SilverCrest Metals - Q1 2024

Transcript

Operator (participant)

Good day, everyone, and welcome to this SilverCrest First Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode, and later you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one on your touchtone phone. Please note, this call may be recorded. I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to CEO and Director of SilverCrest, Mr. Eric Fier.

N. Eric Fier (CEO and Director)

Thank you, operator. Good morning, and thanks everyone for joining. Today, we'll be providing commentary on our Q1 2024 results, 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 U.S. dollars, unless otherwise stated. All of the ounce and per ounce references discussed will be based on silver equivalent ounces sold, unless otherwise indicated. Our silver equivalent references are based on gold to silver ratio of 79.51/1. On the call with me today is Chris Ritchie, President, and Cliff Lafleur, Vice President, Operations. Starting on slide three.

Q1 marked a strong start to the year as we continued to exhibit our ability to deliver positive operational results and demonstrated our continued financial flexibility. Sales of 15,000 ounces of gold and 1.4 million ounces of silver for silver equivalent sales of 2.6 million ounces exceeded plan, positioning us favorably to deliver on 2024 guidance. All-in sustaining costs in the quarter was lower than planned, but is expected to increase in future quarters with our 2024 guidance range of $15-$15.90 per ounce sold is reiterated. Our balance sheet remains one of the best of our silver peers and a significant strength to us.

During the quarter, it has supported some large outflows related to 2023 taxes and duties as a standard course of business and the mobilization of our new mining contractor. We are also happy to report positive retained earnings of $21.5 million, a unique achievement in the mining industry and one we accomplished within only six quarters of commercial production. On the ESG front, we are excited to have initiated the process towards using renewable power at Las Chispas. We are working to implement solar power, which will help achieve strategic objectives while also supporting technology that utilizes silver. Northwest Mexico is extremely desirable location for solar power, given the prominent role that silver plays in solar power and Mexican economy. It's a logical transition.

Renewable energy is not possible without mining, and we are excited to be part of the energy transition with a common-sense approach. I will now pass the call to Chris to discuss our financial results for the quarter.

Christopher Ritchie (President)

Thanks, Eric. Good morning, everybody. Now moving to slide four. In the quarter, we generated revenue of $63.6 million, and cost of sales was $26.2 million. We are proud to have consistently delivered strong operating margins of approximately 60% since achieving commercial production, despite inflationary pressures and the volatility of the Mexican peso. One way we have accomplished this is through an active currency management program, which has hedged the majority of our 2024 peso needs above the current levels and our guidance basis of 17/1. Net earnings in the quarter was $33.9 million, or $0.23 per share, and operating cash flow before change in working capital was $17.6 million, or $0.12 per share.

In the quarter, we benefited from a lower effective tax rate, which we expect to normalize in 2024. As planned and previously communicated, we had some large cash outflows in the quarter. The first was a planned payment of $26.2 million for 2023 taxes and mining duties. The second was a $7.5 million prepayment to our new mining contractor. Our financial strength provided us with the flexibility to support our new contractor while also reducing the overall cost of the contract by $1.5 million over five years. Our financial flexibility continues to allow us to make choices that offer long-term benefits while still remaining well-funded today. We look forward to growing our treasury assets again in 2024. Now on slide five.

Treasury assets decreased by 13% or $14 million in the quarter, which was less than anticipated due to stronger metal prices, lower costs, and higher sales than planned. Our silver and gold bullion on our balance sheet remains a core holding and was our strongest performing currency in the quarter. Despite not adding to our bullion holdings in the quarter, the value increased by 4% to $20 million as we saw strong metal prices through the quarter. With metal prices currently trending higher than the Q1 average, we are glad to be providing greater exposure to gold and silver to our investors. As one of the only companies to hold metal on our balance sheet, we are glad to have the financial strength and flexibility to create greater exposure to our product.

With this program, we strive to improve the returns we can make for shareholders and lower the impact of inflationary pressures. With that, I will now pass it on to Cliff to discuss operations at Las Chispas.

Clifford Lafleur (VP of Technical Services)

Thanks, Chris. I'm now on slide six. Underground mining rates increased 90 tons per day from the previous quarter to 942 tons per day, benefiting from strong collaboration between the two contractors currently at the site. Overall, the mobilization of the new contractor is largely on pace and will continue to progress through Q3 2024. We remain on track to achieve our 2024 ramp-up plans. The Las Chispas plant averaged 1,026 tons per day in the quarter, a slight decrease from previous quarters due to planned downtime for maintenance that was completed ahead of schedule. The processing plant returned to planned availability rates in March. We are extremely proud that the plant recovered 2.6 million ounces with record process grades of 874 grams per ton and record silver equivalent recoveries of 98.3%.

