Earnings Transcript for SVM - Q2 Fiscal Year 2022

Operator: Thank you for standing by. Good afternoon. My name is Chris, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Silvercorp’s Second Quarter Fiscal 2022 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Lon Shaver, Vice President, for opening remarks. Please go ahead.

Lon Shaver: Thanks, Chris. Good morning or afternoon, everyone. On behalf of Silvercorp I’d like to thank you all for joining our call to discuss our second quarter fiscal 2022 financial results. We released our results our results after yesterday’s close, copy of the news release, the MD&A and financial statements for today’s call are available on our website. Before we get going I’d like to remind you that certain statements on today’s call will contain forward-looking information within the meaning of applicable securities laws. Please review the cautionary statements included in our news release and presentation, as well as the risk factors described in our most recent second quarter of 10-K and Form 40-F and annual information form. So with respect to the quarter, we finished a solid quarter here. Revenue in Q2 was $58.4 million. That was up 4% compared to last year’s quarter. And I’d like to note that silver was 56% of our revenues on a net realized basis that compares to 59% in the same quarter of last year. Second quarter net earnings attributable to equity shareholders were $9.4 million or $0.05 per share that compares to $15.5 million or $0.09 for the same period last year. And our adjusted earnings for the quarter were $13.6 million or $0.08 per share and that compares to $15.4 million or $0.09 per share in the same period last year. Just a reminder of the adjusted earnings is a supplemental non-GAAP measure to provide the market with another metric to better measure the performance of the underlying business. It’s con continuing profitability and growth potential. The adjustments made were to remove the impacts from non-cash and unusual items, including the elimination of share-based compensation, foreign exchange loss, share of loss in our associates, and unrealized gains and losses on investments, and other one-time items. As you previously reported, we produced just over 290,000 tons of ore and mill just over 270,000 tons of ore in the quarter, that’s up 9% and 3% respectively compared to last year’s quarter. The mill in shortfall in the current quarter compared to what was mined was mainly as a result of transportation interruptions that would cause by heavy rains in the Ying Mining District. We’re expecting to maintain a similar mining rate in the current quarter, but increasing our milling tonnage at the Ying Mining District that’s for Q3 fiscal 2022. In the second quarter, we sold approximately 1.7 million ounces of silver, 800 ounces of gold, 17.3 million pounds of lead, and 7.6 million pounds of zinc, that represents decreases of 1%, 64% and 7% in silver, gold, and lead respectively. But I’ll note that reduction in gold was due to a special item last year. And we did show an increase 3% in zinc sold, compared to the prior year quarter. Cash cost per ounce of silver, net of by-product credits, of negative $1.65 and this is the second quarter of fiscal 2022 that’s compared to negative $2.09 last year. And or all-in sustaining cost per ounce of silver, net of by-product credits was $7.35, compared to $6.99 in Q2 of fiscal 2021. Our cash flow from operations in the quarter was $30.9 million that was $1.3 million higher than what was reported last year in the same quarter. Capital expenditures were approximately $14.2 million in this Q2 compared to $11.1 million in the prior year quarter, and this was driven primarily by a total of 124,544 meters or $6.2 million worth of diamond drilling that was capitalized and completed in the Ying Mining District in this current quarter compared to just over 70,000 meters or only $2.5 million in Q2 fiscal 2021. Everyone will recall, we are in the midst of a very significant drill program at Ying with lots of results having been reported and to be reported. That increase was somewhat offset by reduced tunneling as the drilling activities in some of the previously mined areas to define resources that require less development going forward. And we’re, as I said, we’re continuing our expanding drilling programs to define additional resources and to test zones of gold mineralization at the Ying Mining District. In the second quarter of fiscal 2022, Silvercorp through its subsidiary in New Infini Silver Inc. initiated a Phase 1 10,000 meter drill program at the La Yesca project in Mexico with now running at four active drill rigs as of September. New Infini had completed a total of just over 2,500 meters of drilling from nine holes and a total of $1.1 million of expenditures had been capitalized. In terms of corporate development in the quarter, we invested $3.1 million to participate as a refundable deposit in the Kuanping project auction. The Kuanping project is located in Shanzhou District, in Henan Province, approximately 33 kilometers north of our Ying Mining District and covered an area of just over 12 square kilometers being approximately three kilo wide and five kilometers long. Adding up these cash flow items, we entered the quarter in a strong financial position with $221 million in cash and cash equivalents and short term investments. That’s up $6.7 million compared to the $214.4 million we had as of June 30th of this year. This does not include the investments in associates and equity investments in other companies, which had a total market value of $172.8 million as of the end of September. Within that number in New Pacific or positioned a New Pacific represented $145 million in this amount. And as of yesterday’s close, New Pacific’s value had increased to $151 million. In terms of outlook, as we announced on October 13, the company won an online auction to acquire a 100% interest in that – Kuanping project for a total consideration of approximately and $13.5 million. We pay the acquisition consideration in October and expect to complete the transfer of the rights in this month, November 2021. In October of 2021, the SGX mine at the Ying Mining District, suspended production temporarily as a precautionary measure due to the heavy rainfall experience in the yellow river region. The water level at the nearby reservoir that discharges into the yellow river reached an all time high causing the operations at the SGX mine to be suspended for 10 days, which has impacted production and head grade somewhat. Despite this interruption we expect to maintain a similar mining rate as we saw in Q2 and increasing the milling tonnage at the Ying Mining District in this third quarter of fiscal 2022. Looking forward, we continue to be on track to meet our annual guidance between 6.3 million ounce and 6.6 million ounce of silver between 65 million pounds and 69 million pounds of led and approximately and between 27 million pounds and 29 million pounds of zinc for this current fiscal year. And with that operator, I would like to open the call for questions.

