Coeur Mining Inc (CDE) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. 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'd now like to turn the conference over to your host, Director of Investor Relations, Mr. Tony Ebersole. Please go ahead.

Thank you Stacey. Good morning everyone. I'm Tony Ebersole, Director of Investor Relations. (technical difficulty) our first-quarter 2005 results conference call. The call is also being broadcast live on the Internet to our website, www.coeur.com, where in the investor relations section you can both hear the presentation and manually scroll through the slide highlighting first-quarter information. The slide and 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, President, and Chief Executive Officer; Jim Sabala, Executive Vice President and Chief Financial Officer; Don Birak, Senior Vice President of Exploration; Ray Threlkeld, President of South American Operations; and Harry Cougher, Senior Vice President of North American Operations. Any forward-looking statements made today by management come under securities legislation in the United States and Canada, and involve a number of risks that can cause actual results to differ from projections. With that, I'd like to turn the call over to Dennis.

Thank you for joining us today as we report our results for the recent quarter, which continued to demonstrate the success of our strategy geared to significant long-term growth, increased production of silver through new projects, ounces of reserves, strong cash flows, and profitability.

Our focus in the past quarter was on both internal and external growth initiatives, which included heavy investment in the future growth initiatives of exploration and our ongoing predevelopment expenses, including $2.4 million spent in predevelopment of the Kensington Mine. In total, these exploration and predevelopment initiatives involve spending of $5.5 million in the quarter. Even with this investment in the future growth of the Company, we delivered income of $0.5 million before income taxes and the onetime charge for litigation expenses.

We maintained our commitment to improving the performance of our North American operations, and continuing to add reserves through our aggressive exploration and development program at our South American mines, while continuing to successfully advance our major new mine projects, San Bartolome in Bolivia and Kensington in Alaska.

Although our silver production was down for the quarter relative to a year ago, due in part to the expected mine plant at Rochester, our gold production you will note was up substantially. Therefore, our silver equivalent production for the quarter equaled the silver equivalent production of last year's first quarter.

We do expect to achieve further efficiencies in our operating properties in North America in particular as the year progresses, with full-year cash cost expected to be lowered to an average of $3.90 for the year.

Our cash, cash equivalents, and short-term investments balance was a very healthy $314 million, which continues to give us the financial strength and flexibility to execute an ambitious and sustainable internal growth platform. The two projects, San Bartolome and Kensington, are expected to lift silver and gold production 66% and 77% respectively over present levels.

Leading the way this past quarter was Cerro Bayo, with per ounce silver production cost of a negative $0.15 net of gold credits. And meanwhile, our expanded aggressive exploration program continues to build future low-cost balances, with exploration expenditures 60% higher than last year's first-quarter in the first phase of an expanded drilling effort, building on our successes of last year.

Coeur's investment in exploration has increased 250% during the past 3 years to a budget of $13.4 million this year, which is generating very positive results. We expect these efforts, combined with strong silver and gold markets, to further extend Coeur's leadership as a leading primary silver producer.

We have said all along that we intended to use our strong balance sheet to grow shareholder value in a variety of ways. This past month, we did just that with the acquisition of additional silver production reserves, income and cash flow from the Endeavor mine in Australia. This is a mine with expected annualized silver production to Coeur of 1.3 million additional ounces per year, giving us additional leverage to strong silver markets.

The Endeavor acquisition immediately increases companywide Silver production by 10%, reserves by 12%, both adding additional leverage to silver prices for our shareholders going forward. We're also pleased to be back in the mineral-rich continent of Australia, and the relationships with CBH that we believe will lead to future opportunities.

Our internal growth platform advanced in the first quarter with construction beginning at San Bartolome and permitting near completion at Kensington as we speak today, where we have a July 1 target date to begin construction. These projects are expected to begin delivering their strong silver and gold production levels in late 2006. We fully intend and expect that these efforts, combined with the expectation of continued strong silver and gold markets, will further extend our dominance.

Now I'd like to take a minute to talk about our new acquisition in Australia, the entire silver production and reserves of the Endeavor mine in New South Wales. The benefits of this acquisition are immediate, with positive impact on the Company's annual silver production, reserves, income, and operating cash flow.

CBH Resources is one of Australia's major zinc and lead producers, and we're glad to be associated with them. We have purchased all the silver contained in the Endeavor mine, which represents an annual silver production of 1.3 million ounces of silver. Add an additional 24 million ounces of silver to our reserve base, which increases the silver reserves by 12% over year-end 2004 levels.

