Andean Precious Metals Corp. (APM) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Andean Precious Metals webcast for the first quarter of 2023. I'm Trish Moran, Andean's VP of Investor Relations. Before we get started, I would like to point out that during today's call, we may make forward-looking statements as defined under Canadian securities law. I ask that you view our slide presentation for cautionary language regarding forward-looking statements and the risk factors pertaining to these statements. Our MD&A, financial statements and relevant filings, are available both on SEDAR and on our corporate website and andeanpm.com. I'd also like to remind you that this webcast is being recorded. With us today is Alberto Morales, Andean's Executive Chairman and CEO, and Juan Carlos Sandoval, our Chief Financial Officer; and Segun Odunuga, our EVP, Finance. Following management's formal remarks, we will then open the call to questions. And now over to Alberto.

Thank you, Trish, and welcome, everyone. While our first quarter results reflect the fact that we are still focusing on correcting some of our operational challenges that arose last year, our priorities for 2023 are clear. First and foremost, we are focused on maximizing the value of our core asset in Bolivia. As you know, San Bartolomé business model is unique, in that, we don't just rely on our own material to fit the mill. We obtain feed from multiple sources. This business model has been proven as it has provided us a strong financial platform, and it continues to provide unique levers that allow us to better adjust to volatile market condition and advantage that traditional mining models does not have. Because we get a significant portion of our feed from third-party suppliers, such factors such as production, grade, metallurgy and recovery require our utmost attention. San Bartolomé does not run on automatic pilot. To further optimize our plan and maximize output and with the help of industry-leading consultant, we are concentrating on the core principles of our operations and logistics, reviewing each and every stage of the production process, analyzing the metallurgy of feed material and taking corrective measures where required. Enterprise Resource planning has been implemented that should help our team to manage processes and supply chains as well as analyze material composition data. Phase 1 of the platform has been deployed. Already we're seeing an improvement in waste separation process. Phase 2 of the project is underway, targeting feed to the mill. Our goal is to achieve better grades and recoveries in the second half of the year. Equally important to optimizing processing at San Bartolomé is extending its mine life. To achieve this, we are looking into securing additional third-party materials as well as converting our FDF resources into reserves. SRK the consultants assisting us to better understand the metallurgy of our tailings has just completed a GAAP analysis and will be commencing a reserve estimation shortly. We have also tasked our Bolivian team to cast a wide net and scout for higher-grade feed stock. Transportation of material over longer distances can be economically feasible in Bolivia as long as the high grade is there. In Bolivia, there are a large number of deposits, some of which have grades of more than 300 grams per tonne. The team is actively looking for steady supplies of such deposits to feed the mill. Clearly, we have much to do in Bolivia, but I am confident to have a team that is focused on this priority and on delivering results. Our second key metric objective in this year is to announce an acquisition. While we have been talking about M&A for some time, the interest yield curve continues to be inverted, creating a credit crunch that extends the window of opportunity for us to continue to look for assets to buy. Although there are discounts on the sale price of assets, we are beginning to see more attractive valuations. Without a doubt, having our strong balance sheet in times like this is a big advantage that we are seeing, in that liquidity challenged assets are having difficulties to secure financing because the cost of debt or equity is getting too high and owners of privately held assets are now looking for an exit, seeking some liquidity in the form of a cash component. We have analyzed a significant number of opportunities at different development stages, which are located in various jurisdiction. The list is down to a handful of names, and we believe would be most accretive to Andean shareholders and would be a good first asset to acquire. I would now like to hand over things to Juan Carlos, who will review our first quarter financials in more detail.

