Coeur Mining Inc (CDE) 2005 Q3 法說會逐字稿

Good day and welcome to today's Coeur d'Alene Mines third quarter earnings conference call. Just a reminder this call is being recorded. At this time I would like to turn the call over to Mr. Scott Lamb. Please go ahead, Mr. Lamb.

Well, thanks and good day, everyone. Thank you for joining us on the call to discuss the Company's results for the third quarter. Effective this quarter, we have begun posting something new on our Website. This is a quarterly financial profile that we hope will be a helpful reference item for anyone who is tracking our performance over time. So if you have a chance to take a look at that, let us know what you think, we'd appreciate it. As per our standard practice, this call is also being broadcast live on the Internet through our Website at www.coeur.com. Where we have also posted the slides that accompany our prepared remarks.

The slides and the audio replay of the call will be available per our standard practice, this call is also being broadcast live on the Internet through our Website at www.coeur.com. Where we have also posted the slides that accompany our prepared remarks. The slides and the audio replay of the call will be available for two weeks afterward on our Website. Today's presenters include; Dennis Wheeler, Chairman and President, Chief Executive Officer, Jim Sabala, Executive Vice President and Chief Financial Officer, and Don Birak, Senior Vice President of Exploration. Also on the call for participation in the Q&A is Harry Cougher, Senior VP of North American Operations.

At this point, I just need to remind you that 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 could cause actual results to differ from projections. With that, I'd like to turn the call over to Dennis.

Thanks, Scott, and welcome to everyone. I think from my vantage point, the third quarter performance demonstrates that we are seeing the results of our strategy to significantly increase our low cost production ounces, add to reserves, cash flow, and resulting earnings. I guess it's kind of the quarter that any CEO in the mining business would be happy to have. Strong markets, rebounding production from our mines in Chile, Argentina, and Nevada. As well as favorable cost data, incremental production from newly acquired assets. And some quite promising exploration results that you'll hear more about from my colleague Don Birak.

We were pleased to learn last week that our third quarter acquisition of the silver production and reserves a t the Broken Hill Mine in Australia have been nominated by the Mining Journal for Deal of the Year. That annual award seeks to recognize the transaction that has, according to the magazine, "most captured the imagination of the financial community". You'll recall that said $36 million transaction boosted Coeur's annual silver production by an average of 2.3 million ounces, or nearly 17%. And provided 15 million ounces of contained silver reserves to our shareholders. Broken Hill has an estimated cash production cost in the range of $2.75 an ounce. And the deal represents another step in Coeur's continuing transformation to a lower cost asset base. And we continue to actively pursue other acquisition opportunities.

Turning now to the particulars of the third quarter performance, the highlights include net income of $3.5 million, or $0.01 a share. Our quarterly silver production was 3.8 million ounces. And gold production, 39,000 ounces. At quarter end, we had had nearly $260 million of cash, cash equivalents, and short term investments on hand.

I guess there are several reasons for the improved performance. First, our consolidated cash production cost per ounce declined 18%. While shipments and price realizations for both silver and gold increased. Secondly, our Australian acquisitions began to make positive contributions during the quarter. Another factor is that we have seen ongoing results from our efforts to reduce overhead costs. With third quarter G&A expenses continuing decline and now representing a 23% drop from those of the first quarter of the year. And finally, with the commencement of construction at Kensington and San Bartolome, the Company's predevelopment expenses in the third quarter of 2005 declined to 0, compared to $3.1 million in the year-ago period.

Virtually all of our key indicators seem favorable relative to the year-ago period, as you'll see in slides three through six on the Website. We had strong medal sales, up 39%. Our silver and gold were up 25% and 20% respectively. Consolidated cash costs declined 18%. And the silver market remained buoyant with average silver prices up 8%. Average gold prices were up as well 11% for the period. And as I mentioned, G&A expenses are trending downward.

We've watched with interest our competitor's report this week and believe that the Company is poised to continue to distance itself as the leading primary silver producer. Certainly that's our mission. With that, I'll turn it the over to Jim Sabala for summary comments of each of the properties. Jim.

