Sierra Metals Inc. (SMTS) Q3 2021 Earnings Call Transcript

Sierra Metals Inc. (SMTS -2.17%)
Q3 2021 Earnings Call
Nov 09, 2021, 10:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Sierra Metals third quarter 2021 financial results call. My name is Emma, and I'll be your operator today. [Operator instructions] It's now my pleasure to hand the call over to Mike McAllister, vice president of investor relations, to begin. Please go ahead.

Mike McAllister -- Vice President, Investor Relations

Operator. Good morning, everyone. Welcome to Sierra Metals third quarter 2021 results conference call. On today's call, we are joined by Luis Marchese, our CEO; and Ed Guimaraes, our CFO.

We are assuming that all published materials have been read, and as such, today's presentation highlights the key issues of the quarter. However, I would like to highlight that, as always, we are open for questions at the end of the presentation, which can expand upon other issues that might be of interest to those listening. In the interest of time, we are allowing all participants to ask two questions and we're asking that participants respect this request, further questions can be addressed through email or follow-up calls after the conference call. The accompanying presentation for today's call is available for download through the webcast or from the company's website at sierrametals.com.

Yesterday's press release, the financial statements and the management discussion and analysis are also posted on the company's website. Before I turn the call over to management, 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 our conclusions, forecasts or projections as reflected in the forward-looking information.

Additional information about the material factors that could cause actual results to differ materially from their conclusions, forecasts or projections 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, which is publicly available on SEDAR or EDGAR via Form 40-F or on the company's website. Please note that all dollar amounts mentioned on today's call are in U.S. dollars unless otherwise noted. I would now like to turn the call over to Luis Marchese, our CEO, who will provide us with the third quarter highlights, as well as an outlook for the remainder of the year.

Afterwards, Ed Guimaraes, our CFO, will take us through the quarter's financial highlights. With that, I will now turn the call over to Luis Marchese.

Luis Marchese -- Chief Executive Officer

Thanks, Mike. Good morning, everyone. Turning now to the third quarter highlights on Slide 4. After reading yesterday's press release, you are now aware that Q3 was an exceptionally difficult quarter for the company.

We have been dealing with the residual effects of COVID-19, which includes delays on mine development, infill drilling, antennas, high personal automotive, infrastructure backlog and others, which have affected throughput, grade and metallurgical performance. While Yauricocha and Cusi are now back on track. The Bolivar mine has experienced limitations on mine development infilling and equipment availability during the past year, which is heavily impacting throughput, head grades and recoveries. While these issues are believed to be temporary in nature, we are very focused in improving the current situation and are currently conducting a comprehensive review of all the operational processes at the Bolivar mine from geology to the mine, as well as at the mill.

We intend to incorporate the findings of these reviews into the Bolivar Mine operations to allow for a return to a normal steady and profitable state of operations at the mine. The early findings and contingencies coming from this review are being created into the 2022 Bolivar Mine budget currently being prepared to provide stakeholders with an updated projection of the Bolivar mines capabilities and operations potential going forward. Despite the significant challenges in the quarter, including lower throughput and metal production, the stronger metal prices have supported revenue. Additionally, foreign exchange rates are working on our favor helping to offset the large associated costs of COVID-19 at Yauricocha which benefited the company.

After reviewing the nature of these limitations moving forward, and taking into consideration previously revised production guidance, we felt it was prudent to lower the EBITDA and capex guidance and increased cost guidance for Bolivar to better reflect the expected outcome for 2021. Turning now to Slide 5. Production guidance remains unchanged with copper equivalent production expected to range between 110 million to 115 million pounds. However, due to the previously mentioned and rapidly changing issues at our Mexican operations, primarily at the Bolivar mine, we have lowered our EBITDA guidance range from $130 million to $140 million to now range between $105 million to $110 million.

We have also lowered our expected capital expenditure guidance previously set at $100 million to now range between $75 million to $80 million. This in part is due to the deferral of our magnetite iron ore project at the Bolivar Mine until 2022, as the iron ore and freight markets normalize and where we complete the required detailed engineering and land access process. Finally, given the issues at the Bolivar Mine, we have adjusted expected costs higher to reflect but is now expected to be in the range for 2021. Cash costs for 2021 are now expected to range between $1.67 to $1.75, up from the previously provided guidance of $1.32 to $1.40 per corporate equivalent pound.

