Earnings Transcript for USAS - Q2 Fiscal Year 2018

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Americas Silver Corporation Second Quarter Investors Call. During the presentation, all participants will be in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, August 14, 2018. I would now turn the conference over to Darren Blasutti, President and Chief Executive Officer. Please go ahead, sir.

Darren Blasutti: Thank you very much, Daisy and sorry for the late start. We had a number of people dialing in just at 8

Operator: Thank you. Certainly. [Operator Instructions]. Our first question comes from the line of Jake Sekelsky. Please proceed with your question.

Jake Sekelsky: Good morning. Thanks for taking my questions.

Darren Blasutti: No problem Jake.

Jake Sekelsky: Looking at San Rafael how should we view grades going forward? It looks like we're running towards reserve grade as we get to the upper zone as you mentioned? But is from a modeling perspective should we expect a reserved grade to be reached by the end of 2019 or is that more of a 2020 event?

Darren Blasutti: I'll let Shawn Wilson answer that because he's got it. I can tell you but I think he's going to be more precise Jake for you.

Shawn Wilson: Yes. Morning Jake. How are you? So as we head into 2019 as Darren mentioned we're going to be reaching the upper zone. The upper zone as mentioned before again contains higher silver grades, lower zinc grades but with that we will also be reaching the guts of the lower body in the main zone which again has our higher zinc. So we will expect to be targeting our sort of average reserve grade by the end of 2019.

Jake Sekelsky: And I'm silver if you could be a little precise from because I think what it adds on --

Shawn Wilson: Yes. So with that, with reaching that upper zone silver grades are well above our average reserved grade of just over a 100 grams per tonne when we blend the upper zone material with the main zone material we should be seeing realizing our average reserve grade on the silver side of 111 grams per tonne or so.

Darren Blasutti: Yes. So basically we start to see that in the early second half of the year next year Jake we start to see that we get into that upper zone. It's got areas that are 300 grams, 200 grams all around there and if you're blending that with kind of 50 or 60 from the main zone, then you're getting smaller amounts obviously out of the upper zone but you're getting very high-grade silver. So our view is by the exit of 2019 will be at reserve grade for silver and there will be some years of 2020 where we're probably higher than our reserve grade.

Jake Sekelsky: Okay. Yes.

Darren Blasutti: So that's why we're going to see doubling of the silver production coming out of out of San Rafael by 2020.

Jake Sekelsky: Okay. Perfect. And this is more of a high-level question but with precious metals prices coming off for the last quarter and base metals for that matter too do you see this changing your broader strategy at all? I mean I guess what I'm asking is with silver at $15 today do you consider leaving zone 120 in the ground until prices recover and are there options to focus on more base metal rich areas until we see prices come back up?

Darren Blasutti: Yes. So obviously there's two things to your question. First one is what do we do with zone 120. I think the first thing we're to do is get the resource. I think we are very confident in what we want what we're going to get at the end of August and we are going to do as I said we've already started some very quick math on cost to develop into areas and on the mill side and we're going to see how robust it is and we know obviously the grades are better than El Cajon and we know that the net recovery is going to be pretty similar but I think the issue we have is if you're talking about $15 silver and you're talking about a mine that would have say roughly a $35 cost per tonne cost and you're going to get $42 a tonne at $15 but you're going to get $70 a tonne revenue with $20 you got a real decision there right. I mean you're going to make money on it. We know we'll make money on it but do we really want to produce it and I think the answer for us is it's really going where the market is because we've got a short term to get into development given how close to this through other assets we've got only in some slight mill modifications. We are putting silver copper concentrate on the back end. So I think those timelines are relatively short in months; six months to eight months. So we can afford to be a little slow on the development there I think. Get the plans in place and then we don't have to do it right away knowing that we have permits in place, knowing that we maybe have the equipment on order and then we can bring it in when we need it because the hardest part in our business is when I was at [Varick] we had this great mine called [indiscernible] and it was the greatest producer I think in the history of gold except it never saw greater than $250 gold and so it made gold at 60 bucks an ounce or its average life of mine and outstanding cost basis but it never saw more than 250. So we think about these things and we want to be able to bring out a plan where you guys can value this in your models as analysts and investors can see with the potential we have but it doesn't mean that we need to bring it into production immediately and it really is where the prices and $15 an ounce I'd be less likely to bring it in than it would be at $20 an ounce it's a no-brainer. So that's how we think about it and then on the base metal side I think what we're seeing through our modeling is we're seeing more homogeneous or so we're seeing more ore out of the ore blocks than we expected better grade out of those ore block. So what we are contemplating now is if we want to get more base metals out and we don't want to build zone 120 then we can expand that existing mill for the base metals and so we're looking at that option too if base metal prices stay as I said I think what we've seen zinc drop from a $1.61 at the peak to a $1.13 is not really supply-demand fundamentals. We feel that as more outward issues and again we feel that as we get towards the end of the year that we're going to start to see those and prices kind of go back up you're seeing the stocks’ decline, you're seeing [TC and RCs] continuing to drop, you're seeing us negotiate better deals with off takers and suppliers. There's still people looking for the product. So again the way we can deal with that Jake is really just to put use that billing capacity that we could expand and use that for base metals and so those are decisions that are on our plate but we're going to look at the zone 120, first we're going to get that out in a preliminary basis to the market in the mid September and then we're going to go do a more robust study later in the year. So that's the plan as we see it today and again that we've had massive changes in metal prices and our job is to provide optionality to our shareholders on pricing but our first objective is to make money and so that's how we're going to kind of take our strategy going forward; how do we make the most money for our shareholders.

