Coeur Mining Inc (CDE) 2004 Q1 法說會逐字稿

Welcome to the first-quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded. I would now like to turn the conference over to Tony Ebersole, director of Investor Relations. Please go ahead.

Good morning, everyone. I am Tony Ebersole, director of Investor Relations for Coeur d'Alene Mines. This is our first-quarter conference call. The call is also being broadcast live on the Internet through our website www.coeur.com where in the Investor Relations section you can both hear the presentation and manually scroll through slides highlighting first-quarter information. The slide audio replay of the call will be available for two weeks afterward on our website.

On the call from Coeur today are Dennis Wheeler, Chairman and Chief Executive Officer; Bob Martinez, President and Chief Operating Officer; Jim Sabala, Executive Vice President and Chief Financial Officer and Troy Fierro, Vice President of mining operations and Senior Vice President of Coeur Alaska. There will be a question-and-answer period following a brief presentation by management.

As most of you are aware, any forward-looking statements made today by management come under the Private Securities Litigation Reform Act of 1995 and involve a number of risks that could cause actual results to differ from projections. With that I would like to turn the call over to Dennis.

Thank you, Tony. And welcome everyone, and thank you for joining Coeur's first-quarter 2004 conference call. I'd like to start off by just making a few comments about the metals market. Most important to Coeur, we've seen silver in recent weeks push above the $8 per ounce threshold, which was the first time at that level in 16 years.

Although we've seen recent price declines in silver and a corresponding decline in Coeur's share price due to our leading share price leverage in the sector it is important for us to keep in mind that silver prices at $6 an ounce slightly above today are still well above the most recent five-year average, less than $4.75 an ounce and silver today is 25 percent higher than it was a year ago. We think industrial demand is going to remain strong again this year spurred by the ongoing economic recovery around the globe along with a steady ongoing development of new uses for silver, which continue to incrementally add to worldwide demand.

The Coeur group reported significant improvements from last year's fourth-quarter with improved financial results. Our net loss was reduced from $31.2 million in last year's first-quarter to $3 million in this year's first-quarter. It's important to note that this year's first-quarter results include the impact of several important investments in our long-term growth plan previously communicated to you.

Those are, $1.2 million to complete our updated feasibility studies at San Bartolome and Kensington. An increase of $900,000 in our exploration program to identify additional high-grade ore reserves. $900,000 to eliminate our gold hedge position, which would have been recognized in later periods. Meanwhile, we are looking forward to a very strong performance for the full year, which I'll get to in a moment. At the end of this most recent quarter we recorded cash and equivalents and short-term investments of a very healthy $235 million, which gives us the financial strength to move forward with the various projects already in place to grow future low-cost production.

Our two major development projects, San Bartolome in Bolivia and Kensington in Alaska, are nearing updated final feasibility study completion. I would like to specifically point out to you that our work revealed that there are no technical hurdles on either project. We have historically been unhedged in silver, and we have no hedges today in gold. We think this gives our investors and you our shareholders an edge in realizing gains from price increases in both metals.

Our growth profile remains in place and very strong. Our financial foundation and growth profile was noted in the recent upgrade by two notches of the Company by Standard & Poor's, the most important of the rating agencies.

Next, we would like to talk about our market performance in the quarter and over the past several quarters relative to the strong market for silver. As you can see, Coeur still has some of the greatest volatility to silver price movements increasing 18 percent in the first quarter. And we fully expect quarter (technical difficulty) react going forward to future price movements as it has in the past. We think the market considers Coeur the silver investment of choice and we have every reason to believe and will work hard to see that this continues.

Because of our consistently unhedged leverage to silver prices, Coeur company has demonstrated its significant leverage to gold and silver. And as the largest primary silver producer, we do believe that the very strong fundamental picture for silver will continue to bode well for the market prices of the metal.

Meanwhile, we are looking ahead to another strong year of performance at our operations with projected increases which we've told you about today in silver and gold production over the last year and ongoing significant improvements in our operating cost. We expect to produce 14.5 million ounces of silver and 133,000 ounces of gold. With cash costs of approximately $3 per ounce of silver.