Thank you, Alberto. Well, our flagship San Bartolomé mine got off to a slower-than-expected-start of the year, we are reaffirming our full year 2023 guidance. Our independent consultants are making headway on further optimizing production and increasing operational efficiencies at San Bartolomé. We are seeing some improvements in material sourcing and plant recoveries. Now let's look at the details of our first quarter financials, starting on Slide 11. We've produced 1 million silver equivalent ounces this quarter compared to 1.2 million ounces in Q1 2022. While recoveries improved slightly to 79%, the production shortfall is due to an 8% decrease in tonnes milled and 9% lower grade. More than half of the ounces produced in the first 3 months of the year came from purchased material with an average grade of 214 grams per tonne. However, the volume purchase from third parties during the quarter was negatively impacted by the extended Bolivian holidays recognized in January, resulting in 10 lost days of production and some road blockages by protesting public service workers. Tonnes milled at our Pallacos and Cachi Laguna were down slightly. However, the main issue was grade due to the depletion of ore. The grade of our mine material was nearly half of what it was in the prior year. It is for the reason that we are increasingly focused on securing new contracts for material purchases. Our year-over-year revenue declined to $23 million from $29.9 million, mostly driven by a lower production, a little over -- a little more than 200,000 ounces, which affected revenues by $5.5 million and a decline in average realized price of silver per ounce negatively impacting revenues by $1.3 million. We had 68,000 silver ounces bullion dore in inventory as of March 31 as we continue to opportunistically withhold sales of bullion during periods of soft pricing. These ounces were subsequently sold at a much higher price last month when the silver price touched a high of about $26 per ounce. To further preserve our average realized price and subsequent to quarter end, we entered into silver collar contracts with an average put strike price of $23 per ounce, and an average call strike price of $30 per ounce for 200,000 ounces per month beginning in August and through the end of 2023. The next slide shows our cost per ounce metrics which were affected by the negative impact of high inflation on our costs and an 18% reduction in silver equivalent ounces sold. To put the inflationary pressures into perspective, the price of cyanide is up by 30% year-over-year, driving milling costs up by $600,000. Inflation has also had an impact on fixed cost like salaries. An additional factor this quarter was the impact of processing harder than anticipated material. We sold more than $800,000 in incremental cost due to the increased consumption of materials, such as [indiscernible] and grinding balls. We also used more water from regulated sources outside our concession area due to the less anticipated rainfall in Q1. G&A in the first quarter decreased to $2.5 million, an improvement of $400,000 over the first quarter of 2022, primarily due to a reduction in share-based compensation expenses. Our focus is on achieving operational efficiencies and prudent cost reductions in 2023. Moving to our profitability metrics on the next slide. And as a result of the factors just discussed during Q1 2023, we realized income from mine operations of $400,000, gross cash profit of $1.8 million and EBITDA and adjusted EBITDA of $1.5 million and $1.4 million, respectively. With the initiatives we have underway to improve production and costs at site, together with the silver contracts recently put in place, we expect our production and profitability metrics will improve over the remainder of the year. As of March 31, our balance sheet remains debt-free and our working capital of $90.5 million marked a small increase from the end of 2022. We had more than $84 million in liquid assets, including $75.8 million in cash, $6.1 million in marketable investments and $2.5 million in VAT certificates. With respect to our cash balance, the year-over-year decline was primarily due to a net cash flow used in operating activities of $4.3 million and impacted by the timing of certain vendor payments and settlement include liabilities, including $1.7 million in payments of previously accrued severance and bonuses. During the quarter, we also used $400,000 to repurchase our shares at an average price of $0.86 under the previously announced NCIB program. I would like to highlight one final point, until now we did not have a formal investment strategy for our large cash balance. Recently, we opened 2 new custodial accounts, one with a Canadian wealth management firm and the other one with an international investment group. The investment strategy is very conservative. The focus is on capital preservation and only a portion of our cash is invested. The investments are mostly in U.S. treasuries generating around 4% interest per annum. By formalizing our cash management, our capital is yielding higher and more -- with more steady returns. This concludes our formal remarks. Now back to you, Trish.

Thank you, Juan Carlos. We'll now start our Q&A session. [Operator Instructions] Our first question is from Justin Chan at Sprott Securities. Justin?

Trish, Just -- we're SCP Resource Finance output small detail. I was just wondering, first on the Pallacos, what you think grade will look like for the remainder of the year? Do you expect them to revert more upwards towards where you were before? Or you mentioned depletion. So I'm just wondering what to expect for the rest of the year there?

This is Alberto, Justin. Yes. On this particular matter, we were assuming that Pallacos will still be giving lower grade material. So what we're intending to do and this is part of our FDF analysis is we're getting into the specific details of actually replacing the Pallacos with the FDF materials. The economics of which should be more beneficial to us literally because we would not have mining costs involved with other than actually incurring in some capital expenditures, of which that would reduce significantly the operating expense of actually taking those -- those materials back to the mill. So we're assuming Pallacos will be lower grade as it has been showing for now. That is a conservative approach that we're keeping in mind. However, we would like the strategy behind getting the FDF up and running, it's mostly because of that to try to replace the Pallacos and use it as a blending source for the other harder materials that we're using into the mill and feeding the mill with.

Got it. And just working back towards your guidance, which is 4.8 million to 5.2 million. Does that assume then a significant pickup in either purchased material volumes or grades or both?

Yes. We are now -- and I'll expand a bit further on this point. We are now actually focusing very -- on a very detailed basis and are actually securing a purchasing team in Bolivia with this specific priority of securing higher grade ore, that is just for starting points. And secondly, we are also focusing on recoveries. We are undergoing and some -- we've retained some industry expert consultants on this and are reviewing the metallurgy of all the different ore sources towards achieving the best blend composition that was -- that is actually feeding the mill to try to cut on consumable expenses such as cyanide, flocculent, et cetera, and at the same time, try to increase that recovery. The combination of both will certainly be helping us to achieve our guidance. Also, if you take a look at our historical track record, production for San Bartolomé has always been loaded on the back end of the year. Because usually, some years, while we anticipate always a slower beginning of the year due to holiday seasons, local and in general, we have always had that back ended load in the production. So mostly impacted as well by the purchases that people on the back end of the year, actually, we get more willing sellers to actually send us the supply materials.

Okay. Understood. And just on the FDF. So your current thinking is wide just slurry the material to the plant, any circuit additions? Or it sounds like the gravity circuit is probably not in the plan, so just slurry the material and put it through the circuit or any changes?

