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

Thank you for standing by. Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Silvercorp's conference call to discuss the announced acquisition of Adventus Mining. [Operator Instructions] Joining us on today's call are Lon Shaver, President of Silvercorp; and Christian Kargl-Simard, President and CEO of Adventus. I would now like to turn the conference over to Lon Shaver. Please go ahead.

Thanks very much, Julie. Yes, Lon Shavers, President of Silvercorp here. I'm joined by Christian Kargl-Simard, CEO of Adventus. We'd like to welcome you all to the conference call this morning to announce the transaction that was -- to discuss the transaction that was announced overnight. We've got a few slides here that have been made available for you to track through on -- obviously, on this link. I guess I'll kick it off here. First off, just from a disclaimer standpoint, this presentation will contain information that is forward-looking. Turning to Slide 2, transaction rationale. I will speak to this from a Silvercorp's standpoint, but I think these ideas, these key concepts will apply to Adventus as well. But we view this transaction as helping to create a growth-focused geographically diversified green metals company. The acquisition really brings immediate asset diversification from a geographic and commodity standpoint and also adds more of the key metals that we have been producing, including silver, lead and zinc. El Domo, a key feature and factor for us in this transaction is advanced. It's got key permits. And as a result of this, the transaction will be fully funded to move forward through construction. Transaction is accretive on a per share basis, both in terms of net asset value, reserves and resources. Going forward, we share the same corporate values in terms of developing projects for all key stakeholders as has been demonstrated by Adventus to date. Silvercorp has the technical capabilities to bring El Domo into production on an accelerated basis. And adding El Domo really brings our near-term production growth to the Silvercorp story and longer term, adds optionality from the PEA Stage Condor project. We view this transaction as giving shareholders of both companies opportunities for a re-rate due to the increased scale and enhanced growth profile and establishing a presence in a new for Silvercorp emerging mining-friendly jurisdiction. Turning to the next page, I'll hand it over to Christian to run through the transaction terms.

Thank you, Lon. So this is an all-stock transaction. Silvercorp acquiring Adventus. Adventus shareholders will become Silvercorp shareholders, approximately a $200 million transaction equity value resulting in pro forma ownership of approximately 80-20. The share exchange ratio was 0.1015, which results in a consideration of $0.50 per Adventus share based on Silvercorp's 20-day VWAP and results in approximately 31% premium based on the 20-day VWAP of Silvercorp and Adventus, respectively. As part of this transaction, and this is an important piece for Adventus, Silvercorp will be subscribing for a placement of CAD 25.6 million at CAD 0.38 a share. There are some key use of proceeds there. We have a -- approximately $10 million debt facility that's maturing on June 30, so that will repay that. We also had an outstanding unsecured convertible debenture with Altius that had a right to convert to a royalty. This deal will allow us to extinguish that convert and extinguish the conversion to a royalty option. Over the next few months, as the transaction closes, we will continue to derisk the preconstruction activities leading to a construction of El Domo later in the summer and for general working cap expenditures. Unanimous approval by the Board of Directors of Adventus. All of the officers and Board members of Adventus have locked up on this transaction, a standard 66.666% required support in the shareholder vote that we expect to be held perhaps as soon as end of June, but more likely the beginning of July. We have lockups on top of insiders with Ross Beaty and Wheaton Precious Metals for a total of about 23% of Adventus outstanding common shares. Customary deal protections including Adventus non-solicitation covenant and Silvercorp right to match superior proposals. There's a break fee of $10 million payable to Silvercorp in certain circumstances as well.

And Christian, do you want to speak to -- well, I guess I can speak to timing expected to close in the third quarter of 2024. Moving to the next slide. Benefits to shareholders. As I highlighted in the opening comments in terms of rationale for the transaction, it provides immediate asset, geographic and metal diversification. And going forward, the company will have exposure to China and Ecuador as well as in green metals, such as silver, copper, lead and zinc that are key for a low-carbon future. We're adding the high-margin, advanced El Domo project and accretive transaction on those key metrics per share for net asset value, reserves and resources, enhancement of our production profile, adding the PEA stage Condor project as an attractive future growth project in Ecuador and with a gold emphasis and as I mentioned, rerating opportunity.

Benefits to Adventus shareholders, obviously, this immediate premium is attractive on top of a significant share appreciation over the last few months since we achieved our environmental permitting. One of the key aspects of this transaction is now that we've derisked most of the permit through construction and eventually production, there's a funding gap in still quite a difficult overall market for funding. This transaction fully funds us with our existing Wheaton Precious Metals stream to see Curipamba El Domo into production in 2026. This transaction really maximizes the company's NAV per share as a result. We like Silvercorp's exposure to silver, zinc and lead. So that will get additional exposure to those commodities as well as retain upside with our assets in Ecuador. Impressed with the technical capabilities of Silvercorp, we are quite constructive on the silver price. And as El Domo is getting built, as the silver price continues to potentially rise, our shareholders should benefit from that. Much more liquid than Adventus Silvercorp is, it trades over the last 3 months, $8 million per day, primarily on the NYSE. And we're impressed with Silvercorp's commitment to ESG practices, which we think marries very well with what we've done in Ecuador. Overall, Adventus has a lot of net asset value in the ground. And this combination, I think, will allow us to extract a lot of that value not only at Curipamba but at Condor and some of our other assets.