Thank you, Dennis. In general, our properties performed well in relation to the year ago quarter. If you're looking at the slides on our Website, I'll just hit the highlights. At Cerro Bayo, silver and gold production were up 23%, and 16% respectively, due to higher grade ore. Silver cash costs per ounce declined sharply to $0.37 per ounce due to an increase in the gold by-product credit. This increased by-product credit reflected higher gold production and higher gold prices. Mine revenues also benefited from the increased shipping frequency associated with a new customer.

At Martha, silver production was up almost 80% due to higher grade ore. As was the case with Cerro Bayo, silver cash costs per ounce declined due to an increase in the gold by-product credit. At Endeavor, Coeur's share of production from this recently acquired asset was more than 220,000 ounces of silver at a cash cost of $1.95 per ounce. At Broken Hill, Coeur's share of production from this asset, which was acquired during the third quarter, was approximately 83,000 ounces at a cash cost of $2.69 per ounce. At Rochester, silver and gold production were up 29%, and 23% respectively, due to improved solution grades in flow from the leach pad. Silver cash costs per ounce declined largely as a result of the increased volume and the increased benefit of the gold by-product credit.

At Galena, silver production was down 41% due to lower than expected ore grades and shorter strike lengths in two mining areas. Although such factors periodically affect nearly all deep underground, narrow-vein mines; the Company is engaged in an ongoing exploration program to identify more productive mining areas at Galena. Low production levels resulted in higher cash costs per ounce. We are considering the performance to be unsatisfactory and are reviewing the operating plan to address this cost trend.

In the exploration arena, the Company invested just under $3 million during the third quarter on exploration drilling activity. Now, Senior Vice President of Exploration, Don Birak, will give you the highlights. And I'd now like to turn it over to Don.

Thanks, Jim. As you know, we have mining development and exploration stage interest in diverse geographic and geologic settings around the globe. During the quarter, our geologic teams were busy on all our properties completing over 114,000 feet of new drilling. Most notable from this large program, are results from Cerro Bayo and Kensington. And that is where I will focus my comments today. If you're looking at the slides, this image is a geologic map of the eastern portion of our large land holdings at Cerro Bayo, Chile.

Our current mining area is shown, as well as all known gold and silver bearing epithermal veins in this part of the district. Much of the area is masked by [barant] cover material. Though as you will see, is still very prospective country. This quarter we discovered a new vein, that we are calling Marcela Sur, under 50 to 70 meters of cover and lying about 100 - - 1,000 meters west of our current mining area.

The next slide shows the longitudinal section of the drilling to date on Marcela Sur. Along with gold and silver grades encountered in the vein. Mineralization has been defined over a 700 meter strike length and nearly 100 meter vertical in the vein. As well as [enveined] loops in the hanging wall. Exploration continues on this new blind vein system as well as to discover to additional new veins in similar geologic settings.

Next, let's shift to the far north hemisphere in our Kensington gold development project. This quarter, we commenced a core drilling program from existing underground positions with two drills running around the clock. The focus of this program is to upgrade and expand our inferred and indicated mineral resources and ultimately increase our mineral reserves. Thus far we are pleased with the results. Next slide shows the greater Kensington area with the main Kensington and Jualin gold zones noted. As I mentioned, we have two drills in operation at Kensington and recently started a third on surface at the Jualin target.

The next slide shows an enlargement of the drilling results received on zones 35 and 41 refined in blue and yellow respectively. Areas of inferred mineral resources are shown in orange where most of the drilling was focused. And a table of drill results is included for your reference. Drilling at zone 41 suggests it is open for expansion to the north. And also note, that we encountered new high gold mineralization between zones 35 and 41. So as you might expect, we feel very good about these two particular areas. And are confident that this and additional work will result in an increase in mineral resources and reserves at Kensington. Where we also have - - already have more than 1 million ounces of proven and probable mineral reserves. Dennis.

Thanks Don, for the summary of our third quarter exploration activity. Now just a few more comments to update you on the status of construction at Kensington and San Bartolome. We continue to make good progress at Kensington. We have built the camp and continued performing earthwork. We now have about 190 workers on site with capital spending during the quarter totaling about $17 million.

