Earnings Transcript for ARREF - Q1 Fiscal Year 2024

Operator: Good afternoon. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Amerigo Resources Q1 2024 Earnings Conference Call. [Operator Instructions]. Mr. Graham Farrell of Harbor Access Investor Relations, you may begin your conference.

Graham Farrell: Thank you, operator. Good afternoon, and welcome, everyone, to Amerigo's quarterly conference call to discuss the company's financial results for the first quarter of 2024. We appreciate you joining us today. This call will cover Amerigo's financial and operating results for the first quarter ended March 31, 2024. Following our prepared remarks, we will open the conference call to a question-and-answer session. Our call today will be led by Amerigo's Chief Executive Officer, Aurora Davidson, along with the company's Chief Financial Officer, Carmen Amezquita. Before we begin with our formal remarks, I would like to remind everyone that some of the statements on this conference call may be forward-looking statements. Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested by any forward-looking statements due to a variety of factors, which are discussed in detail in our SEDAR filings. I will now hand the call over to Aurora Davidson. Please go ahead, Aurora.

Aurora Davidson: Thank you, Graham. Welcome to Amerigo's earnings call for the first quarter of 2024. Although, the figures reported in the call are U.S. dollars, except where we specifically refer to Canadian dollars. Amerigo's first quarter results were operationally and financially solid. Copper production [Technical Difficulty] guidance and cash costs outperformed guidance by 9%. Our average copper price during the first quarter was $3.95 per pound. That is not a bad price, but it is nowhere near what we have today. At this $3.95 copper price, Amerigo's financial results included net income of $4.3 million, EBITDA of $13.6 million and free cash flow to equity of $7.3 million. After my remarks, Carmen will provide a full recap of the quarterly financial results. During the quarter, Amerigo's quarterly dividend to shareholders was $3.7 million, representing a 7.7% yield against our quarter-end share price. The investment deal remains best in class at today's higher Amerigo share price. And as you know, this secure quarterly dividend yield is only one of the ways in which we'll return capital to shareholders. As I mentioned, our copper price in the first quarter was $3.95 per pound. In April, the average price increased to $4.30, and today's spot price is $4.41. This sharp increase in copper prices did not surprise us as it confirms our analysis of copper supply and demand dynamics. For several quarters, we have described the driving factors behind strong global copper demand and the factors enduring meaningful secular growth in global copper supplies and demand is now outstripping supply. Global PMIs were coming in strong and improvement in manufacturing activity is expected to continue. Historically, recoveries in global manufacturing cycles positively correlate with copper prices. In particular, recent Chinese PMIs have been strong, and there continues to be robust demand for green projects in China, as was the case in 2023. [Technical Difficulty] MVC manufacturing activity is also very robust, recording the strongest CMI vote of all countries in March. India's copper demand grew 16% in 2023 double-digit growth as we again expected this year. Once study quote said for each $1 million growth in Indian GDP, we will have a 300% kilogram growth in copper demand. Simply put, global copper demand continues to grow and as demand continues to grow, there are clear risks to copper supply. Last year, global copper consumption was 25.4 million tons, while global copper mine production was 22 million tons. Consumption grew, but copper mine supply remained flat last year. For 2024, copper consumption is expected to grow by 3.5% and refined copper production is expected to grow by 3.1%. However, global mine production, which is the life of refined copper production is stalling. So consumption is outpacing refined copper supply and mine production, which feeds the smelters that produce refined copper cannot be turned on like a light switch. So what needs to happen to get additional copper mine supply going. The old assumption that $4 per pound is the incentive price is no longer valid. This is clearly shown by the lack of recently sanctioned copper projects. The last time a batch of large copper projects was approved due to higher copper prices was in 2017 and 2018 with projects such as Quellaveco and QB2. However, the stronger copper prices we started to see in 2021, still have not incentivized miners to invest in new projects, although our copper isn't sufficient to justify the risk of approving new copper projects. New capacity is coming primarily from expansion projects, not from greenfields as used to be the case. Copper miner have slow expansion for over a decade due to higher capital costs, higher projected operational costs and more regulation. Their permitting process are complex, and they are lengthening with increased risk of resource nationalism. We also cannot ignore the declining quality of new projects. Copper prices were lower when copper was mined from higher-grade mines or mine sectors. A company cannot mine its highest grade sections indefinitely. And as copper grades decrease, a higher price is required for profitability and more certainly to invest in new projects. Earlier this year, $11,000 a ton, essentially $5 a pound was quoted as the new incentive price, but that is just one price point to consider. Robert Friedland perhaps the most local copper supporter and long-term industry spokeman says that an incentive price of 15,080 [Technical Difficulty] a pound is necessary to bring on new projects. It short lived, a price spike to these levels cannot incentivize substantial new projects. Copper miners would need a sustained period of higher prices to sanction new projects. Of course, to say that Amerigo would flourish in this pricing environment would be quite an understatement. Our capital return strategy has been designed to quickly maximize our returns to investors under the pricing circumstances I have just described. Industry analysts estimate that at least $200 billion of investment is required in the next decade