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Sierra Metals Inc. (SMTS) Q1 2021 Earnings Call Transcript | The Motley Fool

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Sierra Metals Inc. (NYSEMKT:SMTS)
Q1 2021 Earnings Call
May 07, 2021, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. And welcome to the Sierra Metals first-quarter 2021 financial results conference call. [Operator instructions] I would now like to hand the conference over to your speaker for today, Mr. Mike McAllister, vice president of investor relations.

Thank you, sir. Please go ahead.

Mike McAllisterVice President, Investor Relations

Thank you, operator and good morning, everyone. Welcome to Sierra Metals first-quarter 2021 results conference call. On today’s call, we are joined by Luis Marchese, our CEO; Ed Guimaraes, our CFO. We are assuming that all published materials have been read.

And as such, today’s presentation highlights the key issues of the quarter. However, I would like to highlight that, as always, we are open for questions at the end of the presentation, which can expand upon other issues that might be of interest to those listening. The accompanying presentation for today’s call is available for download through the webcast or from the company’s website at sierrametals.com. Yesterday’s press release the financial statements and the management discussion and analysis are also posted on the company’s website.

Before I turn the call over to Luis, I would like to indicate that this earnings call contains forward-looking information, so that is based on the company’s current expectations, estimates and beliefs. Such forward-looking information is subject to a number of risks, uncertainties and other factors. Actual results could differ materially from our conclusions, forecast or projections as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from conclusions, forecast or projections in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information is contained in the company’s annual information form, which is publicly available on SEDAR or EDGAR via Form 40-F or on the company’s website.

Please note that all dollar amounts mentioned on today’s call are in U.S. dollars, unless otherwise noted. I would now like to turn the call over to Luis Marchese, our CEO, for the first-quarter highlights and the company outlook and then to Ed Guimaraes, to our CFO, for the financial highlights. Please go ahead, Luis.

Luis MarcheseChief Executive Officer

Thanks, Mike. Good morning everyone. Turning now to Slide 4. Well, I would like to start by stating that above all, the safety of our workers and the communities in which we operate remains paramount to the company.

COVID-19 has imposed various direct and indirect challenges to the company and management, which have affected our ability to operate as effectively as expected in 2020 and continuing into 2021. Impacts have included delays in mine development and preparation of areas for mining and consequently, lower head grades we focus on larger and with lower-grade ore bodies as we strive to meet that. This has resulted in lower metal sales resulting from lower grades. Costs were also affected mainly due to indirect fixed costs, which still must be incurred despite lower metals production.

That said, we continue to take proactive measures to mitigate potential impact that COVID-19 may have on our employees, communities, operations, supply chains and our finances. We continue to test and quarantine employees before they can join the active workforce and we continue to monitor all employees daily. Further, we’re also deferring some exploration and capital project due to ongoing and carry-forward difficulties for 2020. Additionally, our Cusi mine was also affected by a large-scale power outage that affected Texas and parts of Northern Mexico, which caused loss of production during approximately 10-day period and continuous instability in the power grid of Northern Mexico, which has also brought some other production difficulties for the next few months.

However, despite the challenges we faced, the company still had solid revenue and adjusted EBITDA and maintains positive free cash flow. Furthermore, while we are facing challenges from COVID-19, currently, the midterm plans remain in place. Looking ahead to 2021 — in 2021. Please turn to Slide 5.

Despite the challenges we’re currently facing, we continue to see a strong growth opportunities for the company as the operations in Mexico are under way to running at an increased capacities of 5,000 tons per day at Bolivar and 1,100 tons per day at Cusi. Furthermore, we recently received an ITS environmental permit for Yauricocha, and expect to receive the final ITM permit, which is a operational permit, by the end of Q2 2021. This will see Yauricocha increase permitted throughput by 20% to 3,600 tons per day. This would allow us to make better use of the already installed capacity at Yauricocha.

