ARREF - Amerigo Resources Ltd. (ARREF) Q4 2022 Earnings Call Transcript
Amerigo Resources Ltd. (ARREF)
Q4 2022 Earnings Conference Call
February 23, 2023, 08:00 AM ET
Company Participants
Graham Farrell - Harbor Access Investor Relations
Aurora Davidson - Chief Executive Officer
Carmen Amezquita - Chief Financial Officer
Conference Call Participants
Stephen Ferazani - Sidoti
Eric Dalman - private investor
John Polcari - from Mutual of America Capital Management
Presentation
Operator
Operator
Good afternoon. My name is JP and I will be your conference operator today. At this time, I would like to welcome everyone to the Amerigo Annual Earnings Call for 2022. All lines have been placed on mute to prevent any background noise. After the formal remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mt. If you Mr. Graham Farrell, of Harbor Access Investor Relations, you may begin your conference.
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 full year and fourth quarter of 2022. We're delighted to have you join us today. This call will cover Amerigo's financial and operating results for the full year and fourth quarter ended December 31, 2022. Following our prepared remarks, we will open the conference call to a question-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 our formal remarks, I would like to remind everyone that some of the statements on this 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. The 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. Welcome, everyone, to Amerigo's earnings call for the fourth quarter and the 2022 annual results. We remind you that all of the figures reported in the call are U.S. dollars, except where we specifically refer to Canadian dollars. Amerigo's financial performance in 2022 illustrates the company's financial sensitivity to copper prices and the resiliency of our return of capital policy.
Despite higher copper production in the year, lower copper prices in the second half of 2022 reduced our topline copper revenue by $33.3 million compared to our record 2021 revenue results. However, Amerigo's EBITDA in 2022 was $48.7 million, and the company generated $34.9 million in operating cash flow.
Amerigo is a cash flow story, not an earnings story. The strength of our return of capital strategy comes out from our ability to generate cash. And as 2022 showed us, Amerigo is able to weather periods of falling copper prices and still return healthy amounts of capital back to the shareholders.
In 2022, we returned $28 million to shareholders, and we continued to pay down our bank debt, making principal payments of $7 million. At year end 2022, Amerigo had its lowest debt level since Q1 2015, with $24.5 million outstanding, and we maintained a strong cash and restricted cash of $42 million.
From an operational perspective, we achieved all of our 2022 objectives. We hit our production and cost targets and completed CapEx projects on time and budget. We continued to manage water supply risk and secured a collective labor agreement without operational disruptions at MVC. Additional details of these accomplishments are available on the production news release that we disseminated on January 17 of this year.
From a market perspective, we're starting to be recognized for operational excellence and financial strength as our return of capital strategy unfolds. In 2022, Amerigo outperformed many of its copper peers, particularly mid-tier copper producers, with respect to share price performance alone. That is before factoring in the yield component from our quarterly dividends. All of this occurred over a period of very volatile copper prices, which only started to rebound towards the end of the year.
I will now provide a very quick recap of the fourth quarter financial results as they illustrate the effects of the improvement in copper prices. Amerigo's copper price for the fourth quarter was $3.80 per pound compared to $3.50 per pound in the third quarter.
Cash generated from operations in the fourth quarter was $15.6 million compared to $2.6 million in the third quarter. In Q4, EBITDA was $14 million and free cash flow to equity was $9.2 million. Adjusted net income, excluding an $11.5 million equipment write-down was $9.9 million. Q4 financial results included $4.8 million in positive settlement adjustments to copper revenue, of which $2.1 million were final adjustments.
Last quarter, Carmen and I fully described the provisional pricing methodology we have at Amerigo, and I encouraged you to revisit those remarks. Prior earnings call recordings and transcripts can easily be found on our website.
