executive Officer

Yes. So the costs are higher, and the ramp-up has been slower than we anticipated and, in large part, due to COVID-19 management efforts. We have what we've seen in -- on the ground in terms of COVID-19 impact in Mexico has been dramatically different than what has been reported. By the end of 2020, we were having between 40 and 50 employees test positive every rotation.

And when those kinds of numbers are testing positive, it has an adverse impact on the productivity at the site. And interestingly enough, I see there's a media release today that Mexico has admitted to under-reporting by over 60% the number of deaths in Mexico and that the deaths are actually closer to 312,000 and the second highest in the world, just behind United States, but even higher than Brazil, and that's a country that has a population of 127 million people. So this is a very serious issue down there. And when we put together our guidance for 2021, we did so with the assumption that we are going to have to maintain the stringent protocols, and we're going to have to deal with this all through 2021.

We clearly hope that is not the case. But we have no basis to assume it would be anything different than that. So accordingly, you see a much more moderated guidance just because this is what we think we're going to be dealing with.

Doug Groh -- Sprott Asset Management -- Analyst

So do you have -- Steve, do you have an estimate in terms of the COVID cost for 2021 approximately based on last year?

Stephen Orr -- Chief Executive Officer

Yes.

Roger Johnson -- Chief Financial Officer

Steve, can I take that one?

Stephen Orr -- Chief Executive Officer

Yes. Absolutely.

Doug Groh -- Sprott Asset Management -- Analyst

Sure.

Roger Johnson -- Chief Financial Officer

So just going back to the per ounce, you can -- it's about $0.50 per silver equivalent ounce, so if you want to look at it in that fashion. Yes.

Doug Groh -- Sprott Asset Management -- Analyst

OK.

Stephen Orr -- Chief Executive Officer

So just on testing alone, we have two molecular testings. We have our own clinic at site and, of course, our employees are tested prior to them stepping onsite. But that -- those -- the testing cost us last year about $5 million.

Doug Groh -- Sprott Asset Management -- Analyst

OK. And I did a quick calculation on your $0.50 per ounce, and Roger, I guess that's about $5 million. Right?

Roger Johnson -- Chief Financial Officer

Yes. Between five and six. Between five and 6 million.

Doug Groh -- Sprott Asset Management -- Analyst

OK. And then sorry to take all this time here, but do you expect to have free cash flow this year, and about how much?

Roger Johnson -- Chief Financial Officer

Yes. This is Roger. Let me take that too, Steve, and then you can jump in if you need to. So we're not projecting cash flow as part of our guidance.

As you can see we haven't published it, but I can give you a little help on that. We do have -- we do expect to generate enough cash flow to make all of our debt payments -- pretty significant debt payments with our term loan that's out there. We also need to make some reductions in our vendor accounts, and we'll then be able to establish amounts we need to go into the reserve matters for these term loans as well. And you've got our capital estimates and our production costs numbers which you've been talking about.

So you can probably calculate what -- pretty closely what the cash flow is going to be, and we've also talked to you about the pandemic costs that we've got built into that. But if you want to put into the cash flow say maybe a $10 million number for paying down our vendors as well, that's probably the only number you can't calculate from what we've got. That'll give you an idea. And that will -- you should be able to come up with it, yes, we'll be cash flow positive even after we make debt payments.

Doug Groh -- Sprott Asset Management -- Analyst

OK. Great.

Stephen Orr -- Chief Executive Officer

Doug, just further to that, we are cash flow positive. The problem is that with the conditions of the debt facility and the cash sweep components of that, there won't be any dividend that comes out of the joint venture for a few years.

Doug Groh -- Sprott Asset Management -- Analyst

OK. Thank you

Operator

[Operator instructions] I have no further questions at this time.

Stephen Orr -- Chief Executive Officer

OK, operator. Well, thank you very much. I'd like to thank everybody on the call for your time today, and this completes our presentation.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Stephen Orr -- Chief Executive Officer

Roger Johnson -- Chief Financial Officer

Doug Groh -- Sprott Asset Management -- Analyst

All earnings call transcripts