ARREF - Amerigo Resources Ltd (ARREF) Q2 2023 Earnings Call Transcript
2023-08-06 11:50:25 ET
Amerigo Resources Ltd (ARREF)
Q2 2023 Earnings Conference Call
August 3, 2023 14:00 ET
Company Participants
Graham Farrell - Investor Relations
Aurora Davidson - Chief Executive Officer
Carmen Amezquita - Chief Financial Officer
Conference Call Participants
Steve Ferazani - Sidoti
Terry Fisher - CIBC
John Polcari - Mutual of America Capital Management
Presentation
Operator
Good afternoon ladies and gentlemen and welcome to the Amerigo Resources Q2 2023 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, August 3, 2023.
I would now like to turn the conference over to Graham Farrell, Investor Relations. Please go ahead, sir.
Graham Farrell
Thank you, operator. Good afternoon, and welcome everyone to Amerigo’s quarterly conference call to discuss the company’s financial results for the second quarter of 2023. We are delighted to have you join us today. This call will cover Amerigo’s financial and operating results for the second quarter ended June 30, 2023. Following our prepared remarks, we will open the conference call to a question-and-answer session. Our call today will be led by Amerigo’s Chief Executive Officer, Aurora Davidson; along with the company’s Chief Financial Officer, Carmen Amezquita.
Before we begin with our formal remarks, I would like to remind everyone that some of the statements on this conference call may be forward-looking statements. Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company’s plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. Company’s actual results may differ significantly from those projected or suggested by any forward-looking statements due to a variety of factors, which are discussed in detail in our SEDAR filings.
I will now hand the call over to Aurora Davidson. Please go ahead, Aurora.
Aurora Davidson
Thank you, Graham, and welcome to Amerigo’s earnings call for the second quarter of 2023. I have spoken frequently about how important it is for MVC to have achieved operational consistency over the last 3 years. A consistent operation leads to predictable cash flows and market trust. The most – through almost the end of June, MVC has maintained that consistency. So it was very significant for us when a climatic event cut off MVC’s connection to Chile Central Power Grid on June 23.
Today, I am happy to report that after resuming normal operations on July 22, our production results have continued to be on track. I am confident our revised guidance should be met or surpassed this year. While preparing my remarks for today’s call, I reflected on the fact that this was an initial call, almost as starting contracts.
In the second quarter, we saw production weakness versus the continued strength and robust nature of Amerigo’s capital return strategy. And we saw the starch comparison of our routine annual maintenance shutdown with a brilliantly plan and executed emergency repair effort. If you haven’t seen the two videos where we provided market updates on the flooding event and the project to reconnected to the central power grid, I invite you to watch them. They are available on our website, and the images will give you a much better idea of the challenge we faced and how it was resolved.
Amerigo’s three new releases on this subject cannot convey the message like the videos. Despite our comprehensive prior disclosures, I would like to discuss four critical points about this operational disruption. The first point is that it will only impact our second and third quarter results. MVC has operated at full capacity with no further problems since July 22. However, we did reduce our annual copper production guidance by 3% to 60.5 million pounds of copper due to the lost production from the flooding. We also incurred higher-than-normal costs from a secondary power source that enabled us to process fresh tailings while the repairs were being made, and there was additional unplanned CapEx from the reconnection project.
The second point is that the disruption had no lasting effect on Amerigo’s long-term business and did not affect the company’s capital return strategy. This week, the Board of Directors declared our regular quarterly dividend of CAD0.03 per share. This is our eighth consecutive dividend.
The third point is that we came out of this crisis stronger. We took the opportunity to change our infrastructure to have more protection in the future. This extra protection was part of the increased on unplanned CapEx that was money well spent.
My fourth and final comment is that this crisis provides shareholders with a front-row view of how strong a team we have at MVC. This team did extraordinarily from sourcing the materials to managing the project. They also work night and day to reconnect to the power grid as quickly as possible, minimizing loss production. This is significant because the strengths of the MVC plant and operations are the cornerstone of Amerigo’s capital return strategy.
