Guyana Goldfields Inc. (SVM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Silvercorp Metals and Guyana Gold conference call. [Operator Instructions] I would now like to turn the conference over to Lon Shaver, the Vice President of Silvercorp Metals. Please go ahead, Mr. Shaver.

Thank you, Anastasia, and thank you to everyone for joining today's call. As mentioned, I'm Lon Shaver, Vice President of Silvercorp, and it's a pleasure to be talking to you this morning. This morning, we announced that we have entered into a definitive agreement to acquire Guyana Goldfields to create a diversified precious metals producer. Joining me on this call today is Dr. Rui Feng, Silvercorp's Chairman and CEO; and Alan Pangbourne, CEO of Guyana Goldfields. And on this call, we will run through the details of today's announcement and why our agreement to acquire Guyana represents an attractive opportunity for both sets of shareholders. The strategic rationale for this transaction is that it will create a new diversified precious metals producer with enhanced strategic positioning and providing the opportunity for a significant re-rate. We intend to leverage our strong balance sheet and robust cash flow profile to provide the capital to advance the Aurora Gold Mine as it transitions to an underground producer and to produce -- and to pursue further growth opportunities. We also see significant upside in the exploration potential of Aurora, where the combined company will have the ability to fund exploration programs to test numerous high-priority brownfield and greenfield exploration targets within a 1,200-kilometer under-explored land package hosted in the highly prospective Guiana Shield Greenstone Belt. We also expect to achieve significant pro forma synergies. The combined company will benefit from the proven underground mining skill set of our management team and will be able to deliver efficiencies at the corporate level.

Lon, what is the next page? Which page are you now?

Well, these are just the introduction comments with the main cover page. We also plan to leverage Guyana's deep experience in networking Guyana, working towards long-term development of this project. All of this will support a stronger capital markets profile with enhanced liquidity and a stronger shareholder base arising from a newly diversified asset portfolio, adding to the recent inclusion of Silvercorp in major indices, including the VanEck Gold Miners GDX ETF and the S&P/TSX Composite Index. At this point, I'd like to invite Alan Pangbourne, Guyana's CEO, to make some introductory comments.

Thank you, Lon. Good morning, everybody. I'm Alan Pangbourne, the CEO of Guyana Goldfields, and we're very excited about this announcement and the company that will be formed. Since joining Guyana Goldfields, my aim has been to find a way to turn around the operation and develop the underground operations. For our shareholders, this transaction provides them with an immediate and significant upfront premium and exposure to a geographically diverse mid-tier precious metal lining company. With a strong operating history, strong balance sheet and significant underground experience, Silvercorp's management team is well positioned to fund and to continue to advance the underground project at Aurora and realize the project's full potential. I'd like to take this opportunity to thank all of our employees and stakeholders in the mine for their support and hard work to bring us to this point and keep the operations running during the COVID-19 pandemic. I'll now hand the call back to Lon.

Thanks, Alan. At this point, I'd like to go through the slides that we have here on this presentation. And I note on this slide, Slide 2, we have our usual legal disclaimer as this presentation may contain forward-looking statements. So the highlights of this transaction that we'll be acquiring, 100% of Guyana Goldfields and a CAD 105 million cash plus share transaction. And also...

Lon, we don't have the slides. We are still on the 1 page. Who is the controller of the PowerPoint presentation?

Yes. Michael should have access to the slides here.

So we are on Page 2, forward-looking.

Okay. Yes. Go to that one. Now Page 3. Here we go. So this acquisition is consistent with our strategy to acquire high-margin deposits that have a long mine life and also exploration potential to increase their size. We note that the Aurora mine has operated since 2015 by open pit with a 7,500 tonne per day mill in Guyana, which we consider a mining-friendly jurisdiction. And the mine is -- plan to undergo a transition to an underground operation with production targeted over 140,000 ounces per year of gold production over a 14-year mine life, and this is based on the recently published 43-101 completed by RPA on behalf of Guyana. And in that report, there were noted 2.2 million ounces of gold in proven and probable reserves within 3.8 million ounces of measured indicated resources. On top of that, there's 1.9 million ounces of inferred. And we view the deposit as being open for further expansion. On the next slide, Slide 4, we go through some of the key features of this transaction. It creates a diversified precious metals producer with 2 operations generating free cash flow and enhanced strategic position.