At Yauricocha, we continue to complete drilling to grow our mineral reserves and resources and complete the development work requiring operations to increase throughput in the future. We expect this capital expenditure projects will result in future increased cash flows and lower cash costs. Additionally, we expect to fund these capital expenditure programs through the generation of operating cash flows. At Bolivar and Cusi, like Yauricocha, we are continuing with mineral exploration programs and completing infrastructure and operational improvements to double throughput in the future.

These improvements include our expanded tailings facility at both mines and driving an underground tunnel that will connect the mines with the concentrator plant at Bolivar to improve efficiencies and reduce haulage costs. Additionally, at Bolivar, we expect to commence construction of an iron ore processing plant in June, which is expected to produce approximately 500,000 tons per year of 62% iron ore concentrate. This is expected to enhance Bolivar’s profitability, while also lowering our transportation and tailings development cost. This is a project that was approved recently by our board.

We continue to work on the completion of the prefeasibility studies for the three mines, which build upon the previous preliminary economic assessments completed at all three mines. We are starting the expansion of the Yauricocha mine throughput to 5,500 tons per day and a doubling of throughput capacity at the Bolivar and Cusi mines to 10,000 and 2,400 tons per day, respectively. In conclusion, on Slide 7. The company has had a relatively decent first quarter despite the direct and indirect, I would say, receive all the challenges we face for the COVID-19 pandemic.

We were still able to emerge with a stronger balance sheet and cash position. While we continue to operate in a vulnerable environment due to COVID-19, we remain hopeful. We expect further cash flow and liquidity improvements in 2021, a benefit of improving production and metal prices. The company has made the necessary capital investments and infrastructure improvements to continue growing production and improving costs.

We remain committed to the company’s prudent and sustainable growth, and more importantly, to improving the per share value benefiting our shareholders. With that, I will now turn the call over to Ed for the first-quarter financial highlights. Ed?

Ed GuimaraesChief Financial Officer

Thank you, Luis, and good morning everyone. Turning now to Slide 6. The company had a relatively good first quarter despite the COVID-19-related operational challenges. We reported a 4.5% increase to our consolidated throughput and generated EBITDA of $25 million.

We also reported positive free cash flow and net income, and we finished the quarter with approximately $74.3 million in cash. These relatively solid results are the product of evolving optimized operations and expansions ramp up despite the effects of COVID-19, providing solid financial and operational performances, which we expect to continue as we progress into 2021. Our revenue mix by metal continues to be led by copper, followed by silver and zinc. While we have seen the copper portion reduced in Q1 due to previously disclosed factors, it is expected to continue to take a leading role in the company’s metal mix of production and revenue.

In Q1 2021, we saw an improvement in all realized metal prices. Copper continued to improve at the end of 2020 and into Q1 2021 and remains strong currently. I believe today, it’s a $4.70 a pound. Precious metals and zinc have also remained relatively strong in Q1 2021.

Turning now to Slide 7. Compared to the same period in 2019, cash costs were higher at both Yauricocha and Bolivar, attributable to lower metal production due to lower head grades from reduced tonnage contributions from higher grade zones and bad weather at Bolivar in the early part of Q1. At Cusi, cash costs were lower during the quarter due to the 23% increase in silver equivalent payable ounces sold. However, all-in sustaining costs per silver equivalent payable ounce was in line with Q1 2020 as higher sustaining capital offset the impact of the increase in silver equivalent payable ounces.

Turning now to Slide 8. We finished the quarter with $74.3 million and have total net debt of approximately $25 million. The company continues to have a strong balance sheet, working capital and cash position to support capital expenditures and growth initiatives. Management remains committed to the company’s prudent and sustainable growth plan and more importantly, improving the per share value benefiting all shareholders.

With that, I will now turn the call back over to Mike. Mike?

Mike McAllisterVice President, Investor Relations

Thanks, Ed. That ends the presentation portion of this call. As previously mentioned, we are open to discussing other topics of interest that shareholders may have. We would now like to open the call to questions from participants.