Operator: Thank you. [Operator Instructions] Your first question comes from Dalton Baretto of Canaccord. Dalton, Please go ahead.

Dalton Baretto: Thanks. Good morning Lon and team.

Lon Shaver: Hi, Dalton. Thanks.

Dalton Baretto: Hey, I heard you say that you’re reiterating your guidance here. But I’m just having a hard time figuring out how you’re going to get there. So, like at Ying, for example, the low end of your guidance is 5.7 million ounces. You’ve done 2.8 so far, I understand you’re going to try and ramp up the milling rates this quarter, but then you’ve got that one quarter with the Chinese New Year where things tend to drop. Is there something you’re planning and doing around that? I just, I have a hard time getting to that automatic guidance.

Lon Shaver: Yes, no, totally understand Dalton. I mean, we hate missing guidance, and while we all are looking ahead to that quarter and typically it’s a slower quarter I’ll just say that the company and management is doing everything we can looking at all kinds of options of shifting things around maybe adding extra shifts, doing what we can to pull those numbers out. And so at this point, we’re not out in a position where we’re prepared to concede on that guidance yet.

Dalton Baretto: Okay. And then just on the cost side of things too, on a per ton basis, it looks like you’re running in the mid-90s now, and that that’s above your guidance range, but even historically, you guys used to be high-70s, low-80s. And I suspect some of that has to do with the new mining contracts some of that has to do with the renminbi, but is this kind of a level we should think about going forward? Like we’ll stay at these levels?

Lon Shaver: Yes. I mean, I think, as you pointed out we did have a renewal of those labor costs earlier this year, which has impacted that, as we commented in the disclosure, the RMB has certainly been a factor, and that’s something that we can’t predict going forward. We’re not anticipating, any dramatic changes going forward from here. So, that is probably a reasonable number. And I think, overall from an all in sustaining basis. We’re still within that guidance. So, I think it’s maybe better to look at things on that kind of a basis, because some of the activities we’re doing, it really is a bit of a judgment call as to whether those are operating costs to be expensed, or are these longer term investments that the company’s going to benefit from.

Dalton Baretto: Understood. Okay. And then just one last one from me, is it still your intention to put a new mine plan for the Ying District this year?

Lon Shaver: Not necessarily a new mine plan, what we’re aiming to do is update the reserves and resources early next year, or sometime next year, based on the drilling with a proposed cutoff date at the end of this year, obviously that’s the first step to be able to speak to a mine plan, but, we’re clearly driving towards being able to give guidance on that. As we’ve discussed in the past with some of these results in particular looking at these gold zones, that the work that’s being done there is to try to identify a resource, mine planning is under being undertaken right now. It’s just not to a level where we can give solid guidance. But that’s obviously what we’re aiming to do. We’re not doing these activities, just for the front of it and to find mineralization it’s to find resources, put them into reserves and mine. So as soon as we’re able to give that’s the plan, and I’m hopeful, we’ll be in a position to do that in 2022.

Dalton Baretto: Okay, great. And then just, maybe I’ll squeeze one more in if that’s okay. From a corporate development perspective, you do a lot of this kind of early stage stuff in China and Mexico. And so on. Is that going be the focus going forward? Are you still actively looking for something that’s either operating or later stage if you will?

Lon Shaver: No, I’d say, our focus is sort of runs the full range of more advanced exploration to production would be really the criteria. I comment that the acquisitions of those two projects in the Ying Mining District, while we’ve not been in a position to report numbers, those projects do have resource numbers calculate on a Chinese basis associated with them. So, we are looking at those as being sort of analogs to Ying and things that we can fast track into production. Again it’s just not at a state where we can give definitive guidance on those. With respect to some of the other projects, we’ve talked about Mexico before that was arguably a bit of an earlier stage project. But it did have drill holes by the prior vendor. And that’s of course, why we’ve selected to put that project through more of an incubator model in terms of the approach. But I wouldn’t say that we’re shifting our priorities, our sweet spot would be that ideal development asset that, that we can jump into and hopefully bring to production and cash flow quickly. But we’re looking outside of that as well.

