Q2 2023 Gatos Silver Inc Earnings Call

Participants

Dale E. Andres; CEO & Director; Gatos Silver, Inc.

Pieter Andre van Niekerk; CFO; Gatos Silver, Inc.

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Gatos Silver Second Quarter 2023 Results Conference Call. Presenting today will be Dale Andres, CEO of Gatos Silver; and Andre van Niekerk, Chief Financial Officer. We will conclude today's session with a question-and-answer period, where other members of the Gatos Silver management team will be available. (Operator Instructions)
Turning your attention to Slide 2. Please note, today's call contains forward-looking statements. Various risks and uncertainties may cause actual results to vary. Gatos Silver does not assume the obligation to update any forward-looking statements.
I would now like to turn the call over to Dale Andres. Please go ahead.

Dale E. Andres

Thank you, operator, and good morning, everyone. Turning to Slide 3. We continue to build on the foundation [set] last year. With strong liquidity throughout 2023, a $50 million capital distribution was paid by the Los Gatos joint venture to its partners on July 20, of which Gatos Silver received $35 million. We received $9 million -- or we used $9 million of that $35 million to retire the outstanding balance of the revolving credit facility and GSI is now debt-free with the full $50 million available under the revolving credit facility.
From an operating perspective, the Los Gatos joint venture continued to perform well with record mill throughput rate of over 2,900 tonnes per day. Our cost optimization initiatives contributed to offset the impact of the stronger Mexican peso against the dollar as well as other inflationary cost pressures. And we are now focused on completing the new reserve and resource estimate this quarter and continue to do both resource expansion drilling and greenfield exploration on our over 100,000-hectare land package in the Los Gatos district. We currently have 9 drill rigs and that's -- I'll talk about this a bit later, soon to be 10, working to extend the mine life and unlock the district potential.
Turning to Slide 4. This shows our continued strong operating performance at the Cerro Los Gatos mine. As expected in the mine plan, we mined lower silver grades during the second quarter. We expect that silver feed grades will gradually decrease towards reserve grade over coming quarters and years as we move deeper in our deposit.
Cerro Los Gatos had another record quarter of mill throughput in the second quarter, and we are continuing our debottlenecking efforts in the mine with a focus on productivity and equipment efficiencies. We are also continuing to push down on operating costs at the same time with a robust pipeline of continuous improvement and cost reduction initiatives. For our all-in sustaining costs, we continue to expect to finish this year within guidance and for after byproducts, that's within the $11 to $13 per payable ounce range.
I'll now turn the call over to Andre to walk through some of the financials. Andre?