Jake Sekelsky: Got it. Okay. That's all for me and congrats again on a good quarter in a tough market. Thanks.

Darren Blasutti: Thank you.

Operator: Thank you. [Operator Instructions]. Our next question comes from line of Heiko Ihle. Please proceed with your question.

Unidentified Analyst: Hey guys. Thanks for taking our questions. This is Matt here for Heiko. Unfortunately he couldn't make a call.

Darren Blasutti: No worries.

Unidentified Analyst: So you guys are still looking at 8.3 million of long-term debt as per your financials that's down from about 11 million from 1231? You also have about 5.1 million in your prepayment facility. Just if you could you sort of walk us through your balance sheet expectations for the remainder of the year and where we should expect to see all that at the end of the year?

Darren Blasutti: Yes and if you if you look at Matt, I mean I can't tell you exactly where cash is going to be at the end of the year because prices are changing but I can tell you that our debt is going to continue to come down that' match with the Glencore offtake agreements. So every quarter or every shipment we're paying down that balance and so we paid as of today we paid just about $2 million of that. We expect another $2 million to go for the remainder of this year for $4 million over the year and then in 2019 if you look at our shipments it's about $5.5 million and then another $5.5 million in 2020. So that takes our debt down to zero and again it's the thing, we don't think about it as money changing hands. There's a charge for every tonne that they're processing that's really for that credit facility. So they're going to continue to take that off and obviously if things get worse there are different ways that we can deal with that debt and what I mean by that is if we see another 2015 situation and the ‘14 be it ‘15 what we can do is we can extend that credit facility by extending the offtake agreement with Glencore. So again this is on terms that we've negotiated for a four-year offtake and but if we had some issue where the market just really went bad we would just extend that debt and those debt repayments out farther. So we've got a very good interest rate on it. We're making those pre-payments because we'd like to get all of the debt off our balance sheet but there are ways that we can deal with that. So again with $2 million down and $2 million to go for this year and that's factored into our plan and our budget and so we expect the cash balance to be higher than it is today but I just don't know where it is because obviously if we average that $1.40 zinc in the first quarter and right now it's a $1.13 and but we're going to have more zinc and more lead production coming out. So we're going to offset that down in terms of price but whether we can offset all of it is another question or not but expect that we're going to have good production and again continuing to have zinc and lead ramp up and it's really where pricing goes that's going to define where the balance sheet is. So – but it's – we are not – we don't see ourselves in a situation that prices stay the same over the rest of the year that we have any issue with the balance sheet. It's going to be stronger.

Unidentified Analyst: Perfect. Thank you. And then just speaking of the prepayment facility you guys are currently paying LIBOR plus 5% to Glencore. Given the current interest rate environment and also the fact your firms come a long way since January 2017 when this was initiated. Is there potential to refinance this or we understand the precious metals price environment isn't too favorable right now but given the strength of borrowers in the market is there anything you can do or that you guys might be considering?

