Gatos Silver, Inc. (GATO) Updated Cerro Los Gatos Life of Mine Plan and Investor Call (Transcript)

Gatos Silver, Inc. (NYSE:GATO) Updated Cerro Los Gatos Life of Mine Plan and Investor Call September 7, 2023 11:00 AM ET

Company Participants

Dale Andres – Chief Executive Officer

Tony Scott – Senior Vice President of Corporate Development and Technical Services

Conference Call Participants

Cosmos Chiu – CIBC

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Gatos Silver Conference Call on a 2023 update to the Cerro Los Gatos Life of Mine Plan, Mineral Reserves and resources.

Presenting today will be Dale Andres, CEO of Gatos Silver; and Tony Scott, Senior Vice President of Corporate Development and Technical Services. We will conclude today’s session with a question-and-answer period where other members of the Gatos Silver management team will be available [Operator Instructions].

Turning your attention to Slide 2. Please note today’s call contains forward-looking statements. Various risks and uncertainties may cause actual results to vary. Gatos Silver does not assume the obligation to update any forward-looking statements.

I would now like to turn the call over to Dale Andres. Please go ahead, sir.

Dale Andres

Thank you, operator, and welcome, everyone. Slide 3 highlights the significant life extension objectives achieved with the updated mineral reserve estimate that we announced yesterday. Our mine life has been extended by almost three years through to the end of 2030, exceeding our target of adding one to two years. The updated life of mine plan shows strong and consistent free cash flow, averaging $75 million per year and that’s on a 100% after-tax basis and delivering an NPV of $462 million. This is an increase of $123 million over last year’s plan and that’s for the comparable period, which is July 1, 2023 onwards. This includes 46% more silver ounces in the new reserve compared to the previous life of mine plan, and that’s from that date as well July 1st. It is important to note that this plan doesn’t require completion of any new major projects nor any significant ramp-up from production rates currently being achieved. The large increase in reserve and resource this year is predominantly based on additional drilling. We’ve added 62 kilometers of drilling to the database used for this estimation which is a 28% increase, and that’s just in a single year. So we’ve been busy. Even after the resource conversion we have done, we now have a much larger inferred resource driven by our 2022 discovery of the South-East Deeps Zone, where we intercepted mineralization hundreds of meters below what we had previously been identified.

Well, it’s great to announce what the team has accomplished over the past year, it’s even better to have a clear path to have more value creation that we are active — to show that clear path to have more value creation that we are actively working on. We have six surface drill rigs currently with five of those rigs working on infilling the higher grade portions of the South-East Deeps, and that’s for next year’s reserve update. And this drilling will continue for the next six months, so through to the end of the first quarter next year. We are organizing a seventh drill rig to start this month and that’s a surface rig so that we can boost our near mine and district drilling right away. We’re targeting to add another three to four years to the mine life within the next 12 months, and are studying various options to further optimize the mine and processing plant to increase margin and potentially grow production with the aim to deliver quick wins and higher returns.

Slide 4 shows the key metrics from the 2023 life of mine plan update and again, that’s on a 100% basis. Cerro Los Gatos remains a low cost, high margin operation and now has an extended base to work from with a mine life of 7.5 years. Our average silver production over that life is 6.6 million ounces per year or 12.4 million ounces on a silver equivalent basis taking into account the other payable metals produced. It is important to note that production averages 7.7 million ounces of silver for the next three years, giving ample runway to further develop the mine and drive improvements and pursue growth opportunities. All in sustaining costs continue to be very competitive at $7.70 per ounce payable silver and that’s on a byproduct basis, or $14.30 per payable silver equivalent ounce and that’s on a co-product basis. As demonstrated over the past 18 months, we expect that Cerro Los Gatos will continue to deliver stable and strong cash flow, supporting regular quarterly cash distributions for the partners. It’s also worth noting that we use long term prices for our reserve and life of mine plan, so those cash flows are based on $22 per ounce silver.

I will now hand over to Tony to go through the update details. Tony?