We expect this increase in both silver and gold production to significantly improve the Company's operating results as the year progresses. At metals prices consistent with the first quarter we can project this production profile to generate strong cash flow and profitability for the full year. Our two major development projects, the San Bartolome project in Bolivia and Kensington in Alaska are moving toward completion of their updated feasibility studies near the end of the current quarter.

With production still projected from these projects in 2006 they can increase gold production by 75 percent, and silver production by 41 percent over current levels, which I might add does not include the updated feasibility study assumption of San Bartolome of 8 million ounces of production. And this increase is demonstrated on the next two slides showing our annual production trends and the expected boost to production by these two projects.

You will note the footnote reference to the San Bartolome increase. With our projected operating costs at Kensington and San Bartolome, these projects will increase company cash flow and lower Company cash cost per ounce in our corporate profile. The gross profile on the slide includes the first full year of expected production at San Bartolome at 6 million ounces and in subsequent years, silver production is expected to increase to 8 million ounces a year.

We are seeing encouraging early results from our stepped-up exploration programs, particularly in South America. And Bob is going to talk to you about that in more detail later. So we are excited and confident about the year ahead. With our financial strengths we are not only able to move aggressively forward our in-house projects, but I can assure you we are actively looking at growing the Company to acquisition.

Now I would like to turn our review over to Bob Martinez who will discuss our operations and then Jim is going to give you a financial overview and I will be back for the wrap up. And then your questions.

Thank you, Dennis. At Cerro Bayo in the first quarter silver production was 1.2 million silver ounces along with 10,536 ounces of gold. Cash operating costs were $2.31 per ounce of silver, largely due to the reduced gold output, which is used as a byproduct credit. For the full year 2004 we are expecting Cerro Bayo and Martha to produce 4.9 million ounces of silver and 54,000 ounces of gold at an estimated average cash cost of approximately $2.05 per ounce of silver. The following map shows some of the areas with the blue showing the vein systems in Cerro Bayo itself.

We are now focusing on the high-grade vein systems in the main Cerro Bayo area, including Aveyada Sur (ph) Lusaviena (ph) and Verhulding (ph) as well as veins in the Laguna Verde area just west of the Cerro Bayo Mine. Extensions of the high-grade Aveyada Sur vein were mined in the first quarter. During the quarter we also had two new vein drill intercepts in the Vanita (ph) vein systems and the Alena (ph) vein systems located in the newly discovered Canadon Verde area.

In 2004 we will concentrate on completing our medium-term exploration strategy, which involves both drilling near existing infrastructure and in the greater Cerro Bayo area designed for discovery of new vein systems. There are now at least 130 veins identified in our land package at Cerro Bayo that are targets for future exploration and possible development.

The next slide shows South Santa Cruz exploration program including around the Martha mine itself. Most of our 2004 exploration program involves drilling near existing infrastructure at the Martha mine and in select areas in the Santa Cruz Province to build on the positive results we had in 2003. In the first quarter over 4,300 meters of definition and 6,700 meters of drilling were completed around Cerro Bayo and Martha. We have had encouraging results, especially at the R4 Delmedio (ph) area of Martha where recent results indicate economic high-grade mineralizations exist below the 260 meter level where a ramp construction is currently in progress.

At Silver Valley on the next slide, we are making progress on our long-range development plan, which began in last year's fourth-quarter. First-quarter production was impacted because of the focus on our optimization plan, which as we previously announced, focuses on reserve additions rather than production and that will provide the bases to increase mine production in 2007. First-quarter silver production was 906,980 ounces. Cash operating cost this past quarter were $4.93 per ounce, which as planned, were impacted by the development plan.

