Silvercorp Metals Inc. (SVM) Earnings Call Transcript & Summary

Good morning, and welcome to the OreCorp Investor Webinar and Conference Call. [Operator Instructions] I'll now hand over to OreCorp's Executive Chairman, Matthew Yates. Go ahead, Matthew.

Thank you, Nathan, and good morning, everyone. I'd like just to bring your attention to the cautionary statements on the [indiscernible]. These cover both Canadian, Australian compliance. I will take those as red or you can find them in this presentation, which has been platformed on Ore and our respective websites. So thank you very much for joining us today for this webinar to discuss the proposed acquisition of OreCorp Limited by Silvercorp Metals Inc. as is announced on the ASX earlier. I'm excited to speak to you about this transaction and it is transformational for our company allows to create a diversified, highly profitable precious metals producer. Silvercorp is a TSX and NYSE listed Canadian-based mining company, producing silver, lead zinc and gold with a long operating history spanning over 20 years. In the past financial year, it has achieved more than [ CAD 200 ] in revenue and operational cash flow of more than CAD 85 million, demonstrating excellent profitability. With the backing of Silvercorp's balance sheet strength, the transaction will allow us with the combined entity to pursue opportunities for optimization, fund construction, aggressive exploration at our world class Nyanzaga gold deposit. Development is planned to continue in line with our original expectations, delivering commercial gold production in the second half of 2025. Silvercorp strong technical team will be an asset to the development of “Nyanzaga, and we are excited of the opportunity on how now to move it forward with the funding risk largely mitigated to the opportunity for all core and its shareholders. Tanzania is an exciting mining jurisdiction and the combined entity will have exposed to this, which could build further as we continue aggressive exploration at Nyanzaga to expand its resource base with a stronger cash position in which to pursue this growth opportunity. The combined entity at the conclusion of the scheme will have a pro forma market cap of around about USD 630 million. That's AUD 960 million today, so just short of $1 billion. This will enable OreCorp and Silvercorp shareholders to participate from a larger company with greater access to capital, significantly higher liquidity and increased scale and enhanced capital markets relevant and if Silvercorp admitted to the ASX, the combined entity will ultimately be listed on 3 exchanges. Silvercorp's offered to its shareholders as an implied value of AUD 0.60 per share. This is just under 42% premium on the 20-day VWAP and values orchard approximately AUD 242 million. This presents an excellent opportunity for a rewrite now as well as the -- when this transaction completes and also on the successful development of an Nyanzaga. Existing shareholders in OreCorp will ultimately own just under 18% since common shares on issue following the implementation of the scheme. The consideration preserves cyclical strong balance sheet and allowing funds to be deployed into the development of Nyanzaga, mitigating risk and optimizing future opportunities, which it could also include regional M&A. This is a great and wonderful opportunity for OreCorp to become part of a larger, well-funded precious metals producer and unlock value from our Nyanzaga project. I'm now going to hand over to OreCorp's CEO and Managing Director, Henk Diederichs; and Silvercorp's Vice President, Lon Shaver, as we joined hands across the ocean and time zones to provide you a more detailed overview of the proposed transaction. Over to you, Henk. Thank you.

Thank you, Matt, and good morning to all. So I'll just briefly take you through the transaction details. The Silvercorp offer is by means of a scheme of arrangement. The offer is for a total implied consideration of AUD 0.60 per OreCorp share, comprising of AUD 0.15, 1 5 in cash. And then AUD 0.0967 common Silvercorp shares for each OreCorp share. It does represent a 41.7% premium to the 20-day VWAP of the OreCorp share price. Implied a fully-diluted in-the-money equity value of AUD 242 million. Post the transaction, Silvercorp shareholders will hold 82.2% of the combined entity and OreCorp shareholders 17.8%. The transaction is subject to various approvals and some of these key approvals is the approval by OreCorp shareholders the completion of an independent expert report, which concludes that the scheme is in the best interest of OreCorp shareholders. And then approval of Federal Court of Australia and other regulatory approvals as applicable. We do have customary deal protections in place, inclusive of a no due diligence, no talk and no shock provision. And then there's a break fee applicable of AUD 2.8 million payable to Silvercorp. Silvercorp also offered a placement in OreCorp of AUD 28 million at AUD 0.40 per share post-placement Silvercorp will then hold 15% of the OreCorp shares on issue. And that will allow us to progress our resettlement activities as planned. So a very positive development in that regard. If we then look at the immediate benefit to the OreCorp shareholders, there is a significant and immediate premium of 41.7% based on the 20-day VWAP. The transaction will introduce significant trading liquidity to OreCorp shareholders. The Silvercorp creates approximately USD 5 million on a daily basis on the 2 exchanges combined. It will provide ongoing exposure to future development and operational upside at Nyanzaga within the Silvercorp portfolio. And importantly, it does position Nyanzaga for prompt development due to the strong balance sheet of Silvercorp. I'll hand over to Lon just to cover some benefits to the Silvercorp shareholders. Please Lon.

