Fortuna Silver Mines (FSM) Q2 2021 Earnings Call Transcript

Fortuna Silver Mines (FSM -0.43%)
Q2 2021 Earnings Call
Aug 12, 2021, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Fortuna Silver Mines second-quarter 2021 financial and operational results. [Operator instructions] It is now my pleasure to turn the floor over to your host, Luis Ganoza, director of investor relations. Sir, the floor is yours.

Carlos Baca -- Director of Investor Relations

Hi, Matthew. Thank you. By the way, Luis Ganoza is our CFO. It's Carlos Baca, director of investor relations speaking.

Good morning, ladies and gentlemen. I would like to welcome you to Fortuna Silver Mines and to our financial and operations results call for the second quarter of 2021. Hosting the call today on behalf of Fortuna will be Jorge Alberto Ganoza, president and chief executive officer; and Luis Dario Ganoza, chief financial officer. Today's earnings call presentation is available on the featured presentation box on our homepage at fortunasilver.com.

As a reminder, statements made during this call are subject to the reader advisories included in yesterday's news release and in the earnings call presentation. Financial figures contained in the presentation and discussed in today's call are presented in U.S. dollars unless otherwise stated. Before I turn over the call to Jorge, I would like to indicate that this earnings call contains forward-looking information that is based on the company's current expectations, estimates and beliefs.

This forward-looking information is subject to a number of risks, uncertainties and other factors. Actual results could differ materially from a conclusion, forecast or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information is contained in the company's annual information form and MD&A, which are publicly available on SEDAR.

The company assumes no obligation to update such forward-looking information in the future, except as required by law. I would now like to turn the call over to Jorge Alberto Ganoza, co-founder of Fortuna.

Jorge Alberto Ganoza -- President and Chief Executive Officer

Thank you, Carlos, and good morning to all. I will start the presentation on Slide 6, which shares our second-quarter highlights. In spite of COVID-19 related challenges at Lindero, which have led us to revise guidance for the year, our second-quarter results continue to reflect the strength of our business with record sales of $120 million, EBITDA of $55 million, and an EBITDA margin over sales of 46%. Adjusted earnings of $0.12 per share came in largely in line with analyst consensus.

We maintain a liquidity position of $122 million with a debt-to-EBITDA ratio of 0.2%. Our healthy balance sheet, plus the incremental planned contributions to free cash flow from Lindero and Yaramoko in the second half, add to our ability to fund Segeula construction under various price metal scenarios. Lindero produced 19,500 ounces of gold in the period. A dramatic surge of COVID cases in Argentina during the quarter impacted Lindero, leading to a 16 day stoppage spread over the three months.

In addition, continued restrictions in the country impaired our ability to support our ramp-up, which relies on foreign vendor technicians. These entry issues into the country have been partially resolved over the last couple of months. Today, we have specialized technicians on-site for all stages of crushing, including the HP ER, and we're working to get superior technicians for the stacking system in the country in this third quarter. On July 2, we closed the Roxgold acquisition.

We're working on a 100-day integration plan, which is advancing well, and in many instances, exceeding our expectations. With this acquisition, Fortuna is cementing a diversified low-cost production platform sourcing precious metals from four operating mines and with a robust permitted development project in Seguela, where we expect a construction decision this third quarter, as we close the mining convention negotiations with the Cote d'Ivoire. We provided revised production guidance on July 19, which incorporates the Yaramoko Gold Mine contribution for the second half of the year and our downward revision of gold production at Lindero. Lindero gold production is 50,000 ounces lower to 100,000 ounces now.

The 50,000 ounces are not lost, but postponed for next year as we do not believe this year, we will be able to make up for the days of stoppages and the slow ramp-up due to the reasons described in the second quarter. Our revised consolidated guidance for silver does not change from the original and stays at 6.8 million to 7.6 million ounces, and for gold is revised to 194,000 to 223,000 ounces for 2021. The gold equivalent production guidance is 283,000 to 323,000 ounces, still representing a year-over-year increase of 90% to 116% in terms of gold equivalent production. Slide 7, in Slide 7, we share our 12-month rolling average performance on safety KPIs.

Our trend of improvement on safety performance has seen a flattening and in some cases, we observe a reversal across operations, the start of operations at Lindero at the onset of the COVID pandemic last year has weighted heavily on performance at this particular mine. We have had 10 lost time injury accidents in the second quarter. We have in place cultural change initiatives. We are committed to, and we have -- we're displaying and implementing initiatives to continue with this success we enjoyed lowering and improving performance on safety KPIS.