We've had promising early results from drilling and drifting in the upper area of the Galena Mine and drifting to provide drill access to targets in the core mine area remains on schedule. During the full year 2004, Silver Valley is expected to produce 3.7 million ounces of silver at an average cash cost of approximately $4.80 per ounce. Under our development plan reduction is planned to increase 7 million ounces by 2007 with costs declining to $4 per ounce of silver. We are still expecting that the multiple exploration targets that we had targeted have the potential to add up to 53 million new silver ounces.

Moving on to Rochester, we are looking to have a banner year in gold production, about 55 percent more than last year or a total of 78,500 ounces. Silver production is expected to be 5.8 million ounces and cash cost should come in at approximately $2.65 per ounce, which is below historical cash cost levels. Given that 11,475 ounces of gold were produced in the first quarter you can see we expect gold production to increase and per ounce cost to decrease significantly during the remainder of this year.

In the first quarter we began putting higher grade gold ores the pad which will be recovered during the course of the year. This will also result with higher gold production and lower operating costs. With the installation of the new pressure now complete and behind us, mining crushing and leaching operations are now operating according to plan. At San Bartolome, based on the Company's assessment of the updated feasibility study we have revised several of the key benchmarks on the property. The initial expected mine life is 15 years with proven and probable reserves of 123 million ounces of silver.

We are expecting plant throughput to increase from 4,700 tons per day to 5,200 tons per day and changes in the metallurgical circuit are expected to increase tin recovery from 71 percent to 78 percent. The addition of the tin circuit will allow for the recovery of this significant byproduct metal. Based upon these modifications it is now estimated that annual mine production would be as high as 8 million ounces of silver and 2 million pounds of tin annually. Annual production for the first three years of operation was initially expected to average 6 million ounces of silver. It is now estimated that 95 million ounces of silver and 30 million pounds of tin will be produced over the life of the project (indiscernible) established or reserves and mineralized material.

Based on the work performed by independent consultants, we believe that there is an opportunity to expand the mineralized material. The initial capital costs are now estimated at $130 million, including a contingency of 12 percent. And per ounce operating cost net of byproduct credits are now estimated at approximately $3.75 per ounce. The revised project is based upon a silver price of $6 and a tin price of $2.90. The updated feasibility study is addressing these project modifications along with optimization opportunities. Our work indicates no technical hurdles on the project.

The final environmental study was filed with the Bolivian government on April 27, 2004. (indiscernible) Review of the final updated feasibility study and receive our final permit, construction of the project could commence during 2004 with production commencing in 2006.

I will now turn the presentation over to Troy for an update on Kensington.

Thank you, Bob. At the Kensington gold project the ongoing updated feasibility study continues to indicate a project of approximately 85 million to be spent during 2004 and 2005, with annual production of approximately 100,000 ounces of gold when the mine reaches full production. In addition to one million ounces of reserves an additional 7.3 million tons of mineralized material averaging 0.12 ounces of gold per ton exist on the property. We view the Kensington Property as having a 5 million ounce resource potential.

The cash cost of production is expected to be approximately $195 per ounce with an initial mine life of at least ten years. By comparison the 2003 world gold industry average cash costs were $222 per ounce so you can see why we are confident about Kensington. During the first quarter of 2004 the draft supplemental environmental impact statement was released for public comment. The comment period closed and the U.S. Forest Service is currently developing responses to the comments. The Environmental Protection Agency has released a preliminary draft, National Pollutant Discharge Elimination System permit to affect the government agencies for review and comment. But for '04 permit application has been submitted and is currently being reviewed by the Army Corps of Engineers for completeness.

We expect the project will have all permits in the third quarter of 2004. Upon successful completion of the final updated feasibility and receipt of all final permits, construction of this project could still commence during 2004 with production beginning in 2006. Recently, the Alaska Industrial Development and Export Authority, AIDEA, introduced a bill to the Alaska House seeking legislative approval to issue bonds of up to 20 million to finance the acquisition, development, improvement and construction of Coeur's and related facilities located at Slate Creek Cove and Cascade Point in Berners Bay in Southeast Alaska. These proposed facilities would facilitate the operation at Kensington.