to fix a 10 million ton copper deficit, that massive investment figure is based on current capital intensity estimates and does not reflect the inflationary pressures that are occurring in the industry. In a moment, I will tell you another example of America's competitive advantage in this area. To sum up my comments on the macro situation, we know that for the rest of this decade, there will be limited new copper supply coming online. We also know that a higher incentive price is required to bring additional capacity online and that there are long lead times to add supply. In our opinion, these market dynamics will establish a new floor price for copper just as occurred in 2003 with the industrialization and organization of China. So this is where we are now in Amerigo, strong copper prices, stable operations, controlled costs, low CapEx, declining debt levels and a proven capital return policy. The quarterly dividend of CAD 0.03 per share is our live or die cash obligation to shareholders, and it is very safe under these conditions. We are building up our cash decision to the desired target of $25 million, which happens very quickly under current copper prices. Additional cash will be distributed to shareholders via performance dividends, share buybacks or a combination of both. As a reflection of the increasingly positive market sentiment, the questions I received from shareholders have changed from at what copper prices at quarterly dividend save to whether we will be buying back shares of paying our performance dividend. The Board of Directors analyzes multiple elements to determine how best to allocate surplus cash for the benefit of shareholders. For example, we know that the timing of our cash generation cycle is in varies with the timing of buybacks. At higher copper prices, ample cash is generated to buy back shares, but this would typically occur at a higher share price because Amerigo's share price is so responsive to changes in copper price. Of course, in a perfect world, we prefer to buy back shares at lower prices. And in fact, that is what we have done. 2021 Amerigo shares have been repurchased at an average price of CAD 1.50. We are currently trading at CAD 1.76, which is 17% above that average purchase price. However, the real strength of the capital return strategy we have is having multiple tools to return excess cash to shareholders quickly. We can use the quarterly dividend. A performance dividend based on elevated copper prices and it has a higher cash balances or share buybacks. This difference will simplify the effect of the shareholders' long-term return on invested capital. It is also amplified because of how quickly the tangible effects of this strategy can be felt, particularly for the dividend component of the strategy. Now I will provide a brief operational update. During the first quarter, we had another excellent safety record at NBC with no lost time accidents. In fact, on January 29 of this year, we celebrated two years without lost time at MDC. This is significant to all of us. This week, we are not producing copper at MDC as we're doing the annual plant maintenance shutdown. This is a planned event that we factor into our annual production guidance. It is a monumental endeavor as we bring in 667 additional workers to ensure we can complete more than 500 necessary projects when all the equipment is shut down. This shutdown is a crucial part of our operational planning as it allows us to maintain and upgrade our equipment, ensuring optimal production in the long run. This shutdown period is also perfect for bringing any new production-related projects online. NBC's standby power transformer, a significant risk mitigation project is coming online this week. As you may recall, when we issued our 2024 guidance this release, we informed the market that we were evaluating two CapEx projects that would contribute to increasing production of [Technical Difficulty]. We also indicated that the projects could be initiated this year, subject to further technical analysis and higher copper prices. I am pleased to report that we are proceeding with this project and want to tell you more about them. Together, they will generate an additional 345 tons or around 760,000 pounds of copper per year once they are completed. The projects will cost approximately $2.3 million, representing a very low CapEx intensity of $6,600 per ton, which is significantly lower than the $30,000 to $40,000 per ton capital intensity, which is typically required today for new copper projects. This is a perfect example of the benefits of Amerigo's low capital needs and operational excellence. The first project involves installing more uniform in the [Technical Difficulty] Regran cyclone battery to improve the pumping equipment in that process stage. This should increase recovery translates production. The second project involves installing new operational control equipment in a cleaning stage to better control water, air and level variables, further increasing efficiency. This CapEx should be seen as "growth CapEx," and it makes sense to initiate them now with higher copper prices. The fact that the cost of the Amerigo's growth is so much less than the rest of the industry is compounded by how quickly shareholders will feel the benefits. For example, at the $3.80 copper price, the payback of the project is 15 months with the subsequent cash flows available to shareholders using any of our capital return strategy tools. To end my remarks, I will tell you that we performed strongly in April and so did copper. The potential to return additional capital to shareholders this year should be very apparent, whether through the payment of our first performance dividend, the retirement of shares or a combination of both. As a shareholder, I believe this is a great place to be. Last week, on April 30, we had Amerigo's Annual General Meeting of Shareholders. I want to thank our shareholders for their participation and support as they voted in favor of all business items before the AGM. Our next earnings call will be on August 1, 2024, to discuss the Q2 financial results. As usual, if you have further questions about Amerigo, Carmen, Graham or I are available any time. I will now ask Carmen Amezquita, Amerigo's Chief Financial Officer, to discuss the company's financial results. Carmen, please go ahead.

