SilverCrest Metals - Q1 2023

Transcript

Operator (participant)

Morning, ladies and gentlemen, welcome to the SilverCrest reports first quarter 2023 results conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, May 12th, 2023. I would now like to turn the conference over to Eric Fier, CEO and Director. Please go ahead.

Eric Fier (CEO and Director)

Thank you, operator. Good morning, and thanks everyone for joining the first quarterly earnings call as a precious metal producer. Today we'll be providing commentary on our first full quarter of production, after which we'll be happy to take questions. The slide deck we'll be referring to is available on our website at silvercrestmetals.com under the Investor tab. Before we get started, I'd like to direct you to the forward-looking statement on slide two. All figures discussed this morning are in US dollars unless otherwise stated. On the call with me today are Chris Ritchie, President, and Pierre Beaudoin, Chief Operating Officer. Let's start with slide three. Q1 marked our first full quarter of commercial production. We have focused on ramping up, gaining further confidence with operations, generating free cash flow while reducing operational and financial risk.

Our early ramp-up success, coupled with our robust cash position, has allowed us to accelerate debt prepayments, which significantly de-risked our balance sheet. The Las Chispas operation continues to perform well with the processing plant meeting or exceeding design parameters. One of our biggest success stories to date is how our stockpiles have continued to create value and reduce risk. The underground mine ramp-up is progressing as per updated rates. Completion of the updated technical report, some like to refer this to the updated feasibility study, remains on schedule for late Q2. This report forms the basis for future production and cost guidance. We will continue to advance our ESG initiatives, including a strong focus on health and safety, as well as risks and opportunities within the community in which we operate.

The second year of our water stewardship plan in the local communities, which is based on the findings of our TCFD work, is progressing nicely and we remain on track to deliver our inaugural ESG report in Q2. We are also very proud to announce that we recently received a notable ESG award in Mexico. We look forward to continuing with this momentum. I will now pass the call to Chris to discuss financial results for the quarter.

Chris Ritchie (President)

Thanks, Eric. Moving to slide four. In the quarter, we generated revenue of $58 million. Cost of sales were $22.4 million, reflecting a mine operating margin of an impressive 61%. Net income in the quarter was $27.2 million or $0.18 per share. It is important to note that our results in the quarter benefited from access to our surface stockpiles, which carry a lower cost per ounce than those currently being mined, as well as from tax loss carryforwards. We expect these benefits to continue through 2023. Net free cash flow was $19.3 million for $0.13 per share. In November 2022, we restructured our debt facility, which lowered our interest costs and improved the terms.

At that time, we repaid $40 million from cash that was available to us based on an on time and on budget build. The prepayment of an additional $25 million was made in Q1, was supported by strong free cash flow. This is the best way to prove that the mine is operating successfully. Subsequent to quarter end, we have prepaid a further $20 million of debt based on continuing strong cash flow generation. This reduces our total debt outstanding to $5 million. We have now repaid 95% of our debt within six months of declaring commercial production, a significant accomplishment in a short period of time. We forecast that this early prepayment of debt has reduced our interest cost by approximately $6 million.

We ended the quarter with $45.8 million of cash and cash equivalents and an undrawn $70 million revolving credit facility. With that, I will now pass it to Pierre to discuss operations at Las Chispas.

Pierre Beaudoin (COO)

Thanks, Chris. Good morning, everybody. I'm now on slide six. Ramp-up of underground mining rates remain similar as Q4 2022 at an average slightly above 700 tons per day. As planned, the underground mining rate is expected to continue to ramp up over the next few years. Underground capital development is tracking slightly behind plan, but we expect that it will accelerate through the remainder of 2023. Quantum and timing will be defined in the updated technical report. We've undertaken discussion with multiple underground contractors, including our current contractors. These discussions are focused on ensuring we can meet our ramp-up objectives while defining costs that are reflective of the global inflationary environment.

Still on slide six, the Las Chispas processing plant average daily throughput of 1,160 tons per day for a total of 104,000 tons processed during the quarter. The plant recovered 2.44 million ounces of silver equivalent in Q1. We expect similar level in Q2 2023. An estimated 40% of production feed was sourced from stockpile during the quarter. The stockpile continued to reduce risks and provide flexibility as we progress our ramp-up of the underground mine. I want and need to highlight that as the percentage of processing throughput sourced from stockpiles decline, the benefit to the current cost structure will be impacted. Our corporate level AISC, which aligns with the World Gold Council definition, was $11.45 per ounce silver equivalent.