Darren Blasutti: Yes. We've had a tier one Canadian bank down to visit the property and they're doing some work on looking at a facility for us, line of credit and we'll see where that comes out and obviously they would get rid of the Glencore portion and give us a facility on top of that if we needed it. So we are looking at that. Obviously it's very difficult for them. They're the same boat everybody else's is that prices have moved very materially, very quickly. So as they look at their debt coverage ratios and they look at things they're looking at a $1.40 a month and a half ago looking at a $1.13 today and looking at downside cases. So we're not in a rush to do that. Again our relationship with Glencore is very good. So again if there's an issue we can deal with it but we are looking at that. We have started the process they've been down to site. They are doing their due diligence and they're putting formulating something but we don't want to make them do something today if they're going to use $0.90 the zinc price. So we'd much rather take our time and see the mental price recover as we move forward.

Unidentified Analyst: Okay. Perfect. Thanks a lot and have a good one.

Darren Blasutti: Thanks Matt.

Operator: Thank you. Our next question comes from line of Bhakti Pavani. Please proceed with your question.

Bhakti Pavani: Good morning guys.

Darren Blasutti: Hey Bhakti.

Bhakti Pavani: Quick question on Galena. If you could maybe quantify as to how much was the last revenue in the quarter because of the shutdown?

Darren Blasutti: Yes. So I could just give you broad terms. So it was about 14,500 tons. It was about 90,000 ounces of silver, okay and about a 1.5 million pound of lead. Just make 1.6 and then on top of that – so you didn't see the revenue but you saw all the costs come through right.

Bhakti Pavani: Yes.

Darren Blasutti: So some went to care and maintenance of some went into the operating cost depending on where we were in the cycle or what we could mill or what days we could mill and couldn't. So ultimately we had I think an extra probably 600,000 of maintenance costs on top of normal care and maintenance for [indiscernible] and then you probably had about $400,000 of operating cost. So you had $1 million of cost which you saw in the costs or through the balance sheet and net income but you didn't get the 90,000 ounces of production, you didn't get the 1.6 million pounds of lead.

Bhakti Pavani: Got it. Got it. So going forward I think -- so what was the actual cost of the fixing of the repairs that you have to undergo this quarter?

Darren Blasutti: I'll have to ask [Albert] or Warren.

Warren Varga: Yes. The amount that's in the new care and maintenance line Bhakti is about $640,000. I know the total amounts more that we have some marginal care maintenance with some historical properties we have in there as well and through the cost line you could probably put another 250 at least capitalized in the cost as well into a machinery as well.

Darren Blasutti: So we're talking about roughly 900,000 of that includes labor and the fix and all that stuff. 250 is the capital part and 640 is the labor and all the other associated costs of having the mine open without running so that it operates.

Bhakti Pavani: Right. Thank you so much for the color. Just quick question on the grades. The grades have actually improved from second quarter in the second quarter and compared to Q1, so are the silver grade and the lead grade are they representative? Are they expected to continue through the rest of the year or that was just where you were mining in the ore for the quarter?

Darren Blasutti: I'll let Shawn answer that.

Shawn Wilson: Yes. No worries. Hi Bhakti. Yes you did notice an increase improvement in the grades. We do expect that to continue as we move forward. We are as Darren alluded to making some progress with our long haul [stoking] we've made some improvements along the way in terms of minimizing some of that dilution associated with our long haul [stoking] as well as the veins and areas that we are focused on in mining for a mechanized drift and fill again focused on keeping things narrow and minimizing dilution, excuse me. So we do expect as we move forward into Q3 and the remainder of the year to share grades, make a slight improvement.

Bhakti Pavani: Perfect and with regards to mining cost do you expect that to reduce given that you have changed to long haul mining or do you anticipate it to be at the historical level?

Shawn Wilson: Given the amount of long haul material that we've mined to-date and where the mine plans moving to in the future we probably expect to see the mining costs remains similar. We haven't identified enough of the reserves to make a significant difference in terms of the percentage where the long haul still stoking tonnes are coming versus our mechanized and versus our conventional. So I expect that our mining cost should stay similar to the recent levels.

Bhakti Pavani: Okay.

Darren Blasutti: Yes. So Bhakti we're always obviously try to improve but we don't -- we haven't any of that improvement in there I think we've got a team in there now that's basically from all aspects. We've got a new mill person. We have got a new senior mining person. We've got a new GM. All of those things are – we're very positive about but we're not reflecting any decreases in cost yet.