Our acquisition cost of total of $38.5 million in two payments this year translates to $3.26 per payable ounce of silver. As the silver is produced, we will pay an operating cost additional of $1 per ounce, which in total results in Coeur effectively paying 4.26 per payable ounce of silver, well below today's industry average of acquisitions of $5.33 per ounce.

Next year, in the first full-year of 1.3 million ounces of productions to Coeur, we expect our interest in the Endeavor to yield Coeur $6.2 million in annual operating cash flow. So as you can see, we're very excited about the present and future benefits that a structure like the Endeavor transaction brings to Coeur and our shareholders, expanding our asset base with high-quality production.

We now have a strong foothold in three continents, all of which have additional potential to continue our productions and reserve growth at very competitive low-cost. Now I'd like to introduce Ray Threlkeld, in charge of our South American Operations, who will give us an overview of South America in the recent quarter. Ray?

Thank you Dennis. First, at Cerro Bayo, our first quarter production was 659,000 ounces of silver and approximately 14,900 ounces of gold. Giving effect to the byproduct gold as credit, we have a reduction of operating costs and our cash costs at Cerro Bayo were a minus $0.15 per ounce of silver.

Meanwhile, our accelerated 2005 exploration program began in the quarter, building on the success we had last year. A total of 69,000 feet of drilling was completed during the period in a program that will total $3.9 million this year. The drilling focuses on extensions of existing vein systems and finding new systems, with near-term goal of the finding enough reserves to maintain at least three years of future production. We still see excellent potential to discover additional high grade veins within the entire Cerro Bayo trend, which is an area of about 16 square miles.

For the full-year 2005, we're looking at Cerro Bayo to produce approximately 3 million ounces of silver and 56,500 ounces of gold at an estimated average cash cost of approximately $1.01 per ounce of silver.

The ore from both Cerro Bayo and Martha are combined for processing at the Cerro Bayo mill. In today's press release, the production and cost of Martha were reported separately, a practice that will continue going forward. First quarter production of Martha was 379,060 ounces of silver and 471 ounces of gold at an average cash cost of $5.07 per ounce of silver. We expect costs to decline during the year, with full-year cash costs of $4.16 per ounce, while producing approximately 1.8 million ounces of silver and 1760 ounces of gold.

The first quarter drilling at Martha represented the first phase of an accelerated exploration program, with the completion of over 28,000 feet of drilling. Encouraging drilling results were obtained during the quarter, especially at the R4 Deep, which remains ultimate depth, and the Francisca, Catalina and Martha Norte veins. Drilling and development will continue on these veins and other targets during the year. Don Birak will speak to you more on this in a moment.

Reserve levels in 2004 tripled at Martha based on the exploration program last year. The 2005 exploration budget at Martha is $2.7 million, an increase of 17% over last year with a near-term target of building reserves to support a minimum of three years' production.

Now I'd like to speak to you on the San Bartolome construction. At San Bartolome, we continued with construction activities and expect production to commence in 2006. The activities in the recent quarter included advancing engineering and procurement activities, including starting to purchase long lead delivery processing equipment.

Both the construction and mine management teams are in place. The mine management staff is headed by Americo Villafuerte in Potosi with a plan to utilize local mining personnel from the Potosi area, which has a good workforce pool provided by the local mining cooperative, who are involved closely with the project.

During the first quarter of 2005, we capitalized $1.9 million in connection with the construction activities at San Bartolome. Optimization work is ongoing to lower capital expenditures and operating costs. We are still on track for annual production of 8 million ounces of silver annually during the first five years of production, at an average operating cost of $3.50 per ounce.

The 152 million ounces of current reserves provide a minimum initial mine life of 15 years. Now I'd like to turn the call over to Harry Cougher for a recap of North American operations. Harry?

Thanks Ray. The Silver Valley, the Galena Mine production was 710,000 ounces of silver, with a cash cost of $6.73 per ounce. However, we expect those costs to decline to an average of $5.20 cents an ounce for the full year. The principal reason for the higher costs in the quarter was lower ore grades from the higher volume producing stokes (ph). The ore grades will improve as higher grade veins encountered late in the first quarter and the second-quarter are brought into production. In our ongoing development work, we anticipate that the improvements in grade as the year progresses will lead to significantly lower cash costs per ounce, along with higher reduction rates.

Full year production is expected to come in at approximately 3.6 million ounces. We're continuing to the aggressive exploration drilling program at Silver Valley, primarily in the West Caladay area, where early results are showing that the potential to bring that area into production by year-end. The mine exploration and development work continues to target increased production levels to 5 to 7 million ounces per year along with declining cash cost for us.

