Q3 2023 Gatos Silver Inc Earnings Call
Participants
Dale E. Andres; CEO & Director; Gatos Silver, Inc.
Pieter Andre van Niekerk; CFO; Gatos Silver, Inc.
Cosmos Chiu; Executive Director of Institutional Equity Research & Equity Research Analyst; CIBC Capital Markets, Research Division
Presentation
Operator
Hello, ladies and gentlemen. Thank you for standing by. Welcome to Gatos Silver's Third 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 Mr. Dale Andres. Please go ahead.
Dale E. Andres
Thank you, operator, and good morning, everyone. Turning to Slide 3. There are three clear highlights this quarter. We continue to further strengthen the balance sheet, increasing the cash balance and reducing debt with continued free cash flow generation. Both GSI, Gatos Silver and 70% owned Los Gatos joint venture are debt free with a strong cash position.
Number two, operations continued to perform very well with the Cerro Los Gatos Mine matching record throughput rates. As a result of continued good operational performance in the first month of the fourth quarter, in October, along with recent optimization of the mine plan, we are increasing our 2023 full year silver and silver equivalent production guidance by 16% and 8%, respectively, based on the midpoint of each guidance range.
And number three, and I believe most importantly, in early September, we announced an updated life of mine plan and reserve and resource where we extended the mine life to 2030 and increased the expected silver production over the life of mine by 46%.
We are actively infill drilling the new and prospective South-East Deeps zone, and we will be shifting our focus to additional near mine and district drilling through the fourth quarter and into 2024.
Turning to Slide 4. This shows the continued strong operating performance at the Cerro Los Gatos Mine. Throughput in the quarter was just over 2,900 tonnes per day, while silver grades improved compared to the prior quarter, which resulted in an 11% increase in silver production of 2.2 million ounces.
Silver equivalent production, which includes zinc, lead and gold was 3.5 million ounces for the quarter. Cost of sales increased by 10% compared to the same period a year ago, primarily the result of the strong Mexican peso exchange rate, applying pressure on our costs, which are reported in U.S. dollars as well as inflationary pressures.
Our all-in sustaining costs were similar to the prior quarter. I think it's very important to note with regard to operating costs, we are continuing to identify and implement various productivity and cost optimization initiatives and this is having a tangible impact to offset these pressures.
As a result of recent strong operational performance as well as optimization of the mine plan, we now expect to exceed our original 2023 production guidance and have made upward revisions to our silver and silver equivalent production guidance ranges.
I'll now turn the call over to Andre to present our financial results.
Pieter Andre van Niekerk
Thank you, Dale. Good morning, everyone. The Los Gatos joint venture had another good quarter with continued cash flow generation. Lower production and revenues were offset by lower capital expenditures, resulting in similar free cash flows in Q3 2022. The LGJV generated $29.4 million in cash flow from operations in the third quarter of 2023 compared to $38.5 million in the same period of 2022. The joint venture generated free cash flow of $14.3 million this quarter compared to $14.7 million in Q3 2022. Free cash flow for the first 9 months of this year of $62.6 million was 8% higher than in the same period last year.
Cash flow used in investing activities dropped from $23.8 million in Q3 2022 to $15.2 million in this quarter due to the lower expected sustaining capital expenditure requirements going forward. Year-to-date, we have incurred $29.9 million.
Resource development drilling totaled $3.5 million for the quarter, with most of the spending focused on the infill drilling of the South-East Deeps. Greenfield exploration work is ramping up with approximately $1 million incurred on exploration during this quarter. The joint venture made additional capital distribution of $35 million subsequent to the end of the quarter on October 30, bringing the total capital distributions to the partners for 2023 to $85 million. This is $30 million more than the $55 million of dividends paid in 2022.
Now turning to Slide 6 to look at the financial results of the 70% owned Los Gatos joint venture for the quarter. Revenue decreased by 9% in Q3 2023 compared to the same period last year. The decrease in revenue is primarily due to decreases in sales volume of silver, zinc and lead due to lower grades and a decrease in the average realized zinc price of 29%, partly offset by an increase in average realized price of silver and lead.
Cost of sales for the quarter increased by 10%, primarily as a result of the increased purchasing costs as a result of higher mill throughput, the strengthening of the Mexican peso against the U.S. dollar and inflationary cost pressures in the period partly offset by cost reduction initiatives as part of our continuous improvement program.
Depreciation, depletion and amortization expense decreased by approximately 16% primarily due to the increase in mineral reserves and the extension of the life of mine. An income tax recovery of $900,000 was recorded in Q3 2023 compared to income tax expense of $6.7 million in Q3 2022. The income tax recovery is due to the reduction in the valuation allowance on the deferred tax assets related to PPE and mine development as a result of the increase in the mineral reserves and resources, allowing for additional future income tax deductions to be realized.