That's great. Thank you, Henk, and good morning or good evening to everyone, wherever you might be. So very pleased to be entering into this transaction. We've determined and a key feature for this is that it is accretive on a net asset value basis for us, whether looking at consensus or internal models. It provides immediate geographic and metal diversification to our project portfolio. And we're looking for and we've now found in Nyanzaga, a largely derisked low-cost gold project that has key permits in place and has a collective production where we see the initial production happening in the second half of 2025. We think this will provide investors in Silvercorp, a rerating opportunity due to the enhanced scale, this diversification in production and asset base as well as exploration upside. And as it has been mentioned, an excellent mining-friendly jurisdiction with great geology. And right at the outset, it meaningfully adds to some gold mill reserves and really restores.

Thank you, Lon. So just a quick look at the pro forma capitalization of the combined group. So we expect to have 218.7 million shares on issue with a market cap of approximately USD 630 million, that average trading volume of approximately $5 million per day, as I mentioned previously. And then post transaction cash -- net cash of USD 170 million. So pretty big combined group and as we said, good trading volume and strong cash position to support the development of Nyanzaga. Lon, if you can take us through the asset portfolio, please.

Yes. Well, as you can see on the slide on the far left, it shows our inventory in terms of Silver. We've made it a focus of building a significant reserve base at our mines that we've been operating. And what we see in terms of an addition is, obviously, in gold is a significant reserve at Nyanzaga. Looking over on a more broad basis on resources, you can see on the left-hand side of the right portion of the chart, what our inventory is. And of course, we're mixing metals here because as it relates to Silvercorp, this is being shown in silver equivalent, just looking at silver and gold. But a healthy resource base, almost 350 million ounces in terms of silver equivalent. Also indirectly, we have a 28% stake in another public company which has a resource -- a total resource of 215 million ounces of silver. But then looking at the blue shaded bar, looking at what Nyanzaga adds to the mix, another 3.3 million ounces of gold and resources. And this is obviously a significant addition to our mineral resource and reserve portfolio. Next page, please. Now continuing on that. You can see in terms of the pie charts on the left-hand side as it relates to silver, that pro forma resource really entirely comes from Silvercorp at that 280 million ounces. We have a smaller contribution in contained gold. But then there you can see the 3.3 million ounces added from the OreCorp asset, Nyanzaga. On the right-hand side, so is showing our production profile. Again, this is silver equivalent, of millions of ounces based on our existing mines. And we've been looking at consistent growth over the years. But on the bottom part, and this is the reason we're here today, is looking at the significant growth contribution that Nyanzaga can make to our production profile in the right-hand side of that chart.

So just briefly, an overview of Tanzania, located in East Africa. There's been a long history of mining in Tanzania by majors such as Barrick and also AngloGold Ashanti. And more recently, BHP with the investment into Kabanga Nickel of up to $110 million. Also a large energy project called the East Africa crude oil pipeline currently under construction through TotalEnergies. And then a potential massive LNG project worth USD 42 billion being negotiated between Shell plc and the government of Tanzania. So a lot of activity happening in Tanzania at present. Also pleased to do advise that the Tanzanian Power Grid is considered a green grid under the EU guidelines, power being generated predominantly through natural gas and hydro power. Also very strong trade relations between Tanzania and the United States. The Lake Victoria Gold Fields area is a region of world-class gold endowment, produced more than 25 million ounces historically. That region is very well supported by infrastructure and services. And Tanzania historically, had a long history of gold production of approximately 1.5 million ounces per year, 2015 to 2022. So for those that's not that familiar with Nyanzaga gold project. This provides a bit of an overview of the project. So it's an open pit underground combination, 84% owned by OreCorp and the 16% free current interest by the government of Tanzania. We're located in the Lake Victoria Gold Fields of Tanzania. So an excellent address for gold endowment. We completed our definitive feasibility study in August last year, so still very current. Project well supported by infrastructure and services. There's an existing access road that runs past the site. We've got access to water from Lake Victoria and power from the national grid through a 53-kilometer on transmission line. Very conventional processing facility, no smart technologies. We crush grind to 75-micron ultimately for an 88% overall gold recovery. And then there's a 6% royalty payable to the government of Tanzania, and that can reduce to 4% if we refine gold locally. So just key highlights from the definitive feasibility study. So average gold production of 234,000 ounces per year over a 10.7 year life of mine at a low all-in sustaining cost of $954 per ounce with a preproduction capital cost of USD 474 million. It is a project of significant scale, longevity and margin and an excellent addition to the Silvercorp portfolio of projects. Expected to produce further DFS, almost 200,000 ounces of gold in the first 12 months of production, steadily increasing to nearly 300,000 ounces per year for years 5, 6 and 7. 40 million tonnes in reserve at plus 2 grams per tonne for 2.6 million ounces. The Silvercorp development plan for Nyanzaga is very similar to the OreCorp plan. Firstly, they've put in place the $28 million private placement, as we've mentioned earlier, that will allow us to immediately progress with the resettlement activities. The Silvercorp open pit will be slightly deeper and therefore, slightly larger than what was contemplated in the DFS and that provides some upside in terms of additional ore to the process plant. And then Silvercorp currently contemplates a phased development approach whereby I'll start the open pit first, followed by the underground a couple of years thereafter, and also a scaled approach for the process plant. And that will be further defined as they progress with the optimization studies over the coming months. Lon, an overview of Silvercorp, please.