Now I would like to move on to my comments for 2023. Let me continue to address the issue of rebounding copper prices. As I mentioned a second ago, at the end of 2022, our provisional copper price was $3.80 per pound. In January, the copper price went further up to $4.08 per pound and today's price is $4.11. This of course is encouraging, but we have no reason to expect that copper prices have finished strengthening. Let's not forget that a year ago, copper prices peaked at $4.64 per pound as an average price in March.
I will borrow a quote from Freeport's most recent earnings call. Trying to predict short-term copper prices is very difficult. We actually don't even try to do it ourselves. We deal with short-term negative movements when they occur and. End of quote. These remarks echo my sentiments completely. While I cannot predict how high prices might go, I think that the copper market fundamentals are simultaneously showing risks to supply and an increased appetite for copper. This scenario is bullish for continued strength in copper prices.
Here are some of the most recent examples of supply weakness. Let's look first at the world's largest copper producer, Chile. It accounts for 28% of global copper mine production. But Chile is producing less copper. In 2022, Chile's copper production was 7% lower than in 2021, 10% lower than in 2020, and 11% lower than the highest ore production year, which was 2018.
Peru is the world's second biggest copper producer with a 10% stake. You are probably aware of the political unrest affecting the country and top copper operations like MMG's Las Bambas and Glencore's Antapaccay. Issues at these operations do not appear to have near-term resolutions.
Then there are other jurisdictions. First Quantum in Panama has not reached a favorable agreement yet with the government and has announced they are going to be ceasing operations. In the DRC, the Tenke mine is facing royalty disputes. And in the United States, the Twin Metals copper nickel project in Minnesota and the Pebble copper gold project in Alaska have been blocked by the EPA. The risks to copper supply are twofold. We are seeing declining mine outputs due to falling grades and other bona fide technical issues in stable jurisdictions like Chile.
And we're also seeing social and political resistance in other areas of the world such as Peru and even the United States. This is happening concurrently with higher copper demand pressures as copper is increasingly recognized as a critical material for the green economy. There is no question that broader global electrification will be a fundamental driver for copper demand, and this phenomenon has not yet started.
Today, no one is speaking of a short-term copper supply glitch. Industry analysts are talking about structural copper market deficits that could last the rest of the decade. For Amerigo, strong copper prices will continue to make our return of capital policy extremely attractive. So far in 2023, our operational results at MVC are right on track and financial results have been strong on the back of robust copper and moly prices.
In terms of our 2023 financial obligations, we will be making scheduled bank debt repayments of $7 million plus interest. Bank debt at year-end 2023 will then be only $17.5 million. We will also make a final balloon payment of $2.2 million on the capital lease facility under which we financed the upgrades to our molybdenum plant in 2018. Under our 2023 production and cost guidance, which was press released on January 17, at current copper prices, Amerigo's quarterly dividend of CAD 0.03 per share is quite safe. We expect to produce 62.3 million pounds of copper in the year. This is in line with the guidance we provided for 2022. We expect that 59% of copper production will come from fresh tailings.
We also expect to produce 1 million pounds of molybdenum. Moly is a subject of interest because moly prices have moved substantially from around $18 per pound in November to $26 per pound in December to $32 per pound in January. Today's price of moly is almost $38 per pound. This price move has been triggered by constraints in moly supply concurrent with increased demand across several industries. Each $2 per pound change in moly price can have a $0.03 per pound impact on Amerigo's cash cost. A lower cash cost will of course allow us to return even more capital to shareholders.
I would like to finish my remarks with a summary of our return of capital strategy and what has already been achieved. Since implementation of the strategy in the fourth quarter of 2021, Amerigo has paid a cumulative dividend of CAD 0.14 per share, representing $18.6 million and used $21.1 million to purchase and cancel 17.9 million common shares. And this is a 9.82% reduction in the number of common shares outstanding in a little over a year.
We currently have in place a second share repurchase program under our normal course issuer bid. We can repurchase for cancellation up to 10.75 million common shares prior to December 1. This represents an additional 6.14% of the issued and outstanding common shares of Amerigo. We began buying shares for cancellation under the program in January and will continue doing so.