Finally, the LGJV had net income of $15.1 million for the quarter, 16% greater than the $13 million recorded in Q3 2022.
Now let's move to Slide 7 to look at the financial results for Gatos Silver. For the quarter ended September 30, 2023, Gatos Silver recorded net income of $3.3 million or $0.05 per share, in line with the $0.05 per share recorded in Q3 2022. Equity income in affiliates increased by 6%, primarily as a result of the higher net income recorded at the joint venture.
Corporate G&A was approximately $1.6 million higher in Q3 2022 mainly due to a $1.8 million noncash stock-based compensation charge as a result of an equity grant after an extended blackout period, which was partly offset by lower consulting fees.
Slide 8. Early in the third quarter, Gatos Silver [paid off] the remaining $9 million balance on its revolving credit facility and both the GSI and LGJV are debt free. Gatos Silver has the full $50 million available for withdrawal under its revolving credit facility. The LGJV ended the quarter with a cash balance of approximately $47 million and paid a capital distribution of $35 million to its partners, Gatos Silver and Dowa on October 30 of which we received $24.5 million. After the capital distribution, the joint venture remained well funded with approximately $21 million in cash.
Gatos Silver ended the quarter with a cash balance of $33.5 million, which increased to $57.7 million at the end of October at the receipt of its portion of the capital distribution made by the LGJV. The company and the Los Gatos Joint Venture are well positioned to continue to execute on growth opportunities.
I will now hand it back to Dale.
Dale E. Andres
Thanks, Andre. And turning to Slide 9. As mentioned previously, we have increased our full year silver and silver equivalent production guidance. Silver production is now expected to be between 8.8 million and 9.3 million ounces compared with the original guidance of 7.4 million to 8.2 million ounces. This represents an increase of 19% at the low end of the range and 13% at the high end.
Silver equivalent production is now expected to be between 13.8 million and 14.6 million ounces compared with the original guidance of 12.4 million to 13.8 million ounces on a silver equivalent basis. This represents an increase of 11% at the low end and 6% at the high end of the range.
So we have higher silver grades and slightly lower base metal grades anticipated in the fourth quarter compared to the previous plan. Based on the revised mine plan sequencing, we expect full year zinc and gold production to be near the low end of the original guidance ranges.
Full year lead production is expected to be within the upper half of the original guidance range of 36 million to 40 million pounds. We expect full year co-product and by-product all-in sustaining costs to remain in the lower half of the original guidance ranges, and we continue to expect sustaining capital expenditures at the Cerro Los Gatos Mine of approximately $45 million in 2023 with about $30 million spent in the first 9 months of 2023.
On Slide 10, our updated life of mine and mineral reserve that we announced on September 6 of this year, extended our current mine life to the end of 2030, and we believe we have substantial additional upside that we are focused on realizing. There are currently 7 surface drill rigs and 3 underground rigs actively drilling at the mine with 5 surface drills focused on infill drilling of the South-East Deeps area at Cerro Los Gatos targeting to add 3 to 4 years to the mine life by the third quarter of 2024, and that's through conversion of the higher-grade portions of the inferred resources that we also announced just recently in September.
In addition to the South-East Deeps drilling, we have several other high-priority targets located within a couple of kilometers of the mine as well as more than 50 targets across our [expansive] 103,000 hectares concession package. Both near mine and district targets will be an increasing focus for the team for the remainder of 2023 and as we move into 2024.
Turning to Slide 11. This plan map shows a few of the key targets we will be following up over the next 12 or so months that are within a couple of kilometers of the existing mine workings. We are currently drilling at both Portigueno and Cascabel. Portigueno is located roughly 1 kilometer along strike from the South-East Deeps zone and Cascabel which is located about 1 kilometer southwest of the mine is a strongly altered large fault structure parallel to the main fault structures at Cerro Los Gatos.
We already have a few intercepts in the Northwest offset zone from the previous drilling in 2021 and 2022 and we are planning to follow up on those hits with our underground drills from existing development now that we are deep enough to hit it from a good angle.
Our expectation is that it will be 2024 before we get to some of the other district targets. And so we have no shortage of exciting targets to keep us busy next year. In closing, we are looking forward to some of the exciting catalysts for the remainder of the year. We will continue to drive productivity improvements and cost optimization, which is a core part of our business and operating strategy.
As mentioned earlier, we are debt-free and GSI has a cash -- Gatos Silver has a cash balance of close to $58 million. We expect to continue to receive regular cash distributions from the Los Gatos joint venture with strong operating margins and cash flow. We remain focused on extending the mine life by the third quarter of next year through infill drilling and conversion of the South-East Deeps zone with more than half of that infill drilling already complete. And we are very excited as we start to increase our near mine and district drilling in large highly prospective district through the end of this year and into next.
