Sierra Metals Inc. (NYSE:SMTS) Q3 2022 Earnings Conference Call November 15, 2022 11:30 AM ET
Company Participants
Christina Papadopoulos – Manager of Investor Relations
Luis Marchese – Chief Executive Officer
Ed Guimaraes – Chief Financial Officer
Conference Call Participants
Lee Cooperman – Omega Family Office
Operator
Hi, everyone. And welcome to the Sierra Metals Third Quarter 2022 Consolidated Financial Results. My name is Drew, and I’ll be coordinating your call today. [Operator Instructions]
I’d now like to hand the call over to, Christina Papadopoulos, Manager of Investor Relations. Please go ahead.
Christina Papadopoulos
Thank you, operator, and good morning, everyone. Welcome to Sierra’s third quarter 2022 results call. On today’s call we are joined by Luis Marchese, our CEO; and Ed Guimaraes, our CFO. Today’s call will be followed by a question-and-answer period. The accompanying presentation for today’s call is available for download through the webcast or from the company’s website at sierrametals.com. Yesterday’s press release, the financial statements, — are also posted on today’s website.
I’d like to note that this earnings call contains forward-looking information that is based on the company’s current expectations, estimates, and beliefs. This forward-looking information is subject to a number of risks, uncertainties and other factors. Actual results could differ materially from our conclusions, forecasts, or projections, as reflected in the forward-looking information.
Additionally, information about the material factors that could cause — or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information is contained in the company’s annual information form, which is available publicly on SEDAR or EDGAR via Form 40-F, or on the Company’s website. Please note that all dollar amounts mentioned on today’s call are in US dollars, unless otherwise noted.
Before turning the call over to our CEO, Luis Marchese, followed by Ed Guimaraes, our CFO, I would like to note that the earnings press release that was disseminated late yesterday evening has since been amended with the newly filed and disseminated version. The corrections refer to footnote number three, following the first table in the press release that should read that the company is seeking accommodation from lending banks in the form of waivers for its non-compliance.
In addition, there was a sentence added to the impairment charge section, noting that LOM are not a National Instrument 43-101 Technical Report, but management’s best estimate of future expected cash flows. I would also like to note that it is the company’s current intention to not disclose developments with respect to the special committee process unless and until the Board of Directors of Sierra Metals has approved a specific transaction or material steps or otherwise determines that disclosure if necessary. We will not be taking questions that there was a strategic process, which is being overseen in a diligent, transparent, inclusive and comprehensive manner by a special committee of the Board of Directors. Luis?
Luis Marchese
Thank you, Christina, and good morning, everyone.
Before we begin, I would like to convey our heartfelt condolences to the families of the victims involved in the tragic mudslide event that occurred at our Yauricocha mine in September. Our thoughts continue to be with their families and their loved ones during this difficult time. Sierra’s primary objective remains the safety and well-being of all employees and contractors. And as such, we continue to work through our safety assurance at the mine.
Looking at the slide 5 for a review of operational highlights. As you may have read in our Q3 results and the press release, the challenges during the quarter had a significant impact on the company’s operations. With just under three weeks left in the quarter, we experienced operating losses at Yauricocha with three contract workers loss their life’s as a result of the mudslide.
As a result of the actions and the blocking that took place at the mines main entrance in the days are followed by a local community in an unrelated matter, mining activity was suspended for the remainder of the quarter and into Q4. The mine is now in a transition to full production.
Yauricocha mine had a 17% decrease in throughput when compared to Q3 2021. In addition to the decline in throughput, online restricted access to non-permitted areas of debt impacted grades in non-metals and provided a 31% decrease in copper equivalent production.
Bolivar production also declined during the quarter when compared to Q3 2021. Underground flooding in the Northwest zone during most of the quarter, in addition to the operational restrictions due to limited ventilation resulted in a further delay in the production ramp-up at Bolivar.
Seasoned annual rates have improved by 9% and 159%, respectively, when compared to the third quarter of 2021, but were not enough to offset the 38% increase in throughput, resulting in a 16% decline in copper equivalent going pounds produced.
At Cusi, on the other hand, when compared to the same quarter last year, a 7% increase in throughput and improved precious metal grades provided a 22% increase in silver equivalent ounces produced. While the underground flooding event at posed during the second quarter is now under control, access to the lower levels of the mine was truly limited at the beginning of Q3. Throughput was slightly lower than in Q2, but it was offset by higher rates in all metals, resulting in a 32% increase in silver equivalent ounces produced. On a consolidated basis, throughput was 25% lower, equivalent – and copper equivalent production was 24% lower than the third quarter of last year.