Now let me provide you with some specifics of our second quarter results. Carmen Amezquita, our CFO, will provide more detail in her financial update. We knew ahead of time that the second quarter will be the lowest production quarter of the year due to the 8-day annual plant maintenance shutdown at MVC. The floods added 8 days of additional loss production in the quarter. Those additional days account for the 9% decline in copper production compared to the second quarter of 2022. The copper price was weaker than in the previous quarter, which also affected financial results. The copper price was $3.80 per pound, down from $4.02 per pound in Q1, resulting in $2.7 million in final settlement adjustments recognized in the quarter as the final prices for Q1 became known. This resulted in a financial net loss of $3.8 million or $0.02 per share for the quarter, CAD0.03 net loss per share.
During the quarter, our cash decreased by $12.3 million. The three main reasons were CapEx payment of $4.8 million, dividend payments of $3.7 million and our semiannual debt repayment of $3.5 million. Our net cash position that is cash minus bank debt is $16.2 million.
As I have said previously, we will not return capital to shareholders at the expense of the required CapEx we need to have at MVC. This month, we will complete a significant CapEx project, a new sum for processing historical tailings in Cauquenes. This sum will operate for 3 to 3.5 years. The purchase of the standby power transformer a significant risk mitigation CapEx project is also progressing. We expect this transformer to be installed during MVC’s 2024 annual maintenance shutdown.
There is a brief update of the continuing success of the Amerigo’s capital return strategy. As you know, the cornerstone of our strategies a regular quarterly dividend. Consistent dividends provide a big incentive for investors to buy and hold our stock, the regularity and safety of the dividend with a current yield of 7.4% are paramount to Amerigo. Since October 2021, when Amerigo’s capital return strategy was launched, Amerigo has paid a cumulative dividend of CAD0.20 per share. The quarterly dividend has also been raised once by 50% from CAD0.02 to CAD0.03 per share. During the same period, Amerigo repurchased $20.1 million shares, more than 11% of the issued and outstanding shares when the strategy was initiated. Under the strategy, the company has paid $25.9 million in dividends and used $23.7 million to repurchase shares, a total of $49.6 million, with a capital allocation ratio of 52% dividends and 48% buybacks.
I will conclude my comments with the outlook for copper. Currently, global copper inventories remained remarkably low. The most recent LME warehouse stock is 75,000 tons compared to 89,000 tons at the start of the year and 130,000 tons a year ago today. Despite the negative to catastrophic tone of economic headline news, copper prices this year on a shortly floor of $3.60 per pound, which was much better than in 2022. The $3.64 has been followed by raise up to over $3.95 per pound, finding subsequent floors at $3.70 and then $3.80 per pound.
While we continue to see a wide range of short-term copper price forecast, what we know for sure is that copper producers continue to struggle to sustain supply and are selling all the copper they produce. The demand for copper is real and more substantial than headline economic data would let us believe but short-term economic noise persists and spot copper prices react.
However, the positive consensus and the medium and long-term price outlook continues because projected demand will grow faster and sooner than new supply can be developed. This points to higher copper prices. My outlook for Amerigo continues to be very optimistic. My already positive assessment of our operation and team was further strengthened by the response to the flooding crisis. We continue to have a robust copper demand and supply outlook, and we have a unique long-term operation, ideally positioned to benefit from these favorable conditions. I believe the Amerigo continues to represent a tremendous value proposition for new and existing shareholders.
I will ask Carmen to discuss the company’s second quarter financial results now. Carmen, please go ahead.
Carmen Amezquita
Thank you, Aurora. Now I will present the Q2 2023 quarterly financial report for Amerigo and MVC operation in Chile. In the second quarter of 2023, Amerigo had a net loss of $3.8 million, loss per share of CAD0.02 or CAD0.03, EBITDA of $1.7 million and operating cash flow before changes in non-cash working capital of negative $2.3 million.