At Rochester, as expected in the mine plan, we're currently seeing higher gold productions levels and less silver production. In the first quarter, Rochester produced 1.1 million ounces of silver and 13,992 ounces of gold at a cash cost of $6.30 per ounce.

During the quarter, production at Rochester was lower than expected due to a delay in the leaching of gold and silver. As a result, we implemented a program which included a review by world-leading metallurgical and mining engineers to determine that the operating plan at Rochester was sound. I'm pleased to report that these engineers have confirmed that the mine plan, as developed by the Company, was deemed to be appropriate and that the overall expected lease recoveries were also considered appropriate. As a result, we expect the production from the Rochester Mine and the per ounce operating cost to improve in future quarters.

With that, we're expecting cash cost declining to an average of $5.55 per ounce for the full year. Full year productions is expected to come in at approximately 4 million ounces of silver and 72,500 ounces of gold. At Kensington, permitting is moving along toward completion in this quarter, with construction targeted on approximately July 1st. Just this week, the State of Alaska issued its final six permits and certification of Kensington, including the last two state certifications that will allow the U.S. Corps of Engineers to finalize an issue (technical difficulty) its 404 permit and the EPA to issue its MPDS permit during the second-quarter.

Initial production is expected to begin in late 2006 at an annualized rate of 100,000 ounces of gold at an estimated cash operating cost of $220 per ounce of gold, which is below the world average operating cost of a gold mine. Now I'd like to turn the call over to Don Birak for a look at the exploration in the first quarter. Don?

In the first quarter of this year, we conducted exploration at all our properties around the globe, with the largest component devoted to those in South America to follow up on discoveries and reserve additions made in 2004. As Ray mentioned, we continued drilling at a high place at Cerro Bayo and Martha located in southern Chile and Argentina respectively. Reserves at both properties increased significantly year-end 2004 relative to the prior year.

The next three slides show where we have focused our exploration at Martha. In the first quarter this year, we expanded the size of the Martha mine both laterally and at depth with our focused exploration activities. This first slide is a longitudinal section looking northerly at the main Martha and R4 vein. This vein is over 1300 meters long, with mineralization to find over a vertical extent of more than 150 meters. In the first quarter, we extended no mineralization at R4 at depth into the west.

The next two slides are of the new Catalina and Francisco veins, which are north of the Martha and R4 structure. These two veins were discovered in 2004 and remain open in several directions. In the Catalina vein, drilling in the quarter expanded the size of the vein system to the east and at depth. Mineralization in this low sulfidation vein is predominantly high-grade silver.

As on the prior slide, the area drilled in the first quarter on the Francisco vein is shown on the slide as well as the open trends to depth and laterally. Drilling continues on both structures and other target in the Martha mine area.

Next I would like to talk about the Galena Mine and Silver Valley of North Idaho, where as Harry said we're continued to explore targets defined in 2004 and to generate and cast new targets to drill throughout 2005. The Galena Mine consists of high-grade silver and associated copper and lead mineralization in large fault-hosted veins and tension veins related to those faults.

This section looking north is a three dimensional representation of the main ore zone at the Galena Mine. Areas of exploration activity are outlined on this section. The next slide will show the of the West Caladay area.

In the first quarter, we completed several core holes into West Caladay. Results from these holes are shown on the section where drilling encountered high-grade silver and several veins in each hole. Mineralization remains open at depth and up-dip. Follow up work to these encouraging results will be conducted from the new mine headings currently under construction. I will now turn the call over to Jim Sabala for a review of the financial results of the first quarter.

Financial highlights in the recent quarter included 31% higher revenues totaling 38.1 million, a 34% increase in gold production to 29,400 ounces, which with silver production of 2.9 million ounces combined for an overall metal production equivalent to the prior year's quarter. This helped lead to a positive $500,000 in income before the income tax provision and the non-recurring item.

Coeur realized this income even while increasing its investment in future growth initiatives, including exploration expenses of 3.1 million, 60% higher than last year's first quarter, and 2.4 million invested on predevelopment activities at the Kensington project. Operating income before these items was $5.3 million.

For the first quarter, Coeur realized an average silver price $6.85 per ounce compared to an average silver price of $6.94 per ounce during last year's first quarter. As far as gold sales, Coeur realized an average price of $424 per ounce during the first quarter of 2005 compared to an average gold price of 392 per ounce in the same period last year.