Hasn't come yet. The previous slide hasn't come yet.

Yes. And there's a -- it appears to be a bit of a lag for everyone on the call between the slides changing here.

Coming? Yes. There. We got it.

Yes. Amongst the other highlights, opportunity for a re-rate on the development of the Aurora Underground Project, and the combined entity will still have a very strong balance sheet to develop this underground project, fund an aggressive exploration program and pursue additional growth opportunities. There's an attractive growth pipeline with satellite target opportunities on the Aurora property, a regional Sulphur Rose gold project as well as our BYP gold project in China. And we feel that this diversified portfolio has the ability to enhance attract capital markets profile, liquidity and shareholder base, augmenting our recent inclusion in those indices that I mentioned. On the next slide, Slide 5, shows the key locations of the combined entity. Just waiting for that to come out.

Okay. Okay. We got it.

Okay. Good. Thank you for letting me know. There just seem to be a bit of a lag when the slides change. So this map shows the key locations. Corporate headquarters will remain in Vancouver with regional headquarters in Beijing and in Georgetown, Guyana. As noted, we have 2 operations currently producing silver in China as well as the gold projects in China. You see the Aurora Gold Mine noted in Guyana. And we also highlight the New Pacific Silver Sand Project that is a 29% investment of Silvercorp. On Slide 6, we run through some of the benefits to both groups of shareholders. And Alan, when the slide comes up, maybe I could ask you to go through the first portion with the benefits to the Guyana shareholders.

Lon, thank you. So from the Guyana shareholder point of view, obviously, there's a significant premium to the current market price. The dual listing of Silvercorp shares on both the TSX and the New York Stock Exchange should enhance the liquidity for our shareholders. Silvercorp with their long experience underground and excellent underground operating experience will obviously diminish the risk associated with the development of the Aurora Gold Mine. And finally, the strong balance sheet that Silvercorp possesses eliminates the funding uncertainty around the development of that project. So overall, we see this deal as a great outcome for both sets of shareholders. With that, Lon, if you want to go through yours.

Thanks, Alan. And what we see as benefits for Silvercorp is that it significantly increases Silvercorp's precious metals production profile and exposure to gold. And as I mentioned, there's a -- we feel there's a re-rating opportunity, and we create a foothold for the company in South America. And the consideration mix that we're providing to you, Guyana shareholders, still allows us, Silvercorp, to maintain a strong balance sheet, allowing funds to be available for the development of the projects and to manage risk. For both shareholders, we see enhanced liquidity and a capital markets profile and as well potential for a broader analyst coverage. There's no overlapping analyst coverage presently. And it brings together a portfolio of -- with 2 silver mining operations, a gold operation in Guyana and, as well, considerable upside in those assets and other projects within the portfolios of the company. I'll jump to the next slide, Slide 7. We'll run through some of the key terms of the proposed transaction. So Guyana shareholders will be provided the opportunity to receive $0.60 per share in cash, which equates to 0.1195 of the Silvercorp share for each kind of share held. And that's based on a Silvercorp price, which is the volume weighted average price for the 20 days ending April 24. Now there's a limit on the cash consideration of $33.2 million. And assuming there's an election for all the cash to be consumed, which we do expect, the consideration will be prorated down to $0.20 per share in cash and 0.0796 of a Silvercorp Share, which equates to $0.40, so getting the same total of $0.60. This offer represents a 71% premium to Guyana's volume-weighted average share price over the 20 days ending April 24. The total transaction size is $105 million for all of the issue and outstanding common shares of Guyana. Now assuming that maximum cash election, Guyana shareholders would own approximately 7.1% of the common shares of Silvercorp. And as part of this deal, Silvercorp is also providing Guyana with a bridge loan for up to $15 million to address Guyana's near-term funding requirements. That's to include funding expenditures at Aurora, working capital and corporate G&A. On the next slide, we highlight the key transaction steps necessary. So first off, important to note, both companies' Boards of Directors have unanimously approved the transaction, and all we are expecting is the customer and regulatory approvals, including TSX approval. The deal will need to be approved by at least 2/3 of the Guyana shareholder votes at an upcoming shareholder meeting, and the deal includes the usual provisions for nonsolicitation and a right-to-match any superior proposal. There's a $3.65 million break fee or expense reimbursement payable to Silvercorp under certain conditions, and we have entered into support and voting agreements with all the directors and officers of Guyana for this transaction. From a time line standpoint, the special meeting materials are expected to be mailed in late May with a Guyana shareholder meeting in late June and a closing of the deal shortly thereafter. On the next slide, there's an Aurora -- overview of the Aurora Gold Mine. And perhaps, Alan, I can ask you to run through these bullet points as well.