Operator, please open the lines.

Questions & Answers:

Operator

[Operator instructions] So our first question comes from the line of Mark Reichman with NOBLE Capital Markets.

Mark ReichmanNOBLE Capital Markets — Analyst

Good morning. So the first question is Luis, probably address some of this in his commentary, but I wanted to ask just what exactly needs to happen, and when do you expect to see grade improvements at Yauricocha and Bolivar?

Luis MarcheseChief Executive Officer

Thanks, Mark. Thanks for the question. I mean what has happened at both mines Mark is that we’ve been with the COVID situation for over a year now and we have been, over time, prioritizing development and mining to make sure that we had the tons to feed the plant. In that process, we have been prioritizing larger ore bodies, although with lower grades, OK? So we are now, and we’ve had in the first quarter, the effect of this prioritization.

Otherwise, we wouldn’t have met the tonnage. As we speak, we’re in the process of trying to catch up back on the development on reaching these higher-grade areas, so we can have better results in terms of metal production. Having said that, I just want to highlight that the situation in Peru and Mexico in terms of COVID is quite different from other parts of the world where due to vaccination, the pandemia seems to receded. In Peru, we are still in the middle of the second wave.

And only around 2% or 3% of the population has been vaccinated. The government is starting to roll out vaccination for the over 70-year-old people this week. So we are still a way ahead from ongoing over the situation. And this is having issues — this is presenting issues in terms of — for the weekend to other mine.

Certainly, we expect this to hopefully to finish by the end of the year when mass amounts of vaccines would be getting into the country. So in the meantime, we are adding more contractors, reaching to more people and trying to go back into our development that is required. So I would expect that in the next coming months, we will start seeing the results of that. In Mexico, we feel that we are starting to get into better areas as we speak.

So we could see that sooner. But although the team is still struggling with some residual effects from COVID.

Mark ReichmanNOBLE Capital Markets — Analyst

So is it fair to say, when comparing first-quarter production actuals to the guidance range, I mean it doesn’t seem like it should be too much of a stress to achieve the low end of the range. But your ability to gain ground during the remainder of the year, that will in part, be driven by the trajectory of the impact of COVID. Is that the way to kind of think about it?

Luis MarcheseChief Executive Officer

Yes. Yes. I think that summarizes it.

Mark ReichmanNOBLE Capital Markets — Analyst

OK. I’ve got a couple more questions but I think I’ll just go back in the queue and follow them up later.

Luis MarcheseChief Executive Officer

OK. Thank you, Mark.

Operator

Your next question comes from the line of Alex Hunchak with CIBC.

Alex HunchakCIBC World Markets — Analyst

Hi, everyone. Thanks for taking my questions. I was also going to ask on the guidance. So it looks like you guys have sort answered that one.

But maybe switching to the exploration to Yauricocha. Some nice results out there. Is that something that you guys can add to the resources this year or is it going to take a bit more drilling than that? And when could we maybe see some of that new zone in the actual mine plan?

Luis MarcheseChief Executive Officer

Thanks for that question, Alex. Yes, the areas that we started driving, what we call the cruceros cinco mill last year to add — to look into this 1 to 1.5 kilometer stretch with Esperanza and Cachi Cachi and start putting some exploration spots there. As a result of that, we have found some continuity right next to the north of Esperanza, and that’s what we announced in the market in our press release. So this is fairly close to where we are, OK? So the next step is that we are going to do some infill drilling and also a bit of pressing up and down to see how far these findings go.

And this should take us to add resources this year, financially even mind, OK, so these are very good news. It’s very close to where we are operating and it should help us to reach better resources for this year.

Alex HunchakCIBC World Markets — Analyst

OK. Great. Thank you for that. And then maybe could you also just give a comment maybe on the political situation in Peru and how that might impact your closure going forward? I know it’s a bit uncertain still, but how are you guys viewing that going forward?

Luis MarcheseChief Executive Officer

Yeah. Well, Peru is really — mining is very important in Peru. It’s 10% of the GDP. 18% of the taxes.