In addition to quarterly dividends of CAD 0.03 per share and the repurchase of common shares for cancellation under the normal course issuer bid, we are confident in stronger spot copper prices and a robust copper price outlook will translate into deployment of performance dividends in 2023.
We will be launching a new Amerigo website in March, and we will also roll out a simple but powerful ESG scorecard that shows Amerigo's unique standing and its ability to produce copper entirely from waste materials. We do this with essentially no use of diesel fuel, low energy intensity, low water withdrawal, and no generation of additional mine tailings. We expect that as we continue to leverage the predictability of our operations, unique ESG attributes, and the strength of Amerigo's return of capital policy, 2023 will be another great year for Amerigo and its shareholders. I will now ask Carmen Amezquita, our Chief Financial Officer, to discuss the company's financial results. Carmen, please go ahead.
Carmen Amezquita
Thanks, Aurora. We're pleased to present the 2022 annual financial report from Amerigo and its MVC operation in Chile. Amerigo had a net income of $4.4 million in 2022, earnings per share of $0.03, EBITDA of $48.7 million, and operating cash flow before changes in noncash working capital of $34.9 million. Despite higher copper production during the year, lower copper market prices starting in mid-2022 affected Amerigo's financial performance.
There was also an $11.5 million equipment write-down that was recorded during 2022 related to the retirement of 2 generators that the company determined to be obsolete during the year. Excluding the generators write-down, adjusted net income was $15.9 million. Note that the write-down had no impact on the 2022 cash flow.
On December 31, 2022, the company had a cash and restricted cash balance of $42 million and working capital of $10 million compared to a cash and restricted cash balance of $64 million and working capital of $24.6 million at December 31, 2021. Amerigo's financial performance is highly sensitive to copper prices. The company's annual average copper price was $4.01 per pound compared to $4.25 per pound in 2021.
Another factor affecting earnings are the changes in copper price from one period to the next. This is so because of our M+3 price convention for copper sales, where the final settlement price is the average London
Metal Exchange price for the third month following production of copper concentrates. At December 31, 2022, MVC's provisional price was $3.80 per pound and final prices for October, November and December 2022 sales will be the average London Metal Exchange prices for January, February and March 2023, respectively. We already know that the January 2023 price was $4.08 per pound. A 10% increase or decrease from the $3.80 per pound provisional price used on December 31, 2022, would result in a $6.4 million change in revenue in Q1 2023 in respect of Q4 2022 production.
Revenue in 2022 was $168.1 million compared to $199.6 million in 2021. This included copper tolling revenue of $153 million and molybdenum revenue of $15.1 million. Within the copper revenue, the gross copper sales were $255.4 million, and there were negative settlement adjustments of $6.2 million. Then, deducted from revenue, we had $70.5 million in royalties to DET, smelting and refinery costs of $24 million, and transportation costs of $1.7 million.
Total tolling and production costs, including depreciation, were $139.7 million. This compares to tolling and production costs of $127.5 million in 2021. Reasons for the increased tolling and production costs included higher production, inflationary pressures, and the payment of signing bonuses to MVC's operators in connection with the renewal of a collective labor agreement that occurred in October 2022.
Under other expenses, general and admin expenses were $5.4 million compared to $4.8 million. This included salaries, management, and professional fees of $2.9 million, office and general expenses of $1.5 million, and share-based payments of $1 million. Other losses during 2022 were $0.8 million compared to other losses of $2.2 million in the prior year. The main difference between the expenses period-over-period was a lower foreign exchange loss of $0.2 million in 2022 compared to $1.4 million in 2021.
The derivative to related parties in 2022 had a $2.7 million recovery compared to an expense of $0.8 million in the prior year. This was the result of a sharp increase in discount rates that resulted in the net present value of the liability and a gain on the P&L. The impairment of obsolete power generators was $11.5 million. As mentioned previously, this relates to the retirement of 2 generators that the company determined to be obsolete during the year.
