Silvercorp Metals Inc. (SVM) Earnings Call Transcript

Thank you for standing by. Good afternoon. My name is Ina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Silvercorp First Quarter Fiscal 2027 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Lon Shaver, President of Silvercorp. Please go ahead.

Thank you, Ina. On behalf of Silvercorp, I'd like to thank everyone for joining this call today to discuss our Q1 fiscal 2027 financial results, which were released yesterday afternoon. Copies of the news release, the MD&A and the financial statements are available on SEDAR+. Before we start, please note that certain statements on today's call will contain forward-looking information within the meaning of securities laws. Also, please review the cautionary statements in our news release as well as the risk factors described in our most recent regulatory filings. So let's start with our financial results. We delivered a strong first quarter despite the temporary production slowdown at our Chinese operations that's related to the safety upgrades that began in June. Revenue rose 70% year-over-year to $139 million, while cash flow from operating activities and free cash flow reached nearly $62 million and $29 million, respectively, and that was up 28% and 27% from the prior year. This performance was mainly driven by a 135% increase in the realized selling price of silver, which averaged above $69 an ounce after smelter deductions. And silver accounted for 77% of our revenue in Q1. We reported a net income of $59.4 million for the quarter or $0.27 per share. This includes an $11 million gain on investments and a $6 million gain from the sale of the Santa Barbara project in Ecuador. Removing noncash and nonrecurring items. Our adjusted net income for the quarter was $53.9 million or $0.24 per share, and that compares to $21 million and $0.10 in the comparative quarter. We delivered strong cash flow from operating activities before changes in noncash working capital of $70.4 million, up 82% compared to last year. During the quarter, we spent and capitalized about $22 million at our operations in China, $12 million at the El Domo project in Ecuador and $2.6 million at the Chaarat ZAAV project in Kyrgyzstan. Additionally, in May, we made a $60 million cash payment to the Kyrgyzstan government following the issuance of the new mining license and license agreement for ZAAV, which extends the license term by 20 years to June of 2062. As we advance on our growth strategy, our strong balance sheet provides us with significant financial flexibility. We ended the quarter with $387 million in cash and that excludes our investments in associates and other companies, which had a combined market value of $304 million as of June 30. We have further funding available through the RMB denominated term loan facilities that we signed, which totaled approximately USD 220 million, which remains undrawn. Now to recap our operating results, which we reported in July. During the first quarter, we produced approximately 1.5 million ounces of silver, over 2,500 ounces of gold, 13 million ounces of lead and 4 million pounds of zinc. Compared to last year, gold production increased 24%, while silver, lead and zinc production decreased 17%, 15% and 15%, respectively. Production at Ying was impacted by lower head grades, reflecting higher dilution associated with the shift to more shrinkage mining. Also on June 29, we reported that we voluntarily suspended operations at both Ying and GC to complete a comprehensive safety self-review. This followed the rollout of new nationwide safety requirements across China's mining industry after a major accident occurred in the country in May. Through this process, we identified areas requiring some upgrades to meet the new regulations and engage 5 certified vendors to complete the 6 major safety systems underground upgrades. Safety has always been our top priority. While these upgrades are temporarily impacting production, they're an important investment in our operations, and we expect to emerge from this process with even stronger and safer mines. For the quarter, consolidated mining operating income was $84.8 million with Ying contributing $80.1 million or approximately 95% of the total. Turning to costs. Ying's production costs averaged $87 per tonne was up 5% year-over-year. This increase was primarily driven by a 6% depreciation of the RMB against the U.S. dollar. Despite this, production costs remained below our annual guidance range of $88 to $90 per tonne. Ying's cash cost per ounce of silver, net of by-product credits was $2.45 compared with $1.26 in the prior year quarter. This is mainly due to a 15% decline in the silver sold in the quarter and the stronger RMB that I mentioned, partially offset by a $3.8 million increase in byproduct credits. All-in sustaining production costs at Ying were $130 per tonne, essentially flat year-over-year and below our annual guidance range of $155 to $160 per tonne. On a per ounce basis, Ying's all-in sustaining cost, net of by-products, was $13.94 an ounce. This is up 30% year-over-year, and the increase reflected the same factors impacting cash costs but also 60% -- 68% increase in government taxes, which was driven by the higher revenue that we reported. Turning to our growth projects. At Ying, capital expenditures totaled over $16 million in Q1 for underground development and drilling, mainly aimed at improving underground access and material handling to boost productivity. At the Kuanping Project north of Ying, mine construction focused on underground development to access the ore. The project, which has a license to produce up to 200,000 tonnes of ore per year. We'll deliver some nominal development ore to be milled at yen in this fiscal year. With the capacity expansions at the existing Ying permit areas in Kuanping, we'll have a permitted mining capacity of approximately 1.5 million tonnes per year. In anticipation of higher mine production, we've begun constructing a new mill, the #3 mill. Capital expenditures totaled $300,000 in the quarter with foundation treatments and the elevated water tank currently in progress. The mill is expected to add 3,000 tonnes per day of capacity and be commissioned in Q1 of fiscal 2028. Switching to Ecuador. El Domo, construction continued to advance in Q1 despite unusually heavy rainfall. On the infrastructure side, the noncontact water channel, processing plant foundation work and initial tailings storage facility dam construction progressed with more than 600,000 cubic meters of earthworks completed. In parallel, open pit pre-stripping is underway and efficiency is improving through the addition of large-scale equipment, expanded operating areas and road upgrades. In addition, major equipment for the processing plant and water treatment plant has been procured and is being shipped Ecuador. The construction contract for the plant has been awarded to T.G.J.A., an experienced contractor that recently constructed the 80,000 tonne per day flotation mill at the Mirador copper-gold mine in the south of Ecuador. Moving to Condor. Our permitting work continues with the formal consultation process underway with the directly impacted communities. This is the final step required to secure the small-scale environmental license which we expect to obtain later this quarter. Once it is received, we will commence development of two 1,500-meter exploration tunnels at the Camp and Los Cuyes deposits to support underground drilling and advance exploration and resource definition. We have also made significant progress in Kyrgyzstan since acquiring Chaarat ZAAV in January. This is a joint venture company that holds the Tulkubash and Kyzyltash gold projects and is 70% owned by Silvercorp with us as operator and with the remaining 30% owned by the state mining company, Kyrgyzaltyn. At the fully permitted Tulkubash oxide project, construction is underway on the temporary camp and related facilities. We have contracted CRCC 19 which is currently on site building access roads to the future open pit and waste rock storage areas and preparing the foundation for the heap leach pad. CRCC 19 has operating experience in Kyrgyzstan and is also our mining contractor at El Domo. The updated feasibility study on Tulkubash is expected later this month. As outlined in our budget release in June, we plan to invest $166 million to develop a 4 million tonne per year open pit heap leach operation at Tulkubash with $42 million of capital expenditures planned for fiscal 2027. At the neighboring Kyzyltash sulfide project, we completed nearly 13,000 meters of drilling to the end of the quarter with 16 rigs currently turning and assays pending. This work is part of our ongoing 50,000-meter drill program for the year focused on both infilling the deposit to upgrade resources and stepping out to extend mineralization and make new discoveries. This program will support the completion of a PEA next year, followed by a further 60,000-meter drill campaign to support feasibility level studies and detailed engineering design for construction. We look forward to providing further updates as we continue to advance our growth projects. And with that, operator, I'd like to open the call for questions.

