Amerigo Resources Ltd. (ARG) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Welcome to the Q4 2019 investor call. I would now like to turn the meeting over to Mr. Aurora Davidson. Please go ahead, Ms. Davidson.

Thank you very much. Welcome to the fourth quarter and Annual 2019 Investor Conference Call of Amerigo Resources. I am Aurora Davidson, President and Chief Executive Officer. Before we begin the presentation, let me caution you that our comments and discussions will include forward-looking information within the meaning of applicable securities legislation. Forward-looking information will include, among other things, forecasts and projections about copper production for the year, which involves known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from such forecasts and projections. Therefore, although we believe that anticipated future results, performance or achievements expressed or implied by the forward-looking information are based on reasonable assumptions and expectations, you should not place undue reliance on such forward-looking information. We direct you to the press release we issued on February 19, 2020, on our audit documents filed with the securities authorities in Canada, including our annual information form under the heading Description of the Business Risk Factors. This document describes the material factors and assumptions that were applied in drawing the conclusions and making the forecast and projections as reflected in the forward-looking information and the material factors that could cause actual results, performance or achievements to differ materially. Except as required by law, we undertake no obligation to update or revise any forward-looking information made in this presentation. Well, having left the formalities behind, I will start by briefly recapping the 2019 results and then present an update of where we are at now and what we're doing about it. All dollar amounts in this presentation are U.S. dollars. 2019 was not a good year for Amerigo on various fronts. Copper production of 19.3 million pounds produced from fresh tailings and 38.9 million pounds produced from Cauquenes were below budget, below guidance and 10% below 2018's production from the same sources of material. Annual molybdenum production of 1.4 million pounds was also below expectations and 25% lower than in 2018. Cash cost increased to $1.82 per pound compared to a cash cost of $1.56 per pound in 2018. And the company posted an annual net loss of $9.4 million, which is a loss of $0.05 per share. 2019 was not an easy year for Chile either. In October, it faced massive social protests over economic inequality. Chile is, without a question, one of the most politically and economically stable developing countries, but there are visible differences between people who are doing well and those who are not. While the protests did not affect our operations directly, they had a big social impact and have led to a national plebiscite to be held on April 26 this year to ask voters if they want a new constitution and whether they were to be drafted by constitutional convention or a mixed convention, including elected citizens. A second vote will take place on October 25 to elect the members of the constitutional convention. And a third vote would accept or reject the new constitution after it is drafted, which is expected to occur no later than March 2022. However, there were also very positive aspects to the company's performance in 2019, and some of these will continue to have a positive impact in 2020 and subsequent years. First, I will mention that MVC operated in 2019 with 0 accidents and 0 loss days. This is a significant operational metric for any organization and for a mining company. In 2019, MVC signed a 3-year collective agreement with its 208 plant workers without any days lost to strike action and at a lower cost than other mining companies. We were also able to refinance the company's remaining $56.3 million bank debt, extending the term by 2 years to 2023 and lowering the amount of payments in 2020, 2021 and 2022. Despite lower production and lower copper and aluminum prices, the company continued to generate operating cash flow and generated $9.7 million of cash flow from operations. To end illicit profiteers, the company furthered its relationship with Codelco by securing a slag processing contract at the MVC plant while Codelco completed construction of its new slag processing facility. In 2019, this contract represented an economic benefit of $3.8 million to the company. At the end of 2019, the Board of Directors asked me to step up from the role of CFO, that I have held since 2003, to the role of CEO. I have been doing both roles until a newly hired CFO joins us mid-March. As I see it, there are 3 key areas to work on this year. First, we need to increase production at MVC and believe this can be achieved by improving plant performance. Second, we need to make the necessary adjustments at MVC to adequately respond to having less water available most likely on a permanent basis and not just as a result of current drought conditions. And third, we need to lower total costs and achieve a sustainable unit cost. Let's start by discussing production. Our first and necessary step was to obtain more information and clarity on the causes that, starting in 2019, affected production at MVC. Even if in Q4 2019, management, MVC staff and consultants have sat down to identify plant debottlenecking initiatives. We needed more information, and to obtain it, we called in a reliable party to conduct a separate assessment. A comprehensive audit of the MVC plant was completed this month. It has identified various areas of opportunity to improve performance through a low-CapEx, high-impact initiatives. The most significant area of opportunity is to conduct a complete hydrocyclone evaluation. There are hydrocyclones in the market with newer technology than the ones we have at MVC and that can perform better in a low feed water environment. This is important because the audit has identified substantial fugitive copper losses from the primary cyclone systems, which are the cyclones for fines and slimes removal. To resolve this problem, we will proceed to contact KREBS FLSmidth to evaluate a retrofit to gMAX cyclones at MVC. Achieving improved primary cycloning would reduce copper losses to the coarse fraction and allow for greater ball mill tonnages and therefore, greater copper production. We will also be conducting laboratory test work in Canada in order to have precise and detailed information to simplify and optimize MVC's flow sheet in order to improve metallurgical performance. For example, we want to identify optimum primary grind size for fresh and Cauquenes tailings, identify the optimum regrind size for the rougher concentrate, develop a copper concentrate grade versus recovery curve and identify deleterious elements in the moly concentrate and identify how to remove them. MVC will also be modifying the current copper cleaner circuit to allow for 2 concentrate exit streams. Under the current setup, all the concentrate produced at MVC is exiting via flotation column, which causes large circulating loads back to the rougher and limit recovery. The fresh and Cauquenes tailings have different flotation kinetics. So having them coincide in the same clearance circuit is affecting recoveries. The circuit will be modified by adding column cells and mechanical cells. MVC will increase the number of reagent addition points in the flotation circuit and in the regrind to enhance selective flotation and liberated copper recovery. It will also rebalance the flotation frothers using the plant in order to have more control of the rougher for stability. There are also opportunities of an operational nature, which include improving process controls on all classification equipment, decentralized metallurgical process control to improve operational support to the various areas of the plant and by portable equipment to obtain timely assays at a different points in the plant. On the moly circuit, we will most likely be including an additional column cell and are looking at implementing [ nutrition ] flotation in order to increase the moly concentrate