Q3 2017 Sierra Metals Inc Earnings Call
Nov 13, 2017 AM EST
SMT.TO - Sierra Metals Inc
Q3 2017 Sierra Metals Inc Earnings Call
Nov 13, 2017 / 03:30PM GMT
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Corporate Participants
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* Edmundo Gontardo Guimaraes
Sierra Metals Inc. - CFO
* Gordon J. Babcock
Sierra Metals Inc. - COO
* Igor Alcides Gonzales Galindo
Sierra Metals Inc. - CEO, President & Director
* Michael McAllister
Sierra Metals Inc. - VP of Corporate Development
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Conference Call Participants
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* Ian Grundy
Scotiabank Global Banking and Markets, Research Division - Associate
* James Young
West Family Investments, Inc. - Investment Analyst
* Leon G. Cooperman
Omega Advisors, Inc. - President, CEO, and Chairman
* Mark Ghobrial
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Presentation
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Operator [1]
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Good morning. My name is Adam, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Sierra Metals Third Quarter 2017 Results Conference Call. (Operator Instructions) Thank you very much.
[Christina Papadopoulos], Manager of Investor Relations, you may go ahead.
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Unidentified Company Representative, [2]
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Thank you, operator, and good morning, everyone. Welcome to Sierra's Q3 2017 Results Call. On today's call, we're joined by Igor Gonzales, President and CEO; Ed Guimaraes, CFO; and Gordon Babcock, COO. Today's call will be followed by a question-and-answer period. Today's presentation is also available to download both through this website and from the company's website at sierrametals.com.
Last Thursday's press release, the financial statements and the management discussion and analysis are also posted on company's website.
Before we start, I'd like to remind everyone about our disclaimer that certain statements made today by the executive management team may contain forward-looking information. Anything not historical is considered forward-looking. For more information, please refer to our detailed cautionary notes in last Thursday's press release and to the disclaimer on Slide 2 of today's presentation. Please note that all dollar amounts mentioned in this call are U.S. dollars unless otherwise noted.
With that, I'll now turn the call over to Igor Gonzales, President and CEO.
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Igor Alcides Gonzales Galindo, Sierra Metals Inc. - CEO, President & Director [3]
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Thank you. I will have Mike McAllister to do the introduction, please.
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Michael McAllister, Sierra Metals Inc. - VP of Corporate Development [4]
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(inaudible).
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Igor Alcides Gonzales Galindo, Sierra Metals Inc. - CEO, President & Director [5]
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Okay. Good morning, everyone. I would like to begin with an overview of the 2017 third quarter results for Sierra Metals. I will also discuss the operational and exploration highlights for the quarter. Overall, we are very encouraged by the continued progress and achievements in the financial, operational and exploration results at Sierra in this third quarter. We are optimistic that 2017 will continue to be a strong year of operational performance at Yauricocha and a growth year for our Mexican operations as the company progresses on the operational improvement program well underway with improved production, recovery and cash flow.
Following my summary highlights, Gordon Babcock will take us through the operational and exploration highlights. And then, Ed Guimaraes will take us through the third quarter financial highlights and then we will open the call for questions.
On Slide 4, the third quarter 2017 represents a fifth consecutive quarter of solid financial results. During this quarter, the company continues to maintain the improvements in revenue and adjusted EBITDA realized during the previous 2 quarters. The company also achieved significant improvements in the third quarter of 2017 versus the same period last year, with a 25% increase in revenues to $50.9 million and a 16% increase in adjusted EBITDA to $18.8 million, while maintaining a strong liquidity with $28.6 million in cash and cash equivalents. During the quarter, the company processed 505,000 tonnes, which represented a 6% decrease from Q3 2016. The company saw a 29% increase in silver equivalent production of 3.8 million ounces and a 17% decrease in copper equivalent production of 20.9 million (sic) [21.9 million] pounds versus Q3 2016 when using realized metal prices.
A temporary decline in production in Mexico was mainly due to the implementation of a new plan to improve operational performance and produce profitable silver ounces at Cusi and improve efficiencies at our Bolivar copper mine. Lower production in Mexico was partially offset by an increase of 44% in silver equivalent production and 13% increase in throughput in Yauricocha during Q3 2017 versus Q3 2016.
While Yauricocha experienced higher throughput, higher copper and zinc grades and higher recoveries of all metals except gold, a decrease in metal production was due to lower throughput head grades and recoveries of all metals except gold at Bolivar. The lower throughput lead and zinc head grades and lower silver (inaudible).
On Slide 6, similar to the successful program at Yauricocha in Peru, which began at the start of Q2 2015, the company has engaged in an operational turnaround program in Mexico to modernize operations, improve production and address head grades and recoveries. Improvements at the Mexican operations include: Changes in the corporate team and local team, which is now strengthened in Mexico to better support and improve operations. Improved metallurgical recovery levels to above 80% at both mills in Mexico from the low 60% range at Cusi and low 70% range at Bolivar. 13 new pieces of equipment commissioned at Bolivar mine to maximize ore delivery and mine productivity. Drift development underway on 4 sublevels in the Santa de Rosa de Lima structure at the Cusi mine. This development is incrementing the metal campaign with higher grade ore. This trend is expected to continue until full mill capacity from Santa Rosa de Lima is reached, targeted -- it's targeting Q2 2018. The results from the program are expected to become more apparent in Q4 2017 and Q1 2018.