On April 30, 2004 the House passed the bill by a 38 to 0 margin. The bill is now in Senate finance with final action expected in May 2004. I will hand things over to Jim now for the financial update.

Thank you, Troy. The major financial events occurring in the first quarter were the further strengthening of the Company's capital structure and the significant improvement in the Company's bottom line. During the quarter a number of important long-term strategies were implemented which had a short-term impact on the income statement. First exploration expense increased approximately $900,000 and was due to work continued to expand our reserves base in Chile, Argentina and in Silver Valley.

Second, we continued to advance the San Bartolome and Kensington projects for the construction decision. As Dennis said these projects have the potential to increase silver and gold production by 41 percent and 75 percent, respectively. As a result, predevelopment expenses increased by 1.2 million during the first quarter. Finally, the Company's hedge book was closed which resulted in a charge of $900,000 in the quarter, thereby eliminating the hedge books impact on future quarters and allowing our shareholders to experience 100 percent leverage to both silver and gold.

Absent these items the Company would have operated at breakeven in spite of the slow production quarter at Rochester which was due to normal operating conditions. We do expect a significant increase in Rochester gold production during the year as this material that was placed on the pad during the quarter is converted to (indiscernible) production later in the year. As a result in the first-quarter 2004 Coeur reported a net loss of $3 million or 1 cent per share compared to a net loss of $31.2 million or 23 cents per share for the same period in the prior year.

Gold production which totaled 22,000 ounces versus 33,000 ounces of last year's first quarter was impacted by a transition of mining at Cerro Bayo from the (indiscernible) deposit to other vein systems as well as the normal winter cycle of production at Rochester during the first quarter of any calendar year.

Silver production which was 3.4 million ounces compared to 3.6 million ounces in the first quarter of last year was slightly lower in the first quarter due to the development project at Silver Valley, which has stepped up exploration for future production growth. Our $180 million convertible notes offering is completed early in the first quarter, and at March 31st our cash and equivalents and short-term investment position totaled $235 million, giving us the liquidity to pursue our expanded exploration program and the funding of our development project.

During the quarter we completed the redemption of the remaining 7.25 percent debentures that were outstanding and as a result of this and the shift to low-cost financing, our interest expense was reduced by more than half to just $900,000 in the quarter compared to just over $2 million a year ago in the first quarter. All of this has been recognized by the rating agencies Standard & Poor's, which recently upgraded Coeur's credit rating to B- from CCC. Standard & Poor's gave the reasons for the upgrade for the Company's much improved liquidity and financial profile which gives us the capital necessary to fund development of our new low-cost projects and increase our reserve base and improve profitability and diversity. These ratings, this rating upgrade obviously gives a big boost to the Company in terms of our ranking within the financial community and the comfort level for our investors.

The next slide gives us a snapshot of our strong balance sheet, cash and short-term investments stand at $235 million. Total assets are $421 million and our total outstanding indebtedness comes from the recent notes offering with carrying interest rate of just 1.25 percent and is convertible into equity at a rate of $7.60 per share. And shareholders equity stands at $193 million.

So we remain very healthy financially, which gives us flexibility to move forward on a number of fronts. the next slide shows the improvement in our operating cash cost profile. We expect cash cost this year to come in at approximately $3 per ounce of silver a 9 percent reduction from last year. This is due in part to increased gold production at Rochester, which is used as a byproduct credit. The reduction in operating costs will favorably impact our cash flow this year.

This slide shows our EBITDA leverage to severing (ph) more price limits which we referred to in the past. During the quarter we eliminated our gold hedge position so we currently have no hedge positions in place for either gold or silver. As a result, changes in metals prices report directly to the bottom line. Every 10 cent move in silver prices impacts annual EBITDA by 1.4 million on an annualized basis, and every $10 move in gold prices impacts EBITDA by 1.3 million.

