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Edited Transcript of MFRISCOA-1.MX earnings conference call or presentation 24-Jul-19 3:00pm GMT

Q2 2019 Minera Frisco SAB de CV Earnings Call

Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Minera Frisco SAB de CV earnings conference call or presentation Wednesday, July 24, 2019 at 3:00:00pm 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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* Jens Spiess

Morgan Stanley, Research Division - Research Associate

* 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 second quarter 2019.

Before we begin, I would like to remind you that this call is being recorded and that 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 actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements.

Hosting this conference today, we have José Corona. I would now like to 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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Good morning, and thank you for your interest in Minera Frisco's second quarter 2019 conference call. I will take you briefly through the production and financial results. And after that, we will open to the call to any questions you may have.

Regarding production results, Minera Frisco informs that, prior notice on July 5, 2019, a General Ordinary Shareholders' Meeting was held, where the increase in the company's variable capital stock was approved.

Total processed tonnage in the second quarter '19 decreased by 42% when comparing to second quarter '18. The units that processed a lower tonnage mainly were El Coronel, Concheño and Ocampo. El Coronel reduced its processed tonnage due to the selective exploitation that is being carried out in the unit, mainly focusing on obtaining higher grades. In Concheño, its processed tonnage also decreased due to the lower tonnage coming from the pits.

It's important to mention that in the -- in Concheño, the work on the development of underground mine continues with the objective of increasing tonnage with better ore contents. In addition, exploration work continued in surrounding areas to the unit, with the purpose to locate new areas that contributes with ore reserves.

On the other hand, Ocampo reduced its processed tonnage due to the exploitation is mainly concentrated in the underground mine. In the case of Tayahua, the work is underway to reach the installed capacity of the plant. It is expected that in the second half year of this 2019, its maximum ore processing levels get obtained.

Gold production reached 35,723 ounces in second quarter '19. This is a decrease of 47% when comparing to second quarter '18. In the units of El Coronel and San Felipe, they obtained a higher processed grade. However, this effect did not compensate a lower production, mainly due to the -- the reduction in processed tonnage.

On the other hand, in San Francisco del Oro, Concheño and Ocampo units, its lower production is mainly due to the reduction in processed tonnage and a lower grade. By contrast, Tayahua recorded an increase in its gold production due to a higher processed grade. Silver production reached 1,354,716 ounces in second quarter '19. This is a decrease of 25% when comparing to second quarter '18. The units that decreased their production were mainly El Coronel, San Felipe, Concheño and Ocampo.

In the case of El Coronel and Concheño, despite having a higher grade of processed silver, the decrease in processed tonnage affected production. In San Felipe and Ocampo, the decrease in production is due to a lower processed tonnage as well as a lower grade.

Copper production reached 6,053 tons in second quarter '19 versus 6,081 tons in second quarter '18. The slight fall in production is mainly due to the decrease in the tonnage processed in Asientos and San Francisco del Oro units as well as a lower processed copper grade. With the works being done in the Tayahua unit to reach the maximum ore processing capacity, it is estimated that copper production will continue to increase gradually in the second half of this year.

Copper cathode production in Maria reached 453 tons in second quarter '19. This is a reduction by 39% when comparing to second quarter '18. In the Maria unit, metallurgical research work 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 second quarter '19 reached 3,625 tons. This is a reduction by 15% when comparing to second quarter '18. Tayahua and San Francisco del Oro decreased their production due to a lower processed grade. In Asientos, despite obtaining a higher grade with respect to the second quarter of previous year, did not compensate its decrease in production due to the reduction in processed tonnage.

Zinc production in second quarter reached 11,712 tons. This is 15% less when comparing second quarter 2018. Asientos and San Francisco del Oro decreased their production as a result of lower processed grade and lower recovery.

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

Regarding financial results. Net sales recorded MXN 2,465 million. This is a 32% decrease when comparing with the second quarter of last year. This is mainly from the decrease in the production of gold, silver, lead, zinc and copper cathodes and also in the prices of the metals that we produce, except gold, during this quarter.

At the end of 2 quarter '19, an operating loss of MXN 256 million was determined. This represents an operating margin of 10% negative, mainly due to decrease in sales. At the end of the second quarter of 2019, the EBITDA margin was 22%, 12 percentage points lower than the EBITDA recorded in the second quarter of 2018 but 5 percentage points higher than the EBITDA margin of the first quarter of 2019.

At the end of the second quarter '19, a comprehensive financial negative result of MXN 379 million was recorded. This is mainly due to the interest paid.