We expected Amerigo’s financial results this quarter to be the lowest in the year due to the planned 8-day annual plant maintenance shutdown at MVC. Results were also unexpectedly affected by the total production shutdown on June 23, 2023, resulting in $1.3 million pounds of lost copper production. This spot production 9% lower than in Q2 2022, representing $3.2 million in lost copper total revenue in the quarter.
Earnings were also affected by a lower average copper price of $3.80 per pound compared to $4.10 per pound in the comparative quarter and from lower realized copper prices for Q1 sales in Q2, which resulted in $2.7 million in final price settlement adjustments given our M+3 price convention for copper sales.
Copper total revenue in Q2 2023 was $32 million compared to $33.6 million in the comparative quarter. Moly revenue was stronger this quarter at $2.9 million compared to $2.2 million due to higher molybdenum production and stronger prices. Our totaling production costs, including depreciation, were $35.3 million compared to $32 million in Q2 2022. We newly prepared the 2023 budget and provided cost guidance that power costs would be higher in 2023 due to contractual inflationary adjustments to the base power tariffs and higher pass-through charges from the Chilean power grid. Actual pass-through charges, however, have been higher than expected.
Another factor impacting our cost has been a stronger Chilean peso. However, the increase in costs coming from a stronger peso is within the sensitivities we shared in our initial guidance for 2023. Under other expenses, in Q2 2023, general and administrative expenses were consistent with Q2 2022 at $1 million with $0.5 million in salaries, management and professional fees, $0.3 million in share-based payment compensation and $0.3 million in office and general expenses.
We also reported other gains of $0.8 million in Q2 2023 compared to other losses of $2.9 million in the comparative quarter, which relate almost entirely to foreign exchange. Amerigo’s foreign exchange gains and losses are mainly unrealized and come from mark-to-market foreign exchange rate adjustments for amounts held in MVC denominated in Chilean pesos.
The derivative to related parties was a $0.3 million recovery compared to a $0.8 million recovery in Q2 2022. This comes from changes in the discount rates used to calculate the derivatives present value. The company’s finance expense in Q2 2023 was $0.4 million compared to $0.3 million in Q2 2022. In Q2 2023, the company recognized an income tax expense of $0.2 million compared to $3.3 million in the comparative quarter.
Moving on to a brief review of cash cost, Amerigo’s cash cost in Q2 was $2.37 per pound. This was higher than expected due to the lower production in the quarter from the effects of the floods in Chile. Up to the end of May, our cash cost was $2.09 per pound below our original guidance of $2.14 per pound. We have updated our cash cost guidance in our latest MD&A. Based on the lower production and higher power costs from using a secondary power source in July, we expect the 2023 cash cost to be $2.27 per pound.
Moving on to the balance sheet. On June 30, 2023, the company had cash of $31.7 million, restricted cash of $4.2 million and a working capital deficiency of $4.9 million. There was a net decrease in cash of $12.3 million in the quarter as the net cash generated from operating activities was lower than the cash used in financing and investing activities.
The most significant use of cash in the quarter was for financing activities for the following items in order of magnitude, $3.7 million to pay the quarterly dividend, $3.5 million on MVCs on the annual debt payment, $1.7 million for the final lease payment at MVC and $0.8 million on the share repurchases. Of this, the only item that is recurring every quarter is the dividend payment.
On CapEx, we used $4.8 million in the quarter. As we stated before, 2023 is a CapEx-intensive year at MVC due to the constructing a new sump in [indiscernible] and purchasing a standby power transformer at MVC. As a final comment, we reported a provisional price of $3.80 per pound for our Q2 sales. The final settlement prices will be the average LME prices for July, August and September 2023, a 10% increase or decrease from the $3.80 per pound provisional price would result in a $5.2 million change in revenue in Q3 2023 regarding Q2 2023 production. We know now the July price, which was $3.83 per pound.
We will report the Q3 2023 financial results early in November 2023. I want to thank you for your continued interest in the company. We will now take questions from call participants.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question is from Steve Ferazani from Sidoti. Please ask your question.