For those of you here today, I have three shots that give you at least a quick look at the activity at Kensington. The first photograph here is an aerial view. You can see the construction batch plant facility in the center of this shot and the temporary construction camp is at the upper right. When we are in production, workers will commute to the mine on a daily basis. I think you can note the good housekeeping that our people practice onsite. The next shot shows the existing portal of the Kensington side of the mountain at the 800 foot elevation. And finally, you can see Don's diamond drillers hard at work underground at the Kensington mine.

As you know, a few environmental groups have filed the suit against the Army Corps of Engineers and the Forest Service regarding the permits they issued to us last July. We continue to believe that the Agencies have done their work responsibly. And the Corps of Engineers has filed a motion to stay the litigation in order to review their 404 Permit.

Turning to San Bart, we are also in a construction mode but we are - - continue to take a measured pace. During the quarter we continued engineering work and continued work to optimize the mine plan.

Capital spending at San Bart's, through the third quarter, was about $2.5 million. And we are positioned to accelerate the construction work there once the elections are held and political clarity comes after the December 18 elections. We continue to target San Bart's for operation sometime during 2007, assuming a favorable political outcome. As most of you know, San Bart's has the potential to increase our annual silver production by 40% to 60%.

Looking at the markets for silver and gold we continue to be bullish. It seems clear to us that the balance of supply and demand suggests continued strong price levels into next year as reported by Gold Field's Mineral Services in their comments made earlier this week at the Annual Silver Institute Dinner, which many of you attended. Regarding 2005, our view of Coeur's production remains unchanged. We expect to produce more than 14 million ounces of silver at an expected cash cost of about $4.30.

We are confirming our gold production forecast of about 130,000 ounces of gold. With our recent Australian acquisitions, our strong cash flow, our ongoing encouraging exploration results, we remain very optimistic about the Company's prospects to grow the Company both internally and externally as we continue throughout the year.

Operator, we're ready to go to Q and A.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Michael Dudas of Bear Stearns.

Dennis, could you review for us the timetable for Kensington, given that you're into construction now? And how you anticipate that playing through? And are these permit issues - - appeals have any impact on that time frame? And you can remind us the capital estimates and how that capital is going to be spent over the next X amount of months?

Michael, the production target for Kensington is the first quarter of 2007. Actually, there have been no appeals filed at this point in time. There has been action commenced in the Federal Court by a few environmental groups involving the Corps and the United States Forest Service. And that matter is in the preliminary stages. With regard to capital cost and timing of those expenditures, I'm going to ask Jim Sabala to give you more detail there. Jim.

Yes, Mike. Our total budget, including owner's cost, was $124 million from the point of construction starting. Our budget was for about $50 million of that to be spent in the '05 year. We've been spending at a little bit slower pace than that but 50 million is our plan. And the remainder of that would be in '06, since the plan now would be for commercial start-up in early '07.

Terrific. And regarding Cerro Bayo, could you elaborate a little bit more about the new customer and how that improved the quarter and how that may impact flow-through over - - for the intermediate future?

Sure. Historically, Cerro Bayo had shipped its material quarterly to a customer in Japan. And so any time you had a delay, if it missed a quarter we had had huge swings our revenue up and down. We've negotiated a new arrangement for this year, and we think we'll continue into next year, whereby we're able to ship monthly shipments to a new customer in Mexico. It really just smooths out our earnings stream. We don't get peaks and valleys. And so you'll see a much more consistent relationship between ounces sold and delivered and ounces produced.

And one final thought, the G&A cost that came down pretty impressively, is that a sustainable level or what could drive that lower or higher from here?

We believe it is sustainable, Mike. We have an ongoing program within Coeur to continue to review actually all cost centers with the target of reaching lower cash costs throughout the Company.

And one final thought regarding the Silver Valley. Do you think you'll have something next quarter that would maybe delineate how you're going to go about investing there relative to some of the challenges or your exploration opportunities?

Yes, we clearly will. We're in the final stages of evaluating a change in the mine plan that we've previously talked about. Designed to get us back on track and materially reduce the cash costs there, Mike. And we will have I think - - definite comments to make to you about how we foresee the future there.

Thank you, gentlemen.

Our next question comes from John Bridges of J.P. Morgan.