Yes. I think it's just for the benefit of OreCorp shareholders not familiar with Silvercorp. We're a Vancouver-based Canadian company, and as mentioned, listed on the TSX and the NYSE American. Current market cap approximately USD 518 million. We've been a leading silver producer with 90 million ounces produced to date from 2 mining operations, and we have a remaining mine life in excess of 15 years. As has been mentioned a few times on the call, strong balance sheet, $200 million in cash and short-term investments. We have no debt, and we have a 28% stake in New Pacific wells. From a shareholder base, we are widely held, including from some of the well global institutional funds, also very broadly held with retail, and we have no controlling shareholder. And amongst our peer group, we have instrumenting free cash flow percent of growth and operating performance really stemming from the quality of assets that we've been running. And this is also an adjustment to the management team at the operations really focused on implementing best practices, disciplined growth, immensely focusing on higher-margin near-term opportunities and opportunities to grow our resource base. Next slide, please? This spread shows in terms of our asset base, the Ying Mining District in Henan province in China is our flagship operation, actually comprised of the 7 mines that feed into 2 million facilities. I'll speak a bit more on that later. As mentioned, over 90 million ounces of silver produced to date. The in-line alone has distributed profits to shareholders in excess of $520 million and again, long mine life. One of the advantages to operate in China as we're close to our customers. That is the smelter. And so we've got favorable payment and processing times with them. And that is clearly an advantage. Similarly, the advantages on the supply side, looking for reagents and inputs to mining because we do all come from China. And so we have a very competitive market for these supplies no need to carry big inventories. We've operated with a capable and disciplined workforce, stable regulations have been in place for a long time. We're Free in terms of our marketing of our concentrates. There is no set buyers that we need to deal with. And if we wanted to, we could export our concentrates, but as previously mentioned, the situation in China is quite favorable. And just as is the case for other Western companies that have chosen shown as the manufacturing base, we have free ability to distribute profits, and that's why China continues to be centers for manufacturing for really -- for the world. Next page please. This slide shows our growth that we've experienced over the years. The top chart shows the growth in our silver inventory. You can see from the beginning days when the margins got started, we do not have proven and probable reserves. But the extensive drilling and tunneling and exploration that we've done have allowed us to build up a very healthy inventory where we've been running the last several years at approximately 115 million ounces in proven and probable category. And I'll just highlight again, this is silver and gold equivalent in silver does not factor the base metals contribution of these mines. On top of the reserve, we have merged indicated resources, not included in those reserves of approximately 100 million ounces and then another 126 million ounces of silver in the inferred category. The bottom of this chart shows our track record of growth, where we've brought production from under 2 million ounces of silver in the first fiscal year ended March 2007 to where we've been tracking between 6 million and 6.5 million ounces of silver a year. And our current fiscal year that we're in right now, we are targeting 7 million ounces. Also on this chart, you can see our very attractive industry let all subsidy cost profile for the year ended March of 2023. We produced silver at an all sustaining cost of U.S. 9.73 an ounce, and that is net of our byproduct credits. Next page, please. So I mentioned here was really the flagship asset. This is a bit of a blow up on it. The Ying Mining District is 4 mining permits that comprise just under 70 square kilometers. Within that, you can see there's the 7 individual mines listed there SGX, TLP, et cetera. They're all underground mines and they've identified over 300 veins. They deliver ore to 2 mills with a combined capacity of 3,200 tonnes per day, and they produce silver, lead and zinc concentrates, which, as I mentioned, on our process by smelters within 200-kilometer radius of the line. Ying alone has produced over 85 million ounces of silver and 1 billion pounds of lead and zinc since operations began in 2006. And we've been investing heavily over the years in terms of effort, but at a very reasonable cost. 2.2 million meters of drilling since inception, and that's what's kept our mine life at a very healthy 15 years despite having produced for 17 years. We're going to continue this growth program this year. We've already put out a few news releases in the last couple of months by targeting another 270,000 meters of drilling at Ying in this current fiscal year. We've identified and moved on one district consolidation opportunity that we're looking to roll in and has a bit of a satellite hub-and-spoke operation. And we've identified some production expansion initiatives within the existing mining permits down the road. Next Page Please. So this asset quality is what's allowed us and the company to deliver a very consistent positive adjusted net income on a quarterly basis. You see the 1 exception there is the COVID quarter of 2020. And similarly, on a free cash flow basis, very consistent positive free cash flow. And on note that, that calendar Q1 is always the soft quarter [indiscernible] Chinese New Year. Next page, please. Yes, we wouldn't be where we are. Yes, we weren't responsible miners. We've instilled a strong culture within the company with respect to responsible mining, and we have programs and elements touching on each of the key components of ESG, environment, ISO certification, good focus on water. Obviously, that's a key, key point within the mining industry. And so we have targeted to increase our water recycling. But we've also done something very unique at our Ying plant where we've put in place an aggregate plant to divert up to 1 million tons per year of waste rock by processing and turning it into aggregate that can be sold to the market. Moving to social. Again, ISO certification, big investments in education locally, also in terms of technology and training for our workforce, both our workers on-site and the contractors we employ. Lastly, for the G, Governance, we formed that is leiommitte in the word and ESG management center have up by a very capable manager we dealt with all aspects of the operation. Next page please. Just a quick capital market snapshot. On the left-hand side, you can see our top 10 institutional investors. And there should be some similar names to rosters in the mining space, both from ETF quant funds, but then also some factional long holders in the mining sector. We are currently covered by 7 firms in North America, 6 in Canada and 1 in the U.S. At the bottom right, you can see our shareholder breakdown, approximately 32% institutional, 4% insiders, and the balance, approximately 64% is largely retail investors. And I would note that would be mainly in Canada and the U.S. We look at this transaction as an opportunity in addition due to our pursuit of an ASX listing to cultivate that retail base in Australia, obviously, a mining market that we've not spent much time on. Next page, please. It's that try on leadership and the Board. Rui Feng, our Chairman and CEO, is a very accomplished geologist who made a number of discoveries. But he's also been able to, in the case of Silvercorp turning discoveries into profitable mines. Rounding on our Board is a mix of geology, technical expertise, as well as accounting and legal background. I think we can skip over the slide and I'll turn it back over to Matt.

