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's Q4 Production Results and 2024 Guidance Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Keith Neumeyer, President and Chief Executive Officer of First Majestic Silver. Keith, please go ahead.

Thank you, operator, and thanks for everyone joining our call today. We have our senior staff on this call. We're somewhat separated right now remotely. So hopefully, the sound quality is sufficient as we all participate in this call. I would like to introduce a couple of individuals. Firstly, Steve Holmes, our Chief Operating Officer, is on line with us today. Steve you want to say hello?

Hello, everybody.

We also have David Soares, our Chief Financial Officer.

Hello, everyone.

And Samir Patel, our General Counsel and Corporate Secretary.

Good morning, everyone.

And Mani Alkhafaji, our Vice President and Corporate Development and Investor Relations, individual. Before I get into my recap of today's news, I'd like to pass this call over to Samir, just to read our forward-looking statements.

Thanks, Keith. Before we begin today's call, I would like to remind you that we will be referring to certain non-IFRS measures and making certain statements regarding First Majestic Silver and its operations that constitute forward-looking statements in accordance with applicable Canadian and U.S. securities laws. All statements that are not historical facts such as statements regarding future estimates and plans or expectations of future performance, constitute forward-looking statements that reflect the company's current views with respect to the future events. These statements are necessarily based upon a number of assumptions and estimates that, while considered reasonable by the company, are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. We encourage you to refer to the cautionary language included in our news release that was disseminated earlier this morning. And the disclosure on non-IFRS measures in our most recently filed management's discussion and analysis as well as the risk factors set out in our most recently filed annual information form. As a reminder, these documents along with all of our continuous disclosure documents are available on CEDAR + and on EDGAR. Investors are cautioned against attributing undue certainty or reliance on any forward-looking statements made during today's call. And the company does not intend or assume any obligation to update these forward-looking statements or information, other than as required by law. With that, I will turn the call back to Keith.

Thanks, Samir. I appreciate that. So I'm not going to read the news release, of course, I think all of you have it in front of you, so I don't need to go through it in detail. But there is some highlights that I think should be discussed and I will address throughout this call. And of course, we'll have questions and answers after my short presentation. You saw Q4 being a pretty strong quarter. 2023 was somewhat of a challenging year. We started off with the shutting down of Jerritt Canyon, which in the South was a difficult decision to make. It was the right decision mind you, and we've got a lot of excitement around the future of Jerritt Canyon, that can be discussed at some other point. And I think this call here at whenever we get a chance to get together over the year because we will be coming out with additional news on that asset over the next 12 to 18 months. But just covering off Q4, we can see we ended the year off quite strongly. Santa Elena hit an all-time record again, and it's not the first time it has done that. And we're pretty excited about the future of Santa Elena. Its a huge line package and it should be a bigger mine as far as I'm concerned, but only time will tell. But the exploration that's going on there, the production that's coming out of there is just -- it's pretty fantastic. And there is a chance that Santa Elena could potentially even exceed the production of San Dimas, which would be pretty interesting if that actually did occur. But I can tell you that internal discussions are going along that path. But nevertheless, we'll see how that all transpires over the next couple of years. One of the big things that we've achieved is really improving our ESG score. This is a topic that is relevant in today's environment. And then Manny and I were just on a road trip a couple of months ago through Europe, and we were complemented by a couple of institutions who have actually added to their positions because of this exact score. And our team which reports under Manny's directorship is very responsible for this initiative that's underway and it's pretty exciting to see. Exploration for 2024, it's going to be a major exploration program. Will be about $39 million being spent on exploration in 2024, which is obviously, a major investment, about $10 million as going into Jerritt Canyon. The balance of that is being spread throughout Mexico. The company hit close to 27 million ounces of silver equivalent production in 2023, midway between our guidance, a little bit north of 10 million ounces of silver, which you can see in the company's news release and just moving along, we were able to successfully sell 2 of our assets, La Guitarra Silver Mine and La Parrilla Silver Mine, and we have very large positions in both Sierra Madre and Silver Storm, which we're optimistic that will turn into interesting investments for us over time. The -- we're assisting the management of both of those companies whenever necessary. And we're optimistic, or we're actually pretty impressed with the progress that both companies have been making with both of those assets. So there's been -- I would suggest that listeners to this call, would go to their websites, Sierra Madre's website and Silver Storm's website. Have a look at really what they're doing because what they're doing at both La Parrilla and La Guitarra far as I'm concerned, is pretty exciting. Following the -- some of the analyst reports that have come out this morning and also with the stock performance this morning, were down a little bit more than GDX or some of our peers. And I get that's probably likely to do with the La Encantada guidance that we're giving. And we just want to cover this off because it is very important. We were challenged with how we guide. We were quite optimistic. When we lost the water well back in Q2 of 2023, we weren't expecting that it was going to be a big challenge, redrilling a new water well and just simply bringing the water back online. But after 3 holes, the third hole actually hit water, which was nice to see, but the first 2 were not that successful. The third well that we drilled didn't give us the amount of water that we're hoping. So we're now drilling additional wells. We're budgeting for Q1 to drill 3 additional holes for water. But our guidance is -- and we debated this among management on how we guide because I think our guidance is quite conservative. I think we're kind of a little gone a little bit overboard quite frankly. But we're assuming that we do not discover any water in 2024. And that's why we're showing the costs that we're showing in this table on this -- in this news release. I don't believe it, quite honestly. And we've had this in general discussion among the senior management team, but we actually can't come up with a number. So we decided, okay, go ultra conservative and just assume that there's no additional water we're going to run at this 2.2 million to 2.4 million ounce rate for all of 2024, which, of course -- of course, with fixed costs and the lower throughput, you're going to have elevated costs. Of course, we're not going to accept this. We're going to drive these costs down throughout the first couple of quarters of 2024 and we expect to hit water sometime throughout the next couple of quarters, which will also, of course, bring La Encantada back up to its normal throughput rates and normal cost rates. But we can't guarantee that. We don't have any technical guidance to suggest that we're going to be successful. Therefore, we decided to take the ultimate conservative view on this asset. So that's where that number has been driven from. Hopefully, it turns out better than obviously what we're guiding. Moving along, our investments in exploration, it's not quite a record, but $35 million in exploration is a big, big program. We're happy to be able to spend those kinds of dollars. Santa Elena will get a good run to that investment, of course, San Dimas as well and to a lesser degree, Jerritt Canyon. I think that's about it for the news release, so why don't we just open the call up to questions.