I will now hand it back to the operator for questions. Thank you.
Question and Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Cosmos Chiu with CIBC.
Cosmos Chiu
But -- maybe first off on your guidance. Congrats on increasing your guidance for the year. If I recall when we talked in Q1, you talked about expecting a stronger first half, less strong second half. You touched on it, but I'm just trying to confirm what has changed? Is it higher grades? Are you seeing better grade reconciliation? Or is it really just mine sequencing you're continuing longer with the higher-grade stopes? Or is it throughput as well? I'm just trying to get a better sense in terms of what happened.
Dale E. Andres
Yes. Thanks for the question, Cosmos. And -- yes, really pleased to be able to increase our guidance. And I think it's a combination of all of those things. We are seeing higher throughput. We are seeing improved recoveries. We're in a particular area of the mine, both in the Northwest and Central Zone, which is the highest-grade portion. Those are difficult to predict in the sense that quarter-over-quarter variations can be fairly significant when we're into the highest-grade portion. So it's a bit of that. And then it's just optimizing the mine plan as we progress through the year compared to the original mine plan and expectations at the start of the year.
So it's a combination of all of those things. Originally, we had expected higher silver in the first half and a little bit higher base metals grade in the second half. We're seeing the higher silver continue throughout the year, so it's more consistent with these [grade] zones that we're in and the base metals is a little bit lower than we expected, particularly in the second half here.
Cosmos Chiu
Great. And how does it usually work, Dale, when the silver grade goes up? Do the base metal grades usually also go up as well? Can you just remind us?
Dale E. Andres
It really depends on the area that we're in. Typically, with our deposit, we tend to be more silver rich at the top of the deposit and more base metals rich towards the bottom, but where we are in the highest grade portions of the Central and Northwest zone, we're seeing both pretty good silver grades as well as base metal grades.
Cosmos Chiu
And maybe it's too early to ask, but I'm sure you're going through the budgeting process right now for 2024. With the increase in guidance for 2023 and what you've seen in terms of good operations at the asset in 2023. Any kind of read-through that we can carry on to for 2024 at a high level?
Dale E. Andres
Yes. I would just flag for the last 8 or 9 quarters, we've delivered very stable and consistent production, both on a throughput recovery and obviously, there's variation due to grades. We expect that stable operation throughput recoveries to continue into 2024. As you mentioned, we still are going through the budgeting process. We'll continue to optimize the mine plan as we do that.
So I'm hesitant to give any further color on 2024 while we go through that process. But you shouldn't expect any surprises compared to the life of mine plan we put out.
Cosmos Chiu
Sounds good. Maybe switching gears a little bit on Mexico. It's good to hear, Dale, that you're able to contain cost -- well costs have increased, but you offset it with operational efficiencies. Number one, I want to confirm that you've been able to offset the cost increases through operational efficiency, at least most of it; and number two, it's regarding sort of the country itself. We've seen some other mining companies in Mexico have security issues. I just want to confirm that there's no issues in terms of where are you at and no issues in terms of the asset itself.
Dale E. Andres
Yes, thanks again Cosmos. And just on the -- I'll answer the cost question first. We're doing a good job containing costs, obviously, and we're no different than any of the other mine companies in Mexico. We're exposed to the Mexican -- strong -- much stronger Mexican peso over the last 12 or so months. So that is obviously applying some pressure and (inaudible) inflationary pressures. But our continuous improvement program, I'm really proud of our team and the work that we've done. We've got some great initiatives. This year, we're really focusing on -- back half of this year on maintenance improvement, including equipment availabilities and utilizations, continuing to see some great impacts from that work and that work will continue that and other projects as we head into 2024.
So I'm confident that we can offset these pressures. I would just flag on a quarter-by-quarter basis, it's important not to read too much into our site costs, there can be slight variations depending on inventory adjustments or timing of expenditures. But in general, if you look at our cost of sales profile for the last 12 months, it sits quite well, and we don't expect any big swings with continued cost savings and reduction initiatives that we have underway.
Just to answer the question on Mexico and the security in particular. We're comfortable operating where we are. I think this is quite regional based. We know other companies have had some concerns. We're always cautious and -- but we're in an area that is relatively safe on a comparable basis compared to other areas in Mexico. We have a great relationship with our local community, San José del Sitio. And as I said, we have no security concerns at the mine site and so on.
Operator
(Operator Instructions) There are no further questions at this time. Mr. Andres, I turn the call back over to you.
Dale E. Andres
Thanks, operator, and thanks to everyone who participated in the call. We look forward to continuing to update you as we progress with our operating performance. And most importantly, as we head into 2024, updating on our exploration results and continued progress on our life extension work. So thank you all.
Operator
This concludes today's conference call. Thank you for joining. You may now disconnect your lines.