grade. The audit did confirm that MVC has inadequate volume of water at the current times to easily optimize its process plant and indicated the need to engage solid/liquid separation and rheology experts to review and optimize MVC's water thickeners and provide additional expert information in respect of water recirculation and utilization. MVC has started working with the help of independent consultants to implement all the operational recommendations, which are implementable at essentially no extra cost. Most of the recommendations include CapEx, which is roughly estimated to be $2 million to $2.5 million, including lab work. As I mentioned before, our assessment is that these recommendations are low CapEx, high impact. We are in the process of gathering information with the help of independent consultant to determine the actual CapEx timing and implementation flow of the recommendations. We need to be mindful that the water shortage equation will introduce a degree of complexity to the efforts of optimizing the MVC plant. Let's now talk about water supply in Chile and MVC. Drought conditions have affected a number of miners in Central Chile. For example, Anglo American reported much lower production at Los Bronces during Q4 2019, which was down by over 30% in the same period in 2018 due to the drought conditions. According to Anglo, the lack of water has significantly reduced plant performance. The MVC operation, and I'm talking about the plant and the Cauquenes extraction together, requires approximately a water supply of 100 liters per second for each 10,000 tonnes per day, excluding the water that is recirculated by the 3 water thickeners that MVC has at plant. For another operation of 62,500 tonnes per day, this represents 625 liters per second, which is a lot of water. MVC has always been able to obtain this water through the water containing the fresh tailings, through rainwater that was stored in Colihues and through water rights to local rivers. Things have gradually changed as a result of declining rainfall in the central area of Chile in recent years, and more dramatically due to severe drought in 2019, when it only rained 124 millimeters of water compared to a normal year that has range of 410 millimeters. The situation has affected El Teniente as well, which has gradually been increasing the density of its tailings from 48% to 57%. The substantial reduction in rainfall in 2019 had a negative impact on the water reserves in Colihues, which reached an all-time low of only 200,000 cubic meters in November 2019. To increase water availability, MVC has undertaken various initiatives and projects. One project was completed at the end of 2019 at a cost of $300,000 and improved pumping stations -- and included improved pumping stations to increase the supply of water to MVC from adjacent rivers by 200 liters per second. Another project entails the purchase and installation of additional metal piping to increase water recirculation capacity from the water thickeners at a CapEx of $1.9 million, which is ongoing and is expected to be completed at the end of April. This is expected to provide an additional 130 liters per second of water. These measures have been carried and/or are being carried out satisfactorily, increasing the discharge solid from MVC to Caren to 59%, increasing the amount of water recovered for use of the plant and also allowing MVC to redirect water to replenish water levels in Colihues to 1 million cubic meters. The water projects, however, have increased the load to the MVC water thickeners. MVC knew about it and made modifications to the thickeners so that they could receive this additional load. However, despite having followed the recommendations of the equipment supplier, the changes made to the thickeners have negatively impacted their operation, causing repeated embankments in recent weeks, which have forced MVC to stop the plant fully or just treat fresh tailings while the thickeners were being put back online. This has had a negative impact on production, particularly in the current month of February. To avoid further damage to the equipment in the thickeners, during the next months, we will need to be operating them with lower feed tonnage, which will impact on a lower recovery of water and lower processing from Cauquenes. In order to return to the desired condition where the thickeners can operate with greater tonnage, it will be necessary to boost the drive and lead systems of the thickeners and the necessary parts have a lead time of 5 months. The appraisal problems with thickeners have forced MVC to adjust Cauquenes' processing rate to 40,000 tonnes per day through May, estimating going out to 50,000 tonnes per day in June, if rain levels normalized in April and May, which is the start of the local rain season. Under these conditions, annual production from fresh tailings and Cauquenes would be approximately 55 million to 60 million pounds, excluding any effect from plant optimization initiatives. The forecast also excludes further plant stoppages, which, in theory, are not expected to occur given the lower processing rates that I have mentioned above. Finally, let's discuss costs. As I mentioned earlier, cash cost in 2019 was $1.82 per pound, and the 2 most significant components of cash cost were power cost, which was $0.56 per pound, as smelting and refining cost or TCRCs at $0.34 per pound. In 2020, as a result of industry benchmarks, TCRCs will be lower at $0.29 per pound, and power costs are estimated to also be lower at $0.48 per pound as a result of lower contractual supply rates. In 2020, lower power and TCRCs of $0.13 per pound will represent approximately $7.6 million in lower cost at the current 2020 production forecast. Annual cash cost forecast for 2020 is $1.63 per pound, but it's forecast to be higher in Q1 at $1.87 per pound and Q2 at $1.65 per pound. Q3 cash cost is expected to be $1.51 per pound and $1.50 in Q3 and $1.57 per pounds in Q4. We believe that further cost reductions are required, including labor and services in MVC, particularly to pay for the $2 million to $2.5 million plant optimization. Year-to-date, we are seeing lower actual cost and budget. In January, our cash cost was $1.54 per pound compared to budget of $1.83 per pound. January cash cost still included slag by product credit -- adjusted cash cost through January without the slag by product credit was $1.61 per pound. Our 2020 cash projections, based on these scenarios and assuming a copper price of $2.59 per pound for March onwards, show a very tight checkbook in the first half of the year, which will require us to use the existing reserve account in March to make debt and principal payments of $6.1 million. The cash projections indicate our ability to make the September debt payment and also replenish our reserve account by year-end. Under these assumptions, we have limited 2020 sustaining CapEx in the year of approximately $2.2 million essentially to pay for the water project and have also assumed that the plant optimization CapEx estimated at $2 million to $2.5 million would be paid through other operating cost reductions at MVC. In short, 2020 is a challenging year where we're working hard to make the necessary changes to reduce operational risk. Needless to say, we cannot predict a short-term copper price behavior. Wood Mackenzie anticipates that global refined copper consumption will grow 1.8% this year, and their latest price forecast for 2020 is $2.81 per pound, under which at current production and cost forecast, we would end the year with approximately $15 million to $17 million cash. MVC is a good, solid asset. It has been in operation for 27 years, most of them at copper prices substantially lower than today's. We have a long-term contract with Codelco for at least another 17 years and have solid relationship with them. We require very little CapEx going forward, have a manageable debt and proven operational resiliency to survive market cyclicality. In the periods 2005 to 2008 and then 2011 to 2012, Amerigo paid $47 million in dividends to shareholders, and we expect to return to that capacity when copper prices stabilize at higher levels. That is the extent of the presentation, and we are open to questions.