Yes. thanks, Lon. And also thank Henk for that quick run-through. So look, just quickly there, you've got the time line, obviously, first court date in around about mid-October. Dispatch scheme booklet shortly thereafter the meeting mid-November and then essentially looking to wrap this up by the end of November, early December. So thank you, Nathan. I'll come back to you for any questions now.

[Operator Instructions] Your first question comes from Andrew Oswald at Belpotda. He asked why is Silvercorp taking a placement in OreCorp as part of the transaction?

Lon, I'll let you take that one. .

Well, I think it comes down to the fact that Nyanzaga is ready to go. There's certainly a need for funding to move forward with the resettlement program that's been outlined. We certainly, as a company, have targeted and look for projects that are actionable and that we can move forward with. And this is getting money into OreCorp of this resettlement program and some early works on the project that is funded is obviously the key reason for that placement.

Further to that, he asked, could the 15% shareholding be deemed to be a blocking stake?

Yes. Look, I think that's one view of it. But I think from the way that we take it, they need to get the capital into the company, the most effective and swift manner is the way to go. And at the end of the day, I think it will allow us to do what we need to do on site, but I don't really consider it being necessarily a blocking state more to move the company forward and maintain momentum.

[Operator Instructions] So there are no further questions at this time. So I'll now hand back to Matthew for closing remarks.

Thank you, everybody, for attending. And the record of this website will -- sorry, this webinar will be placed on our website and also [indiscernible]. So thank you once again, and we look forward to push him forward with this transaction and building a diversified precious metals explorer. Thank you.