Fortuna Silver Mines (FSM) Q1 2022 Earnings Call Transcript

Fortuna Silver Mines (FSM 3.79%)
Q1 2022 Earnings Call
May 12, 2022, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Fortuna Silver Mines Q1 2022 financial and operational results call. [Operator instructions] It is now my pleasure to turn the floor over to your host, Carlos Baca. Sir, the floor is yours.

Carlos Baca -- Investor Relations Manager

Thank you, Jenny. 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 first quarter of 2022. Hosting the call today on behalf of Fortuna will be Jorge Alberto Ganoza, president and chief executive officer; Luis Dario Ganoza, chief financial officer; Cesar Velasco, chief operating officer, Latin America; and Paul Criddle, chief operating officer, West Africa.

Today's earnings call presentation is available on the feature 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 this 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 actions 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 achieved 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 and for joining us today. Our business performed very well in the first quarter of the year. We realized silver price of $24 per ounce and $1,884 per ounce of gold. We recorded net income of $27 million or $0.09 per share.

After adjustments for unrealized losses on derivative contracts for a portion of our by-product zinc production and the write-down of exploration investments at a prospect in Central Mexico or net -- for adjusted net income came in at a record $33 million or $0.11 per share, beating analyst consensus of $0.10 per share. Our adjusted EBITDA was $80 million with a robust margin over sales of 44%. As of the end of the quarter, the company maintained a strong balance sheet with low debt leverage and liquidity available of $150 million, which is more than adequate to meet all our capital and growth plans. With respect to our key growth projects, Seguela, Paul Criddle, our chief operating officer for West Africa, will be providing an update for you in a minute, but I can advance construction is 48% complete as of the end of March.

And as of the latest report provided to me, as of the end of April, completion is at 55%. The project remains on time and on budget for our first gold pour in mid-2023. Of note at Seguela as well is the maiden inferred mineral resource for the Sunbird discovery comprising 3.5 million tonnes averaging 3.2 grams of gold per tonne, containing 350,000 ounces of gold. We made a news release of this on March 15.

Sunbird remains open with high-grade gold intercepts in multiple directions. We plan to continue drilling Sunbird and other targets at Seguela for all of this year. The Sunbird discovery is incremental to what is already aligned in the making with gold reserves for a decade of production. Looking at our consolidated production, all of our mines performed well and in line with our annual guidance projection for 6.2 million to 6.9 million ounces of silver and 244,000 to 280,000 ounces of gold.

During the quarter, we produced 67,000 ounces of gold and 1.7 million ounces of silver. Compared to the first quarter of last year, we showed a significant increase of 93% in gold production. The increase is driven by contributions from the Yaramoko mine and the ramp-up completion of our Lindero mine in the province of South Argentina. Silver production declined by 13%, and this is explained by lower head grades at our San Jose mine.

These lower grades are in line with reserves and mine plans. In the quarter, gold accounted for 71% of sales and silver for 19% of sales. The 10% balance is made of by-product, lead and zinc at our Caylloma Mine in Peru. On the side of cost, all our mines performed within the ranges we provided for in our annual guidance.

Our costs are quite competitive at all our mines, given the company resilience as we navigate through the precious metals price cycles and short-term price swings. Lindero produced gold at an all-in sustaining cost of $1,038. And Yaramoko at an all-in sustaining cost of $1,147 per ounce. At our silver mine, Caylloma produced silver at an all-in sustaining cost of $17.80 and the San Jose at $15 per ounce.

With 4 million ounces of gold equivalents in mineral reserves, diversified production from mines located in two of the most important mining regions in the world, competitive costs, short-term growth in the pipeline and a healthy balance sheet, Fortuna is well positioned to continue harvesting high-value opportunities within the portfolio as we advance our business. The company has put in place a non-course issuer bid program for the repurchase of up to five of the shares issued and outstanding. We intend to make use of the program this year. In doing so, management will be considered timing of capital requirements of our growth projects and of course, assessing the value of the company.

With that now we can have Cesar provide us a quick glance for LATAM operations, Cesar?

Cesar Velasco -- Chief Operating Officer

And as Jorge mentioned earlier, the company's three operating mines in Latin America delivered a solid first quarter. We had a high COVID absenteeism in January in all operations. But in spite of that, operations managed to deliver according to plan. Costs are well contained within guidance for all operations.

At the Lindero mine in Argentina, gold production exceeded 30,000 ounces for the second consecutive quarter. Compared to year ago, Lindero delivered 35% higher gold production, which is explained by the increase in performance of the three stage crushing and statin circuits, along with a 7% higher head grades for the quarter. We are delivering according to our guidance projection. The San Jose mine in Mexico delivered a lower silver and gold production versus comparable quarter, but it is fair to mention that it is in line with the mineral reserve estimates.