40-whatever-percent of the exports of the country. So it’s the elephant in the room in terms of the economy. And it always comes as a topic of discussion with every presidential election. So this is the case now.

We have two candidates. One, Keiko Fujimori and the other Pedro Castillo. They have also addressed their initiatives around mining and their impact to the country and their view. There are discussions of government take about redistributing the benefits of the mining revenues into the population and the rest.

Having said that, Peru is a demography. So there is a — if — for the initiatives to move forward, they will have to go through Congress and through a strong debate. Keep in mind that the Congress has already been elected, and none of the two candidates have a majority. They have minorities in Congress.

So any decision-making in terms of anything, but in particular, to mining, which is what we’re discussing, would have to go through Congress and through a good debate. We are now, as you said, in the middle of the campaign. So it’s a bit uncertain. You know how campaigns are.

So let’s wait for the result and see what comes out of this. And then eventually, we will engage — the industry will have to engage in a conversation and together with a political adversary.

Alex HunchakCIBC World Markets — Analyst

OK, that’s good enough. Thank you. Yeah, that’s it for me. Thanks guys.

Luis MarcheseChief Executive Officer

Thanks, Alex.

Operator

Your next question comes from the line of Lee Cooperman with Omega Family Office.

Lee CoopermanOmega Family Office — Analyst

Let me just say this, that I am incredulous that you guys do not voluntarily say something about the strategic review process, which was valued as a big deal in early January. So what can you say to update us about the strategic review process?

Luis MarcheseChief Executive Officer

Thank you, Mr. Cooperman. Thank you for the question. We can — OK, well, I can say is that the strategic review process has also been affected by these unusual times.

And it’s taking a bit longer than we had expected because of the restrictions on pretty much anything.

Lee CoopermanOmega Family Office — Analyst

When do you think that you’ll have something to say. Well, we’re not asking what you’re going to say but when do you think you’ll conclude the process? if you had to guess.

Luis MarcheseChief Executive Officer

We won’t — difficult to tell. But certainly, we are working on it consistently and we expect this to happen in the next few months. And hopefully, come back to the market with good results from this process.

Lee CoopermanOmega Family Office — Analyst

Second question. If the process doesn’t yield an attractive enough pricing, I happen to come from the vantage point, your stock is significantly mispriced. Year-to-date, to give you an example, Freeport copper and gold was up 67%. Despite you’re — putting up a sale sign to come, but your stock is only up 13% year-to-date.

But after the strategic review process does not provide a price that’s attractive, how much debt is the company willing to carry? Because I think we could recapitalize the company at a very favorable price. In other words, I look at the — you look at your EBITDA forecast this year and look at the tonnage that you’re projecting for the next couple of years, I assume your earnings will grow quite substantially, if prices stay at these levels. But is the company prepared to take on debt to buy back stock or is the company uncomfortable doing that?

Luis MarcheseChief Executive Officer

Thank you. Thank you for the question. Mike, maybe Mike can comment on the on the market situation and the comparison that you just made, and then we can comment on the scenario that you are suggesting.

Mike McAllisterVice President, Investor Relations

Yes. So the only thing I would say there is — yes, see, if you compare us to Freeport, then we’re down. But it’s not really an apples-to-apples comparison. Freeport is more of a pure copper play.

We’re a diversified producer. If you look at us compared to like Hudbay or some other base metals comparables, we’re pretty much in line. With iron ore, we’re doing better. And silver peers, we’re doing good against them as well on a mid-tier level.

So while I hear you on the Freeport, we’re not a major yet. So a little ways off. So it’s not really a fair comparison for that. We’re more of a…

Lee CoopermanOmega Family Office — Analyst

Well, I would observe is none of these companies you’re mentioning have put themselves up for sale. Generally speaking, when a company puts itself up for sale, you get a premium because people anticipate a favorable outcome. And I am not interested in selling the company at a discounted price. So when I look at the enterprise value of the company and I look at our free cash flow, seems to me that we could create a lot of value for the shareholders by recapping the company.