All-in sustaining cash costs are now expected to range between $3.30 to $3.47, up from the previously provided guidance of $2.60 to $2.74 per copper equivalent pound. I would like to mention that despite these challenges, we have a strong focus on improving operations, but we are continuing to push for production and stabilization and growth at all three mines. Scaling up production and reducing unit costs remain a priority. Additionally, we are emerging from the house restriction imposed by COVID-19.

We continue to see improvements in availability of our workforce as vaccination rates continue to improve, which should help us to return to more normalized operations. Metals prices have and are expected to remain relatively strong during this period of transition. Turning to Slide 6, and looking ahead to the remainder of 2021, 2022. Despite the unexpected challenges we are facing, we continue to see encouraging growth opportunities for the company.

Opportunities still include the production of iron ore concentrate and accelerated stage scaling up of production at Bolivar. Continuous improving initiatives by Jarek at Cusi while we are completing preliminary feasibility studies. We also continue with our Brownfield exploration plants, especially at near mine facilities, including the Kilcaska and Tucumachay area. Preliminary Tucumachay where we recently received drill permits, as well as La Sidra at La Montura near the Bolivar Mine.

We also plan to reactivate our greenfield programs at our extensive land position in Peru and Mexico. The company is making the necessary capital investments and infrastructure improvements to continue growing production and improving costs. We remain committed to the company's prudent and sustainable operational growth and more importantly, to improving the personal value benefiting all shareholders. With that, I will now turn the call over to Ed for the third quarter financial results.

Ed Guimaraes -- Chief Financial Officer

Thanks, Luis. Turning now to Slide 7. The company had a difficult third quarter due to operational challenges primarily at the Bolivar Mine and the residual effects of COVID-19. We reported a 6% decrease in our consolidated throughput and generated adjusted EBITDA of $17.4 million in comparison to Q3 2020.

We also reported an adjusted net loss of $3.1 million, and we finished the quarter with approximately $58 million in cash. These results are primarily due to the operational issues previously mentioned by Luis at our Bolivar Mine. However, the company continues to expect that 2021 EBITDA of $105 million to $110 million will still reflect an increase of 8% to 13% improvement over 2020, a benefit of stronger metal prices. Our revenue mix by metal continues to be led by copper, followed by zinc and silver.

Copper is expected to remain a leading role in the company's metal mix of production and revenue. In Q3 2021, we saw an improvement in copper, zinc and lead realized prices with a minor reduction in silver and gold realized prices. Copper continued to improve in the first half of 2021 and remains currently strong. Zinc has seen growth in Q3 and has remained relatively strong.

Turning now to Slide 8. Compared to the same period in 2020, cash costs were higher at all mines. The reasons have been previously disclosed in this call, but again, this is mainly due to operational issues at our Bolivar Mine, and lower metal production across all mines. We have also seen increased treatment charges due to price participation escalators from off-takers.

Unit costs were also affected mainly due to indirect fixed costs, which still must be incurred despite lower metals production. Looking to 2022, we expect to see higher labor costs from our Mexican operations of approximately $2 million per year because of recent legislation changes. Also, we expect to see higher capex costs as we catch up on a backlog of infrastructure projects, which have been delayed during the past year due to the implications of COVID-19. Turning now to Slide 9.

We finished the quarter with $58 million in cash and have total net debt of $28.6 million. The company has commenced the repayment installments of its debt facility in June of this year with initial installment of $6.25 million. We will continue to make quarterly installments with the last installment occurring in March 2025. The company continues to have a relatively strong balance sheet, working capital and cash position to support capital expenditures, debt repayment and growth initiatives.

Based on our current budgeting process and current strong metals price environment, this scenario has supported for a base dividend policy of $0.03 per share which was recently declared in the press release dated November 5, 2021. With that, I will now turn the call back over to Mike.