Turning to slide 6. The accumulation of operational losses and negative cash flows primarily from our Mexican operations, coupled with the suspension of magnetic activity at Yauricocha during this quarter, ultimately put the company in a difficult liquidity position.
On October 18, we filed a press release inform our shareholders and stakeholders of the outlook for the company and the formation of the special committee made up of the Board’s independent directors and the initiation of a strategic review process.
The Special Committee continues as mandated to explore, review and consider all options to optimize the operations of the company and possible financing, restructuring and strategic options in the best interest of the company.
In [indiscernible] capital conservation, on October 25th, we announced the company’s decision to delist on the NYSE, American and BVL. This decision was not made lightly as we recognize the challenges presents to many of our smaller shareholders. Delisting was something that we had been contemplated for some time, given the costs associated with delisting. The decision to move ahead with listing from exchanges coincided with the news that the company was facing financial and liquidity issues. The final day of trading in the NYSE American was November 14, 2022, which shares been suspended containing today before the market commence trade.
We are continuing to pursue the BVL delisting and suspension from trading is anticipated later during the year. We will provide an update on our final trading day on the BVL once this has been confirmed.
Turning to slide 7. And looking at our current focus as we continue to deal with existing challenges. At Yauricocha, we are focused on completing safety assurance process following the release. Full production will only resume once this process is completed. Drilling remains focused on upper areas of the mines to identify additional new mineable areas within the permitted level of the mine.
In addition to [Technical Difficulty] trade during the quarter is under control. We continue to work with operational constraints due to limited ventilation. The mine plan is focused into Bolivar Northwest and development into higher-grade Cieneguita is ongoing. Other operational improvements in the whole process are also ongoing. Infill drilling and development to reduce backlog and increase the knowledge and availability of ore continues.
Flooding, with the underground flooding under control, the goal remains to continue to mine and continue with operational improvements that are in process. Across all three mines, we are certainly focused on sustainable cost management while dealing with inflationary pressures.
Now, I will turn to Ed to review the third quarter financial highlights.
Ed Guimaraes
Thanks, Luis, and good morning, everyone. Turning to slide 8. The company’s financial results were impacted by the operational setbacks experienced in Q3. For the quarter, we reported a 25% decrease to a consolidated throughput and a 24% decrease in consolidated copper equivalent production, compared to the third quarter of 2021. Metal prices continued to decline during the quarter, and combined with lower production, the revenues from metals payable decreased 36% when compared to Q3 2021.
Adjusted EBITDA for the quarter was negative $3.9 million. We reported the net loss attributable to shareholders for Q3 of $46.2 million, or negative $0.28 per share, which includes an impairment charge of $32 million for the quarter. Given the company’s reduced market capitalization, declining metals prices, lower production and profitability, the company performs an impairment analysis on all three of its mines using the life of mine or long analysis.
The analysis of the life of mine is not a 43-101 technical report, but management’s best estimates for future expected cash flows. The analysis of the Mexican operations concluded that an impairment charge of $25 million and $7 million is required for Bolivar and Cusi, respectively. An updated life of mine analysis for Yauricocha did not require an impairment as of September 30, 2022. We reported an adjusted net loss of $10.7 million, or negative $0.07 per share and finished the quarter with approximately $13.7 million in cash. In our three-month revenue mix by metal continues to be led by copper at 39%, followed by silver and zinc at 21% and 26%, respectively. Lead and gold continue to contribute equally to revenue at 7% and in line with previous quarters.
Looking at the average realized prices compared to Q3 2021. Global recession fears sparked by interest rate hikes and declining demand continued to drive metal prices lower, resulting in a 17% decline in copper in Q3 2022. Silver, gold and lead also declined by 20%, 3% and 16%, respectively. Zinc on the other end increased by 10% during the third quarter.
Turning now to Slide 9 to review the balance sheet, financing and liquidity highlights for the quarter. The company reported $13.7 million in cash as of September 30, 2022. Total debt at the end of the second quarter was $87.3 million, which includes $62.3 million owing on the senior secured corporate facility with Banco de Credito del Peru, or BCP, and $25 million for the corona term loan with BCP and Santander, which was arranged during Q2 to refinance the quarterly installments payable for 2022.
The company’s net debt balance is $73.6 million. Cash and cash equivalents decreased to $13.7 million as of September 30, 2022, due to $31.2 million used in investing activities, offset by $6.1 million generated from operating activities and $3.8 million of cash generated from financing activities.