The company's finance expense in 2022 was $1 million compared to $3.8 million in 2021. This includes interest on loans, leases, and bank charges of $2.3 million and a recovery on the fair value changes and interest rate swap of $1.4 million. On December 31, 2022, the balance of the term loan, net of transaction costs, was $23.7 million. In 2022, the company recognized an income tax expense of $8.1 million compared to an income tax expense of $20.7 million in 2021. This change is the result of lower net income this year compared to last year. As an aside note, most of the income tax payable for 2022 has already been paid by MVC through monthly tax installments.
In respect of cash flow in 2022, cash flow generated from operating activities before working capital changes was $34.9 million, with cash generated of $23.6 million after working capital changes. Cash flow used in investing activities was $9.8 million, which related entirely to the purchase of plant equipment. Cash used in financing activities was $35.9 million. This included $28 million paid to shareholders with $15.7 million paid through Amerigo's regular quarterly dividend of CAD 0.03 per share and $12.3 million used to purchase for cancellation 9.4 million common shares. There was also $7 million in repayments on borrowings and $1 million of lease repayments.
Overall, there was a net decrease in cash and cash equivalents of $22 million in 2022 and an ending cash balance of $37.8 million. The company also held $4.2 million in restricted cash. We will report the Q1 2023 financial results in early May of 2023 and want to thank you for continued interest in the company. We will now take questions from call participants.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] The first question comes from the line of Stephen Ferazani from Sidoti. Your line is now open.
Stephen Ferazani
Appreciate all the detail on the call. Aurora, I do want to touch on the rapid growth in moly prices recently. I know you've certainly gone into detail in talking about the benefits of processing more fresh tailings and you've invested in the facilities to be able to do that. But given that the sharp swing in prices in the near term, is there any reason to try to process more historic tailings to get more benefit from higher moly prices given the temporary move?
Aurora Davidson
Steve, that is a good question. And the answer is no, we will not be changing the operational philosophy. We are a copper producer. We benefit from the additional boost that moly prices can bring to our bottom line. That moly is a byproduct. Copper prices are stronger moving in the right direction under our opinion, and we're getting a significant positive impact from moly price based on our stated production goals of 1 million pounds of moly per year.
Stephen Ferazani
In terms of the raised CapEx for this year, I know you had talked about the sum previously with the standby transformer. I guess one, if you can explain the decision on the standby transformer and then how the higher CapEx could affect or not affect your share repurchase program?
Aurora Davidson
Yes, let's start with the easy one. The higher CapEx should not affect our return of capital goals. They were tested at a $3.60 copper price, which was the budget that we prepared for the year. And that included the CapEx that we disclosed to the market and the ability to repay the quarterly -- or to pay the quarterly dividends of CAD 0.03 per share per quarter. The reason for the power transformer is essentially risk mitigation.
We have taken an approach of seeing ahead of us, not just what is in the immediate future. What could go wrong at MVC? And one of the things that could go wrong would be if one of our existing transformers, we have 3, would face or could face a major damage. If supplies are not readily available, it could entail a curtailment of production. That's not a risk we want to face specifically when we're talking about an investment that's $3.1 million.
Stephen Ferazani
And then if you could briefly just touch on the write-down of those generators. It sounds like they were obsolete. With those no longer in use, is there any CapEx expected to replace them? Just a little detail there.
Aurora Davidson
Yes. Those generators are legacy pieces of equipment. I would call it legacy clunkers that we had at MVC. We bought them many years ago, basically when we were facing a substantially higher power costs from a crisis that Chile was facing back in the day. And we looked at the alternative of having those generators to basically generate power, sell it to the Chilean grid and offset some of the costs that we faced through our power contracts. That risk has been mitigated. We have, as you know, long-term power contracts that guarantee us competitive supply rates to 2037. In the meantime, those generators, which operate with fuel started to become obsolete pieces of equipment gradually.
