Transcription

Steve: I’m Steve Williams, President and CEO of Pasinex Resources, and it’s great to have you all here. Thank you again. As I think some of you are aware we try to have a quarterly webinar. So, we put out our financial results for the quarter. In this case, quarter one from 2018, and then we follow just after with a webinar.

The webinar will consist of obviously a discussion of the financial results, the general discussion of the company. And then as I think also you’re aware we invite questions, and indeed as before we’ve been getting questions, which is great.

Couple of things to say before we get into it. The big thing is this is a great time for the company. When you look at our financial results from 2017, and again coming into first quarter of 2018, they’re very strong financial results. We’ve got a very profitable joint venture operating company in Turkey, and you can see those numbers in the financial results. We’ll go into that in a bit of detail in a minute.

I was talking to somebody the other day and they reflected on the point that, here’s a company that was formed in 2012. That’s when we formed Pasinex. And we just put in these very strong financial results from 2017 and coming into 2018. That’s within six years to go from the formation of the company to a strong financial performance. That puts us above a lot of the pack. I’m very proud and our team is very proud of the performance that Pasinex is putting in financially.

The other thing I wanted to talk about today and it’s not just financial, I wanted to talk about where we’re going, and we’re about future zinc. And so, it’s all about exploration. And I want to take you through that exploration, I want to take you through what we’re doing this year and where we’re going with exploration. Because a big part of our story coming up will be exploration. So that will be another part of the presentation today.

The other really good news is today I’ve got our CFO here, Wendy Kaufman, and Wendy is going to be actually presenting the financial results for you, and taking you through that. It’s great that we can have not just me talking, but somebody else talking too.

A little bit more of the introduction. Most of you are aware of this. Pasinex is zinc focused, and we’ll talk a bit about our copper project, Golcuk, a bit further on. Because there was an impairment of that project in quarter one financials and I’ll go into that. We are a zinc-focused company and now with our project in Turkey and our Gunman project in Nevada, it’s all about zinc. Obviously, our top priority project is our JV in Turkey. It’s a 50/50 JV with the Turkish company called Akmetal, and the profitability that where we’re looking at is all coming from that operation, and specifically the Pinargozu Mine in the south of Turkey.

That’s really all I wanted to say in the introduction there. Now I’m going to introduce you to Wendy Kaufman, the CFO of Pasinex. She’s here, and she’s going to take you through the financial results. Over to you Wendy.

Wendy: That’s great, thank you, Steve. If I could just start talking on slide number four. Pasinex recorded net income of 726,000 in the first quarter of 2018, this compares to 863,000 in the prior year, first quarter. Our earnings included the equity gain from Horzum which has nearly tripled from last year. But a decision to not advance Golcuk resulted in a 1.7 million impairment charge. This charge includes a write-down of the net book value to zero, and about 400,000 in estimated cost to close. Steve will speak further about this decision a little later in the presentation.

Also, in the first quarter, the Horzum Board declared a Turkish Lira 40 million dividend to be paid to both of its shareholders. This compares to a Turkish Lira 7.1 million dividend that was paid in 2017. And this truly reflects the strong operational performance that’s coming from the mine. The 20 million Turkish Lira dividend to our partner has been used to reduce amounts that it owes to Horzum. Our 20 million will be paid to us throughout the year. To date we received Canadian 0.8 million, half of which was received in the first quarter.

Turning to slide number five, I’ll go into more detail on the results of Horzum. Our equity earnings from Horzum represent 50% of Horzum’s net income. And the increase in our equity earnings is due to this higher net income. This slide shows Horzum net income on a 100% basis. And the largest reason for increased earnings is due to higher revenues from higher zinc prices in the first quarter of 2018.

Pricing for the sale of the Pinargozu ore is based on a multiplier which considers the grade of zinc and the average LME zinc price around the time of the sale. LME zinc average for the first quarter of 2018 was U.S. dollar 55 per pound compared to U.S. dollar 26, last year of the first quarter. Costs are consistent to prior years, so the higher zinc price directly correlates to the higher gross margin, 81% compared to 50% last year.

Since the end of the first quarter, the Turkish Lira has significantly devalued. Because Horzum revenues are U.S. dollar based and costs are mostly Turkish Lira based, this devaluation, in fact, benefits Horzum earnings. The dividend, however, is subject to the foreign exchange exposure.

Turning to slide number six, this is a bit of highlights of operational data for Horzum, zinc production and grade are higher than the prior year. And as we can see as I just mentioned costs are very consistent. The U.S. dollar cash cost per pound, which is a typical KPI factor that other mining industries use, also includes lead by-product credit, and that’s why we see a decrease in 2018 as compared to 2017. This U.S cash cost is also one of the lowest that you’ll see within the industry.