Tony Scott

Thanks, Dale. As Dale noted, the key change for this year’s resource and reserve was the addition of a lot of drilling, both surface and underground. The image on Slide 5 is a long section of the Cerro Los Gatos mine showing the drilling that’s been finalized since the 2022 update, the black lines on that image are the new drilling. In just the last 12 months, we’ve added 28% on top of the meters that had been drilled over the entire previous [13 years]. Underground we had between three and five rigs operating during the year and on surface we stepped up from two rigs to five rigs after the discovery of South-East Deeps. That first pass of that drilling on South-East Deeps we completed before the March 31st database cutoff has given us the 4.6 million tons of inferred resource that we’ve reported. Otherwise most of the block model estimation process remains similar to the big rebuild we did in 2022. Slide 6 shows the reserve impact of that additional drilling. This long section shows the 2023 reserve in blue and the ‘22 reserve in red. In late 2022, we targeted drilling at the higher grade portions of the pieces that were inferred resource in the 2022 estimate. You can see from the slide that the drilling was successful at adding reserve at the base of northwest and central zones. Some of the material around South-East was inferred last year, but some has also been defined straight from nothing to the 50 meter spacing for classification as reserved this year. We’re defining the South-East Deeps starting at 1,100 meters above sea level, that represents approximately where we start seeing indicators about other poles of mineralization. This year’s reserve already has 328,000 tons below that 1,100 boundary.

Slide 7 shows some of the other changes to the mine design process. As Dale noted in the overview, the basis of this plan is our recent operating performance. We underlying on new projects or big improvements or ramp ups to achieve it, it’s just based on approximately what we’ve been doing recently. We have been pushing towards a higher proportion of long-hole mining over the last two years and we expect that trend to continue, which will further help with productivity and costs. The north-west zone was always planned as long-hole and that’s what how it’s been mined since the mine started. Things have been changing in central. We’ve been — central was originally designed all as cut and fill whereas we’ve actually been using longitudinal long-hole mining in central zone since 2021. Recently, we’ve also started using transverse long-hole stoping there as well where the thicker zones, even though they’re shallow or dipping, are also amenable to it. The geometry of the whole south-east area, the south-east dominant area, is more like north-west with the main dip mostly above 60 degrees. So the big addition of reserves we’ve had in that area also pushes our long-hole proportion up. Our 2023 mineral reserve is shown on Slide 8. The reserve tables here, just they’re the raw reserve tables at the different effective dates. For the comparison tables, we actually use the tonnage in the mine life from mid 2023 onwards, so that we’re making apples-to-apples comparisons. Our 2023 CLG mineral resource is shown on Slide 9. It is important to note that our mineral resource is reported exclusive of mineral reserve and also we report it within stope optimizations to define reasonable prospects of economic extraction.

The extra mine life comes with extra sustaining capital and this is shown on Slide 10. Most of our capital expense is for underground development, which is shown on the image on the bottom right. So the green lines are the underground development. For this mine plan that development is planned to be finished by 2027. The tailing dam raises and underground dewatering infrastructure are other notable catalog capital items each at $15 million over the eight years. As can be seen on the graph on the top right, we don’t require a lot of capital for the last three years with the mine development finishing earlier. If we do extend the mine life with further drilling this year, which we obviously expect to do, that capital spend profile will push out for longer. Slide 11 shows the annual mill and cost details for the life of mine. Consistent with these types of deposits and also with previous mine plans, the silver grades do decrease as we get deeper. The pie chart in the bottom right shows a simple split of our per ton operating costs between mine, mill and G&A. Long term assumptions for exchange rates have been used for estimating costs to be consistent with the long term metal price assumptions we use. As with most Mexican operations, we are impacted by fluctuations in the exchange rate. We’ve done well over the last year offsetting the stronger Mexican exchange rate impact with business improvement initiatives and we have additional improvements underway with equipment utilization being one particular focus area.