In other words, for example, if EBITDA was a couple of hundred million, which I think will be next year, and you had debt to EBITDA say two times, that’s $400 million, plus you’ll be in a net cash position, that’s two-thirds of the market cap of the company. So it’s to me very exciting that we can make our own luck, but anyway, I just plant that seed. Am I right in assuming that you’re still staying with guidance, which is at current spot prices, EBITDA this year of $170 million to $185 million and on consensus prices, $155 million to $170 million. Is that still your guidance?

Ed GuimaraesChief Financial Officer

Thank you. Yes. Yes, it’s still our guidance.

Lee CoopermanOmega Family Office — Analyst

OK. Good. OK. And I assume that you would anticipate — if I said to you, prices will remain at current levels, which is the big assumption, that we would earn more money in 2022 and 2023 than we’re earning currently?

Ed GuimaraesChief Financial Officer

That’s correct.

Lee CoopermanOmega Family Office — Analyst

OK, good. OK. And tell me about the iron ore project, which is going to take up a fair amount of capex. What is the return on that capex likely to look like or the profitability of the iron ore business?

Luis MarcheseChief Executive Officer

We are going to — thanks for the question. We were very excited about that project, which we are bringing into construction now. We are going to release the economics in the next few weeks as we issued EIA for Bolivar, including that project. So I cannot claim the economics.

But I can tell you some characteristics about this project. We are going to do it at a very reduced capital intensity. We’re going to spend, as you’ve seen in the press release, $28 million for 0.5 million tons of iron ore concentrate. If you compare us with the capex intensity of any other iron ore project in the market, we are in the low end.

On the other hand, in terms of operating costs, Bolivar is very fortunate that we have a way of road line only 50 miles from the mine. While if you have iron ore project anywhere in line in the world, usually build and infrastructure becomes a major color and a major issue in terms of capex. We don’t have that because we have the train available. And also, we have in Mexico one port, which is the closest one to our operation that has space and facilities and infrastructure to manage the production that we are going to bring from the magnetite.

On the other hand, we have quite a good stockpile of ore that we’re going to process through these new facilities. And this will drive our own cash operating cost at the mine to the low end. So now our challenge is to bring these to operations as soon as possible, and then we are going to add value following our ore resources. So on top of our current metals mix, which is, I think, extremely strong because we have, as you are aware, copper, silver, zinc and rest, we’re going to add iron ore.

So Sierra Metals is going to pretty much become an example of the right metals mix for the future.

Lee CoopermanOmega Family Office — Analyst

Yes. You don’t want to answer the question for a few more weeks. But by and large, you have the answer because you would have not gone ahead and improved the capex of $28 million without doing the analysis. Is that correct?

Luis MarcheseChief Executive Officer

Absolutely. Yeah, but we have to follow the regulations.

Lee CoopermanOmega Family Office — Analyst

Well, this is an open mic. You have — this is open to the public, right? So whatever, I don’t want to go down that path. Just — do you expect to end the year with more cash than you have presently? In other words, you have $175 million, let’s say, I’m using as EBITDA. We have capex of, what, $106 million, how much of that $106 million has already been spent this year? In other words, how much additional spending we’re looking at? Have you spent any money this year yet of the $106 million?

Ed GuimaraesChief Financial Officer

Yeah. Yes, we have. And we’re a little bit behind in Q1, we’re about $10 million from what we said in terms of annualized, if you were to take the quarter and annualize that. But to answer your question, yes, we expect there to be a positive free cash flow so — and add-on to the cash balances, yes.

Lee CoopermanOmega Family Office — Analyst

Yes. I would expect that you would end the year debt-free. If you took your cash minus your debt, that you would be debt free. Is that a bad assumption and too aggressive?

Ed GuimaraesChief Financial Officer

No. It’s going to be closely, but yes, it’s going to be approximately around that. Might have some, but it’s going to be de minimis. It might be less than $10 million.

