First Majestic Silver Corp. (AG) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the First Majestic Silver acquisition of Jerritt Canyon conference call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Keith Neumeyer, President and CEO. Please go ahead.

Great. Thank you, and welcome, everyone, to today's conference call to discuss our acquisition of Jerritt Canyon. Today, we have, obviously, myself, and we're all remote, all seemingly in different locations right now. But Steve Holmes, our COO, is on the line; Todd Anthony, VP of Corporate Development, is also on the line; Ray Polman, our CFO, is there -- is here as well; and Connie Lillico, who is our Corporate Secretary, who's online as well. Before I get into the discussion, I'm just going to pass the line over to Connie for our forward-looking statement.

Prior to us beginning today, I'll read our disclaimer and forward-looking statement. Certain statements contained in this conference call regarding the company and its operations constitute forward-looking statements, as defined under applicable Canadian and U.S. securities laws. All statements that are not historical facts, including, without limitation, statements regarding future estimates, plans, objectives, assumptions or expectations of future performance constitute forward-looking statements. We caution you that such forward-looking statements involve known and unknown risks and uncertainties that could cause actual results and future events to differ materially from those anticipated in such statements. Such risks and uncertainties include fluctuations in precious metal prices, unpredictable results of exploration activities, uncertainties inherent in the estimation of mineral reserves and resources, fluctuations in the cost of goods and services, problems associated with exploration and mining operations, changes in legal, social or political conditions in the jurisdictions where the company operates, lack of appropriate funding and other factors as discussed in the Canadian -- company's filings with the Canadian and U.S. securities regulatory agencies. Resources and production goals and forecasts may be based on data insufficient to support them. The company expressly disclaims any obligation to update any forward-looking statements. Back to you, Keith.