These costs incorporate some of the inflationary impact and mine site change experienced over the last 2.5 years. The updated technical report will address any outstanding cost impacts. Moving now to slide seven, you will see that the updated technical report remains on track for release in late Q2 of 2023. This study will include refresh costs, updated resource and reserve, and a new life of mine plan, which will consider optimal mining, stockpile, and processing rates. I will now pass it back to Eric to conclude the presentation.

Eric Fier (CEO and Director)

Thanks, Pierre. As mentioned earlier, our balance sheet de-risking has remained a key focus. We now have minor debt remaining while retaining access to our $70 million revolving facility. Exploration efforts are focused on Las Chispas, El Picacho, and other early-stage regional opportunities around Las Chispas. This is part of a $5 million H1 exploration budget. In parallel with updating the technical term focus at Las Chispas will be on reserve replacement through targeting conversion of inferred and indicated resources. In late April, the Mexican Senate passed a revised mining reform. Since initially hearing about the proposed changes, we have been working with our legal counsel and other members of the industry to review and continue discussion. The situation remains fluid and additional review of changes for more clarity and their potential impact on our concessions is ongoing. That wraps up our formal commentary for today.

We will now take questions. As a reminder, with the upcoming release of the updated technical report/feasibility study, there will be some information that we'll be unable to comment on until this report is released. Operator, please open the line for questions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now conduct a question and answer session. If you have a question, please press star followed by the one on your touch tone phone. You will hear a one-tone prompt acknowledging your request. If you would like to cancel your request, please press star two. Please ensure you lift the handset if you are using a speakerphone before pressing any keys. Your first question comes from the line of Stephen Soock from Stifel. Your line is now open.

Stephen Soock (Director and VP)

Hi, guys. Congrats on a strong quarter and the very rapid pay down of the debt. It's great to see that, almost extinguished just six months after commercial production. My question was just on the unit cost side in the quarter. You know, the impact of the stockpiles was great to see and had a major impact, overall on the per ounce cost. Outside of that, I think some of the other mining and processing costs were a little bit higher than I was expecting. I know it's still early in the progress of commercial production, but are you seeing opportunities to bring those down over the coming quarters, or how should we kind of think about those run rates? Thanks.

Pierre Beaudoin (COO)

Yeah, thanks for your question. It's Pierre here. You know, we've seen a lot of inflationary impact in Mexico over the last nine or 10 quarters, something like 20% or 25% increase. At the mine site, we've seen some others that are even more important. When we're looking at cost going forward, you know, we have to be ready to see a slight increase in cost. Obviously, we're gonna continue to work on the reduction at the mine site. Some of this inflationary pressure to some extent is there to stay.

Stephen Soock (Director and VP)

Okay, understood. Just one more from me here. You also mentioned that the underground capital development is expected to catch up through 2023. I was just wondering if you could provide some more color on what goes into that. Is there additional equipment being mobilized or how are you attacking that?

Pierre Beaudoin (COO)

Well, let me say this to start is, we're not overly nervous about our development on our capital development. Our rules is to be very much ahead, something like three level for every mining area we're planning to mine. You know, when we're saying that we're behind, it needs to be looked in this, in this light. Overall we're something like 800 meter behind, but you know, 400 is on vertical development, which has started in April. This is gonna go extremely rapidly. The balance, once again, we're not nervous because all of this is gonna be needed probably only in the first quarter of next year. We have plenty of time to catch up, and we're working with contractors to actually get back on track.

Stephen Soock (Director and VP)

Got it. That's all for me. I'll leave the line for anyone else.

Operator (participant)

Your next question comes from the line of John Sclodacos from Desjardins. Your line is now open.

John Sclodacos (Analyst)

Hey, thanks for taking my question, and echo Steven's comments on the congrats on paying down debt so fast, very impressive. Of course, you know, I'll focus on the concerns that I had and just wondering with the mine grades, they seemed a little bit below expectations. Wondering if you view it in the same way and really what I'm getting at is kind of those stockpile levels and where those are at and your comfort with those being able to sustain the mill feed going forward.

Pierre Beaudoin (COO)

Well, we're, you know, We were happy with our results in Q4 on the grade side. Still happy in Q1 on the grade side as well. We're managing our grade with our stockpile. What we keep an eye on obviously on this stockpile is how fast we're depleting it. In the updated technical report, we'll, you know, be able to shed some light on this for everybody. At this point, we're very happy with our strategy. We think we managed the risk of the ramp-up very well, and quite honestly, that's what we plan to continue to do. We have still good level of stockpiles. As I said, it's gonna be updated in the technical report.

At this point, you know, for foreseeable future, our focus is really on the ramp-up of the mine and the management of the stockpile.