Okay. On the next slide, I will just speak quickly to some key numbers. This table and pro forma capitalization is obviously based on the transaction. So the implied value for Adventus of $0.50 is shown there in that column. Key takeaways, though, really are overall from a transaction value standpoint, fully diluted in-the-money basis, this is a just over CAD 200 million acquisition. Going forward, our market cap at Silvercorp with the Adventus shareholders participating goes through that CAD $1 billion level. And from an ownership standpoint, as has been highlighted, on a fully diluted in-the-money basis, it's 18.4% owned by Adventus shareholders going forward. Coming to the next slide highlights some of these diversification elements. And on the left-hand side, we're looking at total silver equivalent M&I resources on a 100% basis. So on the left, you can see in terms of the current status quo for Silvercorp 217 million ounces. With the addition of both Condor, a very gold-rich project, you can see as 191 million ounces on a silver-equivalent basis. And in El Domo, 65 million ounces that actually brings us to 473 million ounces, so more than a double in terms of precious metals exposure. Moving to the right-hand side of the table. Now this is looking at the base metals, and we're showing things on a copper-equivalent basis. So again, left-hand side of that chart shows the cumulative amount for Silvercorp at 361 million tonnes of copper equivalent. And moving over with the addition, in this case, a bigger contribution from El Domo because of the metal mix. And then also adding Condor's zinc contribution gets us to 667 million tonnes, so quite a significant increase. Next page speaks to revenue profile in terms of for the next several years, showing Silvercorp on a stand-alone basis. The key components, silver revenue, led revenue, zinc and then gold as well as at the top of what the all-in sustaining cost to produce an ounce of silver on a byproduct basis. Going forward, you can see the jump in revenue. This is looking just at El Domo and factoring in the attributable revenue to the shareholders of the project after the Wheaton stream. You can see that number going from $294 million in 2025 and assuming a start of production of El Domo in 2026, that goes to $469 million. On a combined byproduct basis, it also brings our all-in sustaining cost down from that $8.28 level per ounce of silver to $0.58 and then, in fact, negative in 2027 and 2028. Christian, I'll let you speak to the slide first.

So what Adventus brings in the immediate future is the Curipamba El Domo project. So El Domo is the copper, gold, zinc, silver project. It is, in our view, the next copper mine to be built globally, probably by a few years ahead of the next greenfield copper project. So that project is what is contributing to the potential growth here of Silvercorp's production over the next few years. So Silvercorp's stand-alone 12.7 million ounces of silver equivalent with El Domo, it jumps to 18.2 million ounces of silver equivalent. And it's important to note that these are very low-cost production ounces. So the cash cost reduces as a result of the El Domo project coming online in 2026. The third bar there is the production growth. So Silvercorp would be near the top in terms of that growth. And keep in mind, this is just considering El Domo. This has nothing to do with the potential contribution of Condor down the road. And then from a PNAV perspective, you think about what is Adventus shareholders getting in terms of paper Silvercorp. Silvercorp is quite cheap, very cheap in the silver/precious metals peer group. It's going to get even cheaper with this transaction because of Adventus' relative multiple. But together as a group, we can re-rate significantly to the peer group. Lon?

Yes. And I'd just add that this kind of re-rate is obviously something that we're looking forward to for Silvercorp shareholders.

And on the re-rating, there's a significant synergy here when it comes to fully financing this project. When we concluded a merger with Luminex Resources in January and we received an environmental permit, we had indicated to the public markets that we were looking to fill the financing gap in Q2 and that we're looking at all alternatives to do so with the focus of maximizing our NAV per share. A public market's financing is probably going to be the most dilutive. An M&A transaction with an existing producer and a strong balance sheet was probably going to be the most accretive. So I think we've checked all the boxes in terms of what we set out to do with the Silvercorp transaction. And not only is El Domo fully funded, but our other projects, which if we were stand-alone, would have been care and maintenance through the construction of El Domo now have a chance to be advanced with value created through construction of El Domo as well. Lon?

And this is a point where I can jump in and speak to the fact that from a Silvercorp's standpoint, we believe there can be opportunities with some of the relationships for suppliers and contractors to reduce that initial CapEx number as has been outlined in the Adventus feasibility study. Also from an owner-operator standpoint, we think that we might be able to look at a more optimized mine plan. And then lastly, and Christian touched on this from our operational experience, we've built 8 mines, 3 processing facilities, 3 tailings storage facilities, and we're currently in the midst of an expansion of our mill at the Ying Mining District adding 1,500 tonnes per day of flotation capacity, which is not too far off the targeted throughput of the mill at El Domo. So we think we can bring some access to better and better cost equipment and implement that on a cheaper basis than what's been identified in that feasibility study.