Slide 8, we pre-released production for the second quarter. Our gold equivalent production in the quarter was 56,000 ounces of gold. When measured against the previous quarter, silver production is up 49%. This difference is explained mainly by the 54 days of government-mandated COVID stoppages at the San Jose mine in Mexico last year.

On production, our gold production is up 337%, explained by the same loss of days at the San Jose Mine and the fresh new contribution of ounces coming from Lindero. For byproducts, zinc and lead also exceeded growth with respect to last year. This is also explained largely by the loss of operation days at Caylloma last year. Slide 9, precious metals made 85% of our record sales of $120 million.

Silver contributed 40% to revenue. In the period, we realized a silver price of $26.85 per ounce and a gold price of $1,812 per ounce. Next slide, please, Slide 10. For the comparison of year-over-year quarterly financial performance, the takeaway here is a significant rebound driven by improved COVID conditions in Peru and Mexico, plus the new contribution of Lindero to the business.

Sales of $120 million, up from $44 million, adjusted EBITDA of $55 million, up from $9.4 million and adjusted net income of $21.5 million, up from a loss of $5.1 million. Slide 11, our all-in sustaining cost at all operations were aligned with guidance. San Jose came in at $13 per ounce, Caylloma at $18 and Lindero at $1,214 per ounce. Even though we produced lower gold than Lindero than our guidance plan call for, the timing on the execution of capital projects over the year at Lindero helped offset all-in sustaining costs.

Slide 12, for the first half of the year, we have executed capital projects totaling $32 million out of an annual budget of $80 million for Latin American operations. Exploration investment amounted to $6.9 million or greenfield and brownfields budget for 2021 for LATAM is $21 million. Total approved capital for West Africa for the second half of the year amounts to $42.5 million. Yaramoko's sustaining capital and brownfields initiatives amounts to $22 million, Seguela and Boussoura exploration totaled $9.5 million.

And the Fortuna Board approved in July, an early works budget for Seguela of $11.5 million, which includes long lead equipment packages and focused engineering work. All this in anticipation of a construction decision later in the quarter. Slide 13, please. Focusing again on Lindero, here, the reconciliations of tons, grade and gold ounces mined for the second quarter continue to indicate a good correlation with the reserve model with differences of less than 5% for all parameters.

So reconciliation of the reserve model to production continues to be extremely good. Gold leaching response as well as reagent consumption was within the expected parameters for the granulometric compositions and metallurgical type ores that we have placed on the leach pad. As of July '21, ramp-up of operations continues. Pit operations are performing and delivering according to design.

Primary and secondary crushing systems performed at 80% of design over the period with sustained days exceeding design parameters, HPR, agglomeration and stacking system, the three work in tandem, operated at 72% of designed capacity. Today, with foreign vendor support currently on-site for HPR and crushing circuits, we expect to beat the final mile of this challenging ramp-up at Lindero. And in Slide 14, we share with you the asset portfolio in the portfolio pyramid. Post-Roxgold acquisition, where you can see our four operating mines, our development projects and the baskets of exploration opportunities that we have, ranging from advanced explorations at greenfield explorations and Boussoura, Santa Fe, Boussoura in Burkina Faso, Santa Fe in Mexico, Higo Blanco in Mexico, a large land package, covering 250 -- sorry, 160,000 hectares in Cote and our Cerro Lindo project in Argentina, Baborigame in Mexico, Solitario in Argentina as well.

So certainly a robust exploration portfolio and opportunities at the base of the pyramid. So with that, I will let Luis now take you through the financial results.

Luis Ganoza -- Carlos Baca

Yes. Thank you, Jorge. So on Slide 16, on Slide 16, as Jorge had mentioned, we had record sales in the quarter and overall, a strong financial performance across our main financial metrics. As a reminder, and also, as mentioned by Jorge results in the comparative period in 2020 were depressed due to the impact of the pandemic and related government-mandated stoppages.

So the emphasis will be mostly about the absolute figures in the quarter as opposed to the variance year over year. Earnings per share were $0.09 in the quarter, and adjusted earnings per share was $0.12. After adjusting for $3.5 million of expensed amounts related to the Roxgold transaction and other noncash, nonrecurring items. Adjusted EBITDA of $54.9 million was at an all-time high, except only for the $60.8 million recorded in Q1 2021, the first quarter of this year.