Thanks, Connie. So I'm not going to read the news release or anything like that, I'm sure everyone has read it. And we do have a PowerPoint presentation on the website, which I suggest that people go to and have a look at it. I just wanted to stay high level for now before I get into the weeds on the transaction. But we look at 3 primary tests when we look at M&A transactions. And it's difficult finding good mines. And life of mine is very important, you don't want to be buying a mine that's -- you're going to have to shut down in a couple of years. You'd want a good, lengthy life of mine, and also, you want to be able to have a chance or at least an exploration plan or a view that you can increase the life of mine substantially over time. The second test is production increase. Can you actually produce more metal? And in some mines you can, obviously, in others, you can't. It just depends on the uniqueness of that particular potential target. The third pillar or the third test that we look at is cost reductions, and we analyze that quite deeply. We get pretty deep into the weeds on that, and then we come up with our own conclusions on what kind of things we could do. It just so happens that over the last 19 years, First Majestic has been really good at buying assets that needed money and needed time. In the case of Jerritt Canyon, over the last 5 years, Sprott has done an enormously good job in getting Jerritt Canyon to the way it is today. And if we -- I'm not sure if there's going to be any questions coming in on that, but Steve is online, and he can address some of the things that Sprott has done over the last 5 years. But the mine is in great shape. The mill is in great shape. But these 3 tests all came out very positive for us, and that's what really pushed us over and really got us excited about buying those assets because we believe life of mine can be substantially extended, we also believe that production can be substantially increased, and we also believe that costs can be substantially reduced. So these 3 focuses will be our main focus over the next 2 years, and we've already got a plan in how to achieve that. We can't get into too much real technical details today. Also, obviously, closing isn't going to happen until later in April. There's a number of steps that have to be taken to get closing behind us. And also, we need more time with the asset before we start putting out guidance and redoing our guidance and saying too much about what the future of this asset looks like. So we've got 43-101 coming out shortly. And the fact that we're not closed, in this discussion, we're going to limit the discussion to only just very high level introductory type of discussion. So looking at the transaction itself, we are increasing on a silver equivalency basis just based on last year's production, which is a COVID year, of course. They produced 112,000 ounces of gold. They probably would have produced a lot more if things would have been different. But nevertheless, we're selling or diluting the shares by 12% for a 35% increase in silver -- overall silver in production or you can call it revenues, if you wish. So that was pretty interesting to us. The fact that Eric wanted all stock, that also was a good situation. We're having Eric on board, and having him as significant shareholder of the company is always a good thing. He's one of the most influential investor that I've seen in the mining space. And for him to kind of have another check, it's his second private placement into the company in less than 12 months, and that shows quite a lot of confidence in the company from him. And it's interesting enough, as far as we can tell, First Majestic will become Eric's largest holding of any mining company in the space. So his current largest holding is Kirkland Gold, as most people probably know. But this will give -- the value of this position will actually exceed the value of his Kirkland position. So we're happy to have him on board, obviously, in a much bigger way than he currently already is. The warrants, we're giving him some warrants as well at share price at USD 20 per share. The pricing of the transaction was all done at $17.59 per share, which was the 20 days VWAP. On paper, it's, obviously -- looks pretty good. It's -- and it's accretive on all measurements and all metrics that you could imagine. So just going into the asset itself, it's in Nevada, of course. It's our first investment in the 19-year history of First Majestic, whereby we're investing outside of Mexico. There might be some questions around that, but we've been looking at assets outside of Mexico for quite some time, a couple of years, and we're still looking at a number of assets. We've got a whole list of pretty interesting projects that we're looking at, and it just so happens that this one came to be more quickly, probably because it's private and also it's easier to, I suppose, do a deal. But this was not an easy deal, by any stretch. But there are assets, I've said, we've been looking at throughout the planet, throughout the globe. And there are -- we'll continually do that. We're going to stay as silver-centric as possible. I know this is a 100% gold mine, but this is -- the final -- it was just so compelling to us and had so much upside for us, and also putting us into a brand-new jurisdiction like Nevada, one of the best mining jurisdictions in the world. It just made a whole bunch of sense on so many different metrics, and we decided to pull the trigger on it. And -- but, of course, minds are always on silver, and we're going to continue looking to build our silver portfolio. So I would suggest to investors they don't need to be worrying about us turning into a gold company. An interesting upside was the -- is the plant. This plant has not been filled for quite some time to capacity. It's currently operating at about 2,200 tonnes a day. The bottleneck is the mine, and we know that. So we need to be doing substantial development over the next couple of years to really get this mill filled, and that's going to be one of our primary strategies. Big land package, over 30,000 hectares, very underexplored. Our team is quite excited about getting rigs spinning, and we'll be very much focused on extending the life of mine through exploration over the next couple of years as well. And some other highlights. It's -- on a combined basis, as many of you probably know, in the news release that we put out in January, there was a sentence in there that says our target is to reach 30 million silver equivalent ounces by 2023, and that was without M&A. That was just with the growth that's happening at San Dimas and Santa Elena because we're still, obviously, very much focused on building those 2 mines. And -- but with this acquisition, it actually gets us to 30 million right away, so we're going to have to redo our guidance. But obviously, by 2023, with the successes that we're expecting to have at Jerritt Canyon and also now at San Dimas and Santa Elena, those 3 mines, I think, are going to be producing more than what we've currently stated. So as I said, we'll try to restate our guidance as quickly as possible, but don't look for that probably until July. We will need a couple of months to, obviously, operate the assets. So we have a team going down this week. I'll be down there myself on Thursday with our COO, Steve Holmes. We also have our Human Resources Vice President, Dave Smith, coming as well as our VP of IT is also coming as well. So we're starting hard, and we're going to have a team on site during the entire closing period just assisting and learning, of course. So I would suggest people go to the website and have a look through the presentation. I'm not going to sit here and read it all. I think I've said enough. Would be happy to go to questions.

[Operator Instructions] The first question comes from Heiko Ihle with H.C. Wainwright.

Jerritt Canyon has been around for a long time. In fact, I was at the site many, many years and a few owners ago and saw the roaster first hand. Let me tell you, it's a gigantic piece of equipment, and all in a jurisdiction that really loves mining. I mean this is obviously a transformational acquisition. Is there a longer-term message for the firm or that you want to send out with -- in regards to diversification into gold and across borders? Should we read anything into this for the remainder of the year? You sort of alluded to part of the answer to this question in your prepared remarks a bit ago, but is there anything else you want to share with us, Keith?