The cost of operating them is higher than what the grid will pay you for the power that they can turn out. They were essentially in idle mode, except in those exceptional circumstances where we got a call from the grid saying we can now buy your power at a cost that is at a price that is competitive for you. We had to renew the permits for those generators in 2025, and we decided we're not going to do that.
But we needed to provide notice to the authorities in Chile 2 years in advance. That basically triggered from an accounting point of view the write-down. I mentioned in the news release I believe it was that the generators were fully depreciated for tax purposes. We basically were just carrying them on the balance sheet with the book value.
Stephen Ferazani
And then just the last one for me on the -- you got through the new 3-year labor agreement with the larger union. Are we now 2 years away from another one? The smaller union is just behind us now for a while?
A - Aurora Davidson
We basically have a renewal in January of next year with the supervisors' union, which is a smaller headcount union than the operators' union, which we had last year.
Operator
Your next question comes from the line of Eric Dalman, private investor.
Eric Dalman
Hello, Aurora and Carmen. Firstly, let me congratulate you and the whole Amerigo team on a very successful year despite the challenges in 2022, namely inflationary pressure and lower copper prices for 2 quarters. Well done. I'd like to ask 3 questions. First one is regarding moly prices. With moly being more than double the $16 guidance, how is the moly production priced? I understand that it's not the same as the copper M+3 pricing, so when is the monthly production priced?
Aurora Davidson
Yes. Let's answer that question first, Eric. We have 2 clients for moly, and they have basically the ability to choose their pricing on a monthly basis. If they don't choose their pricing on an open month, we go into M+4 mode. Most of our moly production in 2022 was priced at M+4. We have some at M+1, but most of it was M+4. We essentially are seeing for example in that case, production for September having closed at the January closing price, and we still have October production and onward for our biggest client open. We're benefiting from that from the higher moly price environment with basically October onwards.
Eric Dalman
I see. Basically, the January production would be priced in May? Or April?
Aurora Davidson
Correct Yes. In that case, yes. If they don't make a specific choice, we go to M+4. If they make a call prior to the month ending, they could choose anything from M+1 to M+4.
Eric Dalman
My second question is about shareholder capital return policy. Why in general is the share buyback program given priority over performance dividends?
Aurora Davidson
Why is it in general terms? Because we believe that our share price is still a good buy at current share prices. I think that the key word when you think about our share buyback program is opportunistic price buybacks. And we think that we're in that territory still.
Eric Dalman
Okay, so as long as the share price is in that category, you still prefer buybacks before you issue excess capital for performance dividends?
Aurora Davidson
Yes. But I think it's not just such a linear question. If there is an excessive amount of capital and we're still undergoing our share buyback program, that wouldn't preclude a performance dividend from occurring.
Eric Dalman
Okay, so that leads to my final question then. Where do you see Amerigo's fair value at current copper and moly prices? Of course, that could be probably where the...
Aurora Davidson
Yes, we don't guide that. That is very correlated to copper prices. Depending on the copper price, there is going to be a significant impact on that valuation that we have at Amerigo. It's intrinsically related to copper prices.
Eric Dalman
Okay. So that might change with the copper price as well.
Aurora Davidson
Correct. But we are bullish on copper prices, so we're also bullish on our share price.
Eric Dalman
Me too. Okay. Thanks, Aurora and Carmen. Looking forward to an even more successful in 2023.
Operator
Your next question comes from the line of John Polcari from Mutual of America Capital Management.
John Polcari
There are some indications that at least in North America, on the West Coast, that the drought, which has been lasting over 2 decades is somewhat abating due to increased rainfall and snowfall. Whether that holds up is yet to be seen, but there are some indications of stronger and longer precipitation. And I wondered, have you seen anything similar on the South American West Coast considering Chile's extensive geographic boundaries on the West Coast of the continent? Have you noticed any change in the...