Continuing on Slide #7. Sierra Metals continues to have success in expanding mineral resources and extending mineral mine life as well as made significant progress on its new discoveries and explorations. This morning, the company press release that it had filed NI 43-101 Technical Report updating the Mineral Reserve and Resource at Yauricocha mine on November 10, 2017, which was prepared by SRK consulting U.S. Highlights from the report include: Mineral resources maybe increased 134% compared to prior reserve estimate. Total proven and probable contained metal significantly increased by 86% silver, 237% in copper, 58% in lead; 96% in zinc and 97% in gold as compared to the prior reserve estimate. Mineral resources increased 58% from previous mineral resource estimate.
Total measured and indicated contained metal has significantly increased by 72% in silver, 128% in copper, 74% in zinc, 64% in lead and 61% in gold. Inferred mineral resources increased 77% from previous resource and reserve estimate. Total inferred contained metal has significantly increased by 55% silver, 59% copper, 105% zinc, 42% in lead and 83% in gold. Updated mineral resource estimate are also expected for both Cusi and Bolivar during this quarter.
Gordon will comment on the significant and potential for Sierra Metals' operations of this mineral reserve estimate.
Continuing with Slide #8. Brownfield Exploration success continued in the third quarter at all mines. Gordon again will provide further details on this exploration update, other highlights of the Brownfield program, include as following: At Yauricocha, the company discovered the New Escondida Area containing (inaudible) zinc and lead at the Cachi-Cachi zone. This shows the potential for new discoveries at Cachi-Cachi and demonstrates the mineralization from Esperanza continues to the north, and is still open to depth and along strike.
Additionally, the company has also reported positive drilling results from the Cuye zone located within the Central mine at the Yauricocha mine. To date, 4 holes have been executed from the 870 level and have intercepted polymetallic sulphide mineralization containing high-grade zinc and copper zones over significant widths. These results demonstrate the potential for high grade mineralization at Cuye and indicate the continued existence of extensive mineralization at depth. It appears that Cuye and Catas orebodies unite and become one orebody at depth. The company also completed the Titan 24 Geophysical Survey over the Yauricocha orebody and will enable the location of the hidden sulphide targets for further targeted drilling campaign.
Moving to Bolivar. The company released positive results, drill results from infill drilling at the high grade Bolivar West Zone at the Bolivar mine. Results included the discovery of several wide high grade copper structures at the Bolivar mine. The company also announced the initial results of the positive drilling program designed to test the anomaly of the Titan 24 Geophysical Survey recently completed at the Bolivar property.
Last, certainly not least, at Cusi, the company provided the market with a positive results of an expanded infill drilling program completed at the Santa Rosa de Lima zone. This recently discovered zone contains structures that are more than 2x the width of averaging 3.8 meters and nearly twice the silver head grades now averaging 372 silver equivalent grams per tonne [in future]. That -- than what has been previously mined closer to surface.
Additional steps (inaudible) drilling test also expanded the zone from 700 meters for a total length of 1.7 kilometers to date. The company will continue with its aggressive Brownfield exploration program and the initial drilling program at all 3 mines. And we'll continue to provide further extensions to existing zones aiming at resource growth for all 3 mines. Additionally, we have reinforced our technical team to meet the upcoming challenges of drilling our new Brownfield planning into production in the near future.
With that, I will now turn the call over to Gordon Babcock, our Chief Operating Officer, for the operations and explorations updates.
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Gordon J. Babcock, Sierra Metals Inc. - COO [6]
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Thanks very much, Igor. Turning now to the operational highlights on Slide 9. Q3, as Igor stated, Sierra posted a grand total of 505,000 tonnes, which represented a 6% increase in comparison to Q3, 2016. The company produced 3.8 million silver equivalent ounces, a 29% increase over the 1.8 million copper equivalent pounds representing an 8% increase in copper in the third quarter compared to the third quarter of 2016. This is partially offset -- partially as a result of differences in realized metal prices during both periods. Normalizing the metal pricing used in the equivalent metal calculations with a decrease in metal production, which was due to lower production in Mexico, which was partially offset by the second highest throughput, a record in Peru. Compared to the third quarter at Yauricocha where higher throughput was driven by higher potential, higher copper and zinc head grades and higher recoveries of all metals and gold. The company continues to see through [it smelt] production as a result of the inflation of the higher capacity hoisting in the copper zone and the positive explorations and infill drilling results achieved during the last quarter.
Bolivar saw a decrease in throughput, which is primarily attributable to the new equipment availability at Bolivar and as the company was awaiting final deliveries of equipment purchased as and when needed.
At Cusi, company saw a significant reduction in throughout, low retention rates and recoveries for all metals such as zinc heads and recoveries, as the company continues to focus and develop the higher grade ore with Santa de Rosa de Lima zone.
The company continues to benefit from the operational improvements programs in (inaudible) to our Cusi Mine and with a similar type program in Bolivar and in Mexico, and our objective is improving productivity, metal production and metal recoveries. The results of the program in Mexico will become more apparent in Q4 of 2017 and in the first quarter of 2018.
At Cusi, the company is focused on completing access, development and production of Santa de Rosa de Lima zone, which has much wider structures and higher silver grades than the narrow veins previously mined close to the surface. The company has reached the Santa Rosa de Lima structure and is currently developing drifts to mine this area. Company is currently campaigning development ore from Santa Rosa de Lima structure, which contains improved head grades to the mill at Cusi. The company expects to gradually increase tonnage from Santa de Rosa de Lima zone until the mill is at its maximum capacity of 650 tonnes per day, using the ore from Santa de Rosa de Lima zone. It is expected that the main supply of ore in terms of tonnage and grade will come from Santa de Rosa de Lima starting Q2 2018.
