Q4 2023 Gatos Silver Inc Earnings Call

Participants

Dale Andres; Chief Executive Officer; Gatos Silver Inc

Andre van Niekerk; Chief Financial Officer; Gatos Silver Inc

Lucas Pamatat; Analyst; Canaccord Genuity Group Inc

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Gatos Silver's fourth 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 Andres

Thank you, operator, and good morning, everyone. Turning to slide 3, I'd like to highlight three points for the quarter. Number one, we continued to further strengthen our balance sheet, increasing the cash balance while remaining debt-free, including at the 70% owned Los Gatos joint venture. Andre will speak to this in more detail, but I want to highlight at Castle silver's free cash flow of $21 million -- $22 million in the fourth quarter and continuing distributions received in the first quarter of this year.
Number two point I want to highlight is that operations continue to perform very well with the sale of US GAAP. Those mines setting another record for throughput rate. We ended the year within our upper upwardly revised production guidance range, and we finished the year at the lower end of our cost guidance range for all-in sustaining costs.
As a result our free cash flow was approximately $22 million for Q4 and $85 million, and that's at the Los Gatos joint venture for the full year 2023. And the third point is yet again, we're aiming to extend the mine life by an additional three years when we update our life of mine plan in the third quarter of 2024 and we continue to drive operational performance with a medium term goal of ramping up production to 3,500 tonnes per day on a sustainable basis.
Turning to slide 4, mill throughput in the quarter was over 3,000 tonnes per day, while silver grades improved compared to the prior quarter, which resulted in a 15% increase in silver production of approximately 2.6 million ounces. Importantly, we demonstrated in December that the current capacity of the mill is closer to 3,500 tonnes per day. And we are planning some minor upgrades to make sure it can sustain those kind of rates.
Silver equivalent production, which includes zinc, lead and gold, was 3.9 million ounces for the quarter. For 2023, we produced 9.2 million ounces of silver and 14.3 million ounces of silver equivalent. Cost of sales for the fourth quarter increased by 10% compared to the comparable quarter last year, primarily due to the increased milling rates.
However, cost of sales for 2023 were only 4% higher and on a cash cost basis, were only 1% higher than in 2023 compared to 2022. And that's despite mining and processing 10% more tons this year over year. So that's also despite the strong Mexican peso and the play inflationary pressures, which we managed to largely offset.
All-in sustaining costs per payable ounce of silver for the full year after byproducts of the byproduct credits, we're $11.33 per ounce compared to $10.24 per ounce in 2022, which is a great result considering the lower planned production in 2023.
Turning to Slide 5. This shows our production and cost guidance for 2024. We plan to increase throughput rates at the central Los Gatos mine to average between 3,033 hundred tonnes per day in 2024, with rates expected to increase through the year as we focused on ramping up mining rates to fill the extra mill capacity that we proved up in December.
Key grades are expected to be lower in the first quarter versus the average grades expected for the full year. Sustaining capital expenditures are expected to be similar to last year's guidance at $45 million, with the majority of spend on underground development with continued focus on opening up the southeast area.
Exploration and definition drilling spend is expected to increase as we complete the current phase of conversion drilling in the southeast states and start to switch our focus to both near mine and district targets. We expect to produce between 8.4 million and 9.2 million ounces of silver during 2024 at an all-in sustaining cost after by-product of between $9.50 to $11.50 per ounce of payable silver and $13.5 million to 15 million silver equivalent ounces at a $14 to $16 per ounce on a silver equivalent basis, and that's on a co-product basis.
I'll now turn the call over to Andre to present our financial results.