Aurora Davidson
No, we haven't. We haven't had a rainy, we haven't had any more rain than what we would have expected to see in Chile these days. We had a drought year again in 2022. Our water projections, our 18-month forward quarter projections, are basically estimating the same conditions in 2023 as we had in 2022, and that doesn't put our operations at risk. We withdraw -- we withdrew very little amount of water from our water reserves last year. That was all indicated in the news release, because we basically are having more efficient water recirculation operations at the plant. We are not as reliant on or as dependent on rainfall as we were in the past. You will be seeing that profile clearly shown on the ESG scorecard that we're going to be rolling out shortly.
John Polcari
Thank you. Second question was regarding the repurchases. I wondered if you used a somewhat predetermined plan in regard to the fact that it's hard obviously to predict the stock market and the movement of the stock itself which may not correlate to the underlying operations. Do you choose to target a certain amount based on volume every month or every quarter? Or is it something that management sits down and just determines this is a good and opportune moment based on the indications of where the stock might be trading in the market and the available stock to repurchase? Is there a methodology to how you would go about the repurchases?
Aurora Davidson
I think one helpful piece of information for your question is the fact that we have a maximum amount of shares that we can purchase on a daily basis, which is around 60,000 shares. That puts a limit and we're -- that's an inherent break within the whole system. Other than that, we monitor our cash flow constantly. We have all the information that we need from MVC. We factor in different copper prices, and we make decisions accordingly. It's a very dynamic exercise, John.
John Polcari
In that same vein, once you've completed the repurchases under the approved program, is there an opportunity to reload before the year has expired with another application to the Toronto Exchange? Or are you definitively restricted?
Aurora Davidson
Not under a normal course issuer bid. Normal course issuer bids can only be initiated 12 months of each other. We faced that situation last year. We completed the normal course issuer bid in June, and we had to wait until December to initiate another normal course issuer bid. A company can initiate a substantial bid at any point in time. If it does so, it has to suspend temporarily its normal course issuer bid because you cannot have both running concurrently.
John Polcari
And under the normal course issuer bid, the limit annually is approximately 10% of the outstanding, is that correct?
Aurora Davidson
It is based on a formula that takes into consideration the trading volume. In our case, it's 10.75 million shares for the current program.
John Polcari
10.75. And the current program expires in December, am I correct?
Aurora Davidson
Correct. December 1
John Polcari
Great, thank you. And my last question is regarding the cash costs. I know there's been a significant amount of inflation across the board with material, labor, etc. When backing out what you mentioned regarding lower molybdenum byproduct credits, increased refinery charges, Chilean signing bonuses, there's still approximately a $0.10 year-over-year increase in cash costs. And I wondered if you could give a little more detail or comment on that. Is that just general overall inflation across the board? Or are there any other particular areas? It's the 2 largest costs, I believe, are energy primarily, which is fixed with the U.S. inflation rate on top of that, and the labor cost, which obviously you had in check with the new labor agreement. What else would be driving...
Carmen Amezquita
John, we have all of that information on our January 17 news release. We provided an indication of where the cash cost increases are coming from. You mentioned correctly one of them is power. The other ones are TCRCs. And we provide the quantum of the changes that we're expecting to see this year in line costs, Cauquenes processing costs, industrial water costs, and all other costs combined. All the information is on the on the guidance we provided on January 17.
John Polcari
Okay, Carmen, I'll take a look. Perhaps I missed it. But you're still experiencing overall inflationary pressure, would that be a safe statement? Or has it abated to some degree?
Carmen Amezquita
We are not seeing at this point in time anything different in the actual results for January and February to what we had estimated in our guidance.
Operator
There are no further questions at this time. Aurora Davidson, please continue.
Aurora Davidson
Thank you very much. Given that we have no further questions, I would just like to extend my appreciation for all of you people that have attended the earnings call. We will be back in early May to discuss first quarter financial results. And in the meantime, do not hesitate to reach out to us if you have any further questions about Amerigo. Thank you.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for your participation, and please you may disconnect.+
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Amerigo Resources Ltd. (ARREF) Q4 2022 Earnings Call Transcript