The next slide shows the graphic summary of the quarter. Revenues of 38.1 million were an increase of 31% compared to revenue of 29 million in the first quarter of 2004. Companywide production was 29,423 ounces of gold, up 34% from 22,011 ounces in last year's first quarter to (indiscernible) production from the Rochester and Cerro Bayo mines.

Silver production was 2.9 million ounces compared to a 3.4 million ounces a year ago. This was due to expected reduced production at Rochester as anticipated in the mine plan, and lower-than-expected grades at Silver Valley, which this area has previously reported is expected to continue through the remainder of 2005.

For the first quarter of 2005, the Company had income of 500,000 before income taxes and a onetime charge for litigation settlement. For the quarter, the Company reported a net loss of 1.8 million or $0.01 per share compared to a net loss of 1.7 million or $0.01 per share for the same period in the prior year. Included in the quarter's results is a onetime non-recurring provision to settle outstanding litigation of 1.6 million and $900,000 in connection with the Sarbanes-Oxley compliance program.

The first quarter also included 60% higher exploration expense of 3.1 million associated with Coeur's expanded exploration program, and 2.4 million was invested on predevelopment activities in Kensington. Operating income before these items was 5.3 million.

The Company's balance sheet remains very strong with cash, cash equivalents, and short-term investment balances of 314 million at March 31, 2005. And as is our policy, Coeur does not currently have any of its silver or gold production hedged.

Looking ahead financially, the Endeavor acquisition is expected to produce approximately 900,000 ounces for Coeur this year, which would translate to approximately 4.1 million in operating cash flow to the Company at existing silver prices. Next year, the cash flow number would increase to 6.2 million at current metals prices.

Consolidated cash cost at our 100% owned properties are expected to decline through the remainder of this year an average of $3.90 an ounce for the year. Coeur's balance sheet will remain strong (indiscernible) cash balances to help fund our growth projects, including San Bartolome and Kensington, towards expected startups in 2006. Meanwhile, we expect to maintain our hedge-free position in terms of future metals production, which provides Coeur stock the highest possible leverage to metals prices. And with that, I'd like to turn the call back to Dennis for a look at the metals market and wrap-up.

Over this past year, silver has outperformed gold and is the best performing of all of the precious metals, and we believe the most fundamentally sound of all of the metals. Average silver prices in 2004 increased 36%. And since the beginning of 2003 through the first four months of this year, prices have appreciated 44%. The demand for silver not only reflects its role as a precious metal, but is also being driven by the boom in commodities brought about by the growth of the world economy.

While we've seen a pullback in metal (technical difficulty) due to a perceived slowing of economic growth, most analysts today seem to be predicting continued economic growth and demand spurred by the leading economies of the United States and the fast-growing sectors in the Far East.

We know that no metal is more essential to modernization than silver. And the economies like China and India will continue to need silver in large amounts as they continue their expansion. These are economies with growing middle classes which are demanding the modern appliances, medical applications and technical innovations that need silver.

It was interesting yesterday to see in the recent issue of Barron's an article on silver photography and the impact of the digital camera which first appeared in 1981. The conclusions demonstrate that indeed this segment of our market remains strong, and that the impact over the last 14 years in the digital area has been much less than originally projected. And indeed, camera usage and film consumption continues to spread in the developing regions of the world, including Asia.

May 25th in New York, the Silver Institute will be releasing its World Silver Survey, the definitive study put out each year of the world silver market dynamics. We're hoping that many of you will be there to say hello. In the event you can't attend, more information on the event can be accessed on the Silver Institute web site, www.SilverInstitute.org.

Market dynamics have led to raising prices in both silver and gold this past year. Silver prices have increased 44%, while gold prices have appreciated by 18%. We expect that both of these trends will continue.

As we continue to go through 2005, we are looking forward to another solid year of production as we continue with our development to the next level of gold and silver production growth through San Bartolome and Kensington. That has always been our plan, to set the next stage of Coeur's growth with rising reserves, production and cash flows, leading to strong income performance.

This year, we're expecting metals production to stabilize at 13.5 million ounces of silver and 130 ounces of gold, which on a metals equivalent basis is contingent -- is consistent, rather, with last year. Meanwhile, we will continue to proceed with our planned internal growth of new mines, and continue to aggressively evaluate externally other silver opportunities.

Our cash cost will be declining through the year as we bring greater efficiencies to our North American operations, as Harry described, and continuing our strong performance at our young and growing South American mines led by Ray Threlkeld.

Coeur's accelerated exploration program under the leadership of Don Birak will continue at a 22% increased expenditure level through the balance of this year, most of it around our existing operating mine infrastructure because of the successes we have achieved in those areas, with a target of increasing reserve levels and extending mine lives and future protection growth.