Turning to the third quarter, the company reached certain debt covenants related to its senior secured corporate credit facility with BCP, thereby requiring the company to reclassify $37 million as a short-term loan. Consequently, reporting a negative working capital of $52.3 million at the end of the quarter. The company is seeking accommodation from the lending banks in the form of waivers for this non-compliance.
The company paid its final installment of $6.7 million to BCP and Santander and is proactively engaged in discussions with the senior secured credit facility lenders. The unexpected flooding at its Mexican operation and operational restrictions due to limited ventilation in Bolivar and the mudslide events at the Yauricocha mine another huge [ph] from nature and will have a temporary impact on the company’s ability to generate sufficient cash to meet its financial obligations.
These events have impacted the company’s financial position and prior available lines of credit are now subject to further evaluation. The company has secured short-term credit facilities with certain Peruvian banks over the past several weeks. And although, there is no guarantee, the company is in the process of finalizing repayments from an off-taker on the sale of its 2023 copper concentrates from the Bolivar mine.
As Luis mentioned earlier, the company has formed a special committee of the Board of Directors to explore, review, and consider options to optimize the operation, financing, restructuring and strategic options in the best interest of the company.
The company has also engaged CIBC as a financial adviser to review various strategic options. I want to reiterate that the company would like you — unless and until the Board of Directors of Sierra Metals has approved a specific transaction or material steps or otherwise determines that disclosure is necessary.
We will not be taking questions about the strategic process, which is being overseen in a diligent, transparent, inclusive and comprehensive manner by a special committee of the Board of Directors.
Turning now to slide eight to look at the cost breakdown for each mine. At Yauricocha, we saw an increase to both cash and all-in sustaining costs by 47% and 19%, respectively, when compared to Q3 2021 as a result of the 25% decrease in copper equipment payable pounds. Unit costs decreased slightly relative to Q2 2022 as a result of lower cost of sales and sustaining costs.
At Bolivar, again, both cash and all-in sustaining costs increased when compared to Q3 2021. We cash cost increased by 67% and all-in sustaining costs increased by 18%, driven by higher operating costs and an 8% decrease in copper equivalent payable pounds. Bolivar’s Q3 2022 cash costs and all-in sustaining costs per copper equivalent pound decreased, however, from 339 and 549, respectively, in Q2 of 2022.
At Cusi, cash costs declined by 15% and all-in sustaining costs decreased by 34% when compared to the same quarter in 2021. A decrease in unit costs as a result of lower operating costs and lower sustaining costs compared to Q3 2021 offset the 10% reduction in silver equivalent payable ounces compared to Q3 2021.
With that, I will now turn the call back to Christina.
Christina Papadopoulos
Thanks Ed. That ends the proration portion of this call. We would now like to open the call to questions for participants. In the interest of time and fairness, we ask to keep the question to a limit of two to give all participation an opportunity. Operator, please open.
Question-and-Answer Session
Operator
Thank you. We will now start today’s Q&A session. [Operator Instructions] Our first question today comes from Lee Cooperman from Omega Family Office. Your line is now open.
Lee Cooperman
Yes, thank you. I had trouble hearing similar comments made. So, if I ask a question that you don’t want to respond to, I apologize. But the stock price reflects, I think, the risk of bankruptcy and solvency were extremely dilutive equity financing. Can you — are you far enough into this process where you could say that the market has overreacted to those kinds of risks, or you don’t know the answer at this point in time? Hello? Hello? Hello? Did you hear the question?
Christina Papadopoulos
Hello? Can you hear me?
Lee Cooperman
Hello? Did you hear the question? I didn’t hear any answer in response to the question. Hello?
Operator
Hi. We’re just having some difficulty here.
Lee Cooperman
Continuing with you. [indiscernible] when you can, okay?
[Operator Instructions]
Operator
Our first question today is from Lee Cooperman from Omega Family Office. Your line is now open.
Lee Cooperman
Yes. I had asked the question, I said, the stock price reflects the risk of insolvency or a very dilutive financing to rescue the company. Personally, I don’t think either one was likely. I’m just curious can the company comment on that issue? Do you know enough about the process to say that insolvency or a very dilutive equity financing is not being considered?
Operator
We, unfortunately — we’re having technical issues. I am unable to get management on the line. Unfortunately, we’re probably going to have to end the call. I can certainly arrange a call separately for you.
Lee Cooperman
Yes. You can call my cell phone, I think, they have the number. Thank you.
Operator
Okay. Thank you.
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