Andean Precious Metals Corp. (APM) Earnings Call Transcript

Good morning, and welcome to the Andean Precious Metals' Q3 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Brenda Dayton, Vice President of Investor Relations. Thank you. Please go ahead.

Good morning, ladies and gentlemen, and welcome to Andean Precious Metals' Third Quarter 2026 Financial Results Conference. Today's call will feature Alberto Morales, Executive Chairman and Chief Executive Officer; Juan Carlos Sandoval, Chief Financial Officer; Victor Flores, Senior Vice President, Exploration, Operations and Growth; and Dominic Kizek, Vice President, Finance. Before we begin, I would like to remind listeners that certain statements made during this call may constitute forward-looking information under applicable securities laws. These statements are based on management's current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the company's news release and management's discussion and analysts analysis for future information. I will now turn the call over to Alberto Morales, Executive Chairman and Chief Executive Officer of Andean Precious Metals.

Thank you, Brenda, and good morning, everyone. We appreciate you joining us today to review our third quarter results. Q3 was a strong financial quarter for Andean, we achieved a record quarterly revenue of $196.6 million, net income of $32.3 million and free cash flow of $17 million. We ended September with $195.8 million in liquid assets, including $93.7 million in cash and cash equivalents. These results reflect higher year-over-year realized gold and silver prices, increased sales volumes and importantly, or decision to at the end of Q2 to defer the sale of finished metal inventory. We sold that inventory in the third quarter, generating approximately $56.3 million in gross proceeds. The sale contributed meaningfully to quarter revenue and cash generation and demonstrated our flexibility in managing the timing of our metal sales. It is important to distinguish this timing benefit from recurring operating performance. The sale represented the realization of previously produced inventory rather than an incremental production during the quarter. Our focus remains on generating sustainable cash flow through strong operating performance, disciplined capital allocation and effective management of our assets. Operationally, consolidated production increased 6% year-over-year to 27,262 gold equivalent ounces. For the first 9 months, of the year. Production reached 79,992 gold equivalent ounces, up 12% from the same period of 2025. Both operations contributed to the quarterly increase. San Bartolome continue to benefit from higher purchased ore grades and sustained plant throughput, while Golden Queen delivered a sequential production improvement due to improved grades. At the same time, we continue to manage cost pressures at both operations. At Golden Queen and San Bartolome, higher diesel cost and other mining-related inputs affected our unit costs. In addition, at San Bartolome, higher silver prices supported revenue and absolute margin per ounce, but also increased purchased ore costs, which are linked to the spot of silver prices. Following our review of 9-month performance and our fourth quarter operating forecast, we have updated our consolidated 2026 production guidance to between 101,000 to 109,000 gold equivalent ounces, remaining within our original range. This reflects higher expected silver production at San Bartolome offsetting lower expected gold production at Golden Queen. We have also consolidated capital expenditures guidance by approximately half to $17 million to $28 million, reflecting our decision to prioritize capital investment and defer certain growth expenditures. Our priorities remain consistent, optimize our existing operations, preserve financial flexibility, allocate capital with discipline and pursue opportunities that can strengthen Andean's position as a diversified precious metal producers in the Americas. I will now turn the call over to Victor Flores to review operating performance at San Bartolome and Golden Queen, followed by our financial results.