The next slide shows how well Coeur stock performs relative to silver and gold price movements. During the first quarter Coeur's 18 percent share price increase measures against a 1 percent increase in gold price and a 31 percent increase in the price of silver, and on a relative basis since the beginning of last year to the end of the first quarter this year, Coeur's share price has increased 135 percent versus 25 percent for silver and 12 percent for gold.

And with that, I would like to turn the presentation back to Dennis for his closing remarks.

Thank you, Jim. Just a few comments on the silver market. While we've had some pullback in the silver market recently, I think what we've really seen this year with prices briefly breaching the $8 level is the culmination of the building supply demand fundamentals underlying silver, which have been steadily evidencing themselves for more than ten years. While silver and gold both closely track the growing disparity between U.S. dollar and the euro, silver it seems to us has broken away from its historic relationship with gold, and is being more price driven by a steady growth in industrial demand.

Silver is the world's most widely used metal. With industrial demand accounting for about 43 percent or nearly 450 million ounces of total world consumption that approaches $800 million or 800 million ounces. We are seeing new uses for our unique metal all the time. In everything from textiles to superconductivity; in healthcare a new generation of bandages, surgical threads to catheters and the like are utilizing silver's unique antibacterial properties.

Silver demand is influenced to a large extent by the growth and modernization of the world economies. And industrial demand last year was 5 percent higher than it was in 2002. We are looking forward to next week, seeing many of you when the annual silver survey will be released by Goldfield Mineral Service. And we expect this will confirm our belief that the market fundamentals we've seen drive prices higher this year are well in place and will continue into the future. This bodes well for our shareholders for both silver and for Coeur.

In conclusion, the Coeur team is expecting another solid year with silver and gold production growth and more efficient low-cost operations in cash cost. Nearing completion the feasibility and permitting work at San Bartolome and Kensington puts us in a position for the Board of Directors to decide on proceeding to construction. These are both long-life mines and have the potential to significantly increase our gold and silver production and cash flow growth and drive us to increase profitability.

San Bartolome should increase silver production by at least 41 percent by 2006, and Kensington can increase our gold production by 75 percent over current levels, which is represented on the previous slide. Our cash position and balance sheet puts us in a very strong financial condition and position. Not only to fund increased exploration, but the development of projects that will take Coeur to the next level of growth and our ability to carry on actively the search for opportunities outside the company.

We're looking to add additional ounces this year through our accelerated focused exploration program particularly at our young South American mine. So we've gotten off to a reasonably good start in 2004, but we won't become complacent. And with improved metal markets should be in very good shape as we report to you going on through the balance of the year. Now we will be happy to take your questions.

(OPERATOR INSTRUCTIONS) Adam Graf with Bear Stearns.

Good afternoon, gentlemen. Quick question. I know you guys have given some guidance regarding higher exploration costs this year. I wonder if you could be more specific about how much you plan to spend during the year an the distribution of those expenditures between the last three quarters?

Jim or Bobby.

We would expect to spend approximately $10 million over the course of this entire year, and I think you can assume that that would be spread pretty much equally throughout the last three quarters.

Thank you.

(OPERATOR INSTRUCTIONS) Pierre Vaillancourt with Orion Securities.

Hi, Dennis. You were talking about the long-term outlook for Galena. Could you elaborate a little bit on what that looks like for Rochester and Cerro Bayo? I know it is in flux, but maybe give us some parameters to work with.

At Rochester we basically will stop mining there in 2007. Recovery of metal will continue up until probably 2011, 2012. And that is basically it for Rochester. At Silver Valley the exploration program we are targeting the resource base there about 53 million in ounces and basically we have prioritized about six to seven targets. We go after the first two or three, if we're successful then we continue work on those two or three because we only need about two or three targets to basically give us the number of ounces that we need to increase that production to 7 million as stated earlier in 2007. So right now we are going after what we call the upper country, which we mentioned in the call. We've had some very good results there. The other target that we're going after is we're drifting towards the Coeur mine, and we expect to be at the drilling platforms here next month.