And finally, the Caylloma Mine in Peru delivered a 17% higher silver production and 12% higher lead production as we enter a higher grade portion of the reserves in Level 16, the deepest level of the mine. Production at Caylloma is on track to achieve the upper range of guidance. Back to you, Jorge.

Jorge Alberto Ganoza -- President and Chief Executive Officer

Thank you. Paul, do you want to give us an update on West African operations?

Paul Criddle -- Chief Operating Officer

Thank you, Jorge. Operations in our project in West Africa were solid in the first quarter and in line with guidance for period. The effect of COVID has abated and had no effect on production Yaramoko or progress at the Seguela project. At Yaramoko, production for the quarter was 2% greater than the plan at 28,000 ounces of gold in the mid- to upper end of guidance for the period.

While costs were contained below the lower end of the guidance range, at 1,147 ounces per ounce for the period. Greater ore production realized from development from the Western extension of the 55 Zone and good grade reconciliation in the period contributed to the solid production outcome. Moving to Seguela. Since commencing in Q3 of last year, the Seguela project continues to progress steadily in Cote d'Ivoire.

Today, the overall project completion is at 48% as of the end of Q1, with nearly $76 million spent to end of the quarter and over $130 million committed. The project is well-placed to be de-risked in the challenging environment in which we're developing the mine today. Progress and costs are in line with the plan. We are forecasting the project to be completed on time and on budget in Q2 of 2023.

We feel this is a good outcome to date given the schedule and inflationary pressures we see in the market today. Works underground are proceeding well and in line with the schedule, with critical path items being advanced across the property as well as in the procurement space. Items of note from Q1 are the ongoing and steady progress of bulk earth works in the plant site and TSF areas ahead of the approaching wet season, the mobilization of the EPC contractor, Lycopodium to site and the commencement of the process plant civils, the commencement of the erection of tower steel for the high-voltage power line. Fourth, the execution of the mining services agreement with Mota-Engil.

And the ongoing expediting of key supply items such as the SAG mill and high speed transformers, which both remain on schedule. We're extremely pleased with the reconciliation of progress against our plans at present and look forward to bringing you further updates as they develop.

Jorge Alberto Ganoza -- President and Chief Executive Officer

We'll ask Luis now to give us a run with the financial results and also, expand on a topical issue, which is inflation. So Luis?

Luis Dario Ganoza -- Chief Financial Officer

Yes. Thank you. So as was mentioned, sales for the quarter were $182.3 million. This is an increase of 55% compared to Q1 of 2021.

The higher sales were driven by the contribution of Yaramoko with $55.4 million of sales in the quarter, and sales at Lindero of $54.1 million, which was 48% higher than Q1 2021 and represented an additional $18.1 million to our top line. This was partially offset by lower sales at San Jose of 17%, representing a decrease of $9.4 million in sales -- the decrease, as has been mentioned by Jorge and Cesar was driven by lower production and was broadly in line with our guidance for 2022. Year over year, our key financial metrics reflect the expanded size of our business. Adjusted net income of $33.4 million was up 21% and adjusted EBITDA of $80.3 million was up 32%.

Free cash flow from operations of $9.6 million was impacted in the quarter by negative interest in working capital of $27.9 million and timing of taxes paid. The working capital changes are, to a large extent, related to short-term timing effects, which we expect to revert in the next quarter or 2. Our EBITDA margin in the quarter was 44% compared to 52% in Q1 2021. The lower margins were the result of a decrease in margins at the San Jose mine, and higher general and administration expenses of $8.3 million.

This was comprised of $4 million of higher share-based payments when compared to the first quarter of 2021, for which we recorded a credit of $0.4 million. And $4 million higher G&A between the sites and corporate. We did have some nonrecurring expenses in the quarter in the order of $1.5 billion. Moving forward, we expect quarterly G&A at corporate between $6 million and $6.5 million, excluding share-based payments.

An additional item worth noting on the income statement is a $4.2 million loss on derivatives, of which $3.5 million was unrealized. The unrealized portion was comprised of $4.1 million of zinc and lead derivative contracts, offset by $1 million of unrealized gains from diesel hedges. Moving on, we have provided a comment on the news release and our MD&A on inflation effects so far. We are seeing rising prices for certain key consumables, including cyanide, explosives and steel components at our operations, and of course, fuel.