Carmen Amezquita: Thank you, Aurora. We are pleased to present the Q1 2024 quarterly financial report from Amerigo and its MVC operation in Chile. As Aurora mentioned, we are pleased to report strong financial results in the first quarter of 2024. We posted net income of $4.3 million, earnings per share of $0.03 and operating cash flow before changes in noncash working capital of $10.2 million. The comments on quarterly financial performance and quarter-on-quarter variances with Q1 2023 are as follows

Operator: [Operator Instructions] Your first question comes from Steve Ferazani with Sidoti. Your line is now open.

Steve Ferazani: Thanks. Afternoon, Aurora, Carmen, appreciate all the detail on the call. Carmen, appreciate all the detail on the call. I wanted to ask about cash costs because I know you were comparing it year-over-year, but if we look at it the significant decline sequentially and also well below your guidance just given a couple of months ago. Anything one-off in the quarter? I know you cited the weaker peso, but anything to say that this lower level of cash cost particularly the normalized cash cost, we should see is more sustainable now?

Carmen Amezquita: Steve, thank you for the call. The Chilean peso has an impact, obviously, when we have provided all of the variability that one could expect on our guidance news release. In practice, we saw lower pass-through charges as well. We don't know what the level of the charges is going to be from month-to-month. So we basically project and our budgeting process the most recent information plus any other changes that have been communicated to industrial consumers. So far in Q1, they were lower than what they were in the last quarter of 2023. So that's another source of impact. We use less climbing bolts than we thought we would need that has -- that varies depending on the mix of fresh El Teniente that we are putting through the grinding circuit. On the other side, we did have, as Carmen mentioned, higher line costs. In general terms, we monitor the operation constantly. We're always looking for opportunities of cost containment. So I would say our guidance remains valid for the rest of the year, depending considerably on how the Chilean peso behaves. It's a pricing to see what has happened with the Chilean peso. There is a significant decoupling between CLP performance compared to copper prices. Normally, what you used to see years ago was a stronger Chilean peso in response to stronger copper prices. We haven't seen that yet this year. So it may be lagging, or it may be more of a structural...

Steve Ferazani: Perfect. In terms of the production optimization equipment, it sounds like you're installing them during this -- right now, during this shutdown. Is that accurate? Are we going to see the benefits really as early as 3Q, or what's your timing on that?

Aurora Davidson: I wish it happens like that, it doesn't happen like that. We have approved -- the projects have just been approved. Essentially, this week when we presented the capital allocation proposal to the Board of Directors, and we supported it with the technical analysis and with our projections for copper prices for the rest of the year. We are starting to work on them basically once we finish the current shutdown, which is taking place this week. It will take approximately seven months for works to be completed. And then we have to wait for another [Technical Difficulty] shut down period to put it -- to put that in place. That's one of the reasons why we wanted to accelerate that deployment and those early works now so that they would be -- they will be ready for the next plant shutdown to come online. Plant shut downs have been occurring in May for the last year. They used to occur in January in prior years. So we have to be ready for that in case that's when El Teniente will be having their 2025 shutdown. So don't adjust for projections for this year. This is basically getting ready for 2025 with that project -- with those two projects.

Steve Ferazani: Understood. Perfect. It sounded like Carmen indicated that -- so you had the receivables billed, but it sounds like that reversed rate at the beginning of April. If it did, and you're back up to -- you should have been back up to about $20 million plus in cash just last month. So you're closing in on that target area where you might start considering a buyback again. Is that fair? And given where copper prices are now, you're probably closing in.

Aurora Davidson: We're getting close.

Steve Ferazani: Okay. And last one for me. On second straight quarter, Cauquenes was a larger percentage of the mix than it historically has been over the last couple of years. Any reason for that, or is that just quarter-to-quarter shift?