Thank you, Alberto, and good morning, everyone. I'll begin with San Bartolome. San Bartolome produced 16,394 gold equivalent ounces in Q3, up 5% from the prior year period. Production consisted of 1.28 million ounces of silver and 1,336 ounces of gold, higher purchased ore grades and sustained plant throughput supported quarterly production. Silver sales totaled approximately 2.1 million ounces, including the finished inventory sales that were deferred at the end of Q2. For the first 9 months of San Bartolome produced 49,060 gold equivalent ounces, an increase of 29% year-over-year. This reflects higher tonnes processed and stronger average purchased ore grades over the period. The financial impact of higher silver prices was significant. The operations cost of sales was $106 million in Q3 compared with $32 million in the prior year quarter. This includes the cost of the deferred inventory sold during the quarter. Cash gross operating margin was $18.13 per silver equivalent ounce sold compared with $17.56 in the prior year quarter. Gross margin ratio was 28.6%, down from 43.8%. The distinction between absolute margin and margin percentage is important, higher realized silver prices supported a higher per ounce margin, but purchased ore costs also increased as the spot silver price rose. This put pressure on the percentage margin. We continue to focus on strengthening our ore supply relationships, maintaining plant throughput and improving operating efficiencies. These areas are important to sustain production, managing margin performance in the current silver price environment. For the full year, we have increased silver production guidance to 4.8 million to 5.2 million ounces, reflecting higher expected purchase ore volumes in grades and sustained throughput. Gold production guidance has increased to 4,500 to 5,500 ounces, bringing gold equivalent guidance to 61,000 to 65,000 ounces. Our margin guidance remains unchanged. We continue to expect a cash gross operating margin of $20 to $35 per silver equivalent ounce sold at a gross margin ratio of 35% to 45%, recognizing the relationship between silver prices and purchase ore costs. We remain focused on operational efficiency, supply reliability and maintaining a consistent production profile through the fourth quarter. Now I'll turn to Golden Queen in California. Golden Queen produced 10,868 gold equivalent ounces in Q3, an increase of 8% from the prior year period and up 27% from the second quarter of this year. This sequential improvement reflected the improvement in grades delivered to the Heap Leach Pad. Higher diesel prices and the increase in other mining-related costs contributed to higher cost per ounce sold. Higher byproduct silver credits partially offset these pressures. Operating cash costs were $2,088 per gold ounce sold. And all-in sustaining costs were $2,216 per ounce compared with $1,623 and $1,682 respectively, in Q3 2025. For the first 9 months of 2026, Golden Queen's ASIC was $2,067 per ounce. We have revised full year gold production guidance to 37,000 to 40,000 ounces, reflecting full year lower stack grade and tonnes under the current mine sequence and the timing of Heap Leach recoveries gold equivalent guidance is now 40,000 to 44,000 ounces. As a result of lower expected production and higher mining and site costs, operating cash cost guidance has increased to $1,800 to $2,000 per ounce. And ASIC guidance has increased to $2,100 to $2,300 per ounce. We have also reduced Golden Queen capital expenditure guidance to $14 million to $21 million. This reflects the deferral of the Heap Leach Pad expansion and the decision to review the Merrill-Crowe plant upgrade. Our focus is on improving operational consistency, managing costs and advancing the projects to support the operations longer-term performance. We expect to announce the results of an updated Golden Queen technical report and file the NI 43-101 technical report on SEDAR+ us in the next few weeks. Now let me just finish up by talking about consolidated guidance. Taking both operations together consolidated production guidance is now 100,001 ounces to 109,000 gold equivalent ounces for 2026, compared with the original range of 100,000 to 114,000 gold equivalent ounces. The revised outlook reflects higher expected silver production at San Bartolome offsetting lower expected gold production at Golden Queen. We have also reduced consolidated capital expenditure guidance to $17 million to $28 million from $38 million to $54 million, revised consolidated sustaining capital guidance is $14 million to $19 million, while growth capital guidance is $3 million to $9 million. This reduction reflects the prioritization and rephasing of planned investments, including the deferral of the Golden Queen Heap Leach Pad expansion and the review of the Merrill-Crowe plant upgrade. We believe this approach will help preserve financial flexibility while maintaining investment in the operational priorities to support our existing assets. One additional factor in our updated outlook is the change in Bolivianos exchange rate environment. The third quarter was the first full quarter under the flexible exchange rate regime adopted on June 29. Boliviano traded between approximately $9.76 and $12.64 to the U.S. dollar during the quarter, and the company recognized Boliviana-denominated costs at an average rate of 11.68 for the dollar. Our original guidance assumed an exchange rate of 9 Bolivianos to the U.S. dollar. Our revised guidance assumes $12 million for the fourth quarter. I will now turn the call over to Juan Carlos Sandoval to review the consolidated financial results and balance sheet.

Thank you, Victor, and good morning, everyone. Q3 financial results reflect year-over-year higher realized precious metal prices, increased sales volumes and the sale of the inventory deferred at the end of Q2. Revenue for the quarter reached a record of $196.6 million, up 117% from $90.4 million in Q3 2025. Record sales totaled 39,178 gold equivalent ounces, including the deferred finished inventory. Average realized prices were $4,287 per gold ounce and $63.49 per silver ounce increases of 24% and 58%, respectively, year-over-year. Silver accounted for approximately 71% of quarterly revenue reflecting the strength of the silver market and the contribution of our San Bartolome operation. For the first 9 months of the year, revenue totaled $427.4 million, up 89% from the same period in 2025. Gross profit was $55.5 million compared with $36.8 million in the prior year quarter. Adjusted EBITDA was $54.4 million, up 51% from $36 million in Q3 2020. For the first 9 months, adjusted EBITDA reached $141 million, up 62% year-over-year. Net income was $32.3 million or $0.22 per basic share and $0.21 per diluted share compared with $43.7 million or $0.29 per share in Q3 2025. The year-over-year decrease in net income primarily reflects the lower other income and higher income tax expense, the prior year quarter included significant unrealized gains on marketable securities, which affected the comparison. For the first 9 months of 2026, net income was $66.5 million or $0.44 per share. Going into the cash flows. Net cash flow provided by operating activity was $72.2 million and free cash flow was $69.8 million for the quarter, compared with free cash flow of $12.4 million in Q3 2025. The sale of deferred inventory was a significant contributor to the quarter's cash generation, approximately 732,000 ounces of silver and 2,600 ounces of gold had held at June 30 were sold early in Q3 at an average realized price of $62.26 per silver ounce and $4,168 per gold ounce generating gross proceeds of approximately $56.3 million. [ Metal ] inventory had a carrying cost of $37.6 million and the resulting margin was recognized in Q3. This explains an important part of the strength in quarterly revenue and cash flow. While the sale demonstrates the value of managing inventory and the timing of metal sales, it is important not to treat the resulting contribution as a normalized quarterly operating cash flow run rate. For the first 9 months of 2026, free cash flow was $53.9 million, compared with $23.1 million in the prior year period. Moving on to liquidity and capital allocation. We ended September 30 with $195.8 million in liquid assets compared with $170.8 million at June 30. This included $93.7 million in cash and cash equivalents compared with $52.2 million at the end of the second quarter. Liquid assets exclude $32.8 million in receivables from refiners for metals sold in the final days of the quarter. All of those receivables were collected in October. Our liquid assets measure includes cash and cash equivalents, marketable securities and other investments as well as metal inventory metals held at third-party refineries another metal inventory, which is carried at cost. Importantly, this measure does not include any anticipated margins on metal inventory that have not yet been slowed. As announced on September 30, we purchased 200,000 ounces of silver for approximately $12.1 million as a say strategic treasury holding. The silver is held at a third-party refinery carried at cost and presented separately as precious metals on the statement of financial position. It is also included in liquid assets. This provides diversification for strategic treasury purposes, while any margin on those ounces will be recognized only when they are ultimately saw. We also continued to return capital to our normal course issuer bid. During Q3, the company repurchased approximately 2.35 million shares or CAD 14.5 million or approximately USD 10.7 million. Through October 14, an additional 545,000 shares have been repurchased, bringing cumulative purchases to approximately 2.89 million shares or CAD 17.6 million, out of the 4 million shares authorized under the current NCIB. These decisions reflect our approach to proper capital allocation, maintaining a strong ability position, investing in our operations and evaluating opportunities to return capital where we believe repurchases represent an appropriate use of funds. Overall, third quarter strengthened our financial position, we will continue to balance operating requirements, growth opportunities and shareholder return while maintaining financial flexibility. With that, I'll turn it back to Alberto for closing remarks.