[Operator Instructions] And your first question comes from the line of Kevin O'Halloran from BMO Capital Markets.

On -- starting off on the -- starting off on the guidance. Are you still comfortable with the production guidance even with the temporary shutdowns? Or should we maybe expect those numbers get reviewed as you get through the next kind of quarter or so and get a better sense of the impact on these shutdowns? And then I guess, similarly on the cost side, you were below the dollar per tonne range on the cash costs and the AISC at Ying. Is that something that there's also maybe some potential upside there that you might review as you get through these shutdowns?

Well, I mean I think 1 quarter does not make a year, obviously, both in terms of the negative that we've talked about and addressed with the protection curtailment, but also some of the positive numbers that we see in a particular quarter may not be what applies for the budget for the year just based on what activities are happening at different times during the year. Also, obviously, we are facing a bit of a strength in the RMB, which had an impact, which would have made the cost even better if we hadn't experienced that this past quarter. But coming back to your first part of the question, like it's premature to start making projections at this point and then having to revise them several times. So I think we will wait it out here through this quarter. We're obviously seeing production coming back online on a gradual basis. We're still comfortable with the target that we gave in that news release of 40% to 50% of target for this quarter. And I think once we have better visibility on that, we'll be in a better position to make a comment for guidance for the year.

Yes, that's fair. I appreciate that. Maybe just switching over to Ecuador at El Domo. The spending was a little bit lower this quarter. It sounds like probably that's because of the rainy season there. But just wondering what's the cadence of remaining capital spend that you're expecting and that you would need to spend to get you on track for production next summer?

Yes, I mean the numbers don't tell the full story because there is expenditures and deposits made on equipment, which are obviously a big part of the CapEx that don't flow through into the actual CapEx expenditures for the quarter. So there has been work done on that front. And then just from the nature of the build, it tended to be more back-end weighted anyways based on assembly of the equipment at the process plant and continuing the stripping of the pit. So at this point, while we're maybe a little bit behind our original budget for spending, we don't see that as being an issue. A lot of that work, as I said, was back-end weighted anyways. And some of that work, we had a bit of slack in the schedule with respect to earthmoving and some of the stripping. Our contractor had been quite confident that we had very conservative schedule and they do a lot more in a lot -- in a shorter period of time. So now we'll be holding them to their word for here for the balance of this year and fiscal year.

Okay. No, that's great to hear. Final question for me. Just on Condor. I noticed you guys increased your ownership during the quarter. Was there any payments or royalties or other consideration associated with that?

It was a very nominal payment and it was really just cleaning up what was sort of more of a legacy ownership in the corporation from a government agency.

And your next question comes from the line of Joseph Reagor from ROTH Capital Partners.

I guess, you briefly touched on this, but just any additional color you could give on how the safety upgrades are going? And is there any chance at all that this rolls into fiscal Q3?