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Edited Transcript of MFRISCOA-1.MX earnings conference call or presentation 29-Oct-19 4:00pm GMT

Q3 2019 Minera Frisco SAB de CV Earnings Call

Nov 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Minera Frisco SAB de CV earnings conference call or presentation Tuesday, October 29, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* José Corona Sánchez

Minera Frisco, S.A.B. de C.V. - General Manager of Treasury & Finance and CFO

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Conference Call Participants

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* Rodrigo Garcilazo Carreon

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Head of Research of Andean Region

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the conference call of the results of Minera Frisco's third quarter 2019.

Before we begin, I would like to remind you that this call is being recorded and that the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, and the actual results may differ materially. Please refer to the detailed note in the company's press release regarding the forward-looking statements.

Hosting this conference call today, we have José Corona. I will now turn the call over to Mr. José Corona. Please go ahead.

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José Corona Sánchez, Minera Frisco, S.A.B. de C.V. - General Manager of Treasury & Finance and CFO [2]

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Thank you. Thank you so much. Good morning. Thank you for your interest in Minera Frisco's Third Quarter 2019 Conference Call. I will take you briefly through the introduction of financial results, and after that, we will open the call to any questions you may have.

Regarding the production results, Minera Frisco reports that the capital increase process contributed by the company's shareholders was concluded on September 26, 2019, for an amount of MXN 6,000 million. Total processed tonnage in third quarter '19 decreased by 48% when compared to third quarter '18. The unit that processed a lower tonnage were mainly El Coronel, Concheño and Ocampo.

In the case of El Coronel, its processed tonnage were reduced due to the selective exploitation which had been conducted by the unit, focusing mainly on obtaining higher grades and reduced operating cost.

In Concheño, its processed tonnage decreased due mainly to a flooding at Navidad area of the underground mine combined with a lower tonnage coming from the pit resulting from a failure of auxiliary equipment. It is important to mention that in Concheño, the works and the development of underground mine continues with the objective to increasing tonnage with better ore contents. In addition, exploration works continue in surrounding areas to the unit with the purpose to locate new areas that contribute with ore reserves.

On the other hand, in Ocampo, its processed tonnage was reduced due to exploitation is concentrated mainly in the underground mine. All these added to the difficulties of developing new areas caused by the poor quality of the rock that contains abundant clay cavities.

In the case of Asientos, its processed tonnage increased by 24% due to the fact that ventilation problems with the SAG mill have been solved.

In the case of Tayahua, the work is underway for reaching the installed capacity of the plant. It is expected that in the last quarter of 2019 and the beginning of the first quarter of 2020, its maximum levels of ore processing will be obtained. Gold production reached 20,200 (sic) [29,200] ounces in the third quarter. This is a decrease of 48% when compared to third quarter '18.

El Coronel, San Felipe, Tayahua and Ocampo units obtained a higher processed grade. However, this effect did not compensate for a lower production, mainly due to their reduction in processed tonnage. On the other hand, in the Concheño unit, lower production is due to the reason explained in this report. In contrast, Asientos and San Francisco del Oro unit increased gold production by a higher processed grade. This increase did not compensate the decrease in production in the units mentioned previously.

Silver production reached 1.1 million ounces in third quarter '19. This is a decrease of 40% when comparing to third quarter '18. The units that decreased the production were mainly El Coronel, San Felipe, Tayahua, San Francisco del Oro, Concheño and Ocampo. In the case of Coronel and Ocampo, despite having a higher grade of processed silver, the decrease in processed tonnage affected production.

It's important to mention that in San Felipe unit, the underground mine development work continues with the purpose of processing ore with higher content of grade. In the rest of the unit, the production reduction is due to a lower processed tonnage as well as a lower grade. In the case of Asientos, its silver production increased. This is due to an increase in its processed tonnage and a higher grade.

Copper production reached 5,587 tons in third quarter '19 versus 6,599 tons in third quarter '18. This is a reduction by 15% when comparing to the previous quarter. The lessening in production is mainly due to the decrease in tonnage processed in San Francisco del Oro and Tayahua units as well as the lower processed copper grade. In the case of Tayahua unit, there was a delay in the delivery of equipment, which will help to reach the maximum ore processing capacity. It is estimated that copper production will continue to increase gradually in the fourth quarter 2019 and in the first quarter of 2020.

Maria unit did not generate copper cathode production during third quarter '19 due to the delay in the delivery of reagents coming from the Asia that are used for irrigation in leaching pad. However, the production of cathodes of copper will be reactivated for fourth quarter '19. In the Maria unit, metallurgical research works and changes in the methodology of irrigation and pads maintenance are continued in order to make the recovery of copper from the leaching pads more efficient.

Lead production during third quarter '19 reached 4,181 tons. This is a reduction by 2% when comparing to third quarter '18. Tayahua decreased its production due to lower processed tonnage as well as a lower grade. On the other hand, Asientos and San Francisco del Oro increased their production by 14% and 8%, respectively. However, this effect did not compensate the lower production.

Zinc production in the third quarter reached 13,055 tons. This is 4% less when compared to third quarter '18. Tayahua decreased its production as a result of lower processed tonnage and a lower processed grade. Despite an increase in production in Asientos and San Francisco Del Oro by 11% and 9%, respectively, this effect did not compensate for a lower zinc production during the third quarter.