Well, we're in a pretty good position right now. We have 3 mines producing doré bars, and 65% of our revenue is silver and the balance is gold. So we only produce 2 metals, which is a pretty nice place to be considering going back to 2017 where we produced a zinc concentrate, a lead concentrate and doré bars, and then we actually produced a silver-gold concentrate as well. So the business was much more complicated. And the nice thing about Jerritt is it's doré producing. Yes, it's 100% gold, and -- it does reduce our purity a little bit, but it still keeps us in one of the top range of the purity in the entire silver space. I think what the next acquisition looks like would be the biggest question. We're trying our best not to turn ourselves into a gold company. I like gold, don't get me wrong on it. I like silver, and I know our investors and shareholders like silver as well, so we're very cognizant of that. And I think our portfolio will change over time. I think if you went out 2 or 3 years, you'll probably see a lot of our noncore assets, which are under -- currently out of production, likely sold or partnered with other groups, and I think you'll probably see more diversification internationally outside of Mexico.

Fair enough. You mentioned in your release that you have identified several opportunities to enhance both the cost and production profile of Jerritt Canyon. It sounds like you don't want to provide that much color on this call in regards to what you expect to see besides what you have on Page 9 of the presentation. But I mean maybe just a little bit, do you see this mostly in exploration or in mining activities? And maybe I'll press a little bit more even and say do you have a mental timeline for what you expect to see with regards to impact on the asset following the close of the deal next month, the cost savings?

Well, of course, we do, and we've done all of those numbers. And we do have expectations, and quite high expectations. But I just -- we can't put out any numbers right now. There's -- we could say a broad statement to answer your question broadly, but we just can't say we're going to produce X in X period of time or we're going to -- so on and so forth. So Steve, you want to just step in and maybe just make a comment?

Yes, we could talk a little bit. The 2 things that really stand out at Jerritt Canyon, one is that the plant has tremendous capacity, both real capacity and permitted capacity, that's not being utilized. And there's a number of options for us to be looking at to increase that capacity fairly rapidly. The other piece that you mentioned was exploration. The area is a huge land package. And if you looked at all the detailed exploration done over the last 40 years, it's actually quite small. We think there's a tremendous upside to looking in exploration in the district. And so those 2 factors for us were where we zeroed in on in terms of our due diligence work with Jerritt, and we're confident that we're going to see really good things in those 2 areas.

Excellent. Very helpful. And then just a little clarification. Do you happen to know how much was invested into the property over the past year in regards to exploration?

Todd, do you -- we can get that, Heiko, for you, but I'm not sure if we have that. Todd, do we have that?

No. We don't have that available right now, Heiko, but I can follow up with you after the call.

The next question comes from Craig Hutchison with TD Securities.

I know you can't give forward-looking guidance, but just in terms of sort of the historical CapEx, I think it's a similar question to Heiko, just any sense of what the historical CapEx per ounce has been sustaining and/or development over the last couple of years?

I'll have to pass that to Steve.

Okay. Yes, generally, the sustaining CapEx that's been invested has been focused on a couple of key areas. One is obviously mine development, because in the underground mines, they basically develop and extract ore. It's all one combination of effort, and it also includes their exploration -- what I'll call near-term exploration in order to control drilling, so that's where some of the investment has gone. But the other investment has gone in water treatment. And quite a bit of focus in the last few years has been on addressing some of the environmental concerns that have been part of Jerritt Canyon in terms of water treatment and air quality. And in my view, Sprott has done a very good job in positioning the asset to begin to shift away from solving environmental issues and more on real value investment, and I think that's where we come in.

But just in terms of kind of a rough number, so we have something here of kind of going forward, what has been historically maybe on a balance basis or just kind of a nominal number the last couple of years?

Yes. My understanding is the $30 million to $40 million a year sustaining range, which includes addressing some of those some of those investments that I just mentioned, the biggest one being water treatment.

Okay. Great. Is there any historical liabilities you guys are assuming for this project?

When it went bankrupt 5 years ago, all of that historic stuff was erased, which is interesting. So the starting point was actually when it came out of bankruptcy. So it made the due diligence a little bit easier because we didn't have to go back that far. And then they're -- we've looked at all -- being Nevada, it's obviously -- you're under a lot of scrutiny and so on and so forth, and they're very active. There are regulators in that part of Nevada. There's offices right there, and they do regular inspections. So there's a lot of communication between the mines and the region and the regulators, and we feel that the mine has done -- under Sprott's ownership done a pretty good job, actually a very good job in dealing with all the issues, but they continue. There's a roaster there. It's 1 of only 3 roasters in the entire state, and that comes with unique issues about the waste or the smoke that can come out of these things, you have to deal with in a particular way, which creates unique challenges. But we've done a lot of this stuff before. We've got a pretty darn good team of people, and we'll be bringing in the other people as well that can assist in all the different areas that we may have holes in our organization currently. But we're already looking at adding some individuals with certain expertise that we may lack.