Mike McAllister -- Vice President, Investor Relations

Thank you, Ed. That concludes the presentation portion of the call. We will now open the call up to the Q&A portion of the call. [Operator instructions] With that, operator, please open the lines.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question today comes from Heiko Ihle from H.C. Wainwright. Please go ahead.

Your line is now open.

Heiko Ihle -- H.C. Wainwright and Company -- Analyst

Hello, everyone. Thanks for taking my questions. Hope you're safe. Let's talk about the guidance revision for Bolivar for a second.

You talked about -- and this is a qoute of delays in mine development, infill drilling and high personnel turnover. Therefore, your all-in sustaining at the midpoint are up 26.8% if you're just taking on midpoint old midpoint new with really another 50-ish days left in the year. So obviously, that math ignores the impact of higher costs in Q3, you -- in other words, a change is actually less. But nonetheless, my question still stands.

What could swing you to either end of this figure? And are there any effects that maybe you wouldn't have known about at the end of Q3, which is now 40 days ago?

Ed Guimaraes -- Chief Financial Officer

Thanks for your question. Really, the underlying rationale or the reason for the higher cost, it's all tied to grade, mostly grade issues at the Bolivar Mine. And that, as Luis mentioned, was something that started more than a year ago in terms of the lack of -- due to COVID, the lack of personnel the high turnover we were having, the lack of development, and that was forcing us to go into higher tonnage areas -- throughput areas, but with much lower grades. We're still working through this sequencing issue.

It's been a lot longer than we had expected. And as Luis mentioned, we're doing a full comprehensive review from geology, mine to mill. And so we should know more about this over the coming weeks, months, but we want to get to the bottom of this.

Heiko Ihle -- H.C. Wainwright and Company -- Analyst

OK. Fair enough. And then just one more quick clarification. And it's also building on last question a bit.

You're taking on your capex guidance by $20 million to $25 million, again, only 60 days left in the quarter or 50. How much of that is actually due to the magnetite iron ore planned at the Bolivar Mine. And will this do anything to longer-term costs for the project given the crazy cost inflations we're seeing for everything from printers to used cars to workers?

Ed Guimaraes -- Chief Financial Officer

Thanks, Heiko. Yes, you're correct that primarily the revision in capex guidance was due to the magnetite project. We were fast tracking the magnetite projects when we had iron ore prices above $200 per ton. As those prices came down and with the almost tripling of bulk freight costs, it allowed us to or prudently to consider revising this fast track and more taking our time.

We're doing a comprehensive detail engineering right now on the project. And we should have the results of that in the coming weeks, early December. And it didn't really make sense to start embarking on a capex program until we had that detailed engineering. Again, we were comfortable doing it when iron ore prices were north of $200 per tonne, but it's much different now where you've got iron ore at slightly around $100 and you've got freight -- both freight costs anywhere from $50 to $75.

The economics have changed, but we believe that the freight costs should normalize. I think this is a little -- it's a short-term blur in the system and freight costs, I would expect to get more in line with historical norms over the next six to 12 months.

Heiko Ihle -- H.C. Wainwright and Company -- Analyst

Perfect. Thank you. Thank you. I'll get back in the queue.

Operator

Thank you. Our next question today comes from Mark Reichman from NOBLE Capital Markets. Please go ahead, Mark. Your line is now open.

Mark Reichman -- NOBLE Capital Markets -- Analyst

Thank you. Good morning. So my question is really just kind of piggyback on the last ones. So despite the raised cost guidance at Bolivar, it seems like just given the first three quarters, you still would be expecting some modest improvement in the fourth quarter.

So I wanted just to delve into it in terms of your expectations. I know you're doing the study. But beyond just the -- developing the higher-grade ore bodies. How long do you think it will take? Do you think it will be a quarter or two before you kind of get back to normal? And what would you kind of consider normal?

Luis Marchese -- Chief Executive Officer

Thank you, Mark. This is Luis Marchese. We are expecting that it's going to take us a couple of quarters to go back to normal. What normal mean is that we should have a steady operation at the -- and we can reach the areas that we are planning to reach by then.