Aurora Davidson: That is in response to the feed or to -- in response to the throughput that we get from El Teniente. And it is one of the advantages that we have spoken about in prior quarters. We have the flexibility if we get lower throughput from El Teniente for their own mine sequence in our operational reasons. We can always go in and chunk up a little bit more of token is to keep up our production guidance line.

Steve Ferazani: Any reason to think that could extend into this year or...

Aurora Davidson: El Teniente have a [Technical Difficulty] factor in May discussion. It is factored in to our plant this year that this will be resolved in the second half of the year, and we would then be able to revert back to our normal parameters, Q2, Q1 2023 are good comparison points there. But if that doesn't happen and if they need some more time to get back to their normal operational parameters, it's not of concern to us. We can continue doing what we've done in Q1.

Operator: Your next question comes from John Polcari with Mutual of America Capital Management.

John Polcari: [Technical Difficulty].

Aurora Davidson: John, I'm not hearing your question. You may have cut off.

Graham Farrell: I think he dropped off.

Operator: [Operator Instructions].

Graham Farrell: Let's wait for John to come back. I think he'll come back.

Operator: Your next question comes from John Tumazos with John Tumazos Independent Research.

John Tumazos: I was attentive, Aurora, to how optimistic you are about the future of the copper market. Do you plan to make larger capital investments to expand your milling complex because of the good outlook for copper? Or will you acquire other assets beyond your tie-up with El Teniente to increase your exposure to the copper market.

Aurora Davidson: John, our investments at MVC are at the optimal stage. We have done our expansion to increase our plant capacity. We work that in conjunction with the mining plan from El Teniente. So we're fine at MVC. Obviously, the outlook for copper is very strong in our opinion, and we know how to operate very well with copper tailings. We look for these opportunities, but they have to be the right opportunities. We're not just going to go and seek operations that don't make economic sense. Obviously, with the stronger copper prices, I think the tailings will be an area of focus for other miners. They will see them as an area of opportunity rather than just an environmental liability, and when that is the case, we're better positioned than anyone to work with other partners in recovering copper from copper tailings.

Operator: Your next question comes from John Polcari with Mutual of America.

John Polcari: Aurora, just four quick questions. First, is there any possibility or discussion as copper prices -- if copper prices continue to ramp up, that you would move maybe to some partial hedging from a zero-hedging strategy, or at the moment. And for the immediate future, is that the continued strategy just to stay completely unhedged?

Aurora Davidson: We have no immediate plans of hedging. We are not looking at hedging right away, but we always analyze the costs and the potential benefits of doing that, but there's nothing in front of us right now.

John Polcari: Okay. Secondly, the recently approved optimization projects. I think you might have answered this already. I was wondering what the estimated payback period was. I think you said something like seven months to complete. And then after that, it would start have an impact. Is that what I heard earlier?

Aurora Davidson: It is seven months of preliminary works to get them in hookup mode, and then we're waiting -- we will be waiting for we need at least eight days of equipment shutdown to bring them online. So they're happening in 2025.

John Polcari: Got it. Third question, what would be the level of sustainable cash balances that would be -- you'd be comfortable with for the company, maybe $25 million.

Aurora Davidson: It is $25 million. $25 million is a sweet number.

John Polcari: $25 million, right. And then lastly, any possibility? I know there's been some talk over the years of possibly expanding the tailings relationship with Codelco, any possible further discussions on that where they would be willing to allow Amerigo to expand its existing facilities?

Aurora Davidson: I think I answered that in the prior question...

John Polcari: Okay, I probably disconnected, sorry.

Aurora Davidson: Sorry, sorry about that. We remain interested for the right opportunities. I think there is no one else out there that has experience recovering copper from copper tailings that Amerigo does. So as copper prices continue to be robust, copper tailings will be of interest in a different way most of those tailings, and I think we're the first candidate they should look at there and then.

John Polcari: Do you think is there -- has there been an expression of interest maybe to expand their tailing processing arrangements or none at this time?

Aurora Davidson: Well, with El Teniente that's where we are at now. We are processing basically their fresh and Cauquenes tailing. So that relationship has expanded over time and has led us to where we are now at our stage with MVC and El Teniente. They have six other mines. Eventually, they will probably be interested in doing something similar. And we will be a prime candidate for them to consider. But there is nothing in front of us immediately to report back to you.

Operator: There are no further questions at this time. I will now turn the call over to Aurora for closing remarks.

Aurora Davidson: Thank you. Thank you for joining us today. The recording and the script will be available on our website as soon as we [Technical Difficulty] from our providers. And as I mentioned earlier, we will talk again on August 1 to discuss Q2 financial results. And in the meantime, you can always reach out to myself, to Carmen or to Graham. Thank you very much for being with us today.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.