Focusing now at Yauricocha, the company has the highest quarterly mine throughput in the mine's history of 268,178 tonnes processed, which represents a 13% increase compared to Q3, 2016. Silver production in Q3 2017 was (inaudible) ounces representing a 44% increase over Q3 2016. Sierra saw increases in production in copper, (inaudible) and zinc 40% at Yauricocha in Q3 2017 versus Q3 2016 with increases in production of silver 31%, lead 43% and gold 43%.
The comment -- general comments with regards to our recent publications on our technical report, one of the key factors to bear in mind here is that we're focusing on production increases in Yauricocha operations. We have a great deal of metal available in the future with our new tonnages and the production investment in the tunnel and the shaft facilitate development of the new identified reserves that we have in front of us. So our plans are to maximize in 2018.
At Bolivar, the company had planned throughput of 223,338 tonnes (sic) [223,339 tonnes] processed, which represents 11% decrease compared to Q3 2016. Lower throughput and recoveries of all metals along with lower head grades encountered resulted in 25% increase in copper equivalent production compared to Q3 2016. Copper production decreased by 3% at Bolivar in the third quarter of 2017 versus third quarter of 2016 along with some 20% lower silver production, offset by an 8% increase in gold production.
The company's focus at Bolivar in 2017 has been to improve production volume in terms of new equipment, which includes [Jumbos], [LSPs] and Trucks. These -- there are 13 new pieces of equipment. We're waiting on one more [LSP], one of the 14 [Scoop] and that equipment is arriving as we speak. The additional equipment will supplement the existing equipment in moving material from available production of silver in the mine. We do expect to see the impact of this [machine] starting (inaudible) and its importance here.
At Cusi, the company produced -- processed rather total ore of [13,234] tonnes, which represents 73% increase in Q3 2017 compared to Q3 2016. Lower head grades and recoveries for all metals, except zinc head grades and recoveries contributed to 65% decrease in silver equivalent production. Silver production decreased 68%, gold production decreased 77%, lead production decreased 75%, and zinc production decreased 69% compared to Q3 2016.
Despite the decreases in tonnage and metal production at Cusi, it is important to note that Cusi represents approximately 4% of Sierra Metals current total production. Cusi's contribution for the company's overall production is expected to increase depending the development of some -- expected at the recent news that covers Santa Rosa de Lima de zone. Company has ramped down to the new zone that's currently developed and campaigning development work at the mill with improved grades of (inaudible) zone. It's expected that the current mill will be running at full capacity in Q2 with more reserves from Santa de Rosa de Lima zone.
Turning to Slide 11. Exploration remains a key aspect at all 3 of the mines. During Q3 2017, the company had drilled 106 holes, totaling 13,918 meters at Yauricocha. Exploration drilling accounted for 31 holes or 7,728 meters in various zones, including Cuye, Yauricocha South Fault, Antacaca, Karlita, Esperanza, Elissa continuity of mineralization and explore new mineralized zone and ore bodies at depth.
Also, as noted before, the Titan 24 Geophysical Survey was completed in Q3, 20 lines totaling 54 kilometers surveying around the Yauricocha mine, but no means to (inaudible) whole areas is [much bore at play].
Definition drilling comprised of 53 holes or 5,431 meters at Antacaca, Butz, Esperanza, Esperanza North and Mascota to define and determine continuity of ore bodies. On August 24, 2017, the company announced discovery of the Escondida zone, situated within the Cachi-Cachi mine located some 1,000 meters north of the Central mine. Escondida is one of the several limestone replacement mineralized zones, demonstrating the existence of new mineralized areas within the Cachi-Cachi mine and it's located within the northern extension of the Esperanza ore body. This demonstrates the mineralization from Esperanza continues to the north and is still open to depth and along strike. It's also important that it could also confirm the existence of high grade mineralized areas and unlocks the possibility of discovering additional orebodies along the Yauricocha fault between Esperanza and Cachi-Cachi orebodies.
As I mentioned, one of the key drivers of opportunity was the application (inaudible) completed in the first quarter. This program, we're unable to locate and get sulphide targets. I think Titan 24 survey had never been implemented at the Yauricocha and management is quite permitting that program will bring further drilling results and reach further highlighting targets.
On Slide 12, October 2, 2017, company announced positive drilling results from the Cuye zone located within the central mine zone of the Yauricocha mine. To date, 4 holes have been executed from the 870 level, which have intercepted polymetallic sulphide mineralization containing high grade zinc and copper zones over significant widths. These results demonstrate the potential for high grade mineralization within the reported area and more importantly indicate the continued existence of extensive mineralization at depth. It also appears that the Cuye and Catas orebodies unite and become one orebody at depth. It was important to note that Cuye was one of the main cash flow generators 10 years ago, and it appears to be at depth with similar widths and grades. All drilling that have taken place is exceptional and that was published 2017 was included in the upcoming -- in the last mineral reserve press release on September 28, 2017, and mineral reserve update press release on October 26, 2017.
The mineral reserve and resource estimates has been published and that was filed in today's reported period. Opportunities continue to exist or expand our high value near tonnage in the near term, longer term and the opportunities are numerous that have no means exhaust.