Finally, on slide number seven, this is a summary of our guidance, and we spoke to it in detail at the last webinar. We still have consistent estimates at 54,000 to 60,000 tons of mine production. And I just wanted to also respond to one of the questions we received earlier, and we anticipate sales quantities to be consistent to our production. We consider revenues to be consistent to production, and then it’s really just dependent on the LME zinc price to determine our revenue dollars. And that’s the summary of the financial information, and I’ll turn it back over to Steve.

Steve: Thanks, Wendy. It’s much better having Wendy to do it than me. Okay, I’m going to talk about exploration. As I said, obviously we’re very pleased with production and the profitability coming in from the mine, but in terms of the growth of the company and the future of the company, it’s all about exploration. And this year we plan a big year of exploration, both in the joint venture and with our newly acquired option project, Gunman in Nevada. In the joint venture this year the joint venture company is planning to spend a bit over 3 million U.S. dollars in exploration.

can tell you that’s a significant increase versus last year or the previous year. And the reason that it’s significantly increased is because of the financial strength of the operating company. We have several focuses in terms of our exploration on the joint venture. The first and top priority is Pinargozu. Pinargozu is the operating mine, and what we need to do is we need to continue to grow the resource at Pinargozu.

A number of you are aware that the end of last year we put out a 43-101, we had an indicator inferred resource of 200,000 tons, which is still small. We believe there’s more to be found and so the top priority in terms of exploration is to grow that resource. We’re depleting the resource by about 60,000 tons a year that’s approximately… you can look at the numbers that Wendy just put up. That’s going to be approximately the depletion it would take out this year, so we need to replace that depletion and hopefully grow the resource.

That is priority number one. What we’re doing there is we’ve got two drills running all underground, we’re drilling from underground. And we’re actually doing some underground development as well this year specifically to enable us to get to deeper targets for drilling. That’s where the money’s going, it’s going into drilling and underground development to facilitate that drilling.

The next three targets near Pinargozu, Akkaya, and Regional reflect the fact that we’re sitting on what we regard as a zinc province. We think that there’s a lot more zinc around the Pinargozu Mine and around the historic Horzum Mine which is about 7 kilometers south of Pinargozu.
Specifically, we’re going to look in Pinargozu property, so not on the Pinargozu Mine but around the Pinargozu Mine. We’re going to look at the property north, a property called Akkaya. And then we’re going to look at trying to acquire some other properties nearby. We think all of that area is prospective, and what we’re doing is, first of all, we need to identify the prospective geology. Then we need to do some preliminary analysis, some geochemical and geophysical analysis, and then going into drilling.

And that will be a program that we will follow through systematically with each of those areas near Pinargozu, Akkaya, and Regional. In the case of Akkaya, Akkaya is actually going to be our second priority target this year. We’re already working in the field, we’ve been doing a lot of geological mapping, and we’re starting to get into some geochemical work. We’re doing some interesting geochemical work, what we call ionic leaching, ionic leach geochem, and we’re using that information to target. We hope to be drilling in Akkaya later this year. We’ll update you as we put our plans together, but Akkaya is actually after Pinargozu, and the resource growth for Pinargozu. Akkaya is our next target.

Just to give you the big picture, Akkaya is probably about two kilometers north of the Pinargozu Mine. And it’s very much the same geology as Pinargozu Mine, so we’re optimistic that when we get into the field in Akkaya, that we can have some success there. Then regionally, we’re on what we regard as a zinc province and a trend, a zinc containing trend. And we think that there is more zinc nearby, so we’re looking at opportunities to acquire more property. It’s a big year for us in exploration and there’s lots of opportunity to find more zinc and to grow our resource. That’s a top priority and that’s why we’re going to spend more money on that.

The end of last year we acquired an earn-in option agreement on a property called Gunman, which is in the north of the state of Nevada in the United States. It’s about an hour and a half south of Elko in United States.

Gunman was found some years ago, I can’t remember exactly the year. Like a lot of things in Nevada, people were looking for gold. And they didn’t find gold, but they did find some zinc. They weren’t interested in the zinc, but clearly, a company like Pasinex is interested in zinc.

We’ve been to Gunman, we’ve looked at it, we like it. We like it for a couple reasons. We like it because we think it’s the same type of zinc geology that we’re seeing in Turkey. We can apply that knowledge that we have of that sort of zinc geology, and we can bring that into the United States. We look around and particularly Arizona mining in Arizona with their Taylor Deposit, with their zinc discovery, there’s evidence nearby that there… well not near nearby, but within the region, that there is zinc around.