I might add, Pierre with regard to the Coeur d'Alene mining district operations our practice there historically has been to maintain not more than a five-year ore reserve base. And when we reach that level to replace each subsequent year the ore that has been mined in the previous year. So we would not expect to see the reserve life go beyond that in the course of this program that we have a great deal of confidence in, otherwise our capital is just simply tied up in the ground too long before the ores are mined.

Just to get back to the Rochester production level between now and '07 when you stop mining, is it more or less holding steady, or how does it decline? What kind of a profile do you see as you head into the last years there?

The silver will pretty much stay the same. Gold -- this is a higher grade gold we're going after, so you got 78,000 ounces this year. I think it climbs up to the 90,000 range in the following year and then starts declining after that.

Okay, and so how does that reflect in terms of costs on a per ounce basis?

We've talked in terms of our company goal, of reaching cost of production of $4. And we're looking at this really on a companywide basis going forward with a contribution of blending of all of our properties, and I think you see from the current quarter that the group at Rochester has made very good progress on (indiscernible) costs.

Okay, but I am just looking here, you are talking about 265 per ounce for '04. Is that sustainable, or is that likely to go back up again?

We have not provided any forward guidance on that at this point, Pierre. The information that we've got is really what is contained in the press release.

How about unit costs on a per ton basis? It would be helpful to know just what that is. Do you think you can talk about that a little bit?

Are you talking now specifically about --

I mean, I don't know if this is the right time to do it, maybe I can talk to you later but I am just in terms of trying to track how the performance is at the mine, you've got a better sense on a per ton basis.

I think you can get that from the information contained here because if you multiply our per ounce costs on number of silver produced that would give you the gross production costs. And you would see the tonnage profile.

We're happy to respond to further questions, but perhaps it would be more convenient after the call because of the detail.

Okay. One thing I was confused on, on San Bartolome you are talking now about cost of 375 an ounce. It seems like in earlier discussions with you it was going to be lower than that. I mean closer to $3 or so. Am I mistaken there, or.

You are correct. Actually our initial target at San Bartolome in the prefeasibility study was $2.50. We pointed out to you today the new project description based on the current status, our view of the final feasibility study and with the increased plant throughput, the increased silver recoveries, the production increases to 8 million ounces and the capital cost, this is how we now see the operating cost picture. But still expect that at that level we would have a very satisfactory return.

Finally, at Cerro Bayo you mentioned 6700 meters of drilling. Can you talk, give us a little bit of sense of how that's going? Are you planning on releasing any of the drill results on these veins? I realize you've got a number of vein sets there, but can we get a better sense of what you are encountering there and what kind of success you are having?

Bobby, you want to talk about the exploration results?

Basically we are just coming out of winter down in Chile, so we will be doing a lot more drilling here very quickly. But we've had very good success to the west of Cerro Bayo, and of course, most of our success has been going to the North on the present vein systems. So our exploration program is based on continuing the work to the north of Cerro Bayo and then these new discoveries to the West. So that's what we'll concentrate on this year.

Are you going to be talking about actual results at all?

Well, we've set forth, Pierre, previously what our global outlook is in terms of new ounces there. We obviously haven't provided specific detail on the whole (indiscernible). We would be happy to go into some detail I think at another time with regard to the actual exploration results. Perhaps we can get Don Birak, our new senior VP of exploration involved in that or our Chilean group.

Okay. Well, thanks very much.

And there are no further questions Mr. Wheeler. Please continue.

We would like to thank everybody once again for joining us on today's first-quarter conference call. And we appreciate the opportunity to visit with you and update you on the progress of your company and to respond to your questions. If you have any further follow-up, please feel free to contact Tony Ebersole in Investor Relations, and we look forward to continuing to report to you the balance of the year. Thank you.

Ladies and gentlemen, this conference will be available for replay after 1:30 PM Eastern time today through midnight on Wednesday, May 12, 2004. You may access the (indiscernible) teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 728890. International participants may dial 320-365-3844. (OPERATOR INSTRUCTIONS) That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect your lines.