During Q3 2017, 14,082 meters were drilled in the following areas in Bolivar: 992 meters in the El Gallo area with the objective of locating continuation of the El Gallo Inferior orebody, the lower Gallo orebody between the Mina de Fierro and the Bolivar mine; 7,168 meters were drilled at Bolivar Northwest; 418 meters were drilled in Chimney 2, which is (inaudible) zone; and 5,504 meters were drilled at Bolivar West.
Now turning to Slide 13. On September 5, 2017, the company announced assay results from a recently completed definition drilling program at the Bolivar West zone, adjacent to the current operations at the Bolivar mine. Exploration programs have identified skarn ore deposits in the form of mantos in the area extending for approximately 8 kilometers.
The recently completed drill program of 28 holes, 12,300 meters, has provided the company with copper, zinc and silver grades. Average grade of 2.55% copper equivalent with an average true width of 9.1 meters, which is significantly above the Bolivar current resource grade and current head grades. The infill drilling program covered an area of 300 meters long and 180 meters wide. This detailed drill data will provide the company with new data to update the current resources at Bolivar mine.
On October 4, 2017, the company announced the initial results of drilling program designed to test anomalies of the Titan 24 Geophysical Survey completed on the Bolivar property highlighting over 40 specific areas of interest or anomalies.
The 3 dimension inversion modeling of the data provided an excellent tool for further exploration, highlighting the overall structure below the deposit, in addition to similar structures and mineralization to the north. The company began the first phase of the drilling program with 4 holes to test the most promising anomalies with very positive results, including hole 602 with a 3.1% copper equivalent over 25 meters, hole 613 with a 3.03% copper equivalent over 29 meters, hole 583 1.55% copper equivalent over 33 meters, hole 585 3.48% copper equipment over 13 meters.
Slide 14. Now turning over to Cusi. Company drilled 1,164 meters inside the mines to verify the continuity of orebodies and support development work on various veins; 9,682 on the Santa Rosa de Lima orebody during Q3 2017.
On August 29, 2017, the company announced results from the expanded drilling program completed at the Santa Rosa de Lima zone located adjacent to current operations within the Cusi property. The updated drilling program results not only confirm the existence of high-grade silver mineralization with an average silver equivalent grade, but also increased the average gold 3.8 meters, but also gives the opportunity for the company to upgrade this material into a mineral resource.
Additionally, with our drilling, as noted before, has extended the zone from 700 meters to 1.7 kilometers. The company has reached the Santa Rosa de Lima structure and is currently developing drifts to mine this area in preparation for some sublevel drilling. The company is currently campaigning development ore and expects to gradually increase the tonnage from this area until its operating the mill at capacity using only ore from Santa Rosa de Lima zone.
The assay results will be included in an updated resource estimate for the Cusi mine. Future step-out drilling will continue along the Santa Rosa de Lima zone to the Northwest and Southeast as the possibility exists to further define a 12 kilometers zone. Consolidating the first 9 months 2017, we would -- we continue to build upon new payments and succeed. The company is on track to see smart production growth and further Brownfield exploration success. Sierra continues to execute at all fronts, which is expected to complete through solid improvements in the company and with shareholders.
With that, I now turn the call over to Ed Guimaraes, our Chief Financial Officer, for a financial overview.
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Edmundo Gontardo Guimaraes, Sierra Metals Inc. - CFO [7]
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Thanks, Gord. Turning now to Slide 16. I am pleased to report the company had another solid quarter of financial results benefiting from an increased metal prices as well as strong production at Yauricocha. The company had revenues of $50.9 million in the third quarter of 2017, which represented a 25% increase compared to the third quarter of 2016. Realized metal prices in the third quarter were also higher for copper 36%, zinc 33% and lead 27%.
In addition to the higher metal prices realized, the increase in revenues are primarily attributable to the 13% increase in throughput. The increase in copper and zinc head grades and higher recoveries for all metals, except gold, at Yauricocha. This was partially offset by the [11%] decrease in throughput, lower head grades and lower recoveries for all metals, except gold at Bolivar and a 73% decrease in throughput at Cusi along with lower head grades for all metals except zinc and gold recoveries at Cusi.
Adjusted EBITDA of $18.8 million for Q3 2017 increased compared to $16.3 million in Q3 2016. The increase in adjusted EBITDA was primarily attributable to the $10.1 million increase in revenues at Yauricocha. Yauricocha's Q3 2017 cash cost per silver equivalent payable ounce was $6.55 versus $7.02 in Q3 2016, and all-in sustaining cash cost per silver equivalent payable ounce was $10.35 versus $12.64 in Q3 2016. The increase in realized metal prices used to calculate silver equivalent payable ounces in Q3 2017 versus Q3 2016 was the reason for the decrease in the all-in sustaining cost per silver equivalent ounce for these periods.
Using consistent realized metal prices results in a 14% increase in the all-in sustaining cost per silver equivalent ounce relative to Q3 2016, and is a result of increased CapEx, including a substantial amount of infill drilling, infrastructure improvements, including ramp and shaft development, ventilation improvements, equipment as well as plant improvements that were completed.
The increase was also the result of OpEx, including infill drilling and drift developments that will be utilized within one year.