And free cash flow from ongoing operations was $18.5 million, reflecting the capacity of our business to translate EBITDA results into free cash flow in spite of COVID related challenges at Lindero. Also in relation to free cash flow, we had negative changes in noncash working capital items of $8.3 million in the quarter and $24.7 million year-to-date. The amounts year-to-date are related mostly to accounts receivable at San Jose and natural buildup of accounts receivable and leach pad inventory at Lindero. We expect these absolute amounts to maintain or slightly come down in Q3 and a stronger recovery of receivables toward year end.

Next slide, Slide 17, yes, so sales increased by $76 million over Q2 2020, out of the total impact attributable to higher volume of metals sold of $51.8 million, as shown in the bridge chart. Around two-thirds is explained by Lindero, 30% San Jose and the balance of around 4% would be Caylloma. Similar to the prior quarter, the largest single impact on our sales, excluding Lindero, was the price of silver, with an impact of $17.8 million, as shown in the slide as well. Slide 18, yes, on the left-hand side, we provide a breakdown of EBITDA by mine.

As mentioned before, financial performance for Caylloma and San Jose continues at historical heights, underpinned by higher metal prices as well as delivery of production and cost performance within our guidance range. The higher all-in sustaining costs for San Jose, as shown on the right-hand side of 26% compared to the prior year is, to a large extent, explained by changes in the gold silver ratio and the impact this has on silver equivalent production. This effect is close to around $2 per ounce. At Lindero, lower gold production of over 30% in the second quarter compared to our internal plan, had a significant impact on EBITDA and cash cost per ounce.

However, all-in sustaining costs for the quarter and for the first half of the year, remains within the guided range in our news release of January 19 due to a slower pace of planned capex execution. Also worth highlighting variable unit costs per tonne at Lindero as well as key operational mine KPIs are tracking well and within expectations. With respect to a revised annual guidance for Lindero, given the lower revised gold production of approximately a third, as mentioned by Jorge, we are now expecting higher cash cost per ounce of about 50%, and higher all-in sustaining cost of just below 40%. Please refer to our news release of July 19 for more information.

On Slide 19, yes, here, we show the evolution of our liquidity and cash position. As a reminder, in Q4 of 2020, our credit facility was scaled down from $150 million to $120 million. This is reflected in the drop in liquidity in Q4. Since the end of Lindero construction toward year-end 2020, we continue to show growth in our cash and liquidity position.

For Q2 2021, we show the impact of the Roxgold transaction in the dotted segment at the top of the bar. Without these transaction-related payments, total liquidity would have been in the range of $160 million. We are currently working in putting place a new expanded credit facility, which we expect will be concluded in Q3. This will be a $200 million facility with a very similar structure to the existing one.

And importantly, it will bear a lower cost of interest. Some additional comment based on our revised guidance, and excluding any Seguela construction budgets in the current price environment, we expect to generate between 80 and $85 million of free cash flow for the second half of the year. So based on this and our expanded credit facility, our total liquidity toward yearend should be in the range of $250 million, giving us plenty of comfort to launch construction activities at Seguela. Finally, a brief comment on the information disclosed in the subsequent events note of our financial statements regarding payments done in relation to the closing of the Roxgold transaction.

We have disclosed $29.3 million in change of control sales and settlements of long-term incentive units to non-continuing executives and directors. Out of this amount, $5.6 million is actual change of control payments, and the balance is the cash settlement of RSUS, PSUs and DSUS. With that, I'll pass it back on to you, Carlos. Thank you.

Carlos Baca -- Director of Investor Relations

Thank you, Luis. We would now like to turn the call over to any questions that you may have.

Questions & Answers:

Operator

Certainly. Ladies and gentlemen, the floor is now open for questions. [Operator instructions] Your first question is coming from Don Demarco. Your line is live.

Don DeMarco -- National Bank Financial -- Analyst

Thank you, operator. And good afternoon, gentlemen. Just a couple of questions from me. First of all, on the call, it was mentioned that some of the production at Lindero has been deferred to 2022.

This year, at Lindero, we're looking at maybe 100,000 ounces. Can you give us any indication of how much higher the production at Lindero might be in 2022?

Jorge Alberto Ganoza -- President and Chief Executive Officer

We are currently budgeting the year Don. We are in the process of -- we have started the budgeting process. And -- but the message here is we have a capacity to produce in the range of 150,000 ounces. If we are not achieving that based on the grade that we have at the mine is basically because the rate of production is down.

So I would expect that our production for the second 2022 would be able to capture at higher rate, annual production closer to what our target was this year, right, in the range of between 120,000 and 150,000 ounces. The message basically this is not an absolute loss of ounces, but rather a deferral. I mean, the models are conciliating well. The metallurgy is conciliating well.

And it's just a very painful ramp-up in Argentina right now for the team.