In Q1, the total impact with respect to our cost guidance has been modest. We have seen, however, a trend throughout the quarter and into April for some of these items. You should expect a higher impact in Q2, but based on the more recent data points, we expect all-in sustaining costs at our operations to remain within the range of annual guidance. We are monitoring these trends closely, and the outlook could certainly change.

In the case of Lindero, in particular, diesel is a significant portion of our cost structure between 16% and 18%. It is worth noting we have hedged approximately 55% of diesel consumption for 2022 at levels that are 30% below the average prices we saw in March and 50% below spot prices we were seeing in April. On the balance sheet and liquidity requirements, as Jorge pointed out, we closed the quarter with $110 million of cash and cash equivalents and liquidity of $150 million, which includes $40 million that remained undrawn at the end of the quarter under our $200 million revolving credit facility. Our total net debt, including the outstanding convertible debenture of $46 million is $96 million, which provides for very modest debt leverage.

On the Seguela construction, we have funded $35 million in the quarter and close to $70 million on a cumulative basis. Our expected spend for 2022 remains approximately $110 million. Back to you, Jorge.

Jorge Alberto Ganoza -- President and Chief Executive Officer

Thank you. Carlos?

Carlos Baca -- Investor Relations Manager

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

Questions & Answers:

Operator

[Operator instructions] Your first question is coming from Trevor Turnbull. Trevor, you may ask your question.

Trevor Turnbull -- Scotiabank -- Analyst

Great. Thank you. In my model, it would appear that your operating cash flow is set up to offset the capital expenditures you've got planned for the rest of the year. And so my question was about the drawdown of the line of credit in Q1 and then subsequent to quarter end, a bit more.

I was just wondering if this is insurance against potential inflation or operating risk or perhaps, was this somewhat how related to having extra cash on hand for the share buyback program?

Luis Dario Ganoza -- Chief Financial Officer

No, it really has to do with more of timing of our treasury, Trevor. And we -- I mean, face the alternative of drawing down on the facility or repatriating from the sites. The bulk of the cash sits in the site. And we will always be assessing the use of our facility as opposed to moving cash, which creates friction right and, in most cases, trigger tax events.

So that's really the logic behind the drawdown you have seen.

Trevor Turnbull -- Scotiabank -- Analyst

Right. I guess, I didn't have that visibility into exactly when the capex is going to get spent and forgetting that you do have to move money around. When you talk about repatriation, is that kind of specifically with respect to Lindero that you talk about the most having the effect of friction?

Luis Dario Ganoza -- Chief Financial Officer

It would be beyond Lindero, right? Lindero is -- this repatriation is built into our intercompany funding plan. So drawdown of Q1 is above and beyond Lindero funding that's already taking place.

Trevor Turnbull -- Scotiabank -- Analyst

OK. And then I guess also just sort of related to funding while I've got you, Luis. Do you have a minimum cash balance target while you're under construction that you're thinking about?

Luis Dario Ganoza -- Chief Financial Officer

I would say $100 million is a figure with which we feel comfortable.

Trevor Turnbull -- Scotiabank -- Analyst

OK. And then my last question, still kind of on this theme. Have you thought about any forward gold sales? I've seen some of your peers do very short-term, one year 18-month forward sales and they've had pretty good luck, I think, with the timing of that. Is that something that Fortuna has considered?

Luis Dario Ganoza -- Chief Financial Officer

Honestly, we have not. We typically -- I mean, as you know, we'll not engage in forward sales of either silver and gold. And up to now, it hasn't changed, Trevor.

Trevor Turnbull -- Scotiabank -- Analyst

OK. Well, that's all I had. Thank you. Thank you very much, Luis.

Operator

Thank you. Your next question is coming from Don DeMarco of National Bank Financial. Don, please post your question.

Don DeMarco -- National Bank Financial -- Analyst

Hi. Thank you, operator and good morning, gentlemen. My first question has to do with the spend at Seguela. I think that we -- in our model, per previous messaging, we're looking at about $110 million to be spent in 2022.

We've just allocated this equally between quarters, but I see that in Q1, you're a little bit ahead of, say, a 25% per quarter spend rate. Can you just give us an update? Are you still expecting to spend about $110 million in 2022? And how should we allocate that across quarters?

Luis Dario Ganoza -- Chief Financial Officer

Yes. The expectation on the total amount hasn't changed. I mean, the quarterly expense can be a bit volatile, sometimes, depending on different factors. And we expect to be -- the balance to be spent relatively even over the next three quarters.

But again, that can vary a bit, not necessarily due to deviations in execution, but rather, just management of payables and certain advances, like to contractors.