John Sclodacos (Analyst)

Okay. Yeah, fair enough. Very impressive ramp-up and obviously the plant is operating phenomenally well. One more question from me and I think I probably know the answer, but any chance you can shed light on what you're expecting for sustaining CapEx, maybe just next quarter, if not the rest of the year?

Pierre Beaudoin (COO)

Yeah. Well, that's a good question. Next quarter, we expect the capital to go slightly higher. I cannot say for the rest of the year 'cause it's gonna be contained in the technical report. As I said, we're catching up now on our vertical development. That's gonna hit Q2 far more than Q1.

John Sclodacos (Analyst)

Okay. Appreciate that color and, that's it for me on questions and congrats guys on a, on a very impressive ramp-up here.

Operator (participant)

As a reminder, if you have a question, please press star one on your telephone keypad. Your next question comes from the line of Phil Kerr from PI Financial. Your line is now open.

Philip Ker (Mining Analyst)

Yeah, thanks operator. How's everyone doing today?

Pierre Beaudoin (COO)

Good, thank you.

Eric Fier (CEO and Director)

Good.

Philip Ker (Mining Analyst)

Good. Yeah, thanks for hosting the call. Could you just give us a sense of what veins are currently being mined, and then maybe touch on how many faces you're working at within those veins?

Pierre Beaudoin (COO)

Well, you know, a lot of what we're doing is the, in the Babicanora area. The core of our production is coming from Bon, Babi Main, and then, from Babi Norte and Babi Vista. The number of face is, you know, I'd have to come back to you on this question. At this point, you know, we're quite happy with where we are given the fact that, you know, our target was to be at 700 tons a day. We have enough face in front of us to do that. As I said earlier, our development is not an issue. We have, in all the areas where we're mining, we have something like three levels ahead.

Philip Ker (Mining Analyst)

Yeah. Okay. Fair enough. I guess what I was trying to get at with the number of faces, to achieve, you know, a little over 700 tons a day, I was just curious as to maybe what the targeted number of faces would be, once you know, are able to meet that nameplate mill capacity rate.

Pierre Beaudoin (COO)

It's gonna increase with time. At this point, as I said, we're pretty comfortable with where we are. We're turning over the stopes at a rate that we're satisfied with. Our focus at the beginning has been ore loss and dilution. We're in good shape at this point and, you know, we're looking forward to the technical report so we can inform people, investors, technical analysts on how we're gonna ramp up the mine going forward.

Philip Ker (Mining Analyst)

Okay. Appreciate that. Another one here just touching back on the capital development. What factors limited that, you know, that development rate? Was it personnel, equipment availability, or what other outside factors?

Pierre Beaudoin (COO)

For the vertical, it's just, it was just a matter of timing. You know, I think we were a little aggressive on our expectation to, you know, get the contract started and so on. You know, most of this is related to ventilation, as you would know, and, we're also in a good shape on that side. For the lateral development, we decided to slow down. It was a decision that we took, from a safety perspective to make sure that all our crossings, were up to standard. We slowed down, our contractor. Actually, SilverCrest decided from a safety perspective to slow down its contractor, and force them to actually apply the standard that we agreed upon, within our contracts.

Philip Ker (Mining Analyst)

Okay. Understood. Then maybe just one last question here, and just back to the stockpile. You said you're able to, you know, manage that stockpile and, you know, affect the grade to the mill. You know, is this a factor of knowing, you know, the source of that stockpile, whether it's from the historic dumps or previous development or from underground?

Pierre Beaudoin (COO)

We're operating the stockpile with a what we call internally a blending finger, which is maybe a funny way to explain that we're blending at just on the crushing pad. We fix the grade with the operation, and we blend from different source, high grade, medium grade, low grade, underground, historic or marginal. This has served us extremely well. It has stabilized the grade feeding the plant, which is very helpful to, you know, to essentially control the cost in the plant and control the recovery.

Philip Ker (Mining Analyst)

Very good. Okay. Well, fantastic stuff here. Keep it going. Appreciate the time.

Operator (participant)

Your next question comes from the line of John Tumazos from John Tumazos Very Independent Research. Your line is now open.

John Tumazos (Principal and Director of Research)

Congratulations on paying off the debt in about six months. You're setting an industry record.

Pierre Beaudoin (COO)

Thanks, John.

Eric Fier (CEO and Director)

Thank you.

John Tumazos (Principal and Director of Research)

Excuse me if I haven't been meticulous. I own your stock, but I've just sort of not worried about it very much and not gotten too much into the details. In the 419 gram produced milled grade in the first quarter, how would that disaggregate between the fresh mined ore and the stockpiled ore?