Steve Ferazani
Thanks. Good afternoon, everyone. Given the damage from the flooding and then the efforts to restart, does that have – that result in any raise 2023 CapEx or any long-term investments needed through that process?
Aurora Davidson
Yes, it did. We included that in our MD&A. It’s estimated that the CapEx for the reconnection is going to be $1.1 million.
Steve Ferazani
And then expected – would you expect higher than normal costs in 3Q? Any idea what that might be?
Aurora Davidson
We are expecting higher costs in Q3, particularly in July. We had to face higher power costs associated with the secondary power source. We have increased our guidance as Carmen was saying from $2.14 per pound to $2.27 per pound annually as a result of the various effects see lower production and higher power costs in the month of July.
Steve Ferazani
Makes sense. When I think about the CapEx projects outside of maintenance, you conducted over the last few years, so much of it has been derisking production, whether it had been water supply, the back standby transformer or protecting critical infrastructure, which proved critical after this incident. How is this making you think about further investments in derisking production? Because obviously, you can’t protect against all catastrophes. But is there a lot more you want to do coming out of this? Or do you feel very good at where you are?
Aurora Davidson
I think we have made critical progress in the last 3 years. You follow as well. So you know that we basically improved our water recover infrastructure significantly. Water supply was a risk to us for a number of years. I don’t think it’s the risk at least in the short and medium-term for us in any ways. Two other projects that are significant and one of them proved its value was essentially the flotation protection that we installed in the water ancillary lines in Cauquenes. Right now, with the water that we have in [indiscernible], all of our lines are floating. If we haven’t had that protection in place, we probably wouldn’t be able to produce some Cauquenes until we dewater the area. So that’s significant. We weren’t expecting an issue with the power line. Now we have a robust power line that has been basically redone to better sustain a similar flooding event in the future, should it occur. And another project that Cameron mentioned is our standby power transformer. We have two power transformers in MVC, and we wanted to make sure that should one of those operating damage – operational damage and needed to be repaired, we wouldn’t have any hindrances to production. So we basically will have the new transformer arrived in Chile this month at the month of – end of July, and it’s going to be installed next year, and then we will have a fantastic backup system where if one of our transformers goes down, we will be turned on in a matter of a few hours. So that’s significant. I don’t have a long list of additional derisking projects, but we maintain a critical view of what could go wrong, and new risks continue to pop up. I mean climatic risk is an example. So we are vigilant about that. And as I mentioned, should we identify another project that needs to be financed to reduce operational risk in the future, we will do so.
Steve Ferazani
Great. That’s helpful. I mean, you noted the variety of reasons point to why share repurchases a little slower lately. Obviously, you had – you lost some production. You had some additional costs. But how are you – the balance sheet is still in great shape. How are you thinking with copper prices now back north of $3.80 and seem to be at least temporarily at a more stable range? You got 4 months left on this buyback? How are you thinking about both share repurchases at this point?
Aurora Davidson
Yes. That’s a good question. Buying back shares is one of the tools of our capital return strategy, and we have used it a lot in the last 2 years. If you look at our share buyback activity in 2023, which just in case some people may not know that. We provide the monthly update on what we have done on the share buyback program on our website. So it’s always out there for people to check it out. You can see that outside of the restrictions to buy shares during blackout periods, we were active in the first 4 months of the year. Copper prices during those 4 months were over $4 per pound.
Then in May, the copper price receded to 3.73%, and we were still buying back shares. We bought about 700,000 shares in May. And we went into the second quarter blackout. We faced this operational disruption in MVC and the disruption, as we have said, will affect the cash generated from operations, it had an effect in Q2, it will have an effect in Q3. So at current copper prices, we will take a pause and we will continue to monitor conditions to see when we go back to the NCIB. I know that it is tempting for shareholders to think that if the share price is lower than it has been, just buy as many shares as you can, as fast as you can. But this is a balancing act, and we need to adjust our pace from time to time, and this is one of those times. This is a marathon, not a sprint. And so we are monitoring conditions, but we’re not actively buying back shares just at this point in time.