Sure. Thank you, Lon. Many of you probably don't know much about the Aurora Gold Mine in Guyana. But it entered commercial production in 2015, and since that time, has produced over 620,000 ounces. It is continuing to operate. It started originally as an open-pit mine and is now in the process of starting the transformation to an underground mine to be able to continue to mine the main deposit of Rory's Knoll using underground mining methods. At site, there's significant infrastructure. The mill is capable of processing 7,500 tonnes a day. Obviously, there's a tailings area as well. We have an 1,100 man camp, an on-site power generation, airstrips, mess halls. All of the materials are brought in by road from Georgetown, and we've carried out over 400 kilometers of drilling on the overall site. Additionally to that, we own over 1,200 square kilometers of land that is near or around the existing deposits and contains many known anomalies that are still require testing. Additionally, we have a fiscal stability agreement with the Guyanese government that was put in place back in 2011 and was one of the first agreements to be done in the country. And of course, we currently have over 800 employees in-country that have been working with us for quite some time, and we've recently started training some of those people in underground mining so that they are an added benefit to the development of the mine. So Lon, with that, maybe the next slide.

Great. Thanks, Alan. On Slide 10, we will also note that we're very excited about the exploration potential within Guyana's property package. There's a number of targets within 20- and 40-kilometer radius of the Aurora Gold Mine, and we view these as being potential satellite deposits down the road. And we plan to aggressively test and follow up on higher-grade zones within these targets and that we note that many zones throughout the land position where there have been drill results are open down depth. On the next slide, Slide 11, give just a brief overview for those not familiar with Silvercorp. As I mentioned, we're headquartered in Vancouver, and we're listed on the TSX and the NYSE American with a market cap in excess of $630 million. And we would be considered the China's leading silver producer, having produced 70 million ounces of silver over the past 14 years. And our mines continue to have a mine life in excess for 15 years. We have a strong balance sheet with USD 155 million in cash and short-term investments as of December 2019, and we hold a strategic position of 29% in new Pacific Metals. We're widely held with no controlling shareholder, and we have demonstrated amongst our peer group industry-leading free cash flow per share growth. Our proven management team has shown they are capable of running underground operations profitably, and we're looking forward to doing this as we transition the Aurora Gold Mine into an underground mine. Anastasia, with that, I think we will end the formal part of the webcast and open it up to questions.

[Operator Instructions] Our first question comes from Ryan Thompson with BMO.

Congrats on the deal. Could you just -- for those that aren't familiar with Aurora, just kind of give us a quick snapshot of things like timing, how much it's going to cost to bring into production, what the throughput would be, what the grade is, just sort of a high-level summary of what the underground would look like?