Achieving record grades and recoveries can be attributed to the operational flexibility we have created. The strong operating performance of our plant and access to sizable stockpiles for blending consistent feed are significant operational advantages. Corporate AISC in the quarter of $12.90 per ounce was lower than expected due to lower cash costs and lower sustaining capital spend than budgeted. The delay in sustaining capital spending is not expected to impact annual production, and spend is expected to increase through the remainder of the year. I'll now pass it back to Eric to conclude the presentation.

N. Eric Fier (CEO and Director)

Thanks, Cliff. Now on to slide seven. Looking forward to the rest of 2024, the results of the quarter put us on track to meet 2024 guidance of 9.8 million-10.2 million ounces sold, with an all-in sustaining cost within $15-$15.90 per ounce sold. The underground mine ramp-up will continue to progress, with a target to exit the year at 1,050 tons per day. We have been focused on infill and expansion drilling for some time now at Las Chispas, and this continued in the quarter. Drilling has targeted inferred resources outlined as high priority for conversion that are located within proximity to its existing and planned underground development. Approximately 10 million ounces were initially targeted with this drilling, with more detailed results provided in the MD&A.

Results have confirmed mineral continuity in targets in the Babicanora area and identified opportunities for further expansion of mineralization in the Babicanora Norte Splay 3 vein and the Babisur vein. These results are being compiled and assessed for potential conversion to indicated resources. A shift in early-stage exploration will be prioritized in H2 2024, including both early stage targeting at Las Chispas and continued regional work. Regional exploration is looking for nearby deposits that could eventually be trucked to Las Chispas for processing and will now focus on a number of priority targets that were assessed over the past 18 months. With higher metal prices in Q2 to date and larger one-time payments behind us, we expect our balance sheet to strengthen throughout 2024. We will also continue to execute on our capital allocation program, which includes strategic currency management and our bullion holding program.

That wraps up our formal commentary for today. Operator, please open the lines for questions.

Operator (participant)

Gentlemen, thank you. To our phone audience joining, if you would like to ask a question, please press the star and one on your telephone keypad. Pressing star and one will place your line into a queue, and we'll take your questions one at a time. Once again, ladies and gentlemen, that is star and one on your telephone keypads if you would like to ask a question at this time, and we'll pause for just a moment to allow everyone a chance to signal. We'll take our first question today from John Sclodnick at Desjardins.

John Sclodnick (Managing Director)

Yeah, thanks, guys. And, yeah, congrats on a great quarter and, on getting to positive retained earnings. Of course, you don't see that too often in the industry. Just curious on the other income line of the financials and whether that might be related to the option strategy with the bullion holdings?

Clifford Lafleur (VP of Technical Services)

The other income for the bullion holdings?

N. Eric Fier (CEO and Director)

Yeah, bullion.

Clifford Lafleur (VP of Technical Services)

Yeah, part of it, part of it is related to the bullion holdings, John.

And other derivatives.

John Sclodnick (Managing Director)

Okay. Okay, interesting. Yeah, that was just out of curiosity. I know it's an oddly specific question. And, and I guess on that, you know, the cash build is impressive and, and the bullion holding strategy has been effective. Of course, as an analyst, I'm going to have to ask, so how do you expect to deploy that cash balance? Whether you think you'll use your, your share price and, and if you're kind of looking in this environment, at, at M&A?

Christopher Ritchie (President)

I think first and foremost, having a strong cash balance is a rarity, so using that flexibly and opportunistically is something we did previously when the share price was weak. Having an NCIB in place, or being able to hold on to metal at low prices, or to look at, you know, M&A and other, and other potential targets, like, those are all things that we are really happy to have the flexibility to do. You know, for now, exploration is still, you know, something we're, you know, closely monitoring and spending a lot of time and effort trying to advance. So yeah, I think first and foremost is we wanna provide the benefits of flexibility to the shareholders. For M&A and that target, I mean, that's obviously something on the list of things to spend time on.

So yeah, having that flexibility is also something unique that we think other people would benefit from that flexibility. So one of the things on the list to do, John.

John Sclodnick (Managing Director)

Okay, I appreciate that. I guess on the potential acquisitions, would you guys look within Mexico? It like it feels like you've got a bit of a competitive advantage there, or are you looking to diversify outside?

Christopher Ritchie (President)

I mean, quality assets and minimizing risks as we look for growth is a priority. You know, obviously, in Mexico, the difference between some of the permitting challenges for open pit and underground, so I think obviously we would want assets that, you know, have that lower risk profile associated with them. But again, if there are quality assets in other areas, we are open-minded.

John Sclodnick (Managing Director)

Okay. And last one for me, just on that renewables project, just wondering if you'd give some details on the cost of the project, expected OpEx benefits once that's online, and whether you might have a project NPV.