Lee CoopermanOmega Family Office — Analyst

This is a little bit esoteric, but I am I think, the third largest shareholder in the company. And I — if we don’t have a favorable conclusion to the auction process and I’d say, do we have a favorable conclusion. I think that the buyer should have to pay materially more than the last sale to buy this business that we should consider substituting debt for equity in the capital structure. In other words, we’re in an environment where interest rates are the lowest in history, and our equity price is very cheap relative to the underlying asset value.

So it seemed to me to be intelligent to substitute debt for equity in the capital structure as long as we feel we’re a couple of hundred million dollar EBITDA-type earner, which I suspect you think would probably higher than that going forward? So just expressing a view — expressing view and I’m happy to discuss that off-line with management. And my last observation. You’re going to love this one, Mike. Why are we making it so difficult for people to listen to the call? Why are we requiring preregistration and stuff like that? What are we afraid of? I mean I’ve been doing this for over 50 years and I don’t recall this being done by anybody else.

Why are you doing it that way, to ask questions you have to preregister.

Mike McAllisterVice President, Investor Relations

A matter that, star provider has scaled back during COVID. And there’s not as many operators available. And so if everybody dials in at the last minute, they’re going to be overwhelmed. And so we’re asking people to preregister.

And we’re hoping that this would go away as things improve.

Lee CoopermanOmega Family Office — Analyst

Got you. OK, thank you. Thank you for you answer. I appreciate.

Good luck. Stay safe, stay healthy. Thank you.

Luis MarcheseChief Executive Officer

Thank you, Lee.

Operator

Your next question comes from the line of Richard Carrigan with Equitech.

Richard CarriganEquitech — Analyst

Good morning, guys. You’ve already answered my questions. But I have one last question. Did we undertake this review process four months ago as a result of some specific expression of interest in the company? That’s my only question now.

Luis MarcheseChief Executive Officer

Well, thank you. Thank you for the question. No, it was because we — the board discussed the strategic position of the company. And it was the view of the board that it was a good time and the right opportunity to undertake this process.

Richard CarriganEquitech — Analyst

And did I understand you correctly answering an earlier question that the process will probably drag on for another two months, perhaps?

Luis MarcheseChief Executive Officer

Well, I cannot pre-empt that, but we expect that it will go for the next few months.

Richard CarriganEquitech — Analyst

Thank you for your time and good luck.

Luis MarcheseChief Executive Officer

Thank you.

Operator

Your next question comes from the line of Jim Young with Midwest Investment.

Jim YoungMidwest Investment — Analyst

Yeah. Hi. A couple of questions here for you. Number one, regarding these cost trends that you experienced in the quarter, are these expected to remain at these elevated levels for the foreseeable future? Or would we expect to see the — a decline materializing over the next couple of quarters? That’s my first question.

Luis MarcheseChief Executive Officer

Thank you, Jim. Thanks for the question. As the grades go up, Jim, we expect the cost per metal produced to go down. But that’s a function of how we can be successful on bringing this higher-grade ore into the mix.

I think we are getting there in Bolivar, whose is a bit behind because of all the impacts that they had in the first quarter. Yauricocha, it’s a bit more difficult because, as I said, we are in the middle of this second wave in Peru. So it’s getting a bit trickier to get into those ores as soon as we would have liked to. Having said that, we are bringing more workforce into the mine and trying to get faster into those grades.

So that’s a function of how we do and how well we can do in terms of this COVID situation. Let me give you a number that strikes — that has strikingly in the first quarter. In January, out of the 560 or 570 the people that work in Bolivar, we have — in the — through the screening process, we got a stop over 150 that were sick with COVID. And in February, we had over 40.

So we’re talking in the first month, over 25% of our workers who are sick of COVID. And in the second month, another 8%. So this has been a real hit, OK, in Mexico in the first quarter. Now we’re seeing way lower numbers, but we are still looking into it.