Yes. I mean with that, Guyana just recently published a 43-101, and that was -- that's been posted. We've had the ability to review that with the current COVID-19 situation. We're going to probably be a little bit delay, but I think our intention is to come in and spend some time with our team to relook at that. So we think there may be some changes to the plan that they laid out. But I think at this point, we'll probably defer that question until we've had a chance to go through some more of those details. But I think we would expect there could be some changes to the plan that they posted. And obviously, the timing will be determined when we're able to actually get on site and given that Guyana, like many or most of the other countries, is currently in a lockdown for COVID-19.

Okay. And just as a follow-up question, can you just kind of touch on, is there any sort of regulatory approvals required from the country of Guyana other than the sort of customary approvals that you guys highlighted in the PowerPoint?

No. There's not really approval process, but we've already engaged with the government of Guyana with Guyana Goldfields management. And we've had a good dialogue on positive communications with the government. And so we don't anticipate any issues there.

Our next question comes from Mark Mihaljevic with RBC Capital Markets.

Congrats on the deal, guys. I guess first off, just following up on Ryan's question, are there any other government approvals that you guys need to secure to get this deal done outside of Guyana? So does China have a say on this or anything else you need to manage around?

No. I think the short answer to that is no. There's no Chinese government approval required. But really, there's a standard approval in terms of shareholders and the regulators.

Yes. Silvercorp is a Canadian company, right?

Okay. I just didn't know if there was any restrictions given the ownership. But again, that's good if it's simple like that. And then can you just give a bit of a background to the due diligence process here just obviously, given, as you mentioned, travel restrictions and not? So can you give us a -- give us some background to the deal?

Sure. Our review goes -- on Guyana goes back to approximately a year ago when we first looked at some information on project, and we've stayed abreast of the developments there. But it's really been in the recent months, there's been an additional push to go through all the data that the company has been able to assemble. And while we were not able to complete a site visit, management was very forthcoming and provided, I would say, additional information and effectively, a virtual tour that, in the circumstances, allowed us to complete the review process and give us comfort on what we were entering into in this transaction.

Our next question comes from Justin Stevens with PI Financial.

Just most of what I wanted to ask has already been touched on, but a couple of left. You guys are pretty excited about the exploration upside here. Can you give just a bit more color on sort of what the highest priority targets are and when you think you might be able to get drilling again on that because there wasn't too much out recently?

Yes. I guess second question first is, yes, we are obviously restricted right now based off of COVID-19. So even if we were to close the transaction right now, we would be on hold until that got cleared up. The plan is to go in and drill pretty aggressively a sort of 30,000 to 35,000 meters probably in the first year. Obviously, the key initial targets are those tied into the zones and the structures that we've seen in the known deposits. But we also note that from the property package, there are drill holes in some of the satellite deposits that have delivered some very good grades, that could be amenable if there's, on a 5 to a -- no, a trucking ore situation. But I think that would be something that we would be following up in later months. Really, the priority is to get in and drill the known deposits to justify bringing them into production in an underground operation.

That makes a lot of sense. Only other question then was just back on the Silvercorp side of things. I know you guys are flagging BYP as the other gold operation. Do you guys have any updates on sort of potential timing for the restart there?

Rui, is that one that you'd like to go with? Or would you like me to answer that?

You go ahead.

Okay. So yes, we've been waiting for a permit to enable us to bring BYP on as a gold operation. That has certainly taken longer than we expected. And I think that just ties into the fact that permitting any mining operation anywhere in the world has become more difficult over the years, and China is no exception, given a renewed focus on environmental concerns. But we feel we've made some progress. And effectively, we're finishing the -- nearing the finish line on that. And really, it's more of a procedural thing that certain records need to be updated and made available on certain websites. And so we're expecting that to happen in the next coming months.

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Lon Shaver for closing remarks.

Thank you, Anastasia, and thanks to everyone who's joined the call. We've all got a busy day ahead of us. So with that, I'd like to end this webcast. And of course, management of both companies is available if there are any follow-up questions of anybody on the call. Once again, thank you very much for joining us this morning. And with that, we'll sign off.

Thank you.

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