Obviously we’re excited by what Arizona mining is seeing, and we think that there’s some chance that we can find something of interest in Gunman. So that’s why I acquired Gunman. We acquired at the end of last year, and then we had to sort of sit out the winter. We sat out the winter and waited for the snow to disappear, and now we’re ready to get work. We’ve been in the field in Gunman, and it’s basically the same sort of thing that we’re doing in Turkey.

The basics of the geology, we’re looking for a particular type of geology structure and then going in with some geochem ionic leach work, same as we’re doing in Akkaya. And also, some geophysics and then we’ll be following with the drilling program. We put this out, we announced this recently about a month ago I think, we announced what we’ll be doing. We expect to be drilling in Gunman in the not too distant future. So again, we’re excited by it. We think there’s some good opportunity here, and we think it’s going to be an important part of our future.

As Wendy mentioned we took the decision to impair our Golcuk copper project in quarter one, we took around $1.7 million impairment. There was $1.3 million approximately on the balance sheet for exploration that we’ve conducted in Golcuk. And we also allowed about $400,000 for close out costs, etc. So that explains the full 1.7 million impairment. So that took Golcuk down to a zero. Golcuk is copper project, and I think whenever you’re going into any of these projects, you have you a target in mind in terms of grade and tonnage on what you’re looking for.

And that target reflects a couple of things. It reflects the geology that you’re looking at, but it also reflects, what you think about in terms of a project strategically. Obviously, we would have a different target criteria than say a Rio Tinto. And what I can tell you is that as we’re going through geology we put quite a bit of effort into Golcuk last year in terms of exploration. As we’re going through it yes, we could see evidence of copper in a number of areas around the Golcuk property, but we couldn’t see our way through to our targets, our strategic targets on tonnage.

We were seeing the sort of grade targets that we were looking for, but we weren’t seeing the sort of tonnage targets that we’re looking for. That doesn’t mean that there isn’t some opportunity there in Golcuk, there is, but it wasn’t meeting our sort of criteria for a future mine. Once we considered that, and we brought a number of experts in to assist us and make sure that we weren’t missing something, once we considered that we decided it’s better that we move away now from Golcuk and we focus on other things.

The other thing to say is that this is also very clearly set up as a single zinc focused company. And that’s where we are today and that’s where we’re going to go with Pasinex. I think that sorted Golcuk.

The next part of program is to deal with the questions we’ve received. So as before we’ve received a number of questions, we ask for the questions in advance, and we’re very thankful for the questions. And as before, we got some good questions. Wendy’s already answered one of the questions, and I’ll move away through some of these other questions. In no particular order, I won’t mention who sent the questions in, but I’m sure the people who sent the questions in will recognize their own questions.

When can we expect drilling results from Pinargozu and Gunman? Let me deal with Gunman first, and tell you about that. About a month ago we announced that we were in the field in Gunman, and as I said just now we are in the field as we talk. And we will be mobilizing very shortly to do our first preliminary drill program. It’s only a small program, 1,000 meters, but we will be mobilizing fairly soon. I’m hopeful that later in June going into July depending on you know, any issues, turning around of assays and things like that, we should be talking about what we’ve done in Gunman in terms of drilling.

Pinargozu is a bit more of a complex question, not necessarily complex, but Pinargozu is an operating mine, so it’s very much moved beyond exploration. Maybe what we should add here… I’m going to modify this question and also talk about Akkaya. But in the case of Pinargozu, what’s critical here is the growth of resource and that’s what we’re about.

In Pinargozu’s case, what we need to do is to replace the ore that we’re depleting each year, and hopefully add some. So in Pinargozu’s case, we won’t be putting out routine drill results, but what we will be doing is periodically updating the resource. We haven’t set any timetable on that yet, but that’s inevitably what we need to do and that’s the information that will be coming through to the market. Because it’s an operating mine and what’s critical now is the resource in front of us for Pinargozu.

I’m going to modify the question and add Akkaya because that’s the other thing that will be happening this year. Akkaya as I mentioned is the property just north Pinargozu, and we’re also in the field in Akkaya as we talk, doing geology, geochemistry, and some geophysics. And later this year we plan to be drilling in Akkaya. Akkaya is an exploration property. Pinargozu is an operating property, it’s an operating mine. Akkaya is exploration property.

What you will see is once we get into the field we will announce when we go into the field in terms of drilling for Akkaya. And once we get into the field, because it’s an exploration play then you would expect to see drilling results from Akkaya because it’s an exploration play. There will be a difference in terms of the way we would handle exploration from Akkaya versus Pinargozu.