Thank you, Justin. As to mention that is what we are planning with the FDF project, mostly pumping the materials from the tilling dams and then through gravity goes to the storage tanks that we are building as part of the FDF project and that would go to the directly to the plant. We expect some high increase into the recovery and also on the grades that we will be pumping out.

Okay. Got you. But the actual plant itself is the same circuit? Or were you saying you will have a gravity circuit on the front end first?

It's gravity circuit.

Our next question is from Nick Fordy of Desjardins Securities.

This is actually Jon, the analyst. I think it is my associate logged in for the call. So the past few quarters in a row, we've seen kind of gold production dip below historic levels. I guess what's causing that? And do you expect that to kind of reverse in the upcoming quarters, specifically gold instead of silver?

Yes. Jon. As you know, most of our gold recoveries come from Cachi Laguna. So while we're scouting and mining some of the areas of the Cachi Laguna have more gold than others. So depending upon that we're looking into it, we're scouting and mapping the Cachi Laguna's deposits to try to get the best feed. But we're assuming that the gold may be lower around the average that we've got in Q1 together. But should we begin to scout a better section on the Cachi Laguna rest assure that we will be looking towards those deposits. But as of now, we're assuming that they will stay in the lower end as we saw them in Q1.

Okay. Yes, understood. And can you guys give a bit more context to the road blockages that happened in March and maybe commentary on if any of that has sold into April or May to affect Q2?

Yes, I can. During the early part of the Q1, there were some protests made by public workers related in connection with the regulatory environment, primarily applied to the lithium industry. There has been some discrepancies, tensions and positions taken that it literally boils down to the -- how deep the government regulatory environment would be either warranted or desired for the industry going forward in the lithium side. As you know, the community in Potosi is very sensitive about that industry mostly because it's being viewed as probably one of the largest and most prominent prospects that the country has. So it's picking up significant attention. It did not spill through Q2 as we have not seen those anything above that in Q2. Although I cannot assure you that it's not going to happen again something like that but so far, things are being steady in Q2.

Okay. Great. And I guess kind of specifically this year, should we expect the final results of the feasibility work on the fines disposal facility and to go for decisions at -- coming very soon Q3, Q4? Just wondering what the timing of that is?

Yes. Thank you, John. We are advancing the work on the FDF and based on what has been planned right now, hopefully, by first quarter of 2024, we should see some production coming up from the FDF.

Okay. And has all the work being done -- is there any work being done on the dry stack facility right now, thinking about processing those? Any kind of network? Or is everything looking at the FDF.

Yes, we are focusing on the FDF. That's where we are focusing on right now.

Okay. Any kind of thoughts or plans as to why not looking at the dry stack as well? Or is it just manpower systematically looking at one thing and then moving on to the next. I think the FDF is maybe a little bit higher grade, but dry stack is bigger.

Yes. Right now, based on our business plan and also on competitive pricing, we believe that at this period of time, we should focus on the FDF. While as soon as we bring the FDF to production, then we would assess the situation at that time on the DSF. We are having plans also as part of the overall business strategy to do something with the DSF. But at this period of time, we just want to focus on the FDF.

Thanks, Jon. We have a couple of questions that have come in online. The first one is, are there any plans for tin recovery? And is this being included in the tailings review?

Right now, we are focusing on our priority, which is silver recoveries and extending the life of mine of San Bartolomé. Therefore, we're prioritizing the silver recoveries as opposed to doing a combined tin and silver recovery. We're also intending to defer the decision when we take a look at the DSF and hoping that better spot prices for tin may be showing up as we go along into next year. So for now, our priority is clear, extending San Bartolomé life of mine and increasing the reserves of silver into our 43-101 technical report. That's the focus.

Thank you, Alberto. What is the reason for choosing silver collar contracts?

Thank you, Patricia. It's really to protect our revenues in accordance with our internal budget and to protect against the volatility of silver prices.

And Juan, could you explain the M&A process a little more? And are you hopeful about the acquisition opportunities that you've narrowed down?

Yes. Thank you, Trish. So Alberto mentioned and as you know, this is something that we have been focused on for the last few months and continue to make progress. We have identified a number of potential targets that we believe are the most or would be the most accretive to our shareholders. So we feel confident about the process.

And what happened between the end of the year and now in terms of adding mine life at San Bartolomé?

Well, as we have mentioned, we are engaged in the negotiation of a specific number of contracts with third parties to purchase higher-grade material to feed the mill and we are looking forward to completing our FDF analysis to include those resources and resourcing to our 43-101.

Okay. And our last one is all-in sustaining cost per ounce for Q1 were well above guidance. How are you going to make sure that all-in sustaining costs go down for the rest of the year? And that we don't have to revise guidance?

Yes. Thank you, Trish. Like we've said, we are focused on higher ore grade as a starting point. Secondly, we are focused on improving our recoveries. And last but not least, we are very focused on our -- on cost control measures.

Great. Thank you, Juan Carlos. And if there are no further questions, that wraps up today's webcast. As always, please feel free to reach out to me at [email protected] if you have any follow-up questions. That now completes our call for today.