Steve Ferazani
Great. Thanks, Aurora.
Operator
Thank you. Your next question is from Terry Fisher from CIBC. Please ask your question.
Terry Fisher
Aurora, can you hear me?
Aurora Davidson
We can hear you.
Terry Fisher
Sure. Okay, two questions, and I’ll table both of them. First is you talk about transformers, but transformers don’t generate electricity. So is this something – I mean, if the link to the grid is down, it doesn’t matter whether you have a transformer or not? Are we really talking about generators because you did have some on-site generators? So that’s one question. My other question is that I’m trying to follow the dates here, but the 8-day downtime for maintenance, I don’t believe that, that overlapped with the power problem, which I think was another 8 days. If that’s correct, you were impacted for half of that’s half of the month, not half of the quarter. I haven’t done the numbers. All I can say is that it seems strange to me you’re able to do as well as you did compared to last year, $32 million revenue versus $33.6 million when you had a lower copper price, okay, and lower production. And I would have thought that production would have been impacted even more than it was 13.6% versus 14.9%. So I’m just wondering how you are able to do that, whether you had stockpiled material able to process or I don’t know anyway, I mean, I’m grateful, but just would like to understand it there?
Aurora Davidson
Yes. There is a very simple answer for that. There were higher settlement adjustments, negative settlement adjustments in Q2 2022 than this year. So that is the difference in revenue. Also, if you’re looking at total revenue, not just copper revenue, we had higher moly revenue. In the financials and the MD&A, there is a full breakdown of, let’s call it, the gross copper revenue, the negative settlement adjustments and then the items that we deduct from our revenue, which are the royalties, TCRCs and transportation. So if you look, for example, at Q2 2022, the total amount of settlement receivables that were negative were almost $8 million. So that’s the difference in – that basically dented the revenue left in the comparative quarter compared to this quarter.
Terry Fisher
And what about the production, why wouldn’t it have been down more given how much downtime you had?
Aurora Davidson
We also had a maintenance shutdown last year in Q2. So essentially, we had our maintenance shutdown in both second quarters. And in addition to that, we lost 8 years – sorry, 8 days this quarter that we didn’t lose in Q2 2022.
Terry Fisher
Okay, that’s fine. That explains that. Can you go back to the transformers then versus generators?
Aurora Davidson
The generators – the generating units were impaired last year, at the end of December, we’re not using them. They are essentially not efficient units that operate in an unsustainable way. So it’s very hard for us to produce power in a cost-effective way to sell it back to the grid to use them. So those have been basically impaired and we’re not relying on them. They are going to be decommissioned as soon as of the period in which the authorities, is giving us to basically bring them down. What we’re installing is the power transformer. It has nothing to do with power supply. It’s basically a transformer within the plan to operate our equipment. So we have two, and we’re going to have a third one
Terry Fisher
If the tower was to fall down again and you were no longer connected to the grid, having this additional transformer wouldn’t really help you?
Aurora Davidson
No, it wouldn’t. No. It’s not a generating unit. It is a transformer and to transform the power that comes into the plant through the grid.
Terry Fisher
Okay, that’s all I had. Another great quarter given the circumstances and carryon. We are delighted, thank you.
Aurora Davidson
Thank you, Terry.
Operator
Thank you. [Operator Instructions] Your next question is from John Polcari from Mutual of America Capital Management. Please ask your question.
John Polcari
Thank you. My question was already answered. Thank you in the prior calls, but let me just take the opportunity to commend management for it. Their superior handling of what is a major exogenous event well done. Thank you.
Aurora Davidson
Thank you, John.
Operator
There are no further questions at this time. Please proceed.
Aurora Davidson
Well, thank you for joining us at this call today. A recording of the call and the script will be available in the next few days on the Amerigo website. We will address you again in November to discuss the third quarter financial results. And as usual, if you have any further questions about the company, please reach out to either Carmen, Graham, or myself, we’re always available to shareholders.
Operator
Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.
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Amerigo Resources Ltd (ARREF) Q2 2023 Earnings Call Transcript