Pieter Andre van Niekerk

Thank you, Dale. Good morning, everyone. Slide 5 shows why we remain confident in this asset as it continues to generate consistent strong cash flow period over period. The LGJV generated $74.4 million in cash flow from operations in the first half of 2023 compared to $80.5 million in the first half of 2022, with free cash flow of $48.4 million for the first half of the year, an increase of 14% compared to the first half of 2022.
Our rate of sustaining capital spending is now decreasing as the operation has settled into an optimization stage with cash flow from investing activities dropping from $19 million in Q2 2022 to $14.6 million in Q2 of 2023. We expect sustaining capital expenditures of $45 million for the full year, of which $21 million was spent to date. In addition, exploration and capitalized resource development drilling is expected to be $3 million and $13 million, respectively, of which $1.1 million and $7 million has been incurred today.
Lower cash flow from operations during Q2 2023 was offset by lower capital expenditures resulting in similar free cash flow of $19.7 million versus $19.5 million in Q2 2022. The joint venture ended the quarter with approximately $83 million of cash and cash equivalents and made a capital distribution of $50 million to the JV partners on July 20, of which Gatos received $35 million.
Turning to the financial performance for the quarter. We will start with the results of the 70% on LGJV. Revenues increased by 2% to $58.3 million, the increase in revenue is primarily due to a lower provisional revenue adjustment and a 19% increase in the realized [silver] price. The increase was partly offset by a 13%, 10% and 19% decrease in volume of silver, zinc and lead sale. In addition, the realized zinc price dropped by 50%. Cost of sales decreased by 7%, primarily as a result of the decrease in volume of concentrates sold in the period and continued cost reduction initiatives, which offset the impact of the strengthening peso against the U.S. dollar and other cost inflationary pressures.
Depreciation, depletion and amortization expense was higher than in Q2 2022, primarily due to higher tonnes mined and the additional depreciation charge of capital projects completed in late 2022 and early 2023. Income tax expense increased by $2.9 million, primarily due to an increase in noncash deferred tax expense, partially offset by a decrease in current income tax expense. Overall, the LGJV had net income of approximately $750,000 in Q2 2023 compared to $3.4 million in Q2 2022. The change in net income was primarily due to increases in DD&A and income tax expense, partially offset by decreases in royalties, exploration expense, a gain on foreign exchange and an increase in interest income.
Turning to the financial results for Gatos Silver on Slide 7. For the quarter ended June 30, 2022, Gatos Silver recorded a net loss of $3.6 million or $0.05 per share compared to net income of $5.2 million or $0.08 per share for the quarter ended June 30, 2022, mainly due to the decrease in equity income in affiliates.
Equity income in affiliates decreased primarily as a result of the lower net income recorded at the joint venture. In addition, corporate G&A was approximately $1.9 million higher in Q2 2023 compared to Q2 2022, primarily due to nonrecurring audit and consulting fees related to the restatement of financial statements as well as higher legal defense costs.
Looking at our balance sheet and liquidity on Slide 8. The LGJV continued to generate strong cash flow during the first half of the year, generating approximately $74 million in cash flow from operations and $48.4 million in free cash flow during the first half of the year. The LGJV ended the quarter with a cash balance of approximately $83 million.
As previously mentioned, on July 20, the LGJV paid a $50 million capital distribution to its partners, Gatos Silver and Dowa, of which we received $35 million. After the capital distribution, the LGJV remained well capitalized with approximately $30 million of cash. Gatos Silver ended the quarter with a cash balance of $9.1 million and $9 million outstanding on this revolving credit facility. After the end of the quarter, the company used $9 million of the $35 million capital distribution received to pay out the full outstanding balance on the revolving credit facility on July 21, 2023. Gatos Silver is debt free with approximately $36 million in cash at July 31, 2023. The company, at the LGJV, are well positioned to continue to execute on growth opportunities.
As shown on Slide 9, we are on track to meet previously announced production and cost guidance. As per the mine plan, we expect the silver to be higher in the first half of the year and lower in the second half of the year as a result of lower grade scheduled to be mined in the second half of the year. We still expect full year co-product all-in sustaining cost per ounce to be within the $15.50 and $17.50 per silver equivalent [ounce range] and between $11 and $13 per silver ounce on a byproduct basis. We are also on track to meet our sustaining capital guidance of $45 million for 2023. In addition to the $30 million, which we anticipate spending on resource development drilling on the South-East Deeps zone this year.
I will now hand it back to Dale to tell you more about the life of mine and exploration upside of the CLG.

Dale E. Andres

Thanks, Andre. And turning to Slide 10, which I want to talk about some of our exciting growth potential. And this slide shows a long section through our deposit. We currently have 5 surface drill rigs and 3 underground rigs actively drilling at the mine, and that's targeting up -- to add up to 6 years of the mine life by mid-2024. Our first stage of this life extension is a new life of mine and reserve incorporating recent resource conversion drilling and we're on track to complete before the end of this current quarter in Q3.
We also plan to report an initial resource for the South-East Deeps area as part of this update. The 5 surface rigs that we have on the South-East Deeps are infilling to about 50-meter spacing with the objective of converting this to the reserve -- to a reserve status for our 2024 mine plan update. Our plan is to have the drilling finished by the first quarter of next year, and that subsequent update out in the second half of next year, targeting the third quarter again. Well, we are really pleased with the progress in and around the Cerro Los Gatos mine, the biggest potential upside is our district. The joint venture holds a concession package that is roughly 50 kilometers by 40 kilometers and extend. We currently have more than 50 individual prospects identified with 1 drill active at the current time on the near mine Santa Ana target. And as I said previously, we plan to mobilize the [seventh] surface drill rig next year, and we're continuing our detailed mapping of the district, which will help to generate further targets as we progress.
Turning to Slide 11. Looking forward to the catalysts for the remainder of the year, we will continue to drive productivity improvements and cost optimization. And as mentioned earlier by Andre and myself, we are debt-free. I just want to repeat that. We are debt-free and GSI has a strong cash balance of $36 million with $50 million available under our revolving credit facility. We expect to continue to receive regular cash distributions from the Los Gatos joint venture as it is expected to continue to generate robust margins and cash flow.
We remain focused on extending the mine life, and we are on target to issue our updated mineral resource -- reserve and resource estimate before the end of this current quarter and that will hopefully provide further clarity on the enormous potential of this asset. And we are very excited to accelerate our drilling in the large and highly prospective Los Gatos district later this year and into next year, and that's going to have a near-mine focus to start.
I'll now hand it back over to the operator for questions.

Operator

(Operator Instructions) There are no questions at this time. Mr. Andres, I turn the call back over to you.

Dale E. Andres

Thank you, and we look forward to updating you very soon in the coming weeks on our new life of mine plan and reserve and resource update. And further to that on our Q3 and Q4 performance as we progress throughout the year. Thank you. Thank you very much.

Operator

This concludes today's conference call. You may now disconnect.