Our growth projects, San Bartolome and Kensington, are moving forward toward a target of late 2006 production startups. We are targeting Kensington today for a July 1st startup, and we have received the major permits required from the State of Alaska this past week.

Our ability and drive to move all of these goals forward will continue to be backed by a very strong balance sheet and strong cash position.

Our internal growth profile is one of the strongest in the industry. And our new development projects plus the added production from Endeavor will be increasing silver production by 62% over this year's level, and by 77% over the gold production from 2005 production levels. We are confident of our future and we look forward to keeping you informed of our progress. And now, we'll be pleased to take any of your questions.

(OPERATOR INSTRUCTIONS). Ryan McKeckron (ph), Orion Securities.

Ryan McKeckron from Orion Securities. Just want to have a little color on the outlook for the Galena and Rochester outside this year outlook. And for the fact, maybe an idea of where you see Cerro Bayo and Martha production as well outside this year. In addition to that, I was wondering if you could give some color on the CapEx budget for '05 and '06, and preferably if you could do it on an operational basis?

Okay. You might have to refresh my memory here as we go along. You have several parts to that question, which were going to be happy to respond to. As was mentioned, despite the fact that the first quarter is normally a low reduction quarter for Rochester, it consistently been that way because of winter and the absence of moisture, we nonetheless determined that we had to take a look at the Rochester silver production profile, the recoveries, and see if our mine plan there remained solid, as a consequence of which we brought in two very well-established independent experts to check ourselves.

We do that most of the time at Coeur and we were pleased that they confirmed both the recovery curves and reproduction profile for the Rochester mine through the mine life that had previously been projected of producing metal through 2011.

With regard to Silver Valley, you'll recall that when we announced our optimization plan for Silver Valley nearly two years ago, an anchor premise of that program was that we would be able to continue productions at a reduced level there, but at a basis which would at least be cash-neutral in terms of silver prices while we continued with that program to explore for new deposits that would allow us to increase our silver production first to 5 and then to 7 million ounces.

So far, that program is working. And the targets that we have set have been met. We are encouraged about some recent high-grade vein discoveries that have been made in the Caladay area, as Harry mentioned. And so we seem to be on track there. As we said from the outset, it will continue to depend on the type of optimization program success with the target and goals that I have reiterated here today.

Going forward with regard to sustaining capital, we have minimal levels of sustaining capital outside the two mining projects. And Jim, if you could talk a moment about that, please?

Yes, sustaining capital at the projects that are actually operating in 2005 are expected to be in the $10 to $11 million range.

Are there any other segments of your question that we haven't picked up on?

Yes, just so you -- okay, for the sustaining CapEx -- so like say -- there aren't any other capital programs that -- in the existing operations in '05 and '06 I'd have to add in?

That's correct. Those are for the sustaining capital. The only other capital in addition to that, of course, we talked about our acquisition of Endeavor and the construction activities in San Bartolome and Kensington.

Right. Okay. And just with regard to Cerro Bayo and Martha, I know the target is to get three year mine life -- or to build the reserves up into a three year -- what's your feeling, though, on that type of production moving forward? Do you see it extending? I know you would like to hope that, but any color on that -- lengths of -- life of mine?

This is Ray Threlkeld. We're looking at an ultimate objective really of five years of reserves through the exploration drilling that Don and his crew are doing. And we expect to maintain reduction levels as we've done this last year and the year before.

Okay perfect. Perfect. And without being a hog to the phone here, what was the litigation about?

Well the litigation involved a claim that although we had selected a subsequent underwriter to do a transaction for us (ph) late last year, that an engagement arrangement that had been previously in place with the claimant entitled a piggyback fee. And rather than contest that, we decided that we were just better off to settle it on a reasonable basis.

(OPERATOR INSTRUCTIONS). Mr. Ebersole, there are no questions in queue. Please continue.

This is Dennis Wheeler, and on behalf of the management at Coeur, we appreciate your joining us for today's conference call and we hope to see many of you at the Silver Institute release on the 25th of the month, and look forward to keeping you timely posted on progress at Coeur. Thanks for joining us.

Thank you. Ladies and gentlemen this conference will be available for replay after 1:30 PM today running through May 16th until midnight. You may access the AT&T replay system at anytime by dialing 1-800-475-6701. International participants dial 1-320-365-3844, and when prompted, enter the access code of 781104. (REPEATS NUMBERS). That does conclude our conference call for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.