Slide 12 highlights our annual metal production and all in sustaining costs. Our production stays strong for the next three years then drops in line with the mine grades towards the end of that period back to average reserve grades. The capital portion of the all in sustaining costs drop around the same time as the grade drops, particularly with underground development finishing in 2027. So the all-in sustaining costs stay strong right through till the end of mine life. Our revenue mix by payable metal is shown in the pie chart on the bottom right. Silver is by far our dominant metal. We have added copper to the payable list this year but only getting a low payable as part of the lead concentrated later years as the copper grade picks up. For this reserve and life of mine plan both copper and gold represent only very minor contributions. One key strength of our operation that we have proven over the last 18 months is strong free cash flow. Slide 13 shows the estimated cash flows for the base case at $22 per ounce silver and a sensitivity at ’24. We have delivered strong cash flows for the last 18 months and the new mine plan shows that we are going to have strong consistent cash flows averaging around $75 million per year out until 2030. Those cash flows results in an after tax NPV of $462 million, which represents a $123 million increase from the mid-2023 onwards planned from 2022. While we are really happy with the new reserve and life of mine plan, we still have substantial further upside to analyze and profile.

Slide 14 shows some of the key projects we are starting to move forward with. First and foremost is further extension of the mine life. The inferred resource we are reporting today is based on the first stage of drilling at South-East Deeps. We now have five rigs on this zone infilling it with the intention of getting higher grade portions of it defined for 15 meters spacing for our 2024 update. The mine image here shows the 15 meter space surface drilling planned over the coming months. Our processing plant was constructed in 2019 and it is amazing quality piece of infrastructure. We are already achieving around 17% higher than the feasibility study designed throughput. Now that we have extended the mine life and have a clear path to further mine life extension, it makes sense for us to look at how to maximize the value from the processing circuit. The key projects that we will be evaluating over the following 12 months in conjunction with the additional drilling are increasing throughput, separation of a copper concentrate and increasing silver and gold recovery through flotation and leaching of pyrite concentrate.

Turning to Slide 15. We still have a number of areas to test within a couple of kilometers of the existing mine workings. If we can find anything within this sort of distance, it will be reasonable to access it our existing infrastructure. This plan map shows a few of the key targets we will be following up over the next 18 months. We are already drilling at Santa Ana just north of the north-west zone. Portigueño is a long strike of south-east and we plan to drill that in Q4. We already have a few intercepts in the north-west offset zone and we will try to get some underground drilling into that from our existing development now that we are deep enough [indiscernible] angle. Our expectation is sort of with 2024 before we get to some of the other targets mentioned here. Slide 16 is our base geology map for our whole concession package. During 2023, we have been putting a lot of work into the foundational data collection. This year, we have completed drone air photos work, stage 1 one of the magneto-telluric geophysical survey and some areas of detailed mapping and rock chip sampling. However, this property is huge. The scale on this image is roughly 50 kilometers north-south and 40 kilometers east-west. There is still a lot more data collections to be done. We have built out our exploration crew with new geologists and technicians to start moving that work as quickly as we can. A few areas that have been through detailed mapping and rock chip sampling stages are now being planned for drilling. Our intent is to have two drawings working on new targets in Q4 but the first priorities will be those new mine targets I mentioned on the previous slide. For the targets further appealed, Los Rieles and the Lince targets approximately 20 kilometers to the north-west of CLG. They’re priorities for drilling as is San Luis about five kilometers northwest to CLG along the Los Gatos [salt].

I’ll now hand it back over to Dale to wrap up.

Dale Andres

Thanks Tony. Turning to Slide 17, we continue to deliver on our priorities with our near term objectives of increasing the Cerro Los Gatos’ mine life achieved, while continuing to deliver strong quarterly results with an operation that continues to run very well. The new life of mine demonstrates the quality of the Cerro Los Gatos asset and its ability to continue to deliver strong free cash flows for the partners through to 2030. And as a reminder, Gatos Silver and the Los Gatos joint venture remain debt free with very strong cash balances as previously announced. And most exciting of all with a very large and prospective district and with the South-East Deeps discovery and the inferred resource we’ve recently announced, we are set up very well to continue to extend the mine life further with a near term target at three to four years life over the next 12 months. We also have a clear path for further value creation and growth with numerous margin improvement projects identified that Tony talked to and that are being advanced. If successful with further increases to the reserve and the mine life, we also have options that we are studying, including the potential to increase mill throughput in a capital efficient manner. I’ll now hand it back to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We’ll take our first question from Cosmos Chiu with CIBC.