On June 30, 2019, the company's debt was composed as a syndicated loan of $321 million, the subordinated loans of $303 million, bank credits of $297 million, equivalents and short/long-term bonds of MXN 5,400 million. On June 2019, the company made the [7] amortization of the syndicated loan for $102 million. At the end of second quarter '19, the company record a net loss of MXN 399 million due to the reasons explained before in this report.

The company continues with the strategy of economic metal hedging. For 2019, they -- we already have hedged in a large part of the production of gold, silver and copper. As for zinc and lead, a part of the production is also hedged. It's important to mention that by 2020, a part of the estimated gold production is already hedged.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jens Spiess with Morgan Stanley.

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Jens Spiess, Morgan Stanley, Research Division - Research Associate [2]

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Just wanted to ask, could you maybe provide some details on the capital increase? What are your plans on using that cash? And also maybe elaborate a bit on the Peñasquito exploration results you mentioned. And also maybe give an update on your production guidance.

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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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Jens, on capital increase, we have to [get] first that was the approval from the owner. Second is that it's running -- it's waiting for legal and administrative plan. We're planning to use these resources on paying some accounts payable to renew some important accounts -- the suppliers for Frisco. The goal with this increase is to avoid any issue with -- that affect the production.

Also we are planning not only with a capital increase with our restructured debt to alleviate or to reduce the maximum possible debt, the short-term debt. So if we joined the resources coming from increased -- capital increase, sorry, and the restructure of debt, we can have a better financial situation for the coming years. So we will announce any news from legal structure when we have closed the terms and conditions. We are working right now on this detail.

So on production, again, basically with the transition that we [carried] in the last quarter, we are working on open [ground] -- on giving the correct equipment to the underground mine.

In the case of Concheño, in the case of San Felipe that the transition is carrying out. So we estimate that copper [cathode] will continue increasing production for this year, next 4 quarters this year, reaching its maximum capacity, also process plant. So [Benson Rowland] and team work to try to stabilize the production. On base metals, we will continue increasing through this [reason]. And sorry, Jens, could you provide the second question?

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Jens Spiess, Morgan Stanley, Research Division - Research Associate [4]

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Sure, sure. Just you mentioned something about Peñasquito exploration results. If you could give some details about that and if you will disclose those results.

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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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We do not have yet a complete result to show or deliver. We continue exploring, it is a joint work in the area that we are planning to have good results. Once we have any new results, we will provide you any guidance on that. At this moment, we do not have any complete analysis on results.

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Jens Spiess, Morgan Stanley, Research Division - Research Associate [6]

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Okay. So how much do you plan to spend on exploration at this joint venture? And are you capitalizing that -- those expenses or no?

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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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No. Well, because this is not yet a huge amount of CapEx because we are using our equipment, exploration equipment related to our -- training our people. We are using our own resources to deploy the Peñasquito team. So at this moment, there is no CapEx but it will reflect on the numbers for Frisco. It's a minimum use of CapEx for this.

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Operator [8]

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Our next question comes from Andrea Garcia with 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 [9]

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This is actually Rodrigo Garcilazo from GBM. A couple of questions regarding the capital increase. The first one is, is there a sign, any indication or a commitment of the controller to go to the capital increase according to its own share of the company? The second question is as the stock price has dropped very recently, have you changed your mind about the price of the capital increase? So those two.

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José Corona Sánchez, Minera Frisco, S.A.B. de C.V. - General Manager of Treasury & Finance and CFO [10]

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Yes. We mentioned that we [concluded] the first step of the capital increase. It was the ordinary meeting when the capital increase was approved. So after that, we have to wait for the [response] when shareholders will announce its interest and participate in this capital increase. So the market and the Bolsa Mexicana and Comisión Nacional are carrying out this process, so we have to wait. We have to wait to the correct time when the market receive from the shareholders its [future] participate. So that's what we could comment on this.

Also huge, huge participation on the ordinary meeting. It was a record. So we believe that the same participation, the same interest will be on the final steps.

On the second one, no, we are not planning any change on price that we announced. So if we -- I think that -- so it still depends on appetite for future transactions. But the message is we are not changing any in price at the moment.

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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 [11]

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Okay. And a follow-up, is there a minimum float you would like to see for your stock? Because, well, in some scenarios, the float of the company could be reduced very importantly. Is there any certain level -- threshold of float you would like to maintain after the capital increase?

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José Corona Sánchez, Minera Frisco, S.A.B. de C.V. - General Manager of Treasury & Finance and CFO [12]

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I'd say that the future need -- the balance of the transaction will -- we expect to maintain the same percentage of all shareholding. We really, at this moment, we don't know yet what will be the final decision of the shareholders. Definitely, we can provide any results when -- once we have the final numbers again.

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Operator [13]

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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 [14]

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

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Operator [15]

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