Bhakti Pavani: Got it. Got it. Moving to zone 120 I know you would not be willing to bring that mine online at this silver prices but just kind of curious once you have the results estimate out hopefully by the end of Q3 what are your plans when it comes to zone 120? I mean would you want to do more exploration at this point or would you want to just wait for silver prices to improve before making a move there?

Darren Blasutti: Daren would you want to go ahead? It’s early in Mexico. Okay I don't think we have him, but so I would just say this part I mean obviously if we work with MDA and we have our own internal resource geologists now we work with them and we see areas that we think we can continue to increase the high grade area of the deposit, we're absolutely going to drill it out and the great news about getting a new model is it gives you that 3D ability to look at things. Obviously we don't want to just drill out more material, we want to drill out more of that high-grade material that we were seeing in our last drill holes and so we're going to probably for sure chase that to the southeast a bit and we're going to look where the model is deficient in and it has some more high-grade. At this metal price though again I think putting another $3 million program together may or may not be a reality but again I think we think we got enough size here getting towards that 5 million tonnes or whatever we think it's going to come out to be to have a project. So then it's about optimizing that project and so I think the focus will be on optimizing the project after we get the first initial blush and then chasing out any high-grade areas that we believe that can be added to that and I would expect that we would have that formulated by the end of the year to start early next year.

Bhakti Pavani: Got it. Perfect. That's it for me. I think. Thank you very much guys.

Darren Blasutti: Thanks Bhakti. Operator maybe we have time for one more question.

Operator: Certainly. Thank you. Our last question comes from the line of [indiscernible]. Please proceed with your question.

Unidentified Analyst: Hi guys, I have few questions. I didn't look at your [Edgar] site, what's your cash balance at the end of June?

Warren Varga: So it's $7.8 million U.S. and working capital at $12.1 million.

Unidentified Analyst: One did I hear that the long-term debt is 8.3 and you hope to get it down to 6.3 by year-end?

Warren Varga: Yes, roughly, yes.

Unidentified Analyst: Okay. And finally using earning plus depreciation and amortization what was your cash inflow for quarter two as well as the first half?

Warren Varga: That's a great question. Give me one second. I can get you that. So we have $8 million offices – $7.8 million.

Darren Blasutti: Can I take that?

Warren Varga: Yes go ahead Darren.

Darren Blasutti: Your cash generated some operation of the 4.34 for the quarter. You can add back the depreciation of 2.4 on top of that.

Unidentified Analyst: So that's what? 6.7?

Darren Blasutti: I think roughly.

Warren Varga: Yes. That's just second quarter.

Unidentified Analyst: Second quarter and does that include changes in working capital or is that real cash inflow from operations?

Darren Blasutti: That is I would include the – that is not including a cash flow from working capital.

Unidentified Analyst: All right. So 6.7 give or take for the second quarter and was it double that for the first half?

Warren Varga: No. We were probably around 5 in the first half.

Unidentified Analyst: So you had a cash outflow in the first quarter. I forgot.

Darren Blasutti: No. Yes. We are still doing all that drilling and we were still doing all – so we had a payment for San Felipe Bay. So you saw cash going down. We were spending a lot of money still developing into San Rafael. It was still positive but the cash balance was down as a result of a number of corporate things too.

Unidentified Analyst: But you mentioned drilling and the CapEx that comes after cash inflow. So excluding that what was it in the first half?

Warren Varga: So we were 3.7 of operating cash flow. That was the first quarter, sorry. We don't have year-to-date numbers.

Unidentified Analyst: 3.7 and the depreciation was about 2.3?

Warren Varga: Yes.

Unidentified Analyst: So 6. Yes. Six. Okay. Good. That's quarter one. So a little more in the second quarter than the first quarter.

Darren Blasutti: Yes and again of course, the second quarter was impacted by the fact that we were down for a month right at the [indiscernible]. So obviously we would expect it better numbers but –

Unidentified Analyst: Yes. Sure. All right. I just wanted to get those so I understand them. Thanks guys.

Darren Blasutti: Yes. No problem. We will just sign off and thanks everybody for listening very early morning on the west coast especially it's a very difficult market. We're working very hard to not only make money but conserve our cash to ensure that there's no issues on the downside and we're continuing to move forward with our projects and we believe we will enhance the company moving forward as well and appreciate your patience and your working with us as we move forward through some difficult markets here but I think the company's primed and ready for a move up as we see prices that return. With that I'll look forward to talking to you individually and thanks very much for calling.

Operator: Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.