Dalton Baretto: That’s great. That’s all for me, guys. Thank you.

Rui Feng: Thanks Dalton.

Operator: Thank you. Your next question comes from Joseph Reagor, Roth Capital Partners. Joseph, please go ahead.

Joseph Reagor: Hey, Lon and team. Thanks for taking my questions.

Lon Shaver: Hi, Joe.

Joseph Reagor: Hey, so kind of following a little bit on the, on the cost side of things you guys mentioned your RMB, but you guys starting to see cost inflation from the general move in inflation around the world?

Lon Shaver: I can’t really say that, that’s the case. I think, as we’ve talked about it, and as we’ve talked about on this call already and before, the labor cost aspect, which we addressed early in the year I mean, that was playing catch up for contracts that typically have a two year run rate and that were being revised. And when you look at the, the mining cost at Ying and you back out the other items things like raw materials, utilities, look like they’re about sort of 20% of those costs with the balance being, either our labor or contractor costs. So, I think a lot of the increases that we’ve seen on an RMB basis, have flowed through already. So, now it’s really just comes down to a question of, well, what’s that exchange rate, what’s the exchange rate impact on that.

Joseph Reagor: Okay. And then at Ying, you guys have kind of pointed to the, this potential additional, maybe a seventh mine, let’s call it over time now, when do you think we’ll start to like really get a, kind of a plan from the company and a timeline to how you guys might grow Ying from here?

Lon Shaver: Yes, DCG that seventh mine I mean, it is in that process of ramping up and delivering small amounts of, you might call it development or and you can see from our results, we’re also drilling in around DCG and have identified some gold zones. But, I think to my previous comment, we have over 70 rigs drilling, generating a lot of information. We’re packaging that up and putting that out in news releases just to alert to, what we’re doing, what we’re finding, love to be in a position to say what that resource reserve impact is, but clearly that calculation needs to be done here with that targeted cutoff of the end of December. That’s really going to be the foundation for a solid plan that we can, articulate to the market. And so prior to that, I think it’s just a matter of, please be patient and understand the works being done and we want to do it right.

Joseph Reagor: Fair enough. And then last thing, looking at the cash balance, the short term investments, the equity investments, the lack of debt. And then your share performance has almost been perfectly in line with your peer group. What are you guys doing on the corporate marketing side to kind of get out there and show the differentiation of the balance sheet to investors?

Lon Shaver: Yes, that’s clearly become a key message in our marketing. And we’ve been participating in conferences looking at outreach to get in front of a broader investor base ramping up our messaging on the social media side to make sure people understand more about the company and what we’re looking to do. And yes obviously, we have a very strong balance sheet and we’re looking to use that and leverage that for growth for the company, with new assets and these acquisitions that we’ve made in the Ying District tie into a broader strategy of growth in Ying. We’ve begun the planning and permitting process to look at, adding milling capacity for Ying that would be a dramatic increase. The Ying concessions we currently have, would be a key component, of that growth, but also these satellite projects would be contributors, in terms of mill feed to an expanded milling capacity. These are all the things that we’re looking forward to doing, to grow our presence and up our throughput and up our metal output both, in terms of our traditional silver, lead and zinc, but also potentially that goal and even copper that we’re seeing in some of these other zones.

Joseph Reagor: Okay. Thanks. I’ll turn it over.

Lon Shaver: Thanks.

Operator: Thank you. Your next question comes from Ryan Thompson, BMO. Ryan, please go ahead.

Ryan Thompson: Hi, Lon. Thanks for the update. I think most of my questions actually got asked, but could you maybe just talk a little bit more about La Yesca, just elaborate on some of the work that’s been done there. Have you gotten any assays back yet? Do you like what you’re seeing? Just whatever you can tell us about that project.

Lon Shaver: Yes, it’s still early days. We’ve been getting as assays back. We’ve been getting numbers that have been confirmatory of some of the exciting silver grades that, we saw in the previous work. But, we’re looking to get really more, a more wholesome package of information together, from a significant standpoint, we’ve capitalized 1.1 million. That’s not really a lot of spending in the grand scheme of thing, so we want to get a more complete package of results together. Again, so that we can wrap more context and understanding, well, what is it that we’ve that we’ve been drilling into? What does it look like? What potential does it have and what the game plan for it going forward is? And obviously we’re, not there yet having just started this summer.