Now in Peru, we are seeing more cases. So we still don’t know how this is going to evolve, but we are happy that our screening process is working, OK? But we are certainly — I’m happy that so many of our workers have been sick out of this disease over the last few months.

Jim YoungMidwest Investment — Analyst

OK, thank you and I appreciate your focus on the safety for — of the employees. The next question would be pertaining — and this is for Ed, regarding the TCs and RCs. And Ed, I recognize and understand that in the past, you aren’t able to really comment directly upon Sierra Metals’ specific situation, but can you give us a sense as to how much of the benefit from lower TCs and RCs we saw in the first quarter? And can you help us give us a feel for how much additional benefit do you expect in the second quarter, third quarter and fourth quarter of 2021?

Ed GuimaraesChief Financial Officer

Thanks, Jim. That’s a very good question. And I don’t mind going in and elaborating a little bit more on the TC situation, especially with the rising metal prices, and I could explain a little bit how the TC mechanism works. So just first off, the first quarter still had TCs and RCs from the previous year negotiated contracts.

And that was because of COVID, we had delays in fulfilling all of our contractual commitments with our customers, with our off-takers. Typically, these contracts for concentrates are very short term, they’re usually one year in nature. And the reason — the reasoning for that, is many we do, we do a tender process every year. So it involves about 20 offtakers, some refiners.

And built into these the TCs, RCs, if you will, are escalators. And what that means is that, when you negotiate a contract, the counterparty wants to or puts in provisions that they participate in the upside of any metal price. So in the case of — let’s just take copper. Copper has — a year ago, copper was around $2.50.

We’re currently at $4.70. So what does that mean to the TC? Your TC would be negotiated at a base price. And that base price, for argument’s sake, let’s just say, was $6,000 per ton — copper price. We’re now at over $10,000 per ton and rising.

What this — the implications on the TC is, as the metal price rises, the offtakers can participate by way of an escalator in the form of higher TC. So that — essentially, what I’m saying is that they participate in the upside. We don’t get 100% of the upside. It’s not like you can just take a benchmark TC for copper, for instance, of $60.

No, that $60 will increase. And in the case of copper, it could be significant. If metal prices were to stay where they are now, you could see a significant rise in that TC based on the escalator.

Jim YoungMidwest Investment — Analyst

And that’s close to your price?

Ed GuimaraesChief Financial Officer

That’s correct. That’s industrywide. And it does affect our all-in sustaining costs. Not our cash costs, but are all-in sustaining costs, which is essentially out of our control in that we include it in the overall cost number.

So — and that’s what we’re dealing with there. So there is some upward pressure definitely on the TCs and RCs. Even though we negotiated much better terms in terms of if you want to take benchmark as — if you look at benchmark for zinc, for instance, it is down almost — last year’s benchmark was about 300. This year, I think they were closer to the 140, 150 level.

Same thing with copper, they were down probably 25% compared to last year. But you now have to factor in this escalator, if you will. And that could be significant, especially for copper. Copper is on a tear right now? Is it a bad thing? No, it’s a good thing.

I think we shouldn’t — I’d sooner take this than a copper price of $2.50, but it’s important to recognize that we don’t participate fully in the upside of metal costs.

Jim YoungMidwest Investment — Analyst

And that’s just for this year…

Ed GuimaraesChief Financial Officer

That’s correct. So these — the — because we keep these contracts relatively short term. So when we negotiate next year, these escalators, they reset to 0. So if copper was at $4.70 on January 1, 2022, or whenever we negotiated that contract, that escalator or that’s the base price and then escalators go from there.

So it really doesn’t have any impact long term. It’s really just a short-term impact on the TC situation.

Jim YoungMidwest Investment — Analyst

And that still look for RCs, too?

Ed GuimaraesChief Financial Officer

No. It’s just a TC. It’s on the headline. It’s on the treatment charge.