Don DeMarco -- National Bank Financial -- Analyst

OK. Thank you for that. My next question has to do with the Roxgold transaction. And I see on the cash flow statement, I see an item, the promissory note $35 million promissory note.

Can you give us an indication of the total transaction cost for the acquisition? Is it just the $35 million in that promissory note? Or is it more than that? And any other details in terms of what the major items were would be appreciated.

Luis Ganoza -- Carlos Baca

Yes. So the promissory note really is a balance based on total costs to be paid out directly by Roxgold at the time of closing and their availability of cash. But in terms of total expenses or total transaction cost, the figure I mentioned of $29 million of cash payouts for change of control items and settlement of long-term incentives is the largest amount. The rest really would be related to legal expenses, advisory fees and these amounts will be fully disclosed in our Q3, right? But certainly, the largest component of that is the amounts we have disclosed in our subsequent events right.

Don DeMarco -- National Bank Financial -- Analyst

OK. That's helpful. OK. Well, that's all for me.

Good luck, gentlemen getting Yaramoko added into your portfolio of Q3, and we look forward to Lindero rebounding as well. Thank you.

Jorge Alberto Ganoza -- President and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator instructions] Your next question is coming from Michael Anthony. Your line is live.

Unknown speaker

Yes, sir. The mine you just had the acquisition, can you tell me exactly what precious metals they have?

Jorge Alberto Ganoza -- President and Chief Executive Officer

If I understand your question, you're asking about the recent acquisition and the assets that we're bringing. If that is right, they are all gold assets. The Yaramoko mine is a gold only mine and the Seguela project is a gold only.

Unknown speaker

Yes, sir. Well, I got one more. Will you all be paying a dividend any time this quarter or maybe in the future?

Jorge Alberto Ganoza -- President and Chief Executive Officer

Not in this quarter. The question of a dividend for us is not a question of if, but when, really. And the purpose of bringing, one of the purposes of bringing the Roxgold transaction is to build a portfolio of assets that can provide sustainability over the long-term to provide investors with a return that is sustainable over time, right? Quality assets, high-margin assets, that can be sustainable over time will make a dividend or a means to return to shareholders sustainable over time. So for us, it's a question of when we have a capital project, an important capital project in Seguela that is in the midst of a construction decision this quarter.

So I think that with the -- in this price environment, once we launch that project, the discussion of a dividend is one that the Board will be engaging with.

Unknown speaker

Well. This was a great quarter. It was a very strong quarter. And I appreciate everything you're all doing for shareholders.

Jorge Alberto Ganoza -- President and Chief Executive Officer

Thanks.

Unknown speaker

That's all the questions.

Operator

Thank you. Your next question is coming from Ryan Thompson. Your line is live.

Ryan Thompson -- BMO Capital Markets -- Analyst

Yeah. Hi, Jorge and team. Thanks for the update. Just a question for me on Lindero.

I see you stacked about 1.5 million tons to the pad in the second quarter. If I just look at sort of the ratio of ounces produced down to stack, I'm getting about 43% on my math. Could you just talk a little bit or maybe give a breakdown of how much of that 1.5 million tonnes was course ore versus sort of HPGR crushed and agglomerated ore? And are you seeing differences in the metallurgical performance between those sorts of two types of ore types?

Jorge Alberto Ganoza -- President and Chief Executive Officer

Yes. Our Q2 disclosure, we provide a breakdown of the stacked ore. Give me a second here. We provide a very detailed explanation here where we trucked or amounted for roughly 800,000 tons.

So Q2 was not particularly a good quarter in terms of the composition of the stacking mix, the trucked ore from the run-off mine and core ore stockpiles placed on the leach, but total 800,000 tons. And it was 32% higher than originally planned. At this stage, we have completely stopped truck stacking. All the stacking is taking place with the conveyor stacking system.

So everything that's going to the leach part is going -- is running through the HPER, agglomeration and conveyor stacking. So that's an important development, and that speaks about the continued improvements in reliability and mechanical efficiency we are achieving with that part of the system. Now our metallurgical performance-based on the types of ore that we are stacking in certain sales, be it course ore and conveyor stacked ore, again, our metallurgical performance and cyanide consumption and line consumption, all of that is tracking according to our planned extraction and recovery rate. So the key change that we'll see in the third quarter is a significantly higher contribution of conveyor stacked ore as we have again stopped already course ore stacking, right? That was always a temporary measure that we decided to implement knowing last year around March of last year or June of last year, that it is a complex system, running the HPR agglomeration and stacking, and we were doing it alone.