Cosmos Chiu

Maybe my first question is on the South-East Deeps. I noticed that — first off congrats on getting the resource out there for South-East Deeps. I do noticed that the silver grade is about half of your reserve grade for South-East Deeps. Is this as expected in terms of grade?

Dale Andres

Maybe I’ll just make a quick comment and then I’ll turn it over to Tony. Just a reminder, Cosmos, this is an initial maiden resource and this is at a 100 to 200 meter spacing. And so as that’s modeled, the grades by definition are going to be lower than what we would expect as we target and define the higher grade portions of that zone. But maybe I’ll turn it over to Tony to offer any further comments.

Tony Scott

So I think that pretty much sums it up, Dale. We’ve got 100 to 200 spacing on it at the moment, Cosmos. Because it all lines up and we’re confident in the interpretation of the overall vein, but just the spacing on it is not tight enough to actually define the higher grade portions of it at the moment. So what that grade effectively represents is an overall average, the entire vein, as we’ve actually define it to 50 meter spacing what we expect to see is that we’ll tighten up and that will probably result in a smaller tonnage of higher grade along higher grade trims within that 5 million tons. And so that’s part of the reason why we’re sort of talking about a three year extension, like 3 million of that if we can get that at a higher grade portion within higher grade trends of that that would be a win for us.

Dale Andres

And I think it’s also worth noting, and I’ll just make one final comment on that, that the cutoff for this maiden resource was March 31st and that’s for data. So that would include drilling basically up to the end of February. So we’ve been drilling for six or seven months, you’ve seen some of the results that we’ve announced on our quarterly exploration updates and we’ll continue to do so. But those results will also be incorporated into the next update as well.

Cosmos Chiu

And certainly, Dale and Tony, I read, your MD&A or not MD&A your press release as well, saying that you’re targeting some of the higher grade portions. It’s good to hear that it could potentially come through as higher grades in the reserves. Leading into my next question then, Dale and Tony, I know you don’t tell us in terms of, in the press release, but the reserves, you mentioned 1.8 million tons added from south-east, of which 328,000 tons coming from South-East Deeps. So I don’t think it gave the grade to that reserve from South-East Deeps. But can we assume that that would be higher grade than closer than the 100 grand per ton that are being inferred, is that how we can look at it? Or can you actually provide us with what the South-East Deeps grade was in the reserves?

Tony Scott

Yes, I don’t think that that 300,000 tons is really representative of what the entire few million that we’re sort of planning to convert next year is going to be — the 300,000 tons is only a very small sort of representation of that. I don’t have the stuff at hand but I think it was sort of more in the sort of 130 to 150 range is what I remember. But it’s not ultra high grade but it’s — but I wouldn’t say that’s representative.

Cosmos Chiu

Maybe bigger picture then. As you mentioned, you’re looking for another update in terms of mine plan next year. Number one, timing wise, are we expecting sort of the same timing, September sort of 2024 for the next update? And then bigger picture you’re talking about three to four years of additional mine life. Are you targeting maintaining the current reserve grade even with the additional three to four years, is that the plan?

Dale Andres

And I I’ll speak to that, Cosmos. Yes, on timing, our goal would be to produce another life of mine plan reserve and resource update in the third quarter of next year. The majority of our focus on drilling of the Cerro Los Gatos mine with those five rigs that we have currently is on the South-East Deeps. We’re going to drill it to the February march timeframe and that will enable us to do the modeling and mine plan design and costing to get that done for that timeframe, so that is our intent. And yes, we’re targeting to add that three to four years as we flagged. Obviously, we’re targeting to get as high grade as possible. The additional definition is really going to help. As you know, we’ve hit some higher grade portions as you’ve seen from the individual drill results, but we have to do the work. Our goal will be to try and maintain at least at reserves grade.