Bolivar's Q3 2017 cash cost per copper equivalent payable pound was $1.69 versus $0.89 in Q3 2016 and the all-in sustaining cash cost per copper equivalent payable pound was $3.32 versus $1.81 in Q3 2016. The increase in the all-in sustaining cost per copper equivalent payable pound during Q3 2017 was due to a decrease in copper equivalent payable pound as a result of 11% lower throughput as well as an increase in sustaining capital expenditures related to the various equipment purchases made by the company during the quarter in an effort to improve the equipment availability and increased tonnage.
Cusi's Q3 2017 cash cost per silver equivalent payable ounce was $21.95 versus $9.86 in Q3 2016 and the all-in sustaining cash cost per silver equivalent payable ounce was $51.93 versus $19.59 in Q3 2016. All-in sustaining cash cost per silver equivalent payable ounce increased due to the decline in throughput, which resulted in fewer silver equivalent payable ounces as the company continued its refocused efforts on completing access, development and production from the Santa Rosa de Lima zone, which contains wider structures and higher silver grades.
Cash flow generated from operations before movements in working capital was $21.8 million for Q3 2017 increased compared to $16.9 million in Q3 2016. The increase in operating cash flow is mainly the result of higher revenues generated and higher gross margins realized.
I would now like to review our cash flows, which provide the clearest perspective on our financial performance. I have summarized the changes in cash during Q3 2017 on Slide 17. During the third quarter, our operating cash flows were $15.6 million. We spent $18.7 million on capital expenditures in Mexico and Peru and paid $23.5 million in principal repayments and interest on our credit facilities in Peru and Mexico. We also had proceeds from the issuance of loans and credit facilities of $26 million. These items decreased our cash balance from $31.1 million as of June 30, 2017 to $28.6 million as of December 30, 2017.
Turning to the balance sheet and liquidity on Slide 18. We have ended the third quarter of 2017 in a strong financial position with $28.6 million in cash. We have total debt position at $69 million and a net debt position of $40 million. The company remains confident that 2017 EBITDA will be much greater than the current debt outstanding at the end of the year.
The company has principal payment obligations on its loans and credit facilities of approximately $5 million remain to be paid in 2017, $24 million to be paid in 2018, $8 million to be paid in 2019 and $29 million to be paid in 2020. The company expects to be able to fund the short-term capital and debt commitments through the continued generation of operating cash flow.
I would like to take a moment now to highlight some noteworthy events that have taken place during the third quarter. The company is known to using realized metal prices instead of budget metal prices to calculate silver equivalent ounces and copper equivalent pounds. This change was made due to the continued upswing in these metal prices, which resulted in the generation of cost performance throughputs that were not representative of actual performance.
The company has revised all throughputs orders of silver equivalent ounces and copper equivalent pound calculations, which in turn affected all of the cash cost and all-in sustaining cost metrics. The company has used realized metal prices over 9 months ended 2017 and 9 months ended 2016 to calculate the silver equivalent ounces and copper equivalent pounds, cash cost and all-in sustaining costs metrics, which came from the metal prices used to calculate the quarterly metrics for company's MD&A in respect to the 3 months ended March 31, 2017, and 6 months ended June 30, 2017, previously disclosed by the company.
The company will continue to update these metrics each quarter based on the realized metal prices from each quarter going forward. With regards to Sierra's stock listing on July 6, 2017, the company announced that its common shares were approved for listing on the New York Stock Exchange, American, and we began trading under the symbol of SMTS on July 11, 2017. The common shares have continued to trade on the Toronto Stock Exchange and the Lima Stock Exchange.
The listing of our common shares on the NYSE American represented an important corporate milestone for Sierra Metals and another step in our plan to enhance shareholder value by increasing stock liquidity and exposure to institutional and retail investors.
Another event was the spinout of our Northern properties in Peru. On August 8, 2017, the company announced the completion of the previously announced distribution of Cautivo Mining Inc. common shares, issuance of Rights pursuant to Cautivo's Rights offering and listing of the Cautivo Shares and the Rights on the Canadian Securities Exchange.
On August 8, 2017, Cautivo Shares and the Rights commenced trading on the CSE under the trading symbols CAI and CAI.RT respectively.
On July 26, 2017 (sic) [July 27, 2017], the company [dispose] the Plexmar Resources to Cautivo Mining Inc., the shareholders of the company, as a return of the capital. A total of 3,253,588 shares were issued as well as rights up to 11,904,751 (sic) [11,904,741] shares at $0.84 per share. As a result of this transaction, the company realized a noncash loss on distribution of the net asset of Plexmar of 4,412,000 and distributed [under] noncash dividend of 2,700,000 shareholders relating to the fair value of the assets.
Lastly, the company announced an at-the-market issuance program. On October 10, 2017, the company announced
(technical difficulty)
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Unidentified Company Representative, [8]
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Lastly, the company announced an at-the-market issuance program. On October 10, the company announced that it would enter into an Open Market Sale Agreement with Scotia Capital (USA) Inc., Jefferies LLC, H.C. Wainwright & Co., LLC and Noble Capital Markets. The company has filed a prospectus supplement dated October 20 (sic) [October 10] to the base prospectus whereby the Company may issue up to 55 million of common shares, but not more than 22,500 (sic) [22,500,000] common shares in at-the-market distribution. The company intends to use the net proceeds of the offering for general corporate purposes, including capital requirements and debt repayments. In accordance with our amended acquisition [credit facility] with Banco de Credito del Peru, at least 50% of the proceeds, which were received from the offering, must be allocated to the mandatory prepayment of the amounts owing under the BCP -- to BCP under such the facility.