[Operator Instructions] Our first question is from Craig Hutchison with TD Securities.

My first question is regards to inflation. Can you give us a sense of kind of what IS the inflation rate you're seeing in Mexico? I noticed you're using a slightly weaker Mexican to U.S. dollar exchange rate of [ $18 ] versus the current [ $17 ] now. But what's the sort of sensitivity with regards to the peso, like what percentage of your costs are fixed in the Mexican peso.

Well, I'll -- thanks, Craig, for your question. I'll quickly answer that question, and I'll pass it on to David. But our inflation rate, I think we used in 2023 worked out to about 8%. The -- David, you can correct me if I'm wrong on that. But the peso has been stronger than expected, of course, even with the lower energy prices and the analysts that I listen to any ways or even calling for lower oil prices. So and with the election coming up in Mexico and the uncertainty of what this new government is going to do because the current government is selling bonds at quite inflated prices, which is supporting the peso. So that's been a little bit unusual. So there has been an influx of capital coming into their country, which is unfortunately negatively affected us. We had 21 to 1, you know, Peso to the Dollar, only about 18 months ago and now we're at 17, as you say, when we used 18 in our budget, we just were consensus. We looked at all the banks. And then looked at even your bank and looked at all the consensus, and we just kind of came up with a number. It's not magic. It's just a number that we felt comfortable using. We rethink the peso will weaken. Hopefully, we're right on that, but I just don't -- we don't have a crystal ball. David. I'm not sure if you have any comments you'd like to add to that.

Yes, it's absolutely right, Keith. So when we prepare the budgets, we took a consensus of the different banks projections for 2024. It looked like they were from a starting point of about 18, they were projecting a weakening of the Mexican peso by about 0.5 point a quarter. It looks like some others have that same rate of, let's say, weakening throughout the year. So we're seeing a stronger mix in peso than what we thought at the beginning of the year. But the rate at which it's expected to weaken is pretty much the same in terms of how we offset that, Craig, is through our cost saving initiatives, which we've been pretty successful at last year. Implementing many cost-saving initiatives that have helped us sort of offset inflation and offset some of this strength in the Mexican peso. And in 2024, we also have significant cost saving initiatives that are in our budget that we feel confident that we'll be able to get. But as Keith said, this is something that we're watching. It's from what I understand, many of the economists feel it's one of the most difficult years to predict what the peso is going to do. But in general, we feel it's going to weaken from this point onward into the year.

Okay. And maybe just a follow-up question. With regards to the capital programs you guys have this year, the $39 million of expansionary capital, can you talk to what those projects are and which assets are allocated to?

Yes, Steve, do you want to jump in and address that.

Yes. Sure. The expansionary capital really consists of a couple of things. We classify exploration as part of that in some cases, we also classify mine development. Inside the company, we do not have any major capital investment projects like dual circuit, which we completed last year pretty successfully. So this year, we're focused really on mine development and exploration. And there's a few other things that are kind of focused on the expansionary side. A little bit different like the Mint. The mints a little bit different. But yes, our expansionary capital is really focused on underground mine development. We're about 31,000 meters at $66 million. And then our PP&E, which is mostly a mix of sustaining and some expansion, but mostly sustaining is about $22 million. So there's nothing that really stands out, except for when you say expansion area, it's really about exploration and it's about certain mine development.

Yes. So it's more of an accounting treatment. I think maybe David might want to comment as well. But it's always a battle between the accountants and the company on what you define as sustaining and what you define as expansionary. So it's a causing debate. David, do you want to add to that?