Christopher Ritchie (President)

Sure. First and foremost, what we have done is we've signed a contract with a third-party provider of solar. The facility that we're contracted or working on getting that contract with is already up and running. It's fully built. The capacity is there. We'd still be using the same grid as we're currently using, so there's no disruption or changes for us to do. So again, it's kind of a non- a no-risk change in source of power. What we do require is permitting. So right now, we're working on that permitting and hope to have that in place, so we can implement this in 2025. The benefits to us are quite nice. The contract we have in place would save us approximately $1.5 million per year, and would give us that fixed price for three years.

So in Mexico, for the last, you know, pretty long period of time, energy prices have gone up about 7% per year. So again, not only do we get the cost savings, we get the locked-in price. So that's quite nice. And then the added benefit is we would reduce our greenhouse gas emissions by approximately 70%, again, while using solar panels, using about 90,000 ounces of silver.

John Sclodnick (Managing Director)

Awesome. That, that's a great project there. Appreciate that, and all the questions for me. Congrats, guys.

Christopher Ritchie (President)

Thanks, John.

Operator (participant)

Dan Ellsworth with World Micro, you have our next question.

Dan Ellsworth (President and CEO)

Yeah, just quick clarification with respect to the share buyback versus allocating capital in the treasury of you know kind of gold, silver, and those holdings. Is it safe to assume that the priority is really to kind of maximize the treasury holdings of gold, silver over potential share buybacks at this point in time?

Christopher Ritchie (President)

Morning, Dan, hope you're well. Chris here. The priority, first and foremost, is to have that flexibility, and given the cash outflows we had in Q1, the main point was to see how that all settled out. The framework that we have in place around the bullion holding is to make sure that, you know, we're debt-free, we have enough cash to support operations and maintain all flexibility required to make sure that we can do all the right things for the operation. But that said, if we're able to increase those treasury holdings, our ability to hold bullion, you know, as a percentage of those treasury holdings, certainly can grow with the cash flows in total. So yeah, we definitely believe in the product.

We definitely believe in it as a core holding on the balance sheet, and we definitely want to give more exposure to our shareholders.

Dan Ellsworth (President and CEO)

Sounds good. Appreciate it, and congratulations on the great quarter, guys.

Christopher Ritchie (President)

Thanks, Dan.

Operator (participant)

Our next question today comes from Stephen Soock at Stifel.

Stephen Soock (Director of Equity Research)

Yeah, thanks. Congrats on another strong, strong quarter here. So Dan took part of my question here, but just kind of to follow on, maybe just how you think about the, the bullion strategy and the amount held. I understand this quarter you wanted to manage the, the large tax bill and, and the payment to, to, the new contractor, et cetera. But I guess, how do you, you previously mentioned keeping 12 months worth of CapEx in bullion. You know, is this still the strategy, or is it more of a percentage of the total, treasury holdings? And, maybe just, as, a part two, you know, is there a scenario in which you, you trim some of that, that bullion holding? Yeah, just kind of some color around there would be great. Thanks.

Christopher Ritchie (President)

Yeah, great. I mean, first and foremost, as we said, we wanna give our investors more exposure to gold and silver. It is a currency of choice for people, and we believe an ounce that we hold above the ground is worth more than an ounce in the ground and gets all of the leverage associated with price increases. That said, to your point about, you know, there is volatility in gold and silver, it does move up and down, and as we relate, you know, how much to be holding and when to be buying and selling, it is related to the cost to produce an ounce. So when prices are low, you know, we wanna have the ability to be, you know, price makers instead of price takers.

When prices are high, we would hedge our bullion, just like we would hedge any other currency.

Stephen Soock (Director of Equity Research)

Okay, yeah, makes sense. No, appreciate that. That's it for me. I'll open the line for anyone else.

Operator (participant)

Once more to our phone audience today, that is star and one. If you would like to ask a question, we'll go next to Robert McCleary, private shareholder.

Robert McCleary (Private Shareholder)

Good morning. My question has been answered. Keep up the good work. Thank you.

Christopher Ritchie (President)

Thanks, Robert.

Operator (participant)

To our audience, if you find that your question has been answered prior, you may remove yourself from the queue simply by pressing the pound key. Once again, ladies and gentlemen, that is star and one, and we'll pause for a moment to give everyone a chance to signal. We have no signals from our audience. I'll turn it back to our management group for any additional or closing remarks.

Christopher Ritchie (President)

Thanks, everybody, for attending the SilverCrest Metals Q1 2024 results call, and have a great day.

Operator (participant)

This does conclude today's teleconference, and we thank you all for your participation. You may now disconnect.