Moving on down here, next question. How is it possible that revenue per wet ton increased by 45% over the last quarter while the zinc price increased by roughly 15%? Why do you suddenly get better payments for your product? Good question and well analyzed, whoever picked this up. Well analyzed, so thank you for your analysis. It’s more than just price. The first thing to say… and I think Wendy made a reference to it in what she said a bit earlier. There was a grade differential from the previous quarter to Q1, the grade went up from the previous quarter to Q1, I think 32 to 35?

Wendy: Mm-hmm.

Steve: Yeah, 32 to 35% zinc, so that immediately gives you a higher revenue. The higher the grade of the product the higher the revenue. So that explains some of the story but not the full story. And then obviously price, just a comment on price. When you’re selling in contracts, and it depends on the contract, but it’s not the spot price it’s a moving average on the price. It can be a one-month moving average, to three month moving average. But overall the comment here that went up about 15% is probably correct. So, price explains some, grade explains some.

The other thing that is moving here are the payment terms. Basically, as the zinc market tightened up…and I’m talking about sort of last 18 months, two years. As the zinc market tightened up, not only did we see an effect on obviously the zinc price, but we also saw an effect on the payable percent zinc that we were receiving from the traders and the end users, the smelters. Basically, as the zinc price tightened up, as the zinc price went up, the payment terms to suppliers like us improved. We got more payment for the same amount of zinc, we got more payable zinc in some of the more recent terms versus say if I went back one year.

There’s two things moving here. Not only is the zinc price moving but the payable zinc for the same amount of zinc is also moving. We’ve been blessed by a strong market where the zinc price is going up, and so the payable zinc terms as I was just referring to have also gone up. Equally, if we were to get into a downside and we start to see pressure on the zinc price, not only will the zinc price go down, but you’ll also see the terms coming back off. The payable zinc will come back down. It works both ways. At the moment it’s working in our favor. And there’s no question we are receiving better payment terms now than a year ago.

We got several questions about foreign currency, foreign currency risk, do we hedge, can you comment on foreign currency risk. So without reading the questions, I’ll just comment quickly on that. We are putting the FX rates in our MDNA I believe? In the MD&A or in the financial statements?

Wendy: MD&A.

Steve: We are putting the FX rates in the MD&A. And there clearly is… for those of you have been watching the Turkish Lira, there clearly is some changes going on to the Turkish Lira. There’s been some depreciation the value of Turkish Lira against USD and Europe. Okay before getting into this, maybe tell you a little bit of our operation.

Contracts for sale of zinc are typically written in USD or Euros, and we have a mix of USD and Euro contacts, so we sell our product in USD and Euros. Our cost base is Turkish Lira. We have a few costs, import of goods which are in other currencies, typically in Euro is mostly the other currency., Something like 98% of our cost base is in Turkish Lira. So we sell in USD and Euros and we convert to our cost base in Turkish Lira.

Obviously any depreciation of the Turkish Lira against the USD and the Euro has an impact on our profitability, in this case, a positive impact on our profitability. Then on the negative side is when we bring a dividend out from the company. When you make reference to the fact that we have declared a 40 million Turkish Lira dividend from 2017’s profit, of which 20 million Turkish Lira is payable to Pasinex and we’ve started to receive some of that. There’s a lot more of that yet to come through the rest of this year.

Now, in this case, the operating company declares the dividend in Turkish Lira, obviously in our case when we bring it into Canada, and we’ve also got Gunman in United States, we’re needing to have that currency into Canadian dollars and U.S. dollars. So there obviously there’s a negative impact on the exchange rate. Overall, we’re winning here and losing a bit here, but I think it probably… Wendy can look at this is in a bit more detail but it’s probably sort of evening out. That’s the big picture, that’s how it’s affecting us. I think in terms of overall I think it’s probably a fairly good point.

We looked at this, the board of directors looked at this, and we actually had a board meeting, looking at the sort of currency risks, because we recognized there were currency risks. We took the decision that at this stage we would not hedge, we didn’t want to hedge. We considered a couple of questions hedging on exchange rates and hedging on the zinc price, and at this stage, the board has decided that we want to keep ourselves out of hedging, we did not want to get into hedging. So that’s our position at the moment in terms of that.

Now the next question is related. Are there any delays in planning or timing of exploration on Gunman or Akkaya because of the weak Turkish Lira? The answer is no. I just mentioned that obviously the dividend coming from Turkey back to Canada, there will be a negative impact based on the exchange rate, but we’re gaining on profitability of the other side. So, no, we’re not reacting to the weakening of the Turkish Lira.