Ryan Thompson: Okay. And then maybe just one more follow up on the previous callers question there. Just on capital allocation, I think you guys put a share buyback program in place. A little while back there. Can you just talk a little bit about how you’re thinking about that? Is it something you planned to execute on, or is it more just, you have it in place in case there’s a big drop in the share price? How do you guys think about that?

Lon Shaver: Yes, well I think, you’ve kind of answered and saying that it’s always good to have options have flexibility, so that was clearly why we wanted to have it in place. And at this time we don’t have any immediate plans to use it, but that’ll be decided upon the circumstances as they arise. So right now it’s good to have in place just like we have a shelf in place, just to be able to respond quickly to opportunities.

Ryan Thompson: Got it. Okay. That’s all I had. Thanks a lot for the update.

Lon Shaver: Thanks, Ryan.

Operator: Thank you. [Operator Instructions] Your next question comes from Justin Stevens, PI Financial. Justin, please go ahead.

Justin Stevens: Hey, Lon, yes, thanks for the update and congrats on a pretty good quarter, despite the challenges. So, I know you guys said you were looking to ramp up the processing rate at Ying in fiscal Q3 should we assume that you’re probably targeting somewhere to get the milling rate around the, what the mining rate was achieved in fiscal Q1 or fiscal Q2. And will that be using I guess probably more mill one as well as mill two?

Lon Shaver: Yes. That’s correct. I mean, we do have that flexibility from a milling standpoint. Also when, you look at the some of the issues around Chinese New Year, shutdown that has a greater impact on mining rates than milling. So as it relates to being able to run the mill through that period at a higher rate, that’s definitely easier than operating the mines. From an obvious standpoint, we’re only an over with approximately 20,000 tons that got mine, but not processed. So that’s obviously being coming into this quarter. But yes, I think you’re bang on and your assessment in terms of, what we’re trying to do.

Justin Stevens: Got it. Yes. And so you just, do you – so you said about 20,000 tons was with the, I guess the stockpiles sort of increase was been given that Delta in mining and milling rates.

Lon Shaver: Yes. That’s the difference in the current quarter. So, we have the flexibility now of bleeding that into our milling rate, for the current quarter and then looking at what we’re mining now and sort of scheduling things appropriately to address this quarter, but then also the fiscal fourth quarter, when we would have typically the Chinese New Year shutdown.

Justin Stevens: Got it. Yes, that makes sense. I guess the thing on the obviously thermal coal prices are flip in and bit of a swing lately, and this reports that China’s looking to stay off power shortages. Do you guys expect any impacts to your operations, either from potentially higher power costs or potential power rationing?

Lon Shaver: No, to the former not really any indication in terms of power costs, we were alerted to potential power rationing that could have taken place. But that notification for us at least, was in the month of October it did not really kick-in and have any impact. And as of the end of October, it was we sort of passed that period. There’s no guarantees or assurances that, as we head into the winter heating period, that for, other reasons as we’ve seen in the past such as pollution mitigation, that there might not be power cutbacks, but we don’t have any sort of anything specific or any solid guidance at this point.

Justin Stevens: Got it makes sense. And then last for me with quant thing I’m just curious what your rough sort of exploration timeline would be. And if you think that you might need to do much new exploration before you could get a 43-101 compliant resource, or do you think it’ll just be sort of relogging and verification?

Lon Shaver: It’s more, the latter there’s been some work, there’s been a resource. I think that the main focus here is that this project is in an advanced state to be able to apply for a mining permit instead of more typical of what we’ve done in Ying is get that permit, being able to start looking at mining activities using those early mining activities as a means justification to open up the mine get in and do exploration simultaneously

Justin Stevens: Got it. That makes sense. Yes and but the, so the, it should be hopefully completed this month. And then you’ll probably be boots on the ground fairly soon thereafter I suspect.

Lon Shaver: Yes, I mean, the completion is really more the closing of the transfer of the interest in the company that owns the mine. And so that’s intended to take place this month and then shortly thereafter, it’s the planning to be putting in the application for the mining permit, but yes, as you point out we’ll be able to get over there. And the team we have at Ying just like for the other project that we’ve acquired. The team at Ying is the one that’s going to be tasked with going back and looking at where to pick up from an exploration and development standpoint.

Justin Stevens: Got it. Sounds good. That’s it for me. Thanks guys.

Justin Stevens: Thanks, Justin.

Operator: Thank you. [Operator Instructions] There are no further questions at this time. This concludes the question-and-answer session. I would like to turn the conference back over to Lon Shaver, Vice President for any closing remarks.

Lon Shaver: That’s great. Thank you Chris and thanks everyone for joining in today. That’s all we have for this call, but please you have any additional questions or any new questions as always feel free to give us a call, reach out happy to answer those and look forward to updating you again in February on our Q3 fiscal 2022 results. Have a great day.

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