Andre van Niekerk

Thank you, Dale. Good morning, everyone. 70% on both Gatos joint venture had another great quarter, generating cash flow from operations of approximately $38 million, 2% lower than cash flow generated in Q4 2022. However, the joint venture generated free cash flow of $22.3 million this quarter, 19% more than Q4 2022 due to lower capital expenditures offsetting the expected lower revenues.
Cash flow used in investing activities reduced from $20.4 million in Q4 2022 to $15.9 million this quarter due to lower sustaining capital expenditures incurred resource development drilling totaled $3 million for the quarter, with most of the spending focused on the infill drilling of the Southeast. For the full year 2023, we incurred $41.6 million on sustaining capital expenditures and $30.5 million on resource development drilling.
Free cash flow for 2023 of approximately $85 million was 13% higher than the $75 million of free cash flow generated in 202.2 as a result of the free cash flow generation capital distributions made by the joint venture totaled $85 million in 2023. This is $30 million more than the $55 million of dividends distributed to the partners in 2022. In addition, the joint venture made a further quarterly capital distribution to the partners of $30 million subsequent to the end of the year on February 15.
Now turning to slide 7 to look at the financial results of the US joint venture for the quarter, revenues decreased by $73.5 billion in the fourth quarter of 2023. Revenues before the provisional revenue adjustment were 4% lower in the fourth quarter due to lower silver sales volumes as expected, which are partially offset by higher silver prices and higher Led revenues.
In Q4 2022, we had we recorded a larger positive provisional revenue adjustment, which contributed to lower Q4 20 unitary revenues compared to 2022. Cost of cells for the quarter were 10% higher than Q4 2022, primarily as a result of higher throughput resulting in higher operating costs. The LG JV was impacted by the strengthening of the Mexican peso against the US dollar, which was partly offset by productivity improvement and cost reduction initiatives as part of our continuous improvement program.
Depreciation, depletion and amortization expense decreased by approximately 8%, primarily due to the increase in mineral reserves and the extension of the mine life and income tax recovery of $1.7 million was recorded in Q4 2023 compared to income tax expense of $14.8 million in Q4 2022 to see income tax recoveries due to an increase in recognition of deferred tax assets and additional tax deductions available for certain mine development expenditure expenditures that we incurred.
Finally, we recorded net income of approximately $25 million for the quarter, 16% lower than Q4 2022.
Now moving to Slide 8 to review the financial results for GAAP. With solar net income and net income per basic and diluted share are at 160% and 157%, respectively for the quarter. Total silver recorded net income of $12.3 million or $0.18 per share for Q4 2023.
Equity income in affiliates decreased by 14%, primarily as a result of the lower net income recorded at the joint venture. Corporate G&A was approximately $2 million lower in Q4 2023 being mainly due to lower audit consulting and severance costs incurred in the fourth quarter of 2023 compared to Q4 2022. For the full year, we incurred general and administrative expenses of $25.6 million compared to $25.5 million in 2022 2023, general and administrative expenses included non-cash stock-based compensation of $6 million, non-recurring legal defense fees of $3.2 million, costs related to restatement of the 2021 and 2022 financial statements of $2.3 million and some severances $200,000.
Moving to slide 9, Gatos Silver and I know Scott has joint venture continued to remain debt-free. The LG JV ended with a cash balance of $34.3 million and had a cash balance of $43.1 million at January 31, 2024 forward, as I've mentioned earlier, the joint venture paid a capital distribution of $30 million to its partners, Gatos Silver and our on February 15, 2024 of which we received $21 million.
Got a silver and ended 23 with a cash balance of $55.5 million and had a cash balance of $53.1 million at January 31 than it's been for just a few weeks before the receipt of the additional $21 million capital distribution paid for the joint venture partner on February?
The company and the Los Gatos joint venture is well positioned to continue to execute on growth opportunities. I will now hand it back to Dale.