Okay. And maybe just one last question for me. Just in terms of the report that you're going to report in the next couple of months, is the anticipation to report reserves for that technical forward, or should we expect this all measure indicated?

That's a good question. Todd, do you know to answer to that?

Yes. Craig, yes, they are expecting to declare initial reserves in this report, so P&P, M&I and inferred will be reported.

[Operator Instructions] The next question comes from Ryan Thompson with BMO.

You touched a little bit on there's latent capacity in the processing plant there and you're looking to sort of fill the mill with exploration and development work. Why are you kind of doing that work? Is there opportunities, or are there people potentially calling you with refractory ore in Nevada that they're looking to get processed? How should we be thinking about that opportunity?

Yes. It was one of the business propositions that interested us. Having one of the only roasters around, we know there's material in the region. The current management team just had started some work on potentially doing something in that area by doing toll treating to fill part of the mill. We will take that legacy over and continue those discussions. It's too early now to really suggest if anything is going to happen or what that will look like. Steve is quite expert at this area because he's done these types of things before. So it's -- commenting on whether it's yes or no, it's just too early to say, Ryan. Unless Steve, you got any other comments on that?

No. But I think Ryan has got it exactly right. It'll take a little time to gear the mines up. And if we do advancement on some of the open cuts, that's going to take permitting, and we've accounted for that. And so yes, we're going to look at all options to get full capacity on the plant to generate value. And there are options in the area, certainly. So it's just something that has not matured at this point, but clearly, it's on the radar for us for sure.

Okay. And this technical report that you're coming out with, is it going to sort of lay out to the market what a higher-throughput scenario could look like? Or is it going to sort of assume more historic run rates?

Todd, do you want to jump in?

Sorry, what was the question?

So the technical report that's coming out in the coming months here, like, is that going to show to the market like the sort of increased potential of higher throughput? Or is it going to contemplate throughput sort of more in line with historic run rates? Like, how should we be thinking about that?

Yes. The report is really focused on what the prior report left off on. The last report that was public was in 2018, so all the drilling that's occurred since then will be updated. We're not in control of that report right now, so it is still under Jerritt Canyon's approval and review. So I'll find -- I can find out, Ryan, but for the most part, I think it's just going to be based off of just the current resources and what is -- not what we're implementing in the future.

Got it. Okay, yes. No, that makes sense. That's helpful. And maybe I'll just ask one more follow-up question, and then I'll turn it over. But maybe, Keith, can you just walk us through some of the deal background and how this transaction sort of came to be? Were there other parties interested in Jerritt Canyon? Any sort of color you could provide on that would be helpful.

Yes. You'll have to ask Eric himself that question because I don't know the answer to that. Eric and I go back a long ways. And we've been looking at M&A opportunities for -- well, we always look at M&A opportunities. But since we got San Dimas in our portfolio back in May 2018, once we were able to consolidate that into our business, obviously, we started to look elsewhere and what does the next transaction look like. And we worked with the banks, including BMO and TD and the rest of the banks out there, and we get ideas given to us on a pretty regular basis. And then we're always digging around and doing site visits. And this one just happened to be right on several metrics. Despite the fact that it doesn't have silver, it was still -- everything else about it, it was just perfect for us and our business and what we do best and have done best over the last 19 years. So it just really fit well and it got us into Nevada. So there were just a lot of real good reasons to do it, but it's one of the whole list of things that we're working on. And as I said, this one came to be now and stars aligned, which you can never predict when that's going to happen, but it did.

This concludes the question-and-answer session. I would like to turn the conference back over to Keith Neumeyer for any closing remarks.

Okay. Well, thanks, everyone. I would suggest, again, go to the website, the PowerPoint that's on there has got a lot of good detail into it -- or in it. Look for news coming up. There will be the 43-101 coming out likely before closing, so that will be kind of the next big public event, I suppose. And then we'll have the closing, and then come early to July, we'll redo our guidance and start talking a little bit more about the future of Jerritt Canyon. So we're excited about getting into another country. We have to change our slogan from 2 countries, 2 metals or something. But anyways, well, thanks for everyone joining us today. Have a good day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.