[Operator Instructions] And the first question is from Joseph Reagor from Las Vegas.

So a couple of things, probably more than my normal list. If the drought conditions continue through the rainy season, I know you can't really predict the future, but if that were to happen, what would production for the full year look like? Like what's the low end if droughts continue? I know you guys revised it and assume you get rain in June. But if that doesn't happen, then what?

Well, I think it's very difficult to answer that question right now because we have several things ahead of us that need to be resolved first. So we need to fix the thickeners and with -- fixing the thickeners allows us to increase some level of processing from Cauquenes. We also have to factor in, at some point in time, the improvements from the plant modifications that we have identified would have an impact on recovery. So I think that at this stage in time, we are cautiously commenting that for the time being, we're assuming that rain conditions could occur midyear and allow us to improve our performance in the second half of the year. But there are still those elements up in the area that really precluded from making an educated assessment at this point in time as to what the year-to-date or the full year production would be under the same conditions. There are factors that will be affecting and will be shaping up in the following weeks and months that will have an impact on that projection, Joe.

Okay. Fair enough. And also thinking on some of those comments you made about all these different initiatives you're looking at with the mill, is it still reasonable to expect that if, let's say, rain conditions return to what was normal 2 years ago and the -- all these initiatives get taken care of, could the -- call it, 2 years from now, could the mine -- or could the operations still get back to that original goal of 80 million to 85 million pounds per year?