And we have more certainty on the ore that we are going to mine. And let me go through what the different delays have meant. We've had less mine development that we should -- we would have wanted to have. So we are now only able to reach some areas of the mine, which have lower grade.

And we have limited flexibility in terms of the production or where we can mine. In terms of the infield drilling. Again, we have done less than we would have wanted to do. So the quality of the estimate of the resources that we're mining is also lower.

So sometimes we have surprises on what sort of ore we find. So that is what has been driving the last quarter or so. Now what we are doing now is we're bringing some more drilling machines to get up to speed with the infill drilling. And we are also bringing some more contractors and equipment to go back to the usual mine development.

But as we've highlighted, this has prompted us to go into a very comprehensive review of all processes at the mine. We have our technical team right now there, and we're going to engage with some other outside experts to do a more detailed review. So hopefully, in a couple of quarters, we should be back to normal.

Mark Reichman -- NOBLE Capital Markets -- Analyst

That's very helpful. Thank you very much.

Luis Marchese -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] Our next question comes from Leon Cooperman from Omega Advisors. Please go ahead, Leon. Your line is now open.

Leon Cooperman -- Omega Advisors -- Analyst

Thank you. Just two questions. One is, do you have any ability or willingness to indicate any expectations for EBITDA in 2022? In the words you mentioned you thought a couple of quarters, we'll be back to normal, what should we look at the No. 1 in terms of 2022 EBITDA expectations? And secondly, I'm just curious, is this an example of weak controls or philosophy communication.

The last two quarters, you had major misses and made no attempt to educate the market before the report. So I don't know if this is a philosophy of communication or you just didn't know what's going on in the business and whatever. But it's a philosophical question.

Ed Guimaraes -- Chief Financial Officer

Hi, Lee. Thanks for your questions. Yeah, at this point, our forecasting EBITDA for next year until we have this comprehensive review completed on the Bolivar mine, that's really going to drive EBITDA for next year. Usually, we put out EBITDA in January of every year.

And hopefully, we'll have the answers by then. But if we don't, I'd certainly be willing to push out the EBITDA guidance until we have a better indication. I don't like missing guidances. We've revised two in the past year.

It's been extremely difficult. And that was something that was occurring. And that's to your second point, these major misses. We forecast every two months, we updated our forecast for the year.

And I guess you could say that the mines, in particular, at Bolivar, might have been a little optimistic in terms of how quickly they could have turned things around. And we never saw that play out. When we did our guidance halfway through the year, it was the view was that we could make that up in the second half. But when we got to the end of September, we clearly saw that this trend was continuing and that it was -- we had to adjust guidance.

We had no choice. But it is something that I take your point. It is something we need to reexamine and make sure that our ability to forecast and we improve in that area.

Leon Cooperman -- Omega Advisors -- Analyst

Well, you think you have the ability, you just have not communicated it. I mean the market has been working on stale information for quite some time. And I think it's incumbent upon Mike or whoever you're going to do it to make sure people are on the right track. But that's it.

Enough said.

Ed Guimaraes -- Chief Financial Officer

Thanks, Lee. And just on that point, we put our revised guidance when we have all the information available and we presented to the board in a timely manner. And again, this has been extremely difficult, and it was a lot of discussions at the board level and presentations, and we're continuing to get to the bottom of the issues at Bolivar.

Operator

Thank you. Our next question today comes from Jim Young from Midwest Investments. Please go ahead, Jim. Your line is now open.

Jim Young -- Midwest Investments -- Analyst

Yeah. Hi. A couple of questions here. Number one would be, can you help us understand that the comments you made about the price participation escalators, are they the same as the TCs, the RCs? And so can you just help us understand what these are, number one.

Number two, though, what direction can we expect them to take -- how they unfold in 2022? Will it be at the same level, higher or lower?

Ed Guimaraes -- Chief Financial Officer

Sure, Jim. Yeah, TCs and RCs and the price participation, these are something that the smelters and the offtakers build in. So they want to ensure should metal prices start to increase, they want to participate in the upside. And when we -- looking at Bolivar we locked in our contracts for the 2021 year back in June of 2020, and metal prices were hovering around copper, I should say, was something around $2.75 a pound.