Normally, these things wouldn’t be — we hardly talk about it because you wouldn’t see significant swings in base metal prices like we’ve seen. I don’t recall seeing such a swing over the past 10 years in copper prices.

Jim YoungMidwest Investment — Analyst

OK. And then secondly, I guess, my last issue to just say is that the guidance you gave back on January 18 for EBITDA, I would — I’m a little curious and a little bit disappointed, frankly, that you have not eliminated the low end of that range because of — and I totally recognize and understand that the near-term challenges from COVID, the impact on production, the impact on grades a little bit, but it would seem to me that given where the commodity prices are overall at that low end of the range, is just way, way out of the question. So I don’t understand why you’re not eliminating that low end of the range and updating that guidance for EBITDA for 2021?

Ed GuimaraesChief Financial Officer

I think it’s still premature, Jim. We’ll certainly look at it. I think probably in a couple of months when we close off Q2, we’ll definitely — we’ll provide a lot more clarity at that point. But now given the costs that we’ve had in Q1 associated with COVID, given this price participation that I’ve mentioned in terms of not benefiting fully in the price of the metals.

It’s — we’re comfortable leaving it where it is, and we may make further adjustments or refinements to that in the future, but for now, we’re maintaining assays.

Jim YoungMidwest Investment — Analyst

OK, thank you very much. That’s all for now.

Operator

And you have a follow-up question from the line of Mark Reichman with NOBLE Capital market.

Mark ReichmanNOBLE Capital Markets — Analyst

Yeah. This is a question for Ed. So capital expenditures for 2021, those were originally forecasted to be $78 million, which included kind of a carryover of $10 million from last year. So $37 million was for sustaining, $41 million was for expansion.

And now you’ve got the $28 million for the iron ore processing plant. So do you expect to expand the full budget for the year? Or maybe I should just ask, could you kind of address the spending for the remainder of the year, including the $28 million for the processing plant?

Ed GuimaraesChief Financial Officer

Thank you for the question. And yeah, with COVID, we have had restrictions and that has affected mine development. It’s affected exploration development. And so that was — we had — that explained the carryforward into 2021.

Could we have a similar carryforward? It’s still too early to tell. But if we are restricted in terms of headcount, it could have an impact. So including the magnetite, we’re looking at $106 million, the $78 million plus the $28 million that we just recently announced. Could we fall short of that?

Mark ReichmanNOBLE Capital Markets — Analyst

OK. So…

Ed GuimaraesChief Financial Officer

Yeah. It’s too early to say. But there could be where we might have a carryforward into next year. But if we do, it’s really at the — it’s because of the safety precautions and just having lower headcounts.

Mark ReichmanNOBLE Capital Markets — Analyst

Yes. So some of that spending will fund some of the improvements that Luis alluded to in my earlier question. So in terms of the — do you think for your ability to gain ground in the — for the remainder of the year to — in terms of production, is that more of a function of the sustaining capex spending or will some of that be on expansion as well?

Ed GuimaraesChief Financial Officer

In terms of maintaining — because we could easily…

Mark ReichmanNOBLE Capital Markets — Analyst

It should be all.

Ed GuimaraesChief Financial Officer

The plant capacity, we can go over, so that — it’s really — it’s just in the sustaining. The growth really doesn’t impact production. It’s all-in sustaining. And the good thing is, we have the cash to fund the capex.

So if we can, we definitely will spend it. It’s really more of a security situation regarding COVID.

Mark ReichmanNOBLE Capital Markets — Analyst

OK, great. Thank you very much.

Operator

And there are no questions at this time.

Duration: 49 minutes

Call participants:

Mike McAllisterVice President, Investor Relations

Luis MarcheseChief Executive Officer

Ed GuimaraesChief Financial Officer

Mark ReichmanNOBLE Capital Markets — Analyst

Alex HunchakCIBC World Markets — Analyst

Lee CoopermanOmega Family Office — Analyst

Richard CarriganEquitech — Analyst

Jim YoungMidwest Investment — Analyst

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.



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