We didn't have the benefit of foreign vendor technicians for any of the three components of the system, those being the HPR, the West Pro agglomerators and the superior stacking system. So now we're working with technical support on site, at least for the HPR and over time, our operators have gained more experience. It's taking longer than anticipated again because we're doing it alone. But that's a significant change, Ryan, right, in the -- this is the last quarter, has been the last quarter, you'll see, in any way, significant amounts of trucked ore placed on the leach.

Ryan Thompson -- BMO Capital Markets -- Analyst

OK. No. That's good to hear that those stacking systems sound like they're starting to perform a bit better here. Maybe just switching gears a little bit, going over to West Africa.

You mentioned negotiations on the mining convention for Seguela. Could you maybe just dig into that a little bit more and just provide us some more color on those negotiations and what we should expect there?

Jorge Alberto Ganoza -- President and Chief Executive Officer

Yes. We are in, I'll say, the first round of negotiations with the Cote d'Ivoire government. And we are getting back to them on this first draft of the convention. It is not far from where the team expected we would land.

But it is a negotiation. It's a process, and we're doing it with a lot of care and respect for the country and the authorities. And we expect we can have an agreement between the parts in a way that would allow us to launch the construction of the project toward the end of this quarter. But we are currently engaged with the government in the negotiations.

Ryan Thompson -- BMO Capital Markets -- Analyst

Perfect. Thanks for that. And maybe I'll just ask one more. Are you able to provide any commentary on how Yaramoko performed in Q2? I know that obviously, the deal didn't close until Q3.

But if you can make any comments on how it performed in Q2 or even just in the month of July. Anything would be helpful there.

Jorge Alberto Ganoza -- President and Chief Executive Officer

Yes. In Q2, Yaramada a small shortfall in ounces due to the sequencing of some grade in the plant. They were in some extremely high-grade areas. And those high-grade areas do carry high variability as well.

And in this place, that variability played against the plan. But we understand it as a local event. And we -- the mine is out of those high grade zones right now. So in July, we are already seeing performance tracking in line with the short-term and long-term plan.

And we all know Yaramoko is quite a reliable asset, and we don't see this small shortfall in Q2 as anything of concern or a change in trend, but rather a feature of a particular area, extremely high-grade area in the mine.

Ryan Thompson -- BMO Capital Markets -- Analyst

Got it. OK. Thanks for the update, Jorge. That's all I have today.

Jorge Alberto Ganoza -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Your next question is coming from Adrian Day. Your line is live.

Adrian Day -- Adrian Day Asset Management -- Analyst

Yeah. Good afternoon. I had a couple of questions, if I may. Can you remind me, please, what the anticipated capex for Seguela is? Also if you have any other major capex items over, let's say, the next 12 months? And then given that, do you have any plans for financing?

Jorge Alberto Ganoza -- President and Chief Executive Officer

Good morning, Adrian.

Adrian Day -- Adrian Day Asset Management -- Analyst

Good morning.

Jorge Alberto Ganoza -- President and Chief Executive Officer

The estimated capital for Seguela is approximately $150 million as per the feasibility study. A big chunk of the capex, around $65 million, $70 million are encapsulated within the EPC agreement that we are aiming to execute with [Inaudible] for the execution of the project. So and this is usually the case with these projects, the bigger capital expense as you start seeing flow through toward half to two-thirds of the construction. And this is probably year and a half of construction.

In terms of financing, as we mentioned during our prepared commentary, we believe we have plenty of comfort to launch into construction activities based on the corporate facility we are putting in place and our existing cash availability plus just ongoing free cash generation.

Adrian Day -- Adrian Day Asset Management -- Analyst

OK. No. I know you've got enough. You've always run a very conservative balance sheet, which I like, but you think you've got enough without any additional financing?

Jorge Alberto Ganoza -- President and Chief Executive Officer

Yes. That is an absolute yes.

Adrian Day -- Adrian Day Asset Management -- Analyst

OK. Great. Thank you.

Jorge Alberto Ganoza -- President and Chief Executive Officer

If there are no further questions, I would like to thank everyone for listening to today's earnings call, and we look forward to you joining us next quarter. Have a great day.

Operator

[Operator signoff]

Duration: 42 minutes

Call participants:

Carlos Baca -- Director of Investor Relations

Jorge Alberto Ganoza -- President and Chief Executive Officer

Luis Ganoza -- Carlos Baca

Don DeMarco -- National Bank Financial -- Analyst

Unknown speaker

Ryan Thompson -- BMO Capital Markets -- Analyst

Adrian Day -- Adrian Day Asset Management -- Analyst

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