Okay, the next question… The MD&A mentioned slightly lower production because of difficult ground conditions experienced the first quarter of 2008. Have you been able to solve this issue? Okay, before I answer that question maybe a little bit of clarity on you know, the nature of that question. It’s geology. Basically, most of our production at the moment is still what we call on oxides zinc the mineral Smithsonite, and it’s deposited in cross faults, where we get north, south, and east, west faults. At that cross point between north, south, and east, west fault, is a weak point structurally, and in those weak points structurally you classically get what we call caves, casted caves, caves in limestone. Some of them are really quite attractive. They have stalactites and things like that.

You get the zinc deposited in there. It really is a low temperature or a low-pressure deposition. The result of that is sometimes you can get… it’s not competent rock. Sometimes you can get some competent rock and you can get some uncompetent rock within these caves. And it’s just a function of how the zinc got deposited there.

We’re working on getting a remote control scoop to get into some of these more problematic caves. Some of them are easy for us to get in and mine, others are a little bit more problematic. Part of our capital budget for this year, is to purchase a remote control scooptram to go in and be able to mine in those areas. So that’s what we’re doing. We haven’t got that scooptram yet, but that’s where we’re going.

Okay, the next question. A question that I have for the webinar is whether there are any advantages to installing a Waelz kiln on site to upgrade the product. Thank you for the question, I like these technical questions. The answer is no, but to be fair I need to fill in some background to that question. As I was just mentioning, about 80% of our production…80, 85% of our production is oxide zinc, and it’s a mineral called Smithsonite or zinc carbonate. There are other oxide zincs out there in the world and one of the most famous ones is a mineral called Hemimorphite which is…it’s a different chemical formula to Smithsonite.

Hemimorphite, if you’re mining that mineral and you wanted to upgrade that mineral, that’s where you would use a Waelz kiln. We do not have that mineral, and so we would not use a Waelz kiln because we don’t have that type of mineral. Actually, the mineral we have can be readily upgraded in a simpler process rather than a Waelz kiln. A Waelz kiln is a very high-temperature kiln, 1,100C. Smithsonite, the mineral that we have, can be upgraded in what would be more similar to a cement kiln running around 550C.

What we have actually is a mineral that is easier to upgrade than the sort of mineral that would require a Waelz kiln. We’ve actually done some work and looked at that, and we know that we can upgrade our product, and it upgrades very well, and it upgrades because it is this Smithsonite. We’re aware of that, we have done some work behind the scenes in metallurgical work and we’ve shown that it can be upgraded and it upgrades well.

The decision on whether we would consider any processing is not so much about the metallurgic and the technical aspects of being able to upgrade, it’s more about the resource. Any processing will require capital expenditure, and will require an adequate return on capital expenditure. And the resource is still small as you’ve seen with the 43-101 that we published and we don’t believe it is sufficient at the moment to sustain the sort of capital that we may require for any type of processing. And given that we can readily sell our product, it just makes sense to just sell the product as it is. However, if we were to significantly grow the resource that question comes back to the table. We’re aware that we could do it, but it’s just not appropriate in terms of strategic decision right now.

Okay, how are we going for questions? Some of these questions I can’t really properly answer, but I’ll read the question to you. Are you affected by any kind of sanctions that might be put on by Iran currently or in the future? I can tell you currently the answer is no. In the future I have no idea. I’m sorry, but I’m not an expert on what the future sanctions might be between a country like Iran. We do monitor and continue to monitor closely what goes on in terms of the political environment we operate in, and things like sanctions. But for me to comment anymore, I just can’t.

I’ve come to the end of the questions. I’ve come to the end the questions. I thank you all for the questions you sent in, and yeah, looks like we’re going to finish in a tighter time here today. Okay, Wendy, did you want to make any final comments?

Wendy: No. No. Thank you for the opportunity.

Steve: Okay, then just going back to where I started, we had a strong 2017 financial performance, we had to start strong quarter one financial performance in 2018 despite taking the write-down on the payment on the Golcuk property. Despite that we still had a strong performance. And we believe that we can continue strong performance through this year.

The second thing I wanted to say was that getting back to the basics and getting back in the future, we’re zinc focused and it’s all about exploration. And we have a great exploration opportunity in the Horzum area, near Pinargozu, both Pinargozu, Akkaya, near Akkaya, near Pinargozu, and that’s going to be a big part of our exploration focus this year. And then now also we’re going to Gunman in Nevada, and we’ll be exploring there, we’ll be drilling there going into June.

So that’s going to really be a big part of our future, and I think a big part of the excitement coming into the second half of this year. That’s it, I appreciate you all being online. Thank you and see you soon in the end of quarter two, which I think will put us probably late August, beginning of September thereabouts for our next webinar. Thank you very much, appreciate you being here.