Cosmos Chiu

And then maybe one last question on this. I noticed that — maybe I’m reading it wrong, but I noticed that all the reserve, all the inferred is actually coming from South-East Deeps and all the M&I resources is also coming from South-East Deeps. So can we assume that the additional reserves planned for next year, that’s all going to be coming from South-East Deeps?

Dale Andres

The vast majority, that’s correct.

Cosmos Chiu

Thanks, Dale and Tony for answering all my questions. And great to see that you put out your 2023 mine plan. Thank you.

Operator

[Operator Instructions] And we do have a follow-up question from Cosmos Chiu with CIBC.

Cosmos Chiu

I just realized I turned a page and I have more questions, if that’s okay. I noticed that in terms of unit operating cost this time around 88.67 per ton. In 2022, it was 89.76 per ton. If I look at it in more detail, I saw that, it was the mining cost that’s driving the cost sort of lower in this iteration of mine plan. I understand you’re moving towards longer term more long-hole stoping, Tony, as you mentioned. Is that the key driver behind the cost assumption? And can you remind us in terms of the cost savings that you can realize long-hole versus cut and fill?

Dale Andres

Just high level comment from me, Cosmos, yes, that’s exactly right. That’s primarily due to the bigger proportion or the larger proportion of long-hole stoping. But I believe you will ask Tony to speak to the cost impact to them.

Tony Scott

This year, what we have done, Cosmo, also is to have a look at how the productivities of the two impact the distribution of our fixed costs. And so that gives us what we believe is a better distinction between what the true cost of deal is versus the long-hole, previously which is blended being fixed costs between two on a tonnage basis. And so what that’s showing is about a $24 per ton differential between cut and fill and long-hole. So we definitely — and that’s why we are pushing towards the long-hole, because we get better productivity and that obviously helps on a per ton basis, cost per ton basis. So yes, it is substantial difference between the two and it’s really that that’s driving the differential. Obviously, the ceiling of — the ceiling that we do for the long-hole, it’s just the same cost as the cut and fill, but the actual stoping is significantly cheaper.

Dale Andres

And maybe I will just make one final moment, Cosmos, is that, we continue to drive our business improvement and continuous improvement process at the site. And there is a lot of focus on continuing to offset inflationary pressures, exchange rate pressures and drive productivities and improvements further and that is continuing. We have dozens of projects that we are actively driving and we are going to continue to do so.

Cosmos Chiu

And then one last question, I promise. You talk about the growth to potentially 4,000 tons per day in terms of throughput at the mill. Maybe too early, but I am just wondering, is this going to be a big CapEx project? And then, number two, do you think you currently have to resource size to support such an increase in throughput, or do you want — do you need the resource to get a bit bigger closed?

Dale Andres

So for the size of the reserve, that’s what we have said that we need to convert more resources into reserve before we are going to consider increasing the throughput rate and investing any additional capital. It doesn’t mean that we won’t continue to optimize throughput and drive higher with what we currently have, and that’s mentality that’s throughout the whole team. We’re going to try and best use our asset to produce and we’re mine limited, so the focus is on the mine. But as far as capital, if we did — if we are successful in converting those resources to reserve, it does give a 10 plus year mine life one year from now and that we can consider going up towards that 4,000 ton per day mark. And we’ve put that out as a mark, because we know that we can achieve those kind of throughput rates and there’s still more engineering studies to do, but without major capital. So it would include things like, and this is what we’ll be studying, things like upgrading the motors on the mills as opposed to installing new mills or having to replace the mills, so just as one example. And we’ve got a lot of flotation capacity, so it’s probably more just handling the additional material as opposed to bigger installations of requiring big capital. So that’s just an overall comment but still more work to do, and we’re going to be doing that over the next 12 months.

Operator

And that does conclude the question-and-answer session. I’d like to turn the call back over to Dale Andres for any additional or closing remarks.

Dale Andres

Okay, thanks operator. And thank you everyone for attending today’s call. And we’re very excited to continue update you as we make progress, including on our Q3 results. Thank you.

Operator

And that does conclude today’s presentation. Thank you for your participation, and you may now disconnect.