Don DeMarco -- National Bank Financial -- Analyst

OK. OK, thanks for that. And my next question has to do with Yaramoko. And Paul, congratulations on a strong improvement in costs quarter over quarter in Q4.

AISC improved quite a bit into Q1. But I'm reading in the MD&A that the you're expecting Yaramoko to be on track for the high end of the cost guidance, yet Q1 was below the lower end of the cost guidance. So can you just maybe add a little bit more color on what drove those low costs in Q1? Maybe, was there some fuel subsidies in-country or something? And then what our expectations should be in order for the cost to sort of climb to be within guidance or at the high end of the guidance range for the rest of the year? Thank you.

Paul Criddle -- Chief Operating Officer

Thanks, Don. I think Q4 was an almost. I think we had a tough quarter there from a production perspective, that obviously reflected in the cost. The nature of -- the high-grade nature of the project, and Q1 is very good start to the year.

You're right. There is a component in that -- in the cost specifically whereby, there has been some sustaining capital deferred and then small amounts removed as well a little bit that help things there. But I think projecting forward for the whole year, the costs remain in the guidelines for guidance. We hope to continue on the path that we've had for Q1, but I think it's probably there's a fair way to go.

Don DeMarco -- National Bank Financial -- Analyst

OK, great. Thanks for that. Appreciate it. And good luck with the coming quarters.

That's all for me.

Operator

Your next question is coming from Ernie Molese, who's a private investor. Ernie, over to you.

Unknown speaker

Yes. I'm curious about how your SART plant is doing at Lindero. And specifically, on the financial side, do you count copper in your financials as a by-product. And then secondly, how much cyanide is being recovered through the SART plant? And is that lowering your cost there at Lindero?

Jorge Alberto Ganoza -- President and Chief Executive Officer

Cesar?

Cesar Velasco -- Chief Operating Officer

Yeah, thank you. SART plant is operating as planned. We have been able to recover cyanide significantly, making up or introducing some savings. And we expect to capture some of those benefits along the year, which will offset at some point, some pressure on -- inflation pressure on prices for cyanide.

Unknown speaker

And then the second question I have is your heap leach is running at 400 cubic meters per hour right now. When do you plan to go to 600? And do you feel that a 600 cubic meter per hour flow rate would increase your recovery?

Jorge Alberto Ganoza -- President and Chief Executive Officer

Yes, we're running the system at 400 cubic meters per hour. And yes, we see the opportunity to increase drawdown of inventory in the pile by increasing flow. Remember that we're just in the second lift right now. And not -- we are continuing expanding the liner on the first phase.

So we'll likely be operating in 400 for the remaining of the year. And the inventories are not an issue at this stage. In the design, the expansion was a benefit that we saw in the transition from year 2 into year 3, which would be something in 2023, right?

Unknown speaker

OK, thank you very much.

Jorge Alberto Ganoza -- President and Chief Executive Officer

Thank you.

Operator

[Operator instructions] OK, next question is coming from Don Morant, who's a private investor. Don, over to you.

Unknown speaker

Any follow-up on the permitting concerns at San Jose? And I'm also -- secondly, curious why we haven't seen more drill results from Seguela. It's something I always look forward to. Anyway, any comments are welcome. Thank you.

Jorge Alberto Ganoza -- President and Chief Executive Officer

With the permit at San Jose, the mine is operating under the permits granted in the month of December. And we have nothing new to report on that front. So we have our permitting hub and operating regularly under the permit. With respect to Seguela drilling, we are incrementing drill rigs at Seguela.

We're bringing an additional drill rig. And the program is being expanded. We're allocating additional funding to continue pursuing the open areas that we still have in Sanford and other targets. We're looking to provide an exploration update mid to in the second half of this month.

So we look forward to that, please.

Unknown speaker

Thanks very much.

Jorge Alberto Ganoza -- President and Chief Executive Officer

Thank you, sir.

Operator

There are no more questions in the queue, and I'm going to hand back over to Carlos for his closing remarks.

Carlos Baca -- Investor Relations Manager

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

Operator

[Operator signoff]

Duration: 30 minutes

Call participants:

Carlos Baca -- Investor Relations Manager

Jorge Alberto Ganoza -- President and Chief Executive Officer

Cesar Velasco -- Chief Operating Officer

Paul Criddle -- Chief Operating Officer

Luis Dario Ganoza -- Chief Financial Officer

Trevor Turnbull -- Scotiabank -- Analyst

Don DeMarco -- National Bank Financial -- Analyst

Unknown speaker

More FSM analysis

All earnings call transcripts