Hi, Dennis, Jim, everybody. Could you fill me in a little bit on the Broken Hill acquisition? And in particular, what's the sort of longevity of that thing?

Well, the current reserve level at the mine I think is approximately six years. But when you look at the resource space, there's considerable potential to add to the reserve base as they continue with their development work going forward, John.

Well, this is a mine that's been going for years, so you'd think there would be a lot of potential?

We're quite optimistic about the potential in that district. And we're looking forward to it.

So you're taking feed from a base metal producer?

We basically have acquired the reserve interest in the production base from a primarily based metal producer there, that's right.

Okay.

The silver contributes little to their overall revenue stream but it's significant to us as a primary silver producer.

Okay. And maybe also, the big increase in the stronger production of silver out of Rochester, to what do you attribute that to? I heard Jim talk about flows, but - -.

Well, you maybe will recall that earlier in the year, we were struggling at Rochester. We had increased the height of the heap about 100 feet. And we were not seeing the traditional flow rates that we had previously experienced there. That caused us to have significantly higher cash costs. And we did a full review. Our people have worked very diligently. And as a consequence of that work, I think the answers have been found at Rochester. And we're now returning to normalcy there. And that's the consequence of this work, is increased production again at Rochester and lower costs.

What do you attribute this to? Just a slow flow through the higher dumps or what?

I think primarily it was the increase in the height of the heap itself. This is relatively new in the industry. And the assumptions that we would continue to see the same flow rates did not hold up, as a consequence of which we made the necessary adjusts.

Okay. Thanks, Dennis. Good luck.

Our next question comes from Larry Schumacher of Oppenheimer Company.

I actually have two questions. One, do you have any comment on this ETF that's being talked about, silver ETF? And secondly, can you give us a little more perspective on costs; labor costs, energy costs, tire costs for the machinery, et cetera, and how it's affecting margins, earnings, et cetera?

Let's talk first about ETF. As you know, there are several ETF's in the marketplace, including a gold ETF. In general, we favor giving investors another way to invest in silver through a silver ETF. And we think that would bring further integrity to the silver market. As you know, we won't comment about any specific ETF that's been filed. With regard to the labor, energy costs, you've seen some of in that this quarter. This isn't the first time that the industry has experienced rising costs. And we're doing, I think, everything we can in conjunction with our costs to maintain those. But the industry as a whole and Coeur has been impacted particularly by higher materials costs, available equipment and tire cost.

[OPERATOR INSTRUCTIONS] And it seems Mike Curran of Royal Bank has a question. Please go ahead, sir.

Good afternoon, gentlemen. I just thought maybe for the benefit of people, you could talk about the recent acquisitions, the silver streams, I call them, Endeavor and Broken Hill and how those transactions transpire? Is it all paper transaction, or do you take physical delivery of the silver and then market it? Or do these guys just cut you a check netting out your contribution on the cash cost side?

Okay. Mike, this is Jim Sabala. I'll go ahead and take that on. A very key component of this transaction is we are an actual owner of the metal at the moment the operator becomes the owner. In Australia, for example, the mineral send by the government until it's severed. We take physical title to that at the minute it comes through. So we're an owner of the metal pari pasu with that of the operator. So, we own that physical flow of metal. It does report through the base metal concentrate onto the smelter. And then at the point that the net smelter return comes out, that is physically deposited into our account. And then, of course, we're responsible to write our check to the underlying operator for our operating costs contribution. So we're a physical owner from that the point that the material is mined.

All right. So you do have the marketing of that silver bullion?

No, the bullion actually is sold pursuant to the concentrate marketing contract that the owner has, which we're a party to.

Just a separate account then.

Yes.

Thank you.

At this time, we have no further questions.

Thank you, operator. In summary, Coeur will continue with its growth story. And we aim to continually strengthen our position as the world's leading primary silver producer. By both continuing to develop our internal development projects and our external acquisition program. We appreciate all of your interest to join us today in discussing our third quarter results, and we look forward to reporting to you in year end. Thanks, and have a great day.

Ladies and gentlemen, that does conclude our conference call for today. We do appreciate your participation. At this time you may disconnect.