Operator, with that, we are going to open up the call for questions. We're having some technical issues with our lines in Peru. So if you can open up the line for questions while we get the people from Peru connected back on the line again, please.
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Questions and Answers
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Operator [1]
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(Operator Instructions) And your first question comes from the line of Lee Cooperman from Omega Advisors.
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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO, and Chairman [2]
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I apologize if you covered so many things, but the fidelity was so poor, I had difficulty in hearing the first 90-odd percent of the call, and there may be some questions you don't want to answer, but let me just give you all in one shot. EBITDA, you have an expectation for EBITDA for the year ending 2017 given the fact that we are 11.5 months into the year? Second, your CapEx plans for 2018? Third, have you ever undertaken an appraisal of your asset holdings and you have a view of the appraised value of the shares? Fourth, do you have any insight into the intentions of your largest shareholder, I guess, 50% of the equity is owned by a private equity fund, which, if I understand correctly, has an obligation to distribute or make some decisions in October 2018. Do you have any sense of what they're thinking?
And last, can you kind of review what your intentions are on your open market agreement, your sales agreement? Is there a price objective you have in mind and you want to sell the shares at, et cetera? Is there any price, which -- below which you wouldn't sell the shares? Any help, you could be, would be appreciated.
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Unidentified Company Representative, [3]
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Lee, we are just trying to...
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Edmundo Gontardo Guimaraes, Sierra Metals Inc. - CFO [4]
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We are back in the call. We were cut off on -- I think, on the last part of the last presentation, so can you please give us an update on what happened. And we thought they are already making questions? There is a lot of confusion here, you might maybe...
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Unidentified Company Representative, [5]
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So gentleman, I apologize, you were cut off. I finished reading the section for you, Ed, on the use of proceeds from the BCP spinout and so the script is completed. We've now opened the call up to question, and Mr. Cooperman has asked a few questions, specifically looking for our expectations for CapEx for 2018, whether we have actually had an appraisal of the asset in Peru and then, he wants some insight into the...
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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO, and Chairman [6]
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Hold, hold, hold. Can I rephrase the questions because you are not really stating them correctly. I said, my question #1 is do we have an expectation -- just let me ask the questions, then you could answer them. And I would recommend that you get a better fidelity or better hookup in the next conference call because you're hurting yourself in the way we've been doing it now.
First question is do we have an expectation of EBITDA for the current year ending in about 6 weeks? We're so far into the year. Second, do you have a CapEx forecast for 2018? Third, not Peru, but the entire company, have we undertaken an appraisal of our various asset holdings that we could share with the shareholders a view of the appraised value of our asset holdings?
And then finally, could you discuss what the intentions are with this shelf or Open Market Sale agreement, is there a minimum price you're looking for to make sales? Or would you make sales at the current market? Thank you very much for any help you could be.
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Michael McAllister, Sierra Metals Inc. - VP of Corporate Development [7]
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Lee, I do apologize for the [retractions]. Myself and Igor and Gord are situated in the Lima office for the week and we're reviewing budgets, and I do apologize if that resulted like that. It wasn't that technical issue as well on our end. In terms of your first question, the expectations for 2017 in terms of EBITDA, we have gone on record and say that we would beat our previously high watermarks, which was back in 2012 of $72 million. I expect EBITDA to come in for this year approximately somewhere around $80 million to $85 million.
In terms of expectations for CapEx for next year, we are in the process of reviewing that as we speak, that's meeting here with all of our operating managers. In terms of appraisal, no, an appraisal has not been made with respect to the asset for each of the operating asset and that is something that, again, will -- as we get a little bit more information on the intentions of the ARC fund and its shares, I think that's something that may come, but I have not heard of anything as of yet.
And in terms of the intentions with respect to the shelf and our aftermarket financing, no, we don't expect to issue shares at these price levels. We'll probably -- I don't want to really go on record and say what price we would be willing to do it at because it all depends on the number of shares, it depends on who the potential investor might be. There's a lot of qualitative factors that would go into that, but I would say that we're probably -- to give a range, it would probably be closer to the USD 3 mark over the CAD $3.75 mark before we would contemplate any share [exchanges]. I hope I answered your questions, Lee, by all means.
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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO, and Chairman [8]
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You did. You did. It is fine. And I assume that basically, that you anticipate having improved EBITDA in 2018 versus 2017? Forget the exact number, but directionally, which...
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Edmundo Gontardo Guimaraes, Sierra Metals Inc. - CFO [9]
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Actually, we are hoping so -- yes, directionally, because metal prices are holding currently at, I could see much -- in terms of what we are forecasting and what the market is forecasting, so we're not -- we should see continued strong metal prices going into 2018, and with higher grades receiving better throughputs at Bolivar, Cusi, the turnaround with Santa Rosa de Lima, where we will be mining some probably quite -- beginning of Q2 2018, we will be up to 650 tonnes per day in that area as well as recoveries. The recoveries have improved significantly around the -- north of 80% for both Bolivar and Cusi. So all these should bode well for increased EBITDA in 2018 over 2017.
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Operator [10]
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And your next question comes from the line of [Ron LeGrow] from [Athena Funds].
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Unidentified Analyst, [11]
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With this kind of good news, I sort of hope that you guys will be more proactive in getting in front of the investment community.