As explained in the previous press releases, Maria -- Minera Frisco through the Tayahua unit and Goldcorp, Minera Peñasquito, are carrying out exploration works in the state of Zacatecas in Mexico. Once exploration result has been obtained, both mining companies will evaluate their possible exploitation.

Regarding the financial results. Net sales recorded MXN 2,882 (sic) [2,182] million equivalent $112 million. This is a 34% decrease when comparing the third quarter of '19 versus the same period of the previous year. This is a result mainly for the decrease in the production of metals during the quarter for the reason explained and the decrease in the prices of lead, zinc and copper.

At the end of third quarter '19, an operating loss of MXN 1,672 million was determined, and this represents an operating margin of 77%, minus, mainly due to an impairment for long-lived assets was recorded for MXN 1,297 million. This item does not represent outflows of cash flow and not affect the EBITDA; as well as a decrease in sales. At the end of the third quarter of '19, the EBITDA margin was 21%, 13 percentage point lower than the EBITDA recorded in the third quarter of 2018.

At the end of third quarter '19, a comprehensive financial negative result of MXN 1,110 million was recorded. This is due to a loss due to exchange variation and interest paid on the debt services.

As of September 30, 2019, the company's debt was composed of a syndicated loan of $321 million, the subordinated loan of $305 million, bank credits of $163 million equivalent and long/short-term bonds of MXN 5,500 million. The debt in U.S. dollar decreased by 15% when comparing third quarter versus '19 -- sorry, versus third quarter '18. It reaching $1,069 million versus $1,258 million, respectively.

At the end of third quarter '19, the company record a net loss of MXN 2,027 million due to the reasons explained before in this report. The company continues with the strategy of economic metal hedging until today, and part of the estimated production is hedged for the remainder of 2019 of gold, silver, lead, zinc and copper. It's important to mention that by 2020, a part of the estimated gold and silver production is already hedged.

With this, I conclude my general comments. We can proceed to answer any question you may have. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from Rodrigo Garcilazo of GBM.

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Rodrigo Garcilazo Carreon, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Head of Research of Andean Region [2]

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This is Rodrigo from GBM. Just a couple questions. The first one is, could you provide new guidance for this and next year’s production gold, silver especially, given the difficulties you are having in the operations? The other question, if you could clarify a little bit more about the impairment charge you registered during the quarter.

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José Corona Sánchez, Minera Frisco, S.A.B. de C.V. - General Manager of Treasury & Finance and CFO [3]

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Thank you, Rodrigo. Yes, we can discuss something about the gold and silver production. We experienced some trouble on this change from the open pit into the underground operations. This transition is getting good results, but we need time to complete the total process. We expect to have at the end of this quarter a complete access to the underground work at Concheño mainly and San Felipe.

We reduced from the last year because largely we maintained open pit at these units, at Concheño and San Felipe, but the tonnage is reducing because these open pits are getting at the end. And we are opening a lot of fronts on the Concheño mine. So we expect an improvement on production next year, mainly in gold and silver. But we can share specifically more details on this production soon, Ricardo -- Rodrigo, sorry.

Rodrigo, because of the permit, every year, we are under this review because it is an -- this is an audited company. This is a public company. So the auditors ask to compare the value of some assets. So typically, this impairment is recorded at the end of the year. This is a model that includes prices, includes also long reserves. A lot of factors are included in this model. And this year, the -- our Board asked to start this review before the -- this quarter, not to take -- to finish at the last quarter. So that's the reason that we reduced this impairment in this quarter and not at the end of the year as we used to do it. Okay.

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Rodrigo Garcilazo Carreon, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Head of Research of Andean Region [4]

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And this is more related to zinc and lead prices or? Because I am figuring out that gold and silver prices are higher. So it's related to zinc and lead prices or related to your reserves? I think that was the question.

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José Corona Sánchez, Minera Frisco, S.A.B. de C.V. - General Manager of Treasury & Finance and CFO [5]

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No, no, no. It's a model. A lot of factors are included, not only prices, not only reserves. We can share with you also more details. But every year, we have to do this model and compare it with the last one. And that's the reason that we record this impairment on some assets. This is discussing mainly at Ocampo. Ocampo assets is mainly the reason. Okay.

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Rodrigo Garcilazo Carreon, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Head of Research of Andean Region [6]

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Okay. Perfect. One more question, if I may, is the exploration of the Mazapil Valley has been affected somehow by the frequent protest at Peñasquito? Or the program -- exploration program then continues as expected?

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José Corona Sánchez, Minera Frisco, S.A.B. de C.V. - General Manager of Treasury & Finance and CFO [7]

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The exploration continues. There is no reason to consider as unaffected work. In fact, we -- Peñasquito is having trouble on its operation, but the exploration work is completely in a different area and is carrying out by few companies.

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Operator [8]

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(Operator Instructions) As there are no further questions at this time, I'll turn the call back over to Mr. José Corona for any closing remarks.

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José Corona Sánchez, Minera Frisco, S.A.B. de C.V. - General Manager of Treasury & Finance and CFO [9]

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Thank you. Thanks a lot for participating in this conference call. We are looking forward to speaking with you again. Thank you.

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Operator [10]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.