Pierre Beaudoin (COO)

Yeah. Okay. Out of this, I would say that 60% of this material came essentially directly from the mine, and 40% of the material was coming from stockpile that was there before the start of the quarter.

John Tumazos (Principal and Director of Research)

I understood that from your press release. What I'm asking, Pierre, I'm trying to figure out if you're mining the reserve grade of 461 grams or not, and I'm assuming that the stockpile might be development muck or a lower grade. What is the grade of the new mined ore versus the grade of the stockpiled ore that you're milling?

Pierre Beaudoin (COO)

This is a very good question, and it's gonna be part of what we update everybody on the technical report. What you're leading to is what is the reconciliation of the grade we see against the previous reserve. It's totally our intent to update everybody on this in the technical report. That would be a question that, unfortunately, I cannot answer directly on this call.

John Tumazos (Principal and Director of Research)

I'm looking at your reserves and resources, Pierre. The proven and probable is 461, and the milled grade for the quarter is 419. Can we draw the conclusion that you're mining less than the reserve grade and you haven't gotten to the sweetest stope yet?

Pierre Beaudoin (COO)

No, I would not draw that conclusion from these numbers.

John Tumazos (Principal and Director of Research)

Because the mine grade may be less because of the stockpiles blended with the new ore.

Pierre Beaudoin (COO)

As I said, I would refrain from drawing that conclusion.

John Tumazos (Principal and Director of Research)

Let me try a different question. Your resources are 4.05 million tons, and your reserves are 3.35. The difference is about 690,000 tons or 700,000 tons. When you dilute the resource to make a reserve, how much new rock is brought into it? Is the difference between resources and reserves the 700,000 ton difference, or is it a bigger number because you add tons when you dilute the resource to make a reserve?

Pierre Beaudoin (COO)

You will forgive me on this one. I'm not sure I understand your question.

John Tumazos (Principal and Director of Research)

Okay. You have a vein. When you dilute it, do you assume that there's a half a meter of nil value on either side of the vein?

Pierre Beaudoin (COO)

Yeah. That's. Yeah, that's what we call the loss there in the technical report. That's the overbreak. That's part of our overall dilution. When you're looking at.

John Tumazos (Principal and Director of Research)

Because of the overbreak, the resource becomes bigger than 4.05 million tons when you convert to reserves. I'm trying to figure out how much bigger is the non-reserve value than 700,000 tons because of the overbreak.

Pierre Beaudoin (COO)

Okay. Well, let's go back a bit, okay? The resource that we have was done at, I think at the time, at 150 gram a ton, okay? When we take that resource, which is not economic on its own, we need to do all the design, we need to do the development plan, we need to recalculate the cost. Every time we do that, what is actually a reserve is, you know, it's reducing the resource. What's happening also at the same time is as we reduce the number of ounces in the resource, the grade actually increase because the cutoff of the reserve is increasing. The reserve itself, okay, is inclusive of the dilution material on both side of the vein. You know, you referred to at one point.

John Tumazos (Principal and Director of Research)

I understand that. That's why I'm asking the question.

Pierre Beaudoin (COO)

Okay. okay, I think I answered this question then.

John Tumazos (Principal and Director of Research)

Eric, when you have the debt paid off and you spend $5 million exploring, at the mine in the Picacho project, you still have a little money left over. Do you think you're gonna retain the money to build the next mine? What do you think you're gonna do with, you're gonna have some walking around money by year-end?

Eric Fier (CEO and Director)

Yeah. Hi, John. How are you doing?

John Tumazos (Principal and Director of Research)

Good.

Eric Fier (CEO and Director)

We're looking at our strategies right now for our treasury. We'll do a board meeting in July after the tech report is out and then determine the best course. I mean, you know, generally, we wanna grow, you gotta go explore or you gotta go acquire. We're working on M&A scenarios right now. We're also looking at and if you noted, you know, we're looking at the possibility of holding bullion. We are holding a little bit of bullion right now. That's in the bucket list. There's several things that we can do with that money. Really it's gonna be around getting the technical report out, taking a look at the real cash flows that we would project.

I work with a three-year roadmap and then see the amount that we're actually gonna be creating for free cash flow, and it'll be correctly distributed according to the strategy that we come up with with the board in July.

John Tumazos (Principal and Director of Research)

Okay.

Operator (participant)

There are no further questions at this time. Eric Fier, please continue.

Eric Fier (CEO and Director)

I'd like to thank everybody for attending the SilverCrest Q1 2023 results call, and have a great day.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Eric Fier (CEO and Director)

Again.

Pierre Beaudoin (COO)

Well done.

Operator (participant)

Yeah.