Thank you, Juan Carlos. As we look ahead, we believe Andean is entering an important phase in its evolution. Our third quarter results demonstrate the strength of our 2 operating businesses, our ability to generate substantial cash flow and the financial flexibilities we have built. We are focused on translating that strength into long-term shareholder value. Our strategy is delivered and focused on free cash flow generation. And we'll continue to maximize the performance of San Bartolome and Golden Queen, maintain a disciplined approach to capital allocations and pursue growth opportunities that strengthen our portfolio and advance our position in the Americas. We are not focused on growth for the sake of growth. We're focused on building a stronger, more resilient company, one with the operating capability, financial resources and strategic discipline to create lasting value through the precious metal cycles. With a solid balance sheet to producing assets and a clear growth ambition, we believe Andean is well positioned to continue with its growth. On behalf of our Board and management team, I want to thank you -- I want to thank our employees, shareholders and other stakeholders for their continued support. We remain confident in the opportunities ahead and committed to delivering on our strategy. I want to thank you all for joining us today, and we'll now open the call for questions. Operator, please proceed.

[Operator Instructions] Our first question comes from Simon Wildsmith from Desjardins Securities.

Just two for me. Just -- maybe just first on Golden Queen deferred spending and looking at the kind of revisiting the Merrill-Crowe plant head of the [indiscernible]. Should we still expect that spending on Heap Leach expansion take of next year? Or how should we be thinking about that ahead of the tiger.

Thanks for your question. Could you just please repeat the last part of it because it didn't come through very clearly.

Okay. Sorry. Yes. So yes, so I was just wondering, should we still expect that spending on the Leach Pad expansion to pick up next year? Or like how should people be thinking about that ahead of the technical report?

Yes. Good question. Thank you. Yes, you should definitely consider the heap leach pad expansion as a cost for our capital cost for next year. Just to give you a bit of color, we'll be receiving contractor bids for the construction in the next couple of weeks. We'll be deciding on which contractor we're going to go ahead with. And our plan is to begin construction early in the new year. So yes, definitely, you should consider that in your model for next year.

Okay. Just a maybe second, just wondering about -- second and last question just on San Bartolome. Just wondering about recovery. You saw that dip a little bit in Q3. Wondering if that's just like a new ore blend or something we can expect to continue? Just any color on that on the go forward?

No, I would see that as just run of the mill variability that happens from quarter-to-quarter as we're processing more sources from different sources. But it's not a systemic thing. In fact, there's ongoing work to improve recoveries in the plant. So I'm not suggesting that you go and increase them in your model, but I certainly wouldn't look at the quarterly recoveries as symptomatic of anything.

Okay. And then I think like you have a lease -- or sort of a thickener coming in, in Q1 still and that should -- I think I've read that [indiscernible] recoveries.

Yes. Adding the thickener will definitely tweak our recoveries.

Our next question comes from Alex Terentiew from National Bank.

Question and good work on the NCIB buyback, like those purchases accelerating, like, they are good use of capital. Questions for me. Just on the Golden Queen CapEx reduction. I know you -- tech report is coming up pretty soon. That's going to give us a lot more color on future plans there. But probably one of my questions here, which you kind of touched on already, in some of those costs or deferrals, I guess, suppose you get a Leach Pad into 2027. Can you give us any other color? I mean, this is quite a big reduction in spending for this year. I'm just trying to gauge color what I can kind of think about for next year in terms of spending aside from the Heap Leach Pad expansion, are there any other major elements that you believe you need to be spending on next year?