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Igor Alcides Gonzales Galindo, Sierra Metals Inc. - CEO, President & Director [12]
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Sorry, I couldn't hear your question very well. Can you repeat, please?
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Unidentified Analyst, [13]
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I just wanted to make a comment that in light of the good news that the company has produced for the quarter, I, certainly, hope that you guys are going to be more proactive in terms of getting out to the investment community.
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Igor Alcides Gonzales Galindo, Sierra Metals Inc. - CEO, President & Director [14]
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Well, to respond to your question, we have been very proactive. If you review, the rate is coming 2 months, we've made a number of very important press releases in various fronts. We continuously update the market on our exploration results, results of our Brownfield exploration. We have issued a report for Bolivar, Cusi and Yauricocha. And after the deliveries of these press releases, we are also updating the markets with our operational improvement in Mexico. And then, recently, we have updated the market on the reserve -- update of the reserve calculation for the Yauricocha. We have 2 pending technical reports, 1 for Cusi and 1 for Bolivar that will be coming due in this quarter. And then, we have also been marketing very aggressively the nickel, the Sierra metals in different mineral conferences in North America and Europe. So that, I guess -- so that's simply what we have been doing in terms of communication.
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Operator [15]
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And your next question comes from the line of Ian Grundy from Scotiabank.
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Ian Grundy, Scotiabank Global Banking and Markets, Research Division - Associate [16]
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A question on the Yauricocha for 43-101 that you filed this weekend. I know in the past, the reserve plan sometimes differs from the actual mine plan because, you are mining inferred material that doesn't go into the reserve plan or exploration success has meant that you put different material through the mill. So can you speak to, like whether we should be taking next couple of years as the base case as of today or whether that was just as of July 31 and where you see the Yauricocha mine plan next year?
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Gordon J. Babcock, Sierra Metals Inc. - COO [17]
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I think, again, the focus for Yauricocha is the focus on our improvements for the mine production plans like -- Yauricocha shaft or tunnel. All of the focus has -- was indicated to you when you came to site for visit. Our focus is to [grow] our products in this operation. You can see there is -- one of the things that we do have opportunity on that as we go through the year and we have our detailed infill program that also gives us the opportunity to improve our head grades on to the plan. We've made significant improvements in the zinc [circuit] in the plant itself, so we are gearing up this whole operation for the future with improvements in productivity. That's our main focus. Remember that the whole of the technical reports are based back to our reserved and under reserved bases. We have huge improvements in volume that was not the case 2 years ago. That's our focus for the Yauricocha.
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Igor Alcides Gonzales Galindo, Sierra Metals Inc. - CEO, President & Director [18]
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And I would like to complement the answer from Gordon. I think what all these findings are doing for Yauricocha is they are improving the flexibility as there are availability of different types of ores and [pits] for our operation. And just to mention a few -- for next year, we're going to be having ore for -- from Butz, from Esperanza, from Antacaca, from Angelita, Mascota, Karlita et cetera, and we have more and more places. So that -- although it represents a problem for planning, but it's also an opportunity for us. It gives us more flexibility to source an ore in different locations depending on metal or ore price.
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Ian Grundy, Scotiabank Global Banking and Markets, Research Division - Associate [19]
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Okay, that's very helpful. And then, switching gears to Cusi. The guidance on started up from the Santa Rosa de Lima zone is very helpful and, certainly, you have been helpful putting out the recent exploration results and the average grade of the silver equivalent grade 372 grams per tonne, but what should we be thinking about in terms of silver head grades once you start ramping up? Are you going to get the higher grades first? Or is it going to be near the average of that? Do you have a better sense now you've done some more technical work?
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Igor Alcides Gonzales Galindo, Sierra Metals Inc. - CEO, President & Director [20]
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I think it's going to take us a little bit more time to do some more technical work and lay out a mine plan and that's part of the whole process that we're into right now.
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Ian Grundy, Scotiabank Global Banking and Markets, Research Division - Associate [21]
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Yes, okay, so that would be with the...
(technical difficulty)
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Operator [22]
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And your next question comes from the line of Mark Ghobrial from BRJ Ventures.
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Mark Ghobrial, [23]
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Just a couple of questions on the Bolivar mine. Are copper grades expected to decrease below the [percents] reported in the third quarter? Further also, now that all the equipment are in place or ordered, how long will it take to produce the 3,000 tonne per day target that you guys referenced and can Bolivar produce at a sustainable rate above that level? If so, how much?
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Gordon J. Babcock, Sierra Metals Inc. - COO [24]
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The cost per gram right now, we are starting to see improvements in copper grade. [Our chart rates and industry did well]. We work on our recovery plan and the mine production plan achieved those objectives.
Now that the equipment is now in our hands, we are slowly moving forward to make that move in the right direction. Now -- the last question, could you repeat that again?
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Mark Ghobrial, [25]
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It was just regarding the sustainable production rate for Bolivar, if you can get over 3,000 tonnes per day and how high can you go?
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Gordon J. Babcock, Sierra Metals Inc. - COO [26]
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Well, the objective is to slowly increase productivity in Bolivar setting our target at 3,000 and then moving above that. There is [stable] operational changes that we'll have to make specifically on the milling side. That will be discussed during budget process this week.