Dale Andres

Thanks, Andre. And on Slide 10, I'd like to highlight our updated life of mine and the mineral reserve that we announced on September sixth that extended our current mine life to the end of 2030. And we continue to believe we have substantial additional upside and we are focused on realized realizing that upside with a target this year to add another three years, and we're on track to announce that in the third quarter of of 2024.
Since last April, we have had numerous drills working on our Southeast deep zone with the aim of having the higher grade areas of inferred drilled to 50 meter spacing for conversion for that reserve and resource update that we have planned for the third quarter of this year.
So right now, the Southeast is our major focus, and we currently have seven surface drills focused on that infill drilling. We also have four rigs underground focused on definition and resource expansion across the mine.
We recently added another surface rig, which is on our part to go new near-mine targets, bringing the total number of drills on site up to 12 in December, we showed our mill is capable of processing 3,500 tonnes per day consistently on an operating basis, and we are now advancing future value enhancement projects, including the potential expansion to 4,000 tonnes. And of course, that's linked with additional reserve growth.
On the recovery side, we are completing studies for our copper separation circuit and evaluating technology and various options for increasing the recovery of silver gold and amazing.
Turning to Slide 11. This figure shows a few of the key targets that are within a few kilometers of the existing mine workings and potentially accessible from existing underground infrastructure. Our geologists have been hard at work for the last couple of years, getting this healthy deeps defined and adding to our life of mine.
And now in 2024, we are excited by the chance to ramp up the exploration work on the rest of our 103,000 hectare land package. We will still be doing a lot of work within three to four kilometers of the mine operations. It will be easiest to bring anything we find in this area close to the mine into production in a timely manner.
So you can clearly see the large number of veins we already know of just within that close range. We will be getting the drill rigs out of this area as well with some very prospective targets in the San Luis area, which is about five kilometers to the northwest of the mine. And we have a number of targets further to the northwest, about 22 kilometers from the mine in the lens area.
So turning to Slide 12. In summary, we continue to safely drive mill throughput increases together with productivity improvements and cost optimization, which is a core part of our business and operating strategy. We remain focused on extending the mine life, and that's by the third quarter of 2024, together with other value-enhancing initiatives.
And we continue to be very excited as we start to increase our near-mine and district drilling in the large and highly prospective Los Gatos district. And finally, and importantly, we continue to generate strong operating margins and cash flow with regular distributions expected from the Los Gatos joint venture and a growing cash balance. And I'll now hand it back to the operator for questions.

Question and Answer Session

Operator

(Operator Instructions)
Lucas Pamatat, Cannacord.
Lucas, your line is open. Lucas, you may need to check your line to see if you placed it on mute.

Lucas Pamatat

Sorry, guys, I was on hold. Thanks taking my questions. I just wanted to hit on the can you provide more sort of color on good mill or sorry -- the mine de-bottlenecking efforts you're undertaking to get your 2,500 tonnes a day.

Dale Andres

Yes, sure. Thanks, Lucas. And right now we have development well ahead of production. So to sustain a mining rate above 3,000 tonnes per day, we need to continue to open up new areas and cycle through stopes faster. And our goal is and we've stated our midterm goal is to get up to that 3,500 tonne per day to fill the mill that's just cycling through the stopes quicker.
So it's not really a matter of developing. It's more just on a day-to-day basis equipment, productivity's utilizations and making maximum use of our paste plant to to cycle through both cut-and-fill and long-hole stoping faster. And then importantly, it's opening up the Southeast zone.
What we want to make sure of obviously, for short periods of time, we can do 3,500 tonnes per day. But our goal is to drive towards that as a long term sustainable rate and for that, we are going to need to open up the southeast area, and that's a lot of our focus on development as well.

Lucas Pamatat

Got you. Thank you. And as you undertake this drilling and understand more about the Southeast, do you think you'll be able to include that sort of 300 under this scenario and your new mine plan later this year?

Dale Andres

And like I said, we're making like we put in our guidance, we're guiding to average between 3,033 hundreds. So we're making good progress towards that 3,500 ton goal already expected in our guidance range. But yes, that's what that's what we're going to work towards.

Lucas Pamatat

Okay. Thank you, guys. All the best again.

Operator

(Operator Instructions) At this time there appear to be no further questions. Mr. Andres, I will turn the call back over to you for any closing remarks.

Dale Andres

Thanks for everyone who participated. We are very excited about 2024. We think we're very well positioned to deliver additional shareholder value, and we look forward to providing updates as the year progresses. Thanks, everyone.

Operator

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