So if we think about it -- and the formula, not to get too detailed into the granular, but essentially the formulas work that for every $100 per tonne rise in copper price, there is a $10 per pound rise in the TC/RC. So you can see that our copper price went from -- if we talk in tonnage, we went from around $6,000 a tonne to $10,000 a tonne. We were actually hovering $10,500 a tonne. So based on that formula, it adds another $400 approximately to the TCs/RCs.

So that's extremely significant. And to answer your second part of the question, will these continue? Because of the Bolivar operational issues, we do have -- they're likely that we will complete our 2021 commitments in the first quarter of 2022, just because of the great issues that the concentrates were not at the level that we anticipated. So we will likely see these TCs/RCs continuing into, I'd say, April of 2022 before they reset again and go back to a much more normal prices or costs, I should say.

Jim Young -- Midwest Investments -- Analyst

So Ed, if you set the 2021 prices back in June of 2020, what is the June -- what -- I would assume that the 2022 prices have been set already. So can you help us understand relative to 2020, when you set those to -- for 2021, what will the relative cost be going forward on a normalized basis? 

Ed Guimaraes -- Chief Financial Officer

They're going to be much lower than the $450 a tonne or whatever we're saying. It will be in the range of $60 to $100 a tonne. So you should see a significant decrease in the TCs/RCs.

Jim Young -- Midwest Investments -- Analyst

OK. Thanks very much.

Operator

Thank you. Our next question today comes from Alonso Chaka from Aras Resource Company. Please go ahead. Your line is now open.

Unknown speaker

Thank you. Good morning, Luis and Ed. So I had a couple of questions. First, you noted the COVID-related issues that affected head grade and mine development and drilling.

Can you just help us understand why it seems that the impact that COVID is causing looks much worse on Bolivar related to Cusi and Yauricocho mines operating in Mexico? And the second one is regarding the status or timing of the original tunnel in Bolivar, the tunnel. We understand that was going to hurt the operating costs at the mine. So I just wanted to understand whether you had some timing on that.

Luis Marchese -- Chief Executive Officer

OK. Hi, Alonso. Regarding COVID, yes, in Bolivar has been harder because Bolivar already had a backlog of infield drilling and development in place by the time COVID started. So I think COVID-19 has compounded the issues that Bolivar had in place.

So that's where we are now. And I said, but that's why we're fit. Yauricocho was in a much better position. So it's pretty much operating normally now.

And Cusi had this ventilation issue, which should have -- should have been solved in 2020, but due to COVID could not be solved but now it's already been solved. But due to the backlog in Bolivar at the beginning, now these things just got worse over time. So now we are putting enough capital and resources to go back to where it should be. Regarding the tunnel, yes, that's good news.

After the integration panel is a three-kilometer tunnel. We have driven two kilometers already. We are short one kilometer. So in less than one year, we should be finalizing that tunnel.

We are also driving the connecting panels from Bolivar West Mina de Fierro. So eventually, by 2023, we should have this operating in terms of connection. In terms of including some additional infrastructuring side like a crusher or something else, that should take a bit longer.

Unknown speaker

OK. Thank you very much.

Luis Marchese -- Chief Executive Officer

Thank you.

Operator

Thank you. This concludes today's Q&A session. So I'll now hand the call back to Mike McAllister for any closing remarks.

Mike McAllister -- Vice President, Investor Relations

Operator, that concludes today's call. On behalf of management team, I would like to participate -- I would like to thank all participants for joining us. A replay of the webcast and all materials can be found on our website at sierrametals.com. If there are any further questions or concerns, you may reach out to us after today's call.

Our information can be found in today's presentation, as well as on the company's website. Thank you, operator. Please conclude the call.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Mike McAllister -- Vice President, Investor Relations

Luis Marchese -- Chief Executive Officer

Ed Guimaraes -- Chief Financial Officer

Heiko Ihle -- H.C. Wainwright and Company -- Analyst

Mark Reichman -- NOBLE Capital Markets -- Analyst

Leon Cooperman -- Omega Advisors -- Analyst

Jim Young -- Midwest Investments -- Analyst

Unknown speaker

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