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Igor Alcides Gonzales Galindo, Sierra Metals Inc. - CEO, President & Director [27]
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Just to complement what Gordon had just mentioned. We are actively changing, for example, grades of the mills has improved the grinding of the ore. We have already made some improvements in the [Thompson] and cyclones to improve classification of the ore because we know that with a better grind, there will be better liberation for improved recovery. So those things are on board together with the mine upgrades.
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Operator [28]
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(Operator Instructions) And the next question comes from Jim Young from West Family Investments.
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James Young, West Family Investments, Inc. - Investment Analyst [29]
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And again, I apologize if some of this is repetitive, but it was very difficult to hear on the call. On Page 19 of the MD&A, you have the quarterly mine-by-mine production levels and it has been highly volatile over the last couple of years. And the question is, I guess, we've seen some steady improvements out at Yauricocha, but as you think forward into the fourth quarter, the first quarter of next year and the second quarter and out into the rest of 2018, over what kind of time frame could we expect to see all 3 mines kind of producing at their potential? Can you give -- again with Yauricocha, Bolivar and Cusi, all starting to come together, if that is possible?
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Gordon J. Babcock, Sierra Metals Inc. - COO [30]
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What I'm expecting to see in 2018, I'm expecting to see some more improvements coming through the Bolivar. We are all targeting more productivity out of the Bolivar mine in the future. We want to steady state -- we want to see tonnages that are constant [working to the plant] and getting our recoveries at constant (inaudible).
And on the case of Cusi. When we go to Cusi, there are going to be some opportunities in the future that I believe are going to be pretty dramatic. It's not just so much in the [middle] of 650 tonnes a day, we have to look at this in the future as we increase in volume as we go through the process looking forward. Cusi, I believe, has got a lot of opportunities.
So we want to focus on the initial 2018, 650 tonnes we target in Cusi and in case of Bolivar, trying to bump up productivity to get up to 3,000 or better than that mark and that will be the objective. And then, Yauricocha will have its increases as well based on volumetric increases in the operations. That's where we're targeting.
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James Young, West Family Investments, Inc. - Investment Analyst [31]
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Okay. And then secondly, regarding the upcoming technical report for Cusi, will the resources that will be delineated in this report, will that include just the 1 kilometer length or would that also include the step-out areas out to 1.7 kilometers?
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Gordon J. Babcock, Sierra Metals Inc. - COO [32]
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It's going to include the 1 kilometer section. Basically, it's for the time being. There is not enough drill density in the step-out drilling program. That allows us to incorporate that into the measured and indicated categories. So we will only include the area where it was drilled that included the 30,000 meters of drilling up to July of this year.
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James Young, West Family Investments, Inc. - Investment Analyst [33]
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Okay. So and I guess that report should be coming out no later than the year-end 2017 as I understand, so -- but secondly, regarding the whole Santa Rosa de Lima area, then, can you share with us like how much current drilling in either exploration, infill drilling, are you doing in that 1.7 kilometers step-out area? And then also in addition to the 1.7 kilometers, how aggressively are you currently pursuing to extend that beyond the 1.7 kilometer range at this time?
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Gordon J. Babcock, Sierra Metals Inc. - COO [34]
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We have systematically working on improving the drill density. Our target is that we sense a lot of [progress on the initial force]. So our focus right now is taking the [first step] resource [maintenance] and we will be phasing that through right now -- maybe into next quarter of 2018.
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Igor Alcides Gonzales Galindo, Sierra Metals Inc. - CEO, President & Director [35]
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The 2018 budget will improve the infill drilling in the Santa Rosa de Lima. In other words, we will start doing some additional drilling in the extension of the area that we have improve (inaudible) and technical report. So we will continue to extend that, mineralize that area in both directions.
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James Young, West Family Investments, Inc. - Investment Analyst [36]
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Okay, then my last question is in regard to Yauricocha. At this -- in this mine, you completed the Titan 24 Survey where you identified several interesting anomalies and I'm just kind of curious as to anything that you can share with us about the progress in exploring and further defining the potential opportunities that these anomalies may provide?
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Gordon J. Babcock, Sierra Metals Inc. - COO [37]
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We are, currently, drilling on a few of the targeted anomalies as we speak, and some of these [holes] are fairly long, so it's going to take some time to complete. And then, we have an overview report on the (inaudible) that we have to share with all of our jobs we have to flow. So we're in the process of targeting the (inaudible) areas and setting up drill programs next year [status post] anomalies.
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Igor Alcides Gonzales Galindo, Sierra Metals Inc. - CEO, President & Director [38]
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One of the delays for drilling the anomalies in the case of Yauricocha is that the hole that need to be drilled from surface, need a special permit from the Ministry of [Copper] in Peru and that permit takes anywhere between 3 to 4 months. We have already applied for that permit probably a month ago or so when we learned about that anomaly. And, however, we decided to start the drilling of the 3 holes that we were able to drill from our mine operations area inside the mine and those are the drill holes that are being drilled right now. But the ones that need to be drilled from surface need to wait for the permit from the Ministry of Copper .
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Operator [39]
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And there are no more questions in the queue. I will now turn the call back over to presenters.
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Unidentified Company Representative, [40]
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Thank you, operator. That concludes today's call. On behalf of the management team, I would like to thank all participants for joining us today. A replay of the webcast and all materials can be found on our website at sierrametals.com.
If there any other further questions or concerns, you may reach out to us at any time. Our contact information can be found in today's presentation as well as the company's website. Thank you, operator. I guess that concludes our call.
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Operator [41]
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This does conclude the call. You may now disconnect.
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