Well, I think Steve is right. Like look, when you look at where we're investing our money this year, there's a significant portion all of the exploration in this program is expansionary. As far as the split on underground development between what's sustaining and expansionary, we have certain rule sets that we follow and we don't change. And it depends where the development is being done and what it's for and how it's -- how we ultimately classify it. But in terms of the -- where the majority of the dollars in our capital for 2024 is being spent, it's definitely geared to the expansion of our existing assets. And really, it's the 3 larger ones. It's San Dimas, Santa Elena and Jerritt Canyon with the exploration program that we're doing there.

Okay. Great. Maybe one last question, I'll turn it over to the next caller. But in terms of the grades of San Dimas, you're still sort of trending below reserve. Can you just talk to kind of what the profile looks like there on the -- in terms of the grade outlook? Do you expect to kind of trend back to reserves? Or are you just seeing higher dilution overall?

I'm not sure if Gonzalo is on the phone, Steve. But let me quickly address that, and then I'll pass it to you, Steve. The San Dimas over the last 12 kind of plus months has been going through a transition whereby we've had a very large structure that we've been mining for quite some time, I think probably 4 or 5 years from memory, but Steve could add more context to that. But -- and in that vein has been slowly depleting over the last 12 months, and we've been bringing other structures, other veins back online or not online, but back into production. But it does take time. That doesn't happen overnight. And this is a very, very large mine. It's got probably 300 kilometers of underground development, and it's just simply -- it's a ship you're turning into sea. It's not going to happen overnight. So to transition from one big structure to several other structures that will come in line over the next 12 to 24 months. I believe you will see grades improve over that period of time, but it doesn't happen overnight. And Steve, do you have anything to add?

No, that's exactly right. So San Dimas, there's a couple of really big veins in the last 4 or 5 years that the company has been feeding off of Jessica, Regina, Victoria. So this Jessica vein is pretty moderate lying dipping vein. And if you're running 5 or 6 meters, it's a pretty massive vein to pull out. As Keith said, this vein system has been depleting. And so we're moving outwards towards more narrow veins. There's a number of them listed even in the press release, like Roberta, Robertita, and a number of other ones. And so this issue of controlling dilution is super important for us. And we've been working on that all year along. And in fact, we've actually seen a reduction of nearly 50% of the unplanned overbreak in our stoping process, our long-haul stoping process. So as the veins get more frequent in the mining faces, they are more stoping faces to manage. The veins are narrower. And so you've got to be better at your dilution management, your overbreak management, and we have very robust programs that are addressing those things. I think in 2024, we do see a slight downtick in the grade at San Dimas. It's not very significant, but there's a lot of focus on this issue of managing dilution for more narrow veins that we have to extract this year as we go forward.

The next question is from Don DeMarco with National Bank Financial.

At La Encantada, what flow rate do you require to resume optimal operational performance? And are you thinking the combined flow from the third well that you drilled recently with others that have planned in Q1 to satisfy requirements flow across multiple wells?

Yes. I'll just give you a general comment, and I'll pass your question on to Steve. But the third hole is adding, from memory, this is based on what I've been told by my operations staff, of course, is about a 1 liter per hour. I think it is or whatever, Steve can correct me on that. But the third well is adding some water, but not sufficient enough. So we're as I said earlier in the call that we're going to -- we're planning on drilling 3 additional holes in Q1. Hopefully, the first 1 hits, we have no idea. So unfortunately, we just our guidance is based on what I said earlier, that this is going to become challenging. Hopefully, it's not as challenging as we're guiding. Hopefully, it turns out much better than we're guiding. But without the technical knowledge of where the heck this water is just -- has become a little bit of a surprise for us that it has been as difficult as it's turned out to be. We thought it would be a much easier challenge to deal with. And that's why we guided, and we have had some criticism from investors or shareholders that we guided mid last year that we would have this issue resolved and it has not been resolved yet or which was a bit of a surprise to us. And we're still working diligently on getting this resolving. When it goes to throughput, really 3,000 tonnes a day is really the magic number. And that's what we need to get these costs down to sub-$20. And that's where you should be running at. And then we're hoping it will get there in the next couple of quarters.

Okay. Okay. So we'll just stay tuned as those holes planned for Q1 are drilled. Moving on to the next question, Jerritt Canyon is referred to as a temporary suspension. Could you provide some color on the work that's underway there now and the probability and timing of a potential restart?

Back of the envelope, we talk about 2026 as the kind of a key date or the key year, pardon me. There's a lot of things that has to happen. And then quite honestly, I can't guide you in this call because we just don't have the information available to us. There's a number of things that our technical staff are working on right now, mill improvements, mine planning, there's quite a lot of moving parts. So what I would like to do is just pass this question on to Steve. And I think maybe Steve might have additional color on Encantada as well because I didn't finish that answer. But Steve, why don't you take over and discuss both of those mines.