We have no reason to say no. The assessment that we have at MVC was positive with the caveat that water conditions do have an effect. I think you have nailed it out in a very good way. If water conditions were not to be an issue -- water supply conditions were not to have an issue, saying that we have a substantial opportunity of improving plant performance to levels that are aligned to the original projections that we had ahead of us a year ago, let's say.

Okay. And then one final thing. I think last year, Cauquenes didn't really meet expectations on a grade basis as well. Are there any concerns that the resource grade that we're all assuming is still good, might be a little bit on the high side just based on the age of that estimate and erosion, et cetera, that have impacted that tailings since that -- since the time the resources put together? Or is that -- are you guys actively updating it and making sure that you still expect the same kind of grade long term from there?

Well, we have modeled in a very detailed way the mine sequence plan for 2020, '21 and '22. We are not seeing any significant indications of a review to those assumptions. Having said that, yes, we have seen historically that the performance has been -- when you get to the annual performance, we have seen changes compared to -- perhaps we averaged assumptions that were used in the technical model. I think that averages are always a bit of an enemy because they present a situation that looks more stable and more linear than when you're actually looking at the localized information. But in -- for example, in 2020, we're expecting -- and that has been factored in our production assumptions, that grade will be a little bit lower in the second half of the year just due to mine sequencing, but that is already included in the production forecast for this year.

Okay. Well, obviously, a lot of the stuff has been outside your guys' control. You can't control the weather, you can't control copper prices. But at least you guys are doing everything you can and that's appreciated.

Thanks, Joe.

And the next question is from [ John Polcari ] from New York.

My first question is on the total cost for all the incremental necessarily upgrades as well as the ongoing maintenance. What is the total CapEx for 2020, all-in, everything that conceivably has to be done on an incremental basis plus the ongoing normal maintenance CapEx?

Yes. Well, we mentioned that for the sustaining CapEx -- at the current time, we are limiting the sustaining CapEx of MVC to the water recovery projects, and that's $1.9 million. So we originally had a higher CapEx of approximately $3.4 million, $3.6 million. That has been revised to just take care of the water projects, which have a cost of $1.9 million. The plant improvements have a ballpark CapEx of $2 million to $2.5 million. This is a very rough estimate. We are still working to secure quotes and to get to the more definitive information on that. So you're talking about $4.5 million of CapEx in the year. The repairs to the thickeners are all within maintenance expenses. They are not CapEx-driven, and they are estimated to be in the range of $300,000.

So how is it possible to reduce the sustaining ongoing CapEx to an amount of $1.9 million? Wouldn't -- if it's normally somewhere around $3.4 billion, $3.5 million on an ongoing basis, what gets sacrificed?

Yes. Well, it's not a question of sacrifice, it's a question of what needs to be done every year. In the last year, a substantial portion of sustaining CapEx has been to build sumps at Cauquenes. And we don't have to build the sump this year. We don't need to buy -- build some next year. So that liberates a substantial amount of dollars on the Capex, sustaining CapEx budget.

So the sustaining CapEx number isn't particularly stable from year to year then?

We have always worked within the parameters of $5 million to $5.5 million, $6 million. But the lion's share of that in recent years has been for sumps. So if you take out -- for example, if you take out the cost of the sumps of $4.5 million, you suddenly have -- last year, we had sustaining CapEx in all other projects of about $1.2 million.

And that does not involve deferring essential maintenance that would just get pushed out then, you're saying?

No, it does not involve attacking or bringing onboard several sustaining CapEx projects. Maintenance is an operational cost. And maintenance is being carried out as needed as part of our operational budget.

Okay. Just educate me here as far as the actual percentage of mining from the new tailings versus the historic tailings. As time goes on, am I correct in assuming that the historic tailings would have become a greater percentage, but they don't appear to be moving up in terms of percentage? Or is that not the case?

No. Historic tailings are a substantial amount of our production. Last year, in 2018, they were 68% of production, and that would be the normal that we would be seeing from a normalized operation of Cauquenes. In 2019, because we had issues with recoveries on the Cauquenes feed, production from historic tailings decreased from 68% to 56%. But I would say that normally, you would say 65% to 70% of production should be coming from Cauquenes in a normal year.

And that would be a percentage -- a ballpark percentage that would be, not just for next year, but on an ongoing basis over the next number of years, right? That would be...

Yes.

Based on the substantial amount of tailings. Going back decades, that percentage is probably a stable number for years to come. Would that be correct?

That would be correct. Until that -- until Cauquenes is depleted. But yes, for the foreseeable future, that may be a normal number to expect.