So a little bit more about El Domo. It is a volcanic massive sulphide deposit, a copper, gold, zinc-rich one. These type of deposits have significant capital efficiencies and are significant drivers, ultimately, of free cash flow generation. If you compare El Domo to similar-stage copper projects globally, we would have very low capital cost intensity as a result of very high grades. We have a close to 10 million tonnes of 5% copper equivalent and most of that is open pitable, drives a very strong rate of return. And should add significant cash on the balance sheet to help grow Silvercorp's business, which is synergistic with the assets that they have in China. So of those projects in the top, 2 of those are VMSs, the rest are porphyries. And the bottom there, just backing up my commentary, the all-in sustaining costs on a co-product basis are $1.26 a pound copper equivalent, which puts it in the lowest quartile in the copper business. Next slide. At Ecuador, Adventus entered Ecuador late in the game, so we've been in the country for 6 years. They've been consistently very supportive in working with industry to help grow the mining business. Two major mines in production, the Mirador copper mine and Fruta del Norte, a large gold mine owned by Lundin Gold. El Domo would be -- or is expected to be the third major mine in the country and already the 2 major mines in production is quickly vaulting mining into 1 of the top 3 most important industries in Ecuador. With Daniel Noboa, the new president being elected in Ecuador as President in November of last year, he has shown a very strong commitment to growing the mining business. He was the first Ecuadorian President to attend the mining conference, PDAC, in Toronto in March. There were several signings done -- high-profile signings done there. One of them was an investment protection agreement, Memorandum of Understanding for Condor project. That's in the exploration stage. Approximately $52 million has been spent to date in exploration on the project, so another $48 million is protected. At El Domo, we have an investment protection agreement for exploitation. And we are looking forward to continuing with the Daniel Noboa government to help build this industry for the long term.

Okay. I will recap those key points that we highlighted at the beginning, and we've speaking -- been speaking to you throughout this presentation. Acquiring Adventus really brings us immediate diversification from an asset standpoint. That's obviously geographically, adding a key component in Ecuador also from a commodity standpoint, adding those key metals in terms of copper, but also augmenting our silver, lead and zinc production. Key focus for us at Silvercorp has been looking for an advanced project that is ready to go. El Domo has those key permits and will now be fully funded with the existing Wheaton Precious Metals stream as well as the cash that we have on hand as an accretive transaction on an NAV, reserve and resources basis. As companies, we share the same corporate values in terms of developing projects with a long-term vision and view to benefit all stakeholders. Internally, Silvercorp has the technical capabilities to bring El Domo into production and again, on an accelerated basis and for the benefit of those stakeholders. Adding the El Domo project significantly enhances our near-term growth profile and adds longer-term optionality with the Condor project. Again, for both sets of shareholders, we feel this is a re-rating opportunity, having a larger company with increased scale, a better growth profile and establishing a presence in a new for Silvercorp emerging and mining-friendly jurisdiction. And with that, operator, we'd like to open up the call for questions.

[Operator Instructions] Your first question comes from Dalton Baretto from Canaccord.

Congratulations, guys. I apologize, guys. I'm not really that familiar with El Domo. And I'm wondering if I could ask about the community relationships in the area and sort of the dynamics there as well as the security situation in the region?

Christian, I'll let you tackle that one.

Sure. So over the last 6 years in Ecuador, we have really focused on that social license to operate and building that trust and support from the local communities. The best way I can describe that support is through the consultation process to receive our environmental impact assessment. The government in the last stage have to run a nonbinding vote with the direct communities of interest around the project. That occurred in December and the result was approximately 98% support to proceed with constructing the project. So very, very proud of that outcome. And our communities have been very patient for the last 15 years, hoping and waiting for this mine to be built and the job opportunities that come out of it. From a security perspective, we've never had any serious incidents, any blockades, any kind of shutdowns of the project. Obviously, building a mine is a different set -- a different task. But to date, from a security perspective, it's been very manageable.

And then maybe over to you, Lon. Can you talk a little bit about some of the -- both the CapEx as well as the mine plan optimization opportunities you guys see?

Yes. I think we've had this conversation before, and I'd say it's a similar conversation that we've had. Speaking to the -- from a mining standpoint, still some work to be done there. And from a CapEx standpoint, obviously, some work to do and from a regulatory standpoint, not in a position to give firm and specific numbers, but the CapEx number that has been identified from the feasibility study was about $248 million. We have gone through from our study and analysis, looking at the key elements of the construction costs. And we do feel that the numbers that have been put together, while a good job done by the consultants, we think that we can access suppliers at better rates to get some of these key elements constructed. As you'll note, we're adding that 1,500 tonne per day capacity at Ying for approximately $7 million. Now obviously, that's on an existing operating site with some shared infrastructure. But when we look at the mill components at El Domo, we think that we can probably trim back some of those costs and maybe even get some synergies from a supply and construction standpoint by packaging up these items together.

And maybe I can squeeze one last one in. Is the Salazar piece of El Domo up for acquisition as well? And would you have any interest in it?

Well, I think the key thing, they're obviously Adventus' partner. They're their own company, and they'll make their own decisions. Our understanding is that they have every intention of seeing this project through to production and cash. We welcome them